Reported Decision : 52 ACSR 1 (2005) 23 ACLC 1010 New South Wales Court of Appeal CITATION : William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448 HEARING DATE(S) : 11 August 2003 to 14 August 2003 30 September 2003, 2 October 2003 (written submissions) JUDGMENT DATE : 7 December 2004 JUDGMENT OF : Handley JA at 1; Santow JA at 2; McColl JA at 3 DECISION : (1) Appeal dismissed save as to ground 22. (2) Matter remitted to the Equity Division for hearing on penalty only. (3) Appellants to bear three-quarters of the costs of the appeal. (4) The primary judge's order that the appellants pay ASIC's costs of the proceedings below including reserved costs should not be disturbed. CATCHWORDS : CORPORATIONS LAW - APPEALS - Appeal from declarations of contravention of the Corporations Law, disqualification orders and pecuniary penalties - breach of directors' duties and related party transaction provisions of the Corporations Law - whether proceedings commenced under the Corporations Law validly continued under the Corporations Act 2001 (Cth) - whether fourth appellant was an "officer" for the purposes of s 232 of the Corporations Law - whether primary judge erred in concluding the appellants had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law - subjective or objective test of "honestly" in s 232(2) of the Corporations Law - whether purported ratification of contraventions of the Corporations Law by shareholders effective - whether a separate hearing on penalty should be held in civil penalty proceedings - EVIDENCE - Admissibility of expert evidence going to an ultimate legal issue. (D) Constitution s 51(xxxvii) Corporate Law Economic Reform Program Act 1999 s 1466 Corporations Act 2001 (Cth) s 79, s 180, s 181, s 182, s 208, s 209, s 210, s 211, s 239, s 243N, s 254T, s 254V, s 1317L, s 1332, Ch 10, s 1370, s 1371, s 1371(2), s 1382(1)(bb), s 1383, s 1383(1), s 1383(1)(a), s 1383(1)(b), s 1383(1)(b)(i), s 1383(1)(c), s 1383(2), s 1383(3), s 1383(3)(a), s 1384, s 1384(3), s 1384(3)(a), s 1398, s 1401, s 1401(1)(a), s 1401(1)(b), s 1401(2), s 1401(2)(a), s 1401(2)(b), s 1401(3), s 1408 LEGISLATION CITED : Corporations (Commonwealth Powers) Act 2001 Corporations Law s 9, s 79, s 82A, s 85A, s 191, s 192, s 192(2), s 192(4), s 232, s 232(1), s 232(2), s 232(4), s 232(5), s 232(6), s 232(6B), s 243F, s 243F(1)(a), s 243F(1)(d), s 243F(1)(e), s 243F(1)(f), s 243G, s 243H, s 243K, s 243N, s 243ZE, s 243ZE(2), s 243ZE(3), s 243ZE(5), s 254C, s 254K, s 254K(b), Pt 9.4B, s 1317DA, s 1317DB, s 1317EA, s 1317EA(2), s 1317EA(3), s 1317EA(3)(a), s 1317EA(3)(b), s 1317EA(4), s 1317EA(5), s 1317EB(1), s 1317EC, s 1317ED, s 1317ED(1), s 1317HD(1), s 1317HD(1A), s 1317JA, s 1332, s 1447, s 1473, s 1473(1)(a) Evidence Act 1995 (NSW) s 80, s 80(a), s 135(a), s 135(e) Supreme Court Act 1970 (NSW) s 75A Supreme Court Rules 1970 (NSW) Pt 4 r 1, Pt 15 r 13 Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (Allstate Judgment No 33) (1996) 64 FCR 79 Australian Competition and Consumer Commission v Amcor Printing Papers Group Limited [1999] FCA 672; (1999) ALR 465 Australian Competition & Consumer Commission v FFE Building Services Limited [2003] FCAFC 132; (2003) 130 FCR 37 Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (No 2) (1997) 77 FCR 217 Australian Growth Resources Corporation Pty Limited v Van Reesema (1988) 13 ACLR 261 Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74 Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559 Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760 Australian Securities and Investments Commission v William Arthur Forge and five Others (Supreme Court of New South Wales, unreported, Foster AJ, 12 March 2002) Australian Securities and Investments Commission v Loiterton [2004] NSWSC 172 Australian Securities and Investments Commission v Plymin [2002] VSC 56; (2002) 4 VR 168 Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383 Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 Bamford v Bamford [1970] Ch 212 Banque Commerciale SA (in Liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 160 CLR 279 Barbosa v Di Meglio [1999] NSWCA 307 Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51 Blackie v Police [1966] NZLR 910 Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334 Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 77 ALJR 1629 Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1997) 16 ACLC 252 Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821 Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811 Fitzsimmons v R (1997) 23 ACSR 355 Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 Furs Limited v Tomkies [1936] HCA 3; (1936) 54 CLR 583 Gamester Pty Limited & Anor v The Honourable Mr Justice Lockhart (1993) 67 ALJR 547 George Hill and Co v Hill (1886) 55 LT 769 Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473 Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 122 FLR 253 Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 Harlowe's Nominees Pty Limited v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474 Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157 Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120 Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 CASES CITED : Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447 Kinsela v Russell Kinsela Pty Limited (in Liq) (1986) 4 NSWLR 722 Life Savers (Australasia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431 Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 Malone v Marr [1981] 2 NSWLR 894 Marchesi v Barnes [1970] VR 434 Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679 McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579 Miller v Miller (1995) 16 ACSR 73 Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 Naxakis v Western General Hospital [1999] HCA 22; (1999) 197 CLR 269 Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425 Nicholson v Permakraft (NZ) Ltd (in Liq) [1985] 1 NZLR 242 Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116 O'Brien v Gillespie (1997) 41 NSWLR 549 Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 Pascoe Ltd (in liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246; (1999) 33 ACSR 357 Pemble v R [1971] HCA 20; (1971) 124 CLR 107 Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735 Pioneer Concrete Services Ltd v Galli [1985] VR 675 R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 R v De Simoni [1981] HCA 31; (1981) 147 CLR 383 R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317 R v Newth [1974] 2 NZLR 760 Re Bright Pine Mills Pty Limited [1969] VR 1002 Re Media Entertainment & Arts Alliance; ex parte Hoyts Corporation Pty Limited [1993] HCA 41; (1994) 68 ALJR 179 Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425 Re Portuguese Consolidated Copper Mines Ltd; Ex parte Badman; Ex parte Bosanquet (1890) 45 Ch D 16 Re Wakim; ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Reynolds v Wilkinson (1948) 51 WALR 17 Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354 RW Miller & Co Pty Ltd v Krupp (Aust) Pty Ltd (1991) 34 NSWLR 129 Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451 Sidebottom & Anor v Commissioner of Taxation of the Commonwealth of Australia [2003] VSCA 2; (2003) 173 FLR 335 Southern Resources Limited v Residues Treatment & Trading Co Limited (1990) 3 ACSR 207 Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290 Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332 Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 Van Den Hoek v R [1986] HCA 76; (1986) 161 CLR 158 Whisprun Pty Limited v Dixon [2003] HCA 48; (2003) 77 ALJR 1598 Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559 Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports 81-578 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 William Arthur Forge - (1st Appellant) Jozsef Endresz - (2nd Appellant) Dawn May Endresz - (3rd Appellant) PARTIES : Allan Paul Endresz - (4th Appellant) Kamanga Holdings - (5th Appellant) Bisoya Pty Limited - (6th Appellant) Australian Securities & Investments Commission - (Respondent) FILE NUMBER(S) : CA 40854/02 COUNSEL : P M Biscoe QC (1 - 6 Appellants) D R Stack (Respondent) Ken Cush & Associates by their agents Curwood & Partners (1 - 6 Appellants) SOLICITORS : Graeme Plath, Australian Securities and Investments Commission (Respondent) LOWER COURT Supreme Court JURISDICTION : LOWER COURT SC 2338/01 FILE NUMBER(S) : LOWER COURT Foster AJ JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40854/02 SC 2338/01 HANDLEY JA SANTOW JA McCOLL JA Tuesday, 7 December 2004 William Arthur FORGE & 5 ORS v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION FACTS The first appellant, Mr Forge, is the sole director and secretary of the sixth appellant, Bisoya Pty Limited ("Bisoya"), which is his private family company. The second and third appellants, Mr and Mrs Endresz, are husband and wife. The fourth appellant, Allan Endresz, is their son. The fifth appellant, Kamanga Holdings Pty Limited ("Kamanga"), is a family company of the Endresz family. Mr and Mrs Endresz and Allan Endresz were at different times directors of CTC Resources NL ("CTC"). Mr Forge was a friend of the Endresz family. He became the Managing Director of CTC on 9 September 1994. The Australian Securities and Investments Commission ("ASIC") brought proceedings against the appellants alleging that they had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law. The proceedings related to the disbursement by CTC of a sum of $3,596,348.90 by eight transactions entered into between 20 April and 13 November 1998 which were variously said to be either the payment (both retrospective and prospective) of management and consultancy fees and the provision of unsecured loans to Kamanga and Bisoya respectively. ASIC alleged that the transactions were uncommercial (in the sense of improper), not in the interests of CTC or its shareholders, and in breach of the related party provisions of the Corporations Law. ASIC commenced the proceedings in April 2001. By the time the matter came on for hearing in March 2002 the Corporations Law had been repealed and the Corporations Act 2001 (Cth) had come into force. ASIC was successful at trial. The appellants appealed from declarations made by Foster AJ pursuant to s 1317EA(2) of the Corporations Law that they had contravened the relevant sections of the Corporations Law, orders that each be disqualified from managing corporations for periods ranging up to sixteen years and pecuniary penalties ordered pursuant to s 1317EA(3) of the Corporations Law. The key issues raised by the appeal were: (a) Whether the proceedings were validly continued under the Corporations Act 2001 (Cth); (b) Whether the primary judge erred in concluding that Allan Endresz was an "officer" of CTC for the purposes of s 232 of the Corporations Law; (c) Whether the primary judge had found the appellants had contravened the Corporations Law on a basis not advanced by ASIC at the trial; (d) Whether the primary judge erred in concluding that the appellants had contravened the Corporations Law; (e) Whether the contraventions of the Corporations Law could be, and were, cured by the purported ratification of the transactions by CTC's shareholders in June 2003; (f) Whether a Court hearing civil penalty proceedings should, in the event that it makes declarations of contravention, hold a separate penalty hearing. HELD per McColl JA (Handley JA and Santow JA agreeing), dismissing the appeal save as to ground 22 (separate hearing on penalty): Transitional provisions argument 1. The proceedings, commenced pursuant to the Corporations Law, were validly continued by virtue of the Transitional Provisions of Chapter 10 of the Corporations Act 2001 (Cth). [66] – [68], [71] Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559; Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383; Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 referred to. "Officer" of a corporation 2. The concept of being concerned in the management of a corporation comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs. [199] – [200] Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821; Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474; Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425; Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290 discussed and applied. 3. The primary judge did not err in concluding that Allan Endresz was an "officer" of CTC for the purposes of s 232 of the Corporations Law. [200] – [201] Basis of liability 4. The primary judge found the appellants contravened s 232 of the Corporations Law on the basis for which ASIC had contended, as principals not accessories. [180] – [182] Contraventions of the Corporations Law 5. In order to establish that a person was involved in a contravention of s 243ZE(3)(a) of the Corporations Law it is necessary to prove that the person knew of the essential facts which constitute the contravention. [202] Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 applied. 6. The primary judge found that each appellant had knowledge of all the material facts of the transactions. [203] – [205] 7. The primary judge found the appellants had acted with subjective dishonesty. [247] – [248] Marchesi v Barnes [1970] VR 434; Australian Growth Resources Corporation Pty Limited v Van Reesema (1988) 13 ACLR 261; Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626; R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 referred to. 8. It is not the function of an appellate court to survey evidence afresh and arrive at its own conclusions in the absence of an appellant positively demonstrating that the primary judge was wrong. [9], [233], [242] Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports ¶81-578; Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1; Fox v Percy [2003] HCA 22; (2003) 214 CLR 118; Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449 applied. 9. The appellants failed to demonstrate any error in the primary judge's conclusions that they had breached ss 232(4) and 232(6) of the Corporations Law. [250] – [252] Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 applied. 10. Expert evidence that goes to an ultimate legal issue is admissible. [271] Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 applied. Evidence Act 1995 (NSW) s 80; Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (Allstate Judgment No 33) (1996) 64 FCR 79; O'Brien v Gillespie (1997) 41 NSWLR 549; Barbosa v Di Meglio [1999] NSWCA 307; Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705; R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317; Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 referred to. 11. The primary judge did not err in concluding that the appellants had contravened ss 232(2), (4) and (6) and s 243EZ(3) of the Corporations Law. [242], [300] – [303] Ratification 12. The purported ratifications of the contraventions of the Corporations Law by CTC's shareholders in June 2003 were ineffective because: (a) They sought to cure the appellants' wrongful taking of CTC's resources, would unfairly prejudice third parties, and the shareholders did not exercise their voting power for the benefit of the company as a whole. Ratification is ineffective where it would constitute a fraud on the minority or misappropriation of company resources. [376] – [377] Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425; Miller v Miller (1995) 16 ACSR 73 applied. (b) Ratification resolutions cannot cure a breach of statutory duty. [384] Miller v Miller (1995) 16 ACSR 73 applied. Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737; Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334 referred to. (c) They were too late in time. [389] Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 applied. (d) The disclosure to CTC's shareholders was inadequate. The shareholders were not fully informed both of CTC's rights consequent upon the declarations of contravention and that the effect of the ratification resolutions could be that CTC would lose both its statutory and equitable rights against the appellants. [402] Bamford v Bamford [1970] Ch 212; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; Miller v Miller (1995) 16 ACSR 73 applied. Penalty 13. A court hearing civil penalty proceedings should, in the event that it makes declarations of contravention, hold a separate hearing on the issue of penalty. [423] – [424] Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378; Malone v Marr [1981] 2 NSWLR 894 applied. Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157; Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120 distinguished. Reynolds v Wilkinson (1948) 51 WALR 17; Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679; R v De Simoni [1981] HCA 31; (1981) 147 CLR 383; Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447; Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51; Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332; Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515; Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354 referred to. 14. The primary judge should also have drawn the appellants' attention to their right to elicit evidence and make submissions on the issue of penalty. [424] Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 applied. 15. ASIC should have drawn the primary judge's attention to the principles of law referred to in Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 and Malone v Marr [1981] 2 NSWLR 894 as well as to the circumstances of other civil penalty proceedings in which it had been involved in which there were separate hearings on the issue of penalty. [425] Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378; Malone v Marr [1981] 2 NSWLR 894; Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718 referred to. ORDERS (1) Appeal dismissed save as to ground 22. (2) Matter remitted to the Equity Division for hearing on penalty only. (3) Appellants to bear three-quarters of the costs of the appeal. (4) The primary judge's order that the appellants pay ASIC's costs of the proceedings below including reserved costs should not be disturbed. INDEX Paragraph No INTRODUCTION 3 Scope of the appeal 8 Legal representation 10 Statement of the case 13 THE LEGISLATIVE FRAMEWORK Substantive provisions 18 Transitional provisions 24 TRANSITIONAL PROVISIONS ARGUMENT 44 CONTRAVENTIONS OF THE CORPORATIONS LAW The transactions 73 Events following the transactions: the auditor's concerns 75 The transactions: the factual context 93 Mr Tutt's evidence 118 The appellants' case at trial 120 The primary judge's assessment of the appellants' evidence 124 Credit 138 Conclusions at trial Related party transactions 140 Directors' duty contraventions 146 INVOLVEMENT 150 Role of Allan Endresz: the primary judge's findings 155 The appellants' submissions 168 ASIC's submissions 172 Consideration The threshold issue 177 Officer of CTC: legal principles 183 Officer of CTC: conclusion 196 Knowledge 202 DIRECTORS' DUTY CONTRAVENTIONS Grounds of appeal 206 The appellants' submissions 208 Transactions 1 and 2: retrospective management and consultancy fees 211 Transactions 3, 4, 5, 6 and 8: future management and consultancy fees 220 Transaction 7: Bisoya loan $75,000 222 Interpretation of s 232(2) 223 ASIC's submissions 226 Interpretation of s 232(2) 231 Consideration 233 Contravention of s 232(2) 244 Contravention of ss 232(4) and (6) 250 Admission of Mr Tutt's evidence 253 Repayment of loans 280 Related party transactions 293 Penalty privilege 304 Proof 320 RATIFICATION Introduction 329 The evidence 334 The appellants' submissions 350 ASIC's submissions 362 Consideration 370 Misappropriation/fraud on the minority 371 Breach of statutory duty 378 Timing of ratification resolutions 385 Disclosure 390 Conclusion 403 DECLARATIONS, BANNING ORDERS AND PECUNIARY PENALTIES 405 PENALTY Grounds of appeal 409 Separate hearing on penalty: conclusion 410 OTHER GROUNDS OF APPEAL 429 ORDERS 435 COSTS 436 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40854/02 SC 2338/01 HANDLEY JA SANTOW JA McCOLL JA Tuesday, 7 December 2004 William Arthur FORGE & 5 ORS v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Judgment 1 HANDLEY JA: I agree with McColl JA. 2 SANTOW JA: I agree with McColl JA. 3 McCOLL JA: Introduction The Australian Securities and Investments Commission ("ASIC") brought proceedings against the appellants alleging that they had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law . It was successful. The appellants now appeal from declarations made by Foster AJ pursuant to s 1317EA(2) of the Corporations Law that they contravened those sections of the Corporations Law , orders that each be disqualified from managing corporations for periods ranging up to sixteen years and pecuniary penalties ordered pursuant to s 1317EA(3) of the Corporations Law . 4 The first appellant, William Arthur Forge ("Mr Forge"), is the sole director and secretary of the sixth appellant, Bisoya Pty Limited ("Bisoya"), which is his private family company. The second appellant, Jozsef Endresz ("Mr Endresz"), and the third appellant, Dawn May Endresz ("Mrs Endresz"), are husband and wife. The fourth appellant, Allan Paul Endresz ("Allan Endresz"), is their son. The fifth appellant, Kamanga Holdings Pty Limited ("Kamanga"), is a family company of the Endresz family. Mr and Mrs Endresz and Allan Endresz were at different times directors of CTC Resources NL ("CTC"). Mr Forge was a friend of the Endresz family. He became the Managing Director of CTC on 9 September 1994. 5 The action did not proceed against Kamanga because the proceedings against it were stayed (Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760 at [145]). The reasons for the stay did not emerge from the judgment or, so far as I could glean, from the evidence or counsel's addresses at trial or on appeal. 6 The proceedings relate to the disbursement by CTC of a sum of $3,596,348.90 by eight transactions entered into between 20 April and 13 November 1998 which were variously said to be either the payment (both retrospective and prospective) of management and consultancy fees and the provision of unsecured loans to Kamanga and Bisoya respectively. ASIC alleged that the transactions were uncommercial (in the sense of improper), not in the interests of CTC or its shareholders, and in breach of the related party provisions of the Corporations Law. 7 ASIC commenced the proceedings by filing a document entitled "Originating Process" in April 2001. The matter came on for hearing in March 2002. During that period the Corporations Law was repealed and the Corporations Act 2001 (Cth) ("the Corporations Act") came into force. Scope of the appeal 8 The key issues raised by the appeal are: (a) Whether the proceedings were validly continued under the Corporations Act ; (the "transitional provisions argument") (b) Whether the primary judge erred in concluding that Allan Endresz was an "officer" of CTC for the purposes of s 232 of the Corporations Law; (c) Whether the primary judge had found the appellants had contravened the Corporations Law on a basis not advanced by ASIC at the trial; (d) Whether the primary judge erred in concluding that the appellants had contravened the Corporations Law ; (e) Whether the contraventions of the Corporations Law could be, and were, cured by the purported ratification of the transactions by CTC's shareholders in June 2003; (f) Whether a Court hearing civil penalty proceedings should, in the event that it makes declarations of contravention, hold a separate penalty hearing. 9 As will become apparent the appellants' challenge to the findings that they had contravened the Corporations Law raised multiple issues. To the extent they attacked the primary judge's factual findings that they had contravened the Corporations Law their approach, in some respects, resembled the approach criticised in Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports ¶81-578 where Heydon JA (with whom Spigelman CJ and Sheller JA agreed) drew attention to the limits of a rehearing pursuant to s 75A of the Supreme Court Act 1970 (NSW). These remarks were endorsed recently in Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 (special leave refused 28 May 2004; [2004] HCATrans 182) in which Giles JA (with whom Mason P and Beazley JA agreed) said (at [17] ff): "17 It is necessary that the appellants demonstrate factual error on the part of the trial judge. The observations of Santow JA, with which Meagher and Beazley JJA agreed, in Jones v Bradley [2003] NSW CA 81 at [113] - [116] are pertinent to the appellants' challenges to the findings: "113 In Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW …, Heydon JA delivering judgment for the court gave a detailed exposition of the law in this area. Heydon JA held at [60] that the Appellant 'bore the burden in the appeal not merely of showing that on the facts her contentions might be available or even correct, but of showing that the Trial Judge's conclusions ought to be reversed'. Heydon JA then favourably referred to the Full Federal Court decision of Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359 at 369 where it was held: '... the court is not obliged to proceed to make new findings of fact on all relevant issues and discharge the judgment appealed from if those findings differ from those of the Trial Judge and do not support the judgment. The court must be satisfied that the judgment of the Trial Judge is erroneous and it may be so satisfied if it reaches the conclusion that the Trial Judge failed to draw inferences that should have been drawn from the facts established by the evidence. The court is unlikely to be satisfied if all that is shown is that the Trial Judge made a choice between competing inferences, being a choice the court may not have been inclined to make but not a choice the trial judge should not have made.' 114 In dismissing the appeal in Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW , Heydon JA highlighted that the Appellant's approach was inadequate to warrant appellate court interference with the judgment at first instance. The impugned approach was characterised by His Honour as [61]: 'The Plaintiff's approach sometimes invited the court to survey for itself, afresh, all the evidence on particular points and arrive for itself at particular conclusions about them, without essaying the necessary task of positively demonstrating that the Trial Judge was wrong. The Plaintiff's approach also paid insufficient regard to the difference between, on the one hand, pointing to difficulties in the Defendants' path of establishing matters which they wished to contend for and, on the other, pointing to sufficient evidence to permit an inference to the contrary of the Defendants' contention.' 115 Heydon JA then favourably quoted from Biogen Inc v Medeva plc [1997] RPC 1 at 45 per Lord Hoffman: 'The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la [vérité] est dans une nuance ), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved.' 116 Thus it is clear that for the Appellant to succeed it is necessary that the Appellant demonstrate more than that there were alternate findings (which this Court may or may not prefer) available. The appellant must demonstrate, positively, that the Trial Judge in making the findings that he did was wrong." 18 Where the facts are undisputed, or are established by the findings of the trial judge, this Court will give respect and weight to the conclusions of the trial judge, and the demonstration of error on the part of the trial judge - "... may not be straightforward where findings or conclusions involve elements of fact, degree, opinion or judgment or when the findings on conclusions in question can be seen as made with the advantage of hearing the evidence in its entirety, presented as it unfolded at the hearing and adjournments for reflection and mature contemporaneous consideration and assessment, in particular in a long and complex hearing ... ". ( Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [24])." Legal representation 10 The appellants chose not to be legally represented before Foster AJ. Allan Endresz represented them all. Their choice was not determined by lack of funds. They had legal representation prior to the final hearing, including at a time when consent orders were made for the filing of evidence. They had relinquished those representatives by the time they made an application before the primary judge in March 2002 seeking certain interlocutory orders. These included a challenge to the competence of the proceedings based on the transitional provisions argument. 11 In the course of the appeal Mr Biscoe QC submitted that the primary judge ought to have drawn principles relating to penalty privilege and sentencing to the appellants' attention. It should be noted, in this respect, that "[o]utside a criminal trial there is no requirement that a judge … do more than afford a party a reasonable opportunity to present his or her case. In particular, there is no requirement to point to arguments or evidence that may assist in making the case": Re Media Entertainment & Arts Alliance; ex parte Hoyts Corporation Pty Limited [1993] HCA 41; (1994) 68 ALJR 179 at 185; Gamester Pty Limited & Anor v The Honourable Mr Justice Lockhart (1993) 67 ALJR 547 at 549. The position is otherwise in a criminal trial where there is an obligation on the trial judge to leave to the jury defences which are open on the evidence but not raised in order to ensure the accused has a fair trial according to law: see Pemble v R [1971] HCA 20; (1971) 124 CLR 107 at 117–18, 132–3; Van Den Hoek v R [1986] HCA 76; [1971] HCA 20; (1986) 161 CLR 158 at 161 – 162. 12 In hearing ASIC's application the primary judge was required to apply the rules of evidence and procedure applied in hearing civil matters. However, as Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354 at 1361 – 1362 [30] – [35] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; at 1363 [41] per McHugh J makes plain, that does not deny the fact that civil penalty proceedings may bear the character of both civil and criminal proceedings. As will become plain later in this judgment, the fact that the final stage of the proceedings bore a close resemblance to the sentencing process which occurs in a criminal trial meant that the trial judge was, at least in that respect, under an obligation to draw the appellants' attention to principles of law attendant upon that process. Statement of the case 13 The background to the proceedings can conveniently be taken from the final judgment below (Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760): "2 … [C]ertain facts … are clearly established in the evidence. The second defendant, Jozsef Endresz ("Mr Endresz") and the third defendant, Dawn May Endresz ("Mrs Endresz") are husband and wife. The fourth defendant, Allan Paul Endresz ("Allan Endresz") is their son. The fifth defendant, Kamanga Holdings Pty Limited ("Kamanga") is a family company of the Endresz family. 3 The first defendant, William Arthur Forge "(Mr Forge") is a friend of the Endresz family and is the sole director and secretary of the sixth defendant, Bisoya Pty Limited ("Bisoya") which is his private family company. 4 Mr and Mrs Endresz and Allan Endresz were at different times directors of the company CTC Resources N.L. ("CTC") which, until 12 March 1991, was named Emu Hill Gold Mines N.L. From 1989 Allan Endresz and Mr Endresz held 51% of the issued shares in this company. Until 18 December 1990 the company was listed on the Australian Stock Exchange ("ASX") but, on that date, was delisted pursuant to an ASX discretionary rule. 5 In April 1991 Mrs Endresz was appointed a director of CTC. On 11 June 1993 Allan Endresz resigned as director and secretary and Mr Endresz was appointed as secretary in his place. Mr Forge was appointed a director of CTC on 9 September 1994. 6 In 1992, a registered fixed and floating Charge of $1,000,000.00 was registered over all the assets of CTC in favour of Kamanga. 7 In the early 1990's CTC retained Davis Samuel Pty Limited ("Davis Samuel") as a corporate advisor. This company was owned as to 50% of its shares by Kamanga. In 1994 CTC brought a claim for damages in the Supreme Court of Western Australia against the ASX, alleging that its delisting had been wrongful. Damages were claimed, ranging between $37,000,000.00 and $1,500,000,000.00. Davis Samuel conducted the action on behalf of CTC, originally in consideration of its receiving 60% of damages recovered. A subsequent variation of these arrangements involved CTC purchasing half of the 60%, whilst the remaining 30% was sold to Kamanga. Instead of the previous arrangements Davis Samuel was given a fee of $60,000.00 per month from 1 May 1998 onwards in consideration of its continuing to prosecute the claim. 8 CTC has about 1,200 shareholders but no annual general meeting of the company was held between 1991 and 1997. On 23 March 1998 an annual general meeting was held in respect of those years. The accounts for 1991 to 1997 were produced to the meeting and were approved. These accounts referred to the fact that CTC was fully supported by Kamanga, the auditors (Messrs. Ernst & Young) expressing doubts as to CTC's ability to continue as a going concern unless provided by support from Kamanga. It was not possible to determine whether Kamanga had the relevant ability to provide support. 9 These accounts, when presented, indicated significant operating losses in the years 1994 to 1997. In 1994 there was a loss of $164,000.00. In 1997 the loss was $344,000.00. Accumulated losses had increased each year with the result that the accounts indicated that shareholders' equity was, in fact, a deficiency of $1,427,273.00 in 1997. The company had earned no income over that period. 10 The events with which these proceedings are concerned occurred in April 1998. In that month CTC received into its funds the amount of $6,000,000.00. This amount was received from the Commonwealth of Australia and was characterised as payment for 60,000 redeemable convertible non-cumulative A-Class preference shares called CTC Capital Bonds Series 1, the issue price being $10.00 per share. A dividend of 6.5% was to be paid annually and there was to be a guaranteed redemption of the capital at the end of four years. 11 The circumstances attending the entry into of this capital raising exercise and the receipt of the payment are not in issue in these proceedings. It is the manner in which the amount received was dealt with, by way of disbursement, that is called in question." 14 A portion of the $6,000,000.00 received from the Commonwealth of Australia was invested in a Commercial Bill Facility. The balance, $3,596,348.90, was disbursed in eight transactions as summarised below: Transaction Date Description 1 20.04.98 $2,205,000 to Kamanga 2 20.04.98 $260,000 to Bisoya 3 29.05.98 $40,833 to Kamanga 4 28.05.98 $10,833 to Bisoya 5 28.10.98 $250,000 to Kamanga 6 30.10.98 $100,000 to Kamanga 7 27.10.98 $75,000 to Bisoya 8 13.11.98 $150,000 to Kamanga 15 The first two transactions involved the retrospective payment by CTC of management fees to Kamanga and Bisoya respectively. The third and fourth involved payment by CTC of future management fees to Kamanga and Bisoya respectively. The final four transactions related to unsecured loans CTC made to Kamanga and Bisoya respectively. Transactions 5 and 6 were two tranches of one loan of $350,000. Transaction 7 was a loan to Bisoya to enable Mr Forge to facilitate a Family Law settlement. 16 ASIC complained that the eight transactions occurred in breach of relevant sections of the Corporations Law. Its Originating Process summarised the application as follows: "This application concerns conduct that occurred in 1998. The application is made under subsection 1317EB of the Corporations Law, which continues to apply to the conduct pursuant to subsection 1473(1) of the Corporations Law. The conduct involved contraventions of certain provisions of the Corporations Law that were in force in 1998, namely subsections 232(2), 232(4), 232(6), 243ZE(2) and 243ZE(3) of the Corporations Law . This application seeks civil penalty orders under provisions of the Corporations Law that were in force in 1998 and which continue to apply regarding the conduct pursuant to subsection 1473(1) of the Corporations Law . The civil penalty orders that the application seeks are declarations under subsection 1317EA(2) of the Corporations Law and orders under subsection 1317EA(3) of the Corporations Law …. ". 17 ASIC complained, in substance, that the eight transactions had been entered into in breach of the appellants' duties as officers of CTC and also fell foul of the related party transaction provisions in the Corporations Law. It sought declarations that the appellants, as officers of CTC, had contravened ss 232(2), (4) and (6) of the Corporations Law by "approving, permitting and allowing" CTC to enter into each relevant transaction. In addition it sought declarations that the personal appellants had each, "by being involved in or by being recklessly concerned in or by being party to" the transactions, contravened s 243ZE(3) of the Corporations Law in relation to CTC. It also sought declarations that Kamanga and Bisoya had respectively contravened s 243ZE(2) of the Corporations Law in relation to the payments they had received as a result of the impugned transactions. The legislative framework: substantive provisions 18 ASIC contended that the provisions of the Corporations Law in force at the time of the various transactions governed the proceedings. It relied upon the following provisions. 19 The allegations of breaches of directors' duties related to the following provisions of the Corporations Law: "s. 232(2) An officer of a corporation shall at all times act honestly in the exercise of his or her powers and the discharge of the duties of his or her office. s. 232(4) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties. s. 232(6) An officer or employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation. s.232(6B) Subsections (2), (4), (5) and (6) are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening any of them, or of being involved in a contravention of any of them." 20 The following provisions of the Corporations Law were relevant to the related party transaction allegations: "SECT 243F Related party of a public company (1) Each of the following is a related party of a public company: (a) a director of the public company; (b) a director of a body corporate that is a parent entity of the public company; (c) one of the persons constituting an entity (other than a body corporate) that is a parent entity of the public company; (d) a spouse or de facto spouse of such a director or person; (e) a parent, son or daughter of such a director, person, spouse or de facto spouse; (f) an entity (other than a child entity of the public company) over which: (i) a person of a kind referred to in paragraph (a), (b), (c), (d) or (e) has control; or (ii) 2 or more such persons together have control; (g) a parent entity or sibling entity of the public company." "SECT 243H Prohibited financial benefits to related parties of public companies (1) A public company must not give a financial benefit to a related party except as permitted by Part 2E.4 or 2E.5." 21 Sections 243K and 243N, which appeared in Part 2E.4, relevantly provided: "SECT 243K Remunerating officers (1) A body corporate may pay or provide remuneration to a person in a capacity as an officer of the body if it is reasonable for a body corporate in the body's circumstances to pay or provide that remuneration to an officer in the person's circumstances. (2) A body corporate may pay or provide remuneration to a person in a capacity as an officer of the body if: (a) the body does so as required by a contract between the body and the person; and (b) it was reasonable for a body corporate in the body's circumstances to make that contract with an officer in the person's circumstances. (3) An entity may give a financial benefit to a person in the person's capacity as an officer of a body corporate if subsection (1) or (2) would permit the body itself to give the benefit to the person in that capacity. (4) Any of the following paid by a body corporate to an officer of the body as such (however the rate or amount is worked out) is remuneration paid by the body to the officer: (a) salary; (b) wages; (c) bonuses; (d) allowances paid for the sole purpose of meeting expenses incurred in connection with performing services as such an officer. … (8) Subsections (4) to (7B), inclusive, have effect for the purposes of subsections (1), (2) and (3), but nothing in them limits the generality of: (a) the expression "remuneration" in subsections (1) and (2); or (b) anything else in subsections (4) to (7B), inclusive. SECT 243N Financial benefit on arm's length terms (1) A public company, or a child entity of a public company, may give a financial benefit to a related party of the public company if it does so on terms and conditions no more favourable to the related party than those on which it is reasonable to expect that the company or entity, as the case may be, would give the benefit directly if dealing with the related party at arm's length in the same circumstances. (2) In the case of a loan or other financial accommodation, the matters to consider for the purposes of subsection (1) include, for example: (a) the amount of the loan or the extent of the accommodation; (b) what interest or charges are payable; (c) the credit risk; (d) what security is given; (e) the timetable for repayments of amounts owing and for payments of interest or charges." 22 Section 243ZE, which appeared in Part 2E.6 dealing with Enforcement, relevantly provided (notes omitted): "s 243ZE (1) This section applies if: (a) a related party of a public company receives a financial benefit from the public company… (b) the public company contravenes subsection 243H(1) …, by giving the benefit. (2) The related party contravenes this subsection. (3) Subject to subsection (4), a person contravenes this subsection if the person: (a) is involved (as defined in section 79) in; or (b) is, by act or omission, directly or indirectly, recklessly concerned in, or party to the contravention of subsection 243H(1) or (2), or the contravention of subsection (2) of this section. (4) Neither the public company …: (a) is guilty of an offence because of the contravention of subsection 243H(1) or (2); or (b) is taken to be involved in, or concerned in or party to: (i) a contravention of subsection (2) of this section by the related party or by any of the persons constituting the related party; or (ii) a contravention of subsection (3) of this section by a person. (5) Subsections (2) and (3) are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening, or of being involved in a contravention of, either of them. (6) In a proceeding against a person for: (a) a contravention of subsection (2); or (b) a contravention of subsection (2) because of section 243ZG, 1317DB, 1317DC or 1317DD; it is a defence if it is proved that the person was unaware of a fact or circumstance essential to the contravention of subsection 243H(1) or (2), as the case requires." 23 Section 79 of the Corporations Law which was referred to in s 243ZE(3)(a) relevantly provided: " s. 79 … A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." The legislative framework: transitional provisions 24 The transitional provisions argument took its colour both from amendments to the Corporations Law prior to 15 July 2001 and from the change, effective from 15 July 2001, from the regulation of corporations through State and Territory legislation to their regulation by federal legislation, the Corporations Act. The latter change was consequent upon the States enacting the Corporations (Commonwealth Powers) Act 2001 which had the effect of referring matters relating to corporations and financial products and services to the Parliament of Australia under s 51(xxxvii) of The Constitution. The Corporations Act was a product of that referral of power. 25 The legislative matrix which supported the regulation of corporations prior to 15 July 2001 was described by Gummow and Hayne JJ in Re Wakim; ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 at 566 [87] – [88] as follows (footnotes omitted): "87 During 1989 and 1990, the Commonwealth and each of the States passed legislation intended to replace the co-operative scheme of companies and securities codes that had operated between 1982 and 1989. The Commonwealth enacted the Corporations Act 1989 (Cth) ("the Commonwealth Corporations Act ") and the Australian Securities Commission Act 1989 (Cth) and made regulations under those Acts. The Commonwealth Corporations Act provides in s 5: "The Corporations Law set out in section 82 as in force for the time being: (a) applies as a law for the government of the Capital Territory; and (b) as so applying, may be referred to as the Corporations Law of the Capital Territory." Each State passed an Act, the purposes of which were described as being: "(a) to apply certain provisions of the Corporations Act 1989 of the Commonwealth and the Australian Securities Commission Act 1989 of the Commonwealth and of regulations under those Acts as laws of [name of State]; and (b) to apply certain other laws of the Commonwealth as laws of [name of State] for the purpose of the administration and enforcement of the law relating to corporations, the securities industry, the futures industry and some other matters." 88 Section 82 of the Commonwealth Corporations Act sets out the Corporations Law of the Capital Territory. The provisions that are applied by the State Corporations Act s include the Corporations Law set out in s 82 of the Commonwealth Corporations Act ." 26 Prior to 13 March 2000 Part 9.4B of the Corporations Law dealt with the civil and criminal consequences of contravening civil penalty provisions. 27 Division 2 dealt with "Civil Penalty Orders". "Civil penalty order" was defined in s 9 to mean "a declaration or order made under section 1317EA". 28 An application for a civil penalty order could be made by ASIC, a Commission delegate or a person authorised by the Minister (s 1317EB(1)). Applications for civil penalty orders had to be made within six years after the contravention (s 1317EC). In hearing and determining an application for a civil penalty order the Court was required to apply the rules of evidence and procedure that applied in hearing and determining civil matters (s 1317ED(1)). 29 Section 1317EA applied when the Court was satisfied that a person had contravened a civil penalty provision. In such circumstances the Court was required (subject to one exception under Division 4) to make a declaration of contravention of the relevant civil penalty provision (s 1317EA(2)). The Court was also given discretion to make an order prohibiting the person from managing a corporation for a specified period (s 1317EA(3)). Such an order could not be made if the Court was satisfied that, despite the contravention, the person was a fit and proper person to manage a corporation (s 1317EA(4)). 30 The Court could also order the person the subject of the declaration to pay a pecuniary penalty to the Commonwealth (s 1317EA(3)), but such an order could not be made unless the Court was satisfied that the contravention was a "serious one" (s 1317EA(5)). 31 The Corporations Law was amended on 13 March 2000 by the Corporate Law Economic Reform Program Act 1999 (the "CLERP Act"). The CLERP Act repealed Chapters 2D and 2F of the Corporations Law in which the provisions of the Corporations Law to which ASIC's Originating Process referred were found. It inserted a substitute Chapter 2D dealing with "Officers and employees" and a substitute Chapter 2E dealing with "Related party transactions". It repealed Part 9.4B of the Corporations Law and substituted a new Part 9.4B dealing with the civil consequences of contravening civil penalty provisions. It also inserted s 1473 which provided: "s.1473 (1) Part 9.4B of the old Law continues to apply in relation to: (a) a contravention of a civil penalty provision listed in section 1317DA of the old Law; or (b) an offence committed against one of those civil penalty provisions; despite its repeal." 32 "[O]ld Law" meant the Corporations Law as in force immediately before the commencement of Schedule 1 to the CLERP Act: s 1466 CLERP Act. Schedule 1 contained the main amendments to the Corporations Law. 33 Subsections 232(2), (4), (5) and (6) and ss 243ZE(2) and (3) were listed in s 1317DA of the old Law. 34 The Corporations Law of the States and Territories was repealed, with effect from 15 July 2001, and replaced by the Corporations Act. That Act re-enacted (inter alia) Chapters 2D and 2F as enacted by the CLERP Act. 35 Chapter 10 of the Corporations Act deals with Transitional Provisions. I set out below the provisions which are relevant to the appeal. 36 Section 1370 provides: " Object of Part (1) Subject to subsection (3), the object of this Part is to provide for a smooth transition from the regime provided for in the old corporations legislation of the States and Territories in this jurisdiction to the regime provided for in the new corporations legislation, so that individuals, bodies corporate and other bodies are, to the greatest extent possible, put in the same position immediately after the commencement as they would have been if: (a) that old corporations legislation had, from time to time when it was in force, been valid Commonwealth legislation applying throughout those States and Territories; and (b) the new corporations legislation (to the extent it contains provisions that correspond to provisions of the old corporations legislation as in force immediately before the commencement) were a continuation of that old corporations legislation as so applying." 37 "[O]ld corporations legislation" of a particular State or Territory is relevantly defined in s 1371 to mean: "(a) the old Corporations Law and old Corporations Regulations of that State or Territory, and any instruments made under that Law or those Regulations; and (b) the old application Act for that State or Territory, and any instruments made under that Act; and (c) either: (i) when used in relation to a State or the Northern Territory — the laws of the Commonwealth as applying in relation to the old Corporations Law and the old Corporations Regulations of the State or Territory from time to time before the commencement as laws of, or for the government of, that State or Territory because of Part 8 of the old Application Act for that State or Territory, and any instruments made under those laws as so applying; …" 38 "[N]ew corporations legislation" of a particular State or Territory is relevantly defined in s 1371 to mean the Corporations Act. 39 Section 1383 deals with proceedings which had been commenced under the old corporations legislation. It provides: "SECT 1383 Treatment of court proceedings under or related to the old corporations legislation — proceedings other than federal corporations proceedings (1) This section applies to a proceeding, other than a federal corporations proceeding, in relation to which the following paragraphs are satisfied: (a) the proceeding was started in a court before the commencement; and (b) the proceeding was: (i) under a provision of the old corporations legislation of a State or Territory in this jurisdiction; or (ii) brought as, or connected with, a prosecution for an offence against a provision of the old corporations legislation of a State or Territory in this jurisdiction; and (c) the proceeding was not an enforcement proceeding, or an appeal or review proceeding, in relation to an order of a court; and (d) the proceeding had not been concluded or terminated before the commencement; and (e) either: (i) if the proceeding is a primary proceeding—no final determination of any of the existing rights or liabilities at issue in the proceeding had been made before the commencement; or (ii) if the proceeding is an interlocutory proceeding—this section applies… (2) In this section: (a) the proceeding to which this section applies is called the old proceeding ; and (b) the provision of the old corporations legislation referred to in whichever of subparagraphs (1)(b)(i) and (ii) applies is called the relevant old provision. (3) A proceeding ( the new proceeding ) equivalent to the old proceeding is, on the commencement, taken to have been brought in the same court, exercising federal jurisdiction: (a) if subparagraph (1)(b)(i) applies — under the provision of the new corporations legislation that corresponds to the relevant old provision; …" To the extent that the old proceeding, before the commencement, related to pre-commencement rights or liabilities, the new proceeding relates to the substituted rights and liabilities in relation to those pre-commencement rights or liabilities. Note 1: See sections 1400 and 1401 for the creation of substituted rights and liabilities. Note 2: In all cases, there will be a provision of the new corporations legislation that corresponds to the relevant old provision, either because: (a) the new corporations legislation actually contains a provision that corresponds to the relevant old provision; or (b) the new corporations legislation, because of section 1401 or 1408, is taken to include the relevant old provision (whether with or without modifications), in which case the provision so taken to be included will be the corresponding provision." 40 "Corresponds" is relevantly defined in s 1371 as follows: "(2) Subject to subsection (4), for the purposes of this Part, a provision or part (the old provision or part) of the old corporations legislation of a State or Territory corresponds to a provision or part (the new provision or part) of the new corporations legislation (and vice versa) if: (a) the old provision or part and the new provision or part are substantially the same, unless the regulations specify that the 2 provisions or parts do not correspond; or (b) the regulations specify that the 2 provisions or parts correspond." Note: The range of provisions of the new corporations legislation that may be corresponding provisions for the purposes of this Part is affected by sections 1401 and 1408, which take certain provisions of the old corporations legislation to be included in the new corporations legislation. (3) For the purposes of paragraph (2)(a), differences of all or any of the following kinds are not sufficient to mean that 2 provisions or parts are not substantially the same: (a) differences in the numbering of the provisions or parts; (b) differences of a minor technical nature (for example, differences in punctuation, or differences that are attributable to the correction of incorrect cross references); (c) the fact that one of the provisions refers to a corresponding previous law and the other does not; (d) that fact that: (i) the old provision or part allowed a court to exercise powers on its own motion but the new provision or part does not; or (ii) the old provision or part required a court to apply a criterion of public interest but the new provision or part requires a court to apply a criterion of justice and equity; or (iii) the new provision or part requires ASIC to take account of public interest but the old provision or part did not; (e) other differences that are attributable to the fact that the new corporations legislation applies as a Commonwealth law throughout this jurisdiction; (f) other differences of a kind prescribed by the regulations for the purposes of this paragraph. This subsection is not intended to otherwise limit the circumstances in which 2 provisions or parts are, for the purposes of paragraph (2)(a), substantially the same." 41 Section 1401 provides: "Sect 1401 Creation of equivalent rights and liabilities to those that existed before the commencement under repealed provisions of the old corporations legislation (1) This section applies in relation to a right or liability (the pre-commencement right or liability), whether civil or criminal, that: (a) was acquired, accrued or incurred under a provision of the old corporations legislation of a State or Territory in this jurisdiction that was no longer in force immediately before the commencement; and (b) was in existence immediately before the commencement. However, this section does not apply to a right or liability under an order made by a court before the commencement. (2) For the purposes of subsections (3) and (4), the new corporations legislation is taken to include: (a) the provision of the old corporations legislation (with such modifications (if any) as are necessary) under which the pre-commencement right or liability was acquired, accrued or incurred; and (b) the other provisions of the old corporations legislation (with such modifications (if any) as are necessary) that applied in relation to the pre-commencement right or liability. (3) On the commencement, the person acquires, accrues or incurs a right or liability (the substituted right or liability), equivalent to the pre-commencement right or liability, under the provision taken to be included in the new corporations legislation by paragraph (2)(a) (as if that provision applied to the conduct or circumstances that gave rise to the pre-commencement right or liability). Note: If a time limit applied in relation to the pre-commencement right or liability under the old corporations legislation, that same time limit (calculated from the same starting point) will apply under the new corporations legislation to the substituted right or liability—see subsection 1402(3). (4) A procedure, proceeding or remedy in respect of the substituted right or liability may be instituted after the commencement under the provisions taken to be included in the new corporations legislation by subsection (2) (as if those provisions applied to the conduct or circumstances that gave rise to the pre-commencement right or liability). Note: For pre-commencement proceedings in respect of substituted rights and liabilities, see sections 1383 and 1384." 42 Section 1408 provides: " SECT 1408 Old transitional provisions continue to have their effect (1) Subject to subsection (3), this Act has the same effect, after the commencement, as it would have if: (a) the transitional provisions (see subsections (6) and (7)) of the old Corporations Law s of the States and Territories in this jurisdiction (as in force from time to time before the commencement) had been part of this Act; and (b) those transitional provisions produced the same results or effects (to the greatest extent possible) for the purposes of this Act as they produced for the purposes of those old Corporations Law s." 43 After hearing the argument on these grounds of appeal as a preliminary objection to the proceedings the Court indicated it overruled that objection. I am of the view that that was the appropriate course for the following reasons. Transitional provisions argument 44 The primary judge considered the appellants' argument that the proceedings were incompetent in his first judgment in the proceedings: Australian Securities and Investments Commission v William Arthur Forge and five Others (Supreme Court of New South Wales, unreported, 12 March 2002). This argument depended upon the proposition that the effect of the commencement of the Corporations Act on 15 July 2001 was to render ASIC's proceedings a nullity which could only be cured by the bringing of fresh proceedings pursuant to the Corporations Act. His Honour rejected that submission, holding that ASIC's proceedings were properly framed under the Corporations Law by virtue of the transitional provisions in the Corporations Act. 45 In the primary judge's view the situation was governed by s 1383 and s 1401 of the Corporations Act. He held that ss 1383(1)(a), (b) and (c) applied to a civil liability incurred under a provision of the old corporations legislation of a State in existence immediately before the commencement of the Corporations Act. The effect of ss 1401(2) and (3) was that a person incurred a liability on the commencement of the new Corporations Act equivalent to his pre-commencement liability which was taken to be included in the new corporations legislation by virtue of s 1401(2)(a) as if that provision applied to the conduct or circumstances that gave rise to the pre-commencement right or liability: judgment, 12 March 2002 at [16] – [18]. 46 The challenge to the primary judge's conclusion on the effect of the repeal of the Corporations Law was made in the following grounds of appeal: "1. His Honour should have held that the proceedings which had been commenced under and for alleged contraventions of the Corporations Law , were not validly continued under the Corporations Act . 2. His Honour erred in holding that the provisions of the Corporations Law the subject of these proceedings continued to apply pursuant to ss 1383 and 1401 (or any other provisions) of the Corporations Act . 3. His Honour erred in his interpretation of ss 1383 and 1401 of the Corporations Act . 4. His Honour erred in having regard to the heading of s. 1401 of the Corporations Act when interpreting it. [This ground was not pressed]" 47 The argument Mr Biscoe QC advanced on the appellants' behalf on appeal was more sophisticated than that the primary judge was asked to consider. 48 Mr Biscoe QC's first argument accepted that the proceedings were caught by s 1383(1) of the Corporations Act so that, prima facie, s 1383(3) applied to them. However, he argued that in order that s 1383 could validly deem a new proceeding to have been brought under the Corporations Act, it was essential to identify a provision in the Corporations Act which corresponded to a "relevant old provision" of the Corporations Law: ss 1383(2), 1383(3)(a). He noted that for the purposes of the Corporations Act "corresponds" meant "substantially the same": s 1371(2). He pointed to the provisions relating to directors' duties in ss 180 - 182 and the provisions dealing with related party transactions in ss 208 - 211 and 243N of the Corporations Act and submitted that, even given the meaning of "corresponds" in s 1371(2), those provisions did not correspond with ss 232(2), 232(4) and 232(6) and ss 243ZE(2) and (3) of the Corporations Law. Accordingly, he argued, there was no proceeding before the Court under s 1383. 49 Alternatively, Mr Biscoe QC referred to Note 2 to s 1383 which I repeat for convenience: "Note 2: In all cases, there will be a provision of the new corporations legislation that corresponds to the relevant old provision, either because: (a) the new corporations legislation actually contains a provision that corresponds to the relevant old provision; or (b) the new corporations legislation, because of section 1401 or 1408, is taken to include the relevant old provision (whether with or without modifications), in which case the provision so taken to be included will be the corresponding provision." 50 Turning to s 1401(2), Mr Biscoe QC argued the words in that section "with such modifications (if any) as are necessary" meant that the provisions upon which ASIC relied as against the appellants became modified so as to accord with the provisions of the Corporations Act to which they bore some similarity. He submitted that the trial had proceeded on a different basis and, sub silentio, was invalidated on that basis. 51 ASIC argued that the primary judge's interpretation of the transitional provisions was correct. Mr Stack submitted that his Honour's conclusion was consistent with Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383 (reversed on appeal, Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559, but not on this point) and Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124. 52 In Shum Yip Properties v Chatswood Investment & Development, Austin J considered the transitional provisions in Chapter 10 of the Corporations Act which he, in my view fairly, described as "intricate" (at [9]) and concluded (at [12]) that the effect of ss 1401, 1408 and 1383 of the Corporations Act on proceedings instituted prior to the CLERP Act was that the Court was to continue to apply the substance of the pre-CLERP Act provisions of the Corporations Law, treating those provisions as if they were part of the new Corporations Act. 53 In Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591 at [3]; (2002) 169 FLR 383, Gzell J accepted that the effect of s 1401 of the Corporations Act was that ss 1317DA and 1317EA(3) of the Corporations Law were deemed to be included in the Corporations Act. 54 Mandie J reached the same conclusion in Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 where (at [336]) he said: "By virtue of s 1401(2), the new corporations legislation is taken to include the provisions of the old corporations legislation (with such modifications (if any) as are necessary) under which the pre-commencement liability was incurred, together with the other provisions of the old corporations legislation (with such modifications (if any) as are necessary) that applied in relation to the pre-commencement liability. In other words, for the purposes of this proceeding, the Corporations Act 2001 is taken to include the provisions of Pts 5.7B and 9.4B of the Corporations Law which were operative before 13 March 2000." 55 His Honour concluded (at [339]), after a detailed examination of the transitional provisions in Chapter 10 of the Corporations Act, that: "[339] The consequence of the foregoing provisions is that this proceeding (although in law a new federal proceeding under the new Act) continues, for all practical purposes, under the provisions by which any liability was initially incurred being those which also governed the proceeding when it was commenced. That accords with the object of Pt 10.1 of the Corporations Act 2001 as expressed in s 1370(1) …" (footnotes omitted) 56 In the present case, in my view, the appellants' argument failed for the following reasons. 57 The conduct of which ASIC complains took place in 1998. Under the then Corporations Law ASIC had six years to make an application for civil penalty orders: s 1317EC, Part 9.4B. 58 Although Part 9.4B was repealed by the CLERP Act, it continued to apply to a contravention of ss 232(2), (4) and (6) and ss 243ZE(2) and (3) which were listed in s 1317DA by virtue of s 1473 of the Corporations Law. When ASIC commenced proceedings in April 2001 against the appellants, it did so, as its Originating Process made plain, in reliance upon the preserved Part 9.4B. The proceedings were proceedings started before the commencement of the Corporations Act (s 1383(1)(c)) under a provision (Part 9.4B) of the old corporations legislation of a State (s 1383(1)(b)(i)). 59 Having reached this conclusion, it is necessary to determine for the purposes of s 1383(3)(a) whether there is or are provisions of the Corporations Act which correspond to the provisions of the Corporations Law referred to in s 1383(1)(b)(i). This requires consideration of s 1401 and, in particular, identification of the provision of the Corporations Law under which the pre-commencement liability "was acquired, accrued or was incurred": s 1401(2). 60 A contravention of ss 232 and 243ZE did not of itself create civil liability. The civil and criminal consequences of a contravention of those sections were provided for in Part 9.4B of the Corporations Law as in force prior to the commencement of the CLERP Act on 13 March 2000: ss 232(6B) and 243ZE(5); see also ASIC v Plymin, above, at [335]. Thus the civil liability of the appellants for the alleged contraventions of ss 232 and 243ZE was incurred under provisions of the "old corporations legislation" of New South Wales (Part 9.4B) which were no longer in force immediately before the commencement of the Corporations Act, having been repealed by the CLERP Act. This satisfied s 1401(1)(a) of the Corporations Act. 61 Further, the liability the appellants had incurred under Part 9.4B was "in existence immediately before the commencement" having been preserved by s 1473(1)(a) of the Corporations Law during the period 13 March 2000 to 15 July 2001: ASIC v Plymin, above, at [335]. This satisfied s 1401(1)(b) of the Corporations Act. 62 Accordingly, s 1401 of the Corporations Act applied in relation to the liability the appellants had incurred under the old Part 9.4B. That meant the Corporations Act was taken to include both the provisions of Part 9.4B of the Corporations Law under which the appellants' pre-commencement liability was incurred (s 1401(2)(a)) and the provisions of ss 232 and 243ZE of the Corporations Law which applied in relation to that pre-commencement liability (s 1401(2)(b)). 63 As the proceedings had been commenced prior to 15 July 2001, however, it was necessary to have regard to how those proceedings were dealt with under the Corporations Act. Both the appellants and ASIC argued the case on the basis that s 1383 of the Corporations Act was the provision which applied in those circumstances. In my view, s 1384 was the provision which applied to the proceedings as they were "federal corporations proceedings" being proceedings to which the Commonwealth, which for this purpose referred to ASIC, was a party: s 1382(1)(bb); and see Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559 at 584 per Gleeson CJ, Gaudron and Gummow JJ and ASIC v Plymin, above, at [337]. 64 Little turns upon whether the question is determined as one to which either s 1383 or s 1384 is applicable because, in both cases, the continuance of the proceedings requires the identification of "the provision of the new corporations legislation that corresponds to the relevant old provision": see s 1383(3)(a) and s 1384(3)(a) and see ASIC v Plymin, above at [338]. Mr Biscoe QC's argument, as I have earlier noted, was that there was no provision of the new corporations legislation which corresponded to the relevant old provision. 65 However, in my view, once it is understood that the effect of s 1401(2) was to treat the Corporations Act as including Part 9.4B as well as ss 232 and 243ZE of the Corporations Law it is plain that the s 1383(3)(a) requirement to identify a provision of the Corporations Act which corresponds to the relevant old provision was satisfied. The provisions are identical. They must, therefore, correspond. 66 Accordingly, the proceedings were either a new proceeding equivalent to the old proceeding taken, on commencement of the Corporations Act on 15 July 2001, to have been brought in the Supreme Court exercising federal jurisdiction under the provisions of the Corporations Act which corresponded with the relevant old provisions of the Corporations Law (s 1383(3)), or were continued in the Supreme Court as if they were and had always been a proceeding in relation to a matter to which the provision of the Corporations Act corresponding to the relevant old provision of the Corporations Law applied (s 1384(3)). 67 This conclusion is reinforced by the provision which appears in both ss 1383 and 1384 that "[t]o the extent that the old proceeding, before the commencement, related to pre-commencement rights or liabilities, the new proceeding relates to the substituted rights and liabilities in relation to those pre-commencement rights or liabilities". When the Corporations Act commenced the appellants incurred a liability, described in s 1401(3) as "the substituted liability", which was equivalent to the liability they had incurred under Part 9.4B of the Corporations Law. 68 In the light of the above analysis Mr Biscoe QC's argument concerning the modifications s 1401(2) effected should also be rejected. It proceeded on a misapprehension of the way the transitional provisions operate. 69 In Shum Yip Properties v Chatswood Investment & Development, above at [12], Austin J referred to the legislative scheme created by the transitional provisions as involving "tangled reasoning". In fairness to the legislature, it should be recalled that the transitional provisions in the Corporations Act operate in the federal legislative context to preserve rights and liabilities which arose or were incurred under the State and Territory legislative regimes I have earlier described. It is not surprising that the drafter, in that context, apparently operating out of more abundant caution, sought to achieve that result by a variety of routes. For example, s 1408 also appears to operate to continue Part 9.4B. The fact that provisions such as s 1401 and s 1408 might overlap was intended to ensure the object of Chapter 10 was achieved. This is made plain by s 1398, which provides: "The provisions of this Division deal at a broad level with concepts and matters in a way that is intended to achieve the object of this Part as set out in section 1370. Some of the provisions of this Division will (depending on the situation) have an effect that overlaps or interacts to some extent with the effect of other provisions of this Division. This is intended, and the provisions of this Division should be not be regarded as dealing with mutually exclusive situations." 70 Having regard to the conclusion I have reached concerning s 1401, it is unnecessary to consider the operation of s 1408. 71 The primary judge was correct to reject the appellants' argument that the proceedings were incompetent. In my opinion the proceedings were validly continued pursuant to the Transitional Provisions of Chapter 10 of the Corporations Act. 72 Grounds 1 to 3 of the appellants' grounds of appeal must be rejected. Contraventions of the Corporations Law The transactions 73 The primary judge made the following unchallenged findings concerning transactions 1 and 2: "18 The amount of $6,000,000.00 was received by CTC on 20 April 1998. At 11.30 am on that day there was a meeting of the company's directors, the minutes of which are in evidence. Those in attendance were Mr Endresz as Chairman, Mr Forge and Mrs Endresz. Under the heading "Management Fees and Retainer Kamanga Holdings Pty Limited", the minutes record the following: "The Chairman advised the meeting that the matter to be considered by the board concerned the past and future management fees and retainers with respect to Kamanga Holdings Pty Ltd. In view of his common directorship with Kamanga, the chairman advised that he would not vote on the matter nor would he be present whilst the board considered the matter pursuant to Section 232A of the Corporations Law. Accordingly, Mr Jozsef Endresz retired from the meeting and handed the chair over to Mr William Forge for the duration of this matter. Mr Forge confirmed that pursuant to the Articles of Association and the Corporations Law , the remaining directors constituted a quorum and the meeting was declared open to consider this matter. IT WAS RESOLVED to accept the invoice issued by Kamanga in respect of past management fees totalling $2,205,000 and calculated as to $245,000 p.a. over 9 years. This represented the enormous management contribution provided by Kamanga over the Company's most difficult and turbulent years in its Corporate history. IT WAS FURTHER RESOLVED to execute the attached Management Retainer with Kamanga on the basis of a minimum of $245,000 p.a. for a period of 5 years. This is to ensure that the Company retains Kamanga and its professional staff for such a minimum period. Payments to be made on a monthly basis commencing 1st May 1998. Having concluded this matter, Mr Forge invited Mr Endresz to rejoin the meeting and resume the chair." 19 Under the heading "Management Fees Bisoya Pty Ltd., the following is minuted: "Mr Forge advised the meeting that the matter to be considered by the board concerned the past and future management fees and retainers with respect to Bisoya Pty Ltd. In view of his common directorship with Bisoya Mr Forge advised that he would not vote on the matter nor would he be present whilst the board considered the matter pursuant to Section 232A of the Corporations Law . Accordingly, Mr Forge retired from the meeting for the duration of this matter. Mr Jozsef Endresz confirmed that pursuant to the Articles of Association and the Corporations Law , the remaining directors constituted a quorum and the meeting was declared open to consider this matter. IT WAS RESOLVED to accept the invoice issued by Bisoya in respect of past management fees totalling $260,000 and calculated as to $65,000 p.a. over 4 years. IT WAS FURTHER RESOLVED to execute the attached Management Retainer with Bisoya on the basis of a minimum of $65,000 p.a. for a period of 5 years. Payments to be made on a monthly basis commencing 1st May 1998. Having concluded this matter, Mr Endresz invited Mr Forge to rejoin the meeting and resume his board position." 20 It may be noted that the invoice referred to, relating to Kamanga, was dated 20 April 1998 and that relating to Bisoya was dated 21 April 1998." 74 The primary judge made the following unchallenged findings concerning transactions 3 - 8: "39 I find Transaction 3 established, namely a payment of $40,833.34 by CTC to Kamanga on 26 May 1998. This represents two monthly payments to Kamanga, pursuant to a Consultancy Agreement approved at the CTC board meeting of 20 April 1998. The Consultancy Agreement is in evidence and refers to the retainer sum of $245,000 per year, the Principal Officer of Kamanga being Allan Endresz. Kamanga is to perform and provide advisory services including strategic and business planning, marketing, financial and organisational services. It is also to carry out the role of Public Officer of CTC. The payment relates to management fees for the months of May and June. The directors involved in the authorising of the payments are Mr Forge, Mr Endresz, Mrs Endresz and, it is alleged, Allan Endresz. … 40 Transaction 4 involved the payment of $10,833.34 by CTC to Bisoya. Again there is a Management Agreement dated 20 April 1998, the Principal Officer of Bisoya being Mr Forge. The amount represents management fees for May and June. The directors involved are Mr Forge, Mr Endresz and Mrs Endresz. Bisoya is involved as the recipient of the payment. 41 Transactions 5 and 6 involve a loan by CTC to Kamanga of $350,000 broken up into two payments, one of $250,000 and the other of $100,000 being, respectively, transactions 5 and 6. There is a Loan Agreement bearing date 27 October 1998 signed by Mr Endresz on behalf of Kamanga which confirms the acceptance from CTC of a loan in the amount of $350,000 dated that date and for the term of twelve months. It is a loan without security. The loan was approved on 27 October 1998 at a Directors' Meeting of CTC at which Mr and Mrs Endresz were present together with Mr Forge. As previously, because of the common directorship Mr Forge absented himself from the Directors' Meeting and Mr and Mrs Endresz resolved to confirm and ratify the loan of $350,000 to Kamanga. The documentation to which I have been taken clearly indicates the payment from CTC to Kamanga of $250,000 on 28 October as an unsecured loan. 42 Transaction 6 is the balance of the unsecured loan being the amount of $100,000. It is debited to CTC on 30 October. The documents indicate quite clearly that it represented the "balance of loan facility" to Kamanga. 43 Transaction 7 relates to a $75,000 loan to Bisoya. On 27 October 1998 a Loan Agreement was executed by Bisoya by Mr Forge as sole director and secretary. It was to be an unsecured loan from CTC for a period of twelve months. Relevant documentation shows its payment and receipt on 30 October 1998. 44 Transaction 8 was a loan of $150,000 by CTC to Kamanga, received on 13 November 1998. There was a Loan Agreement in the same format as the previous Loan Agreements. It is an unsecured loan. The loan is authorised in a meeting of CTC directors conducted in the same way as previous meetings to avoid relevant directors voting in matters in which they had an interest." Events following the transactions: the auditors' concerns 75 Soon after transactions 1 and 2 were effected, Ernst & Young, CTC's auditors, raised various concerns in relation to the 20 April 1998 transactions. The primary judge placed considerable weight on the contrast between the response the appellants gave to the auditors' concerns and the explanations given for the transactions during the trial. 76 In their draft "Summary Review Memorandum" (the "Review Memorandum") (which, although headed "Year ended 30 June 1997", it was accepted related to the 30 June 1998 financial year), the auditors recorded that CTC had made a loss of approximately $3.8 million for that year compared to $164,000 for the 1997 financial year. The Review Memorandum attributed that loss "predominantly … to the following factors." These factors included the payment of the management fees of $2.25 million to Kamanga (transaction 1) and the management fees of $0.27 million paid to Bisoya (transaction 2). 77 Under the heading "Significant Accounting and Auditing Issues" the Review Memorandum referred to the issue of the 600,000 redeemable convertible non-cumulative preference shares and to the annual dividends payable in respect of them and noted that this should be recognised as a financial liability of CTC. While the Review Memorandum noted that "[t]he Commonwealth Bank has provided a capital guarantee for the full amount to be redeemed", Mr Walsh, the Ernst & Young audit partner responsible for CTC's audit, said in his affidavit of 27 June 2001 that he had issued a bank confirmation request to the Albury branch of the Commonwealth Bank in relation to this "guarantee" but had been "unable to obtain confirmation as to [its] existence". 78 After referring again to the payment of the management fees and noting that these payments were funded from the $6,000,000.00 resulting from the issue of the redeemable convertible non-cumulative preference shares, the Review Memorandum continued under the heading "Potential breach of Corporations Law": "s 243 of the Corps Law governs financial benefits to related parties. S 243H states that a public company must not give a financial benefit to a related party except as permitted by Division 4 or 5. Essentially, where the transaction is not at arms length, or the remuneration is not reasonable, the payment of the benefit must be approved in a general meeting by non-involved shareholders. Given the financial performance of CTC, it appears difficult to maintain an argument that the remuneration was reasonable. CTC have not notified the ASIC of any of their related party transactions, thus it appears EY are required to notify the ASIC of the breach of s 243H." 79 The Review Memorandum also dealt with the agreement with Davis Samuel relating to the claim against the Australian Stock Exchange as follows: "This agreement was amended in April 1998, whereby CTC paid Davis Samuel $300,000 (plus a monthly retainer of $6,000) in return for CTC increasing their share of any damages awarded to 70%. CTC have attempted to capitalise these costs in the expectation of a substantial damages payment from the claim against the ASX. We have been unable to find adequate evidence supporting the Directors' assertion that a damages payout is likely in the foreseeable future. EY have discussed the status of the claim with Michael McPhee, Partner of Michell Sillar McPhee [the] law firm running CTC's case. Per McPhee, the case has not yet gone to trial and is unlikely to do so before the middle of 1999. McPhee stated that proving CTC had incurred loss as a result of their delisting would be difficult, and that even if judgment was obtained then the ASX had the option of appealing to the full bench of the WA Supreme Court and ultimately the High Court (pending special leave). Based on the above, EY consider any future benefit arising from the legal costs incurred to be uncertain and immeasurable. Client will be asked to expense all legal costs, and failure to [do] so will result in EY qualifying the audit report to reflect the disagreement with management (given the costs are material)." 80 On 24 September 1998, Mr Walsh wrote to the directors of CTC in relation to what his letter described as "a number of related party transactions" which had been encountered in the audit. Reference was then made to transactions 1 and 2 which were characterised as retrospective payments of management fees. The letter also referred to the Management Retainers which committed CTC to future management fees of $245,000 per annum to Kamanga and $65,000 per annum to Bisoya for the next 5 years. The letter then relevantly said: "Based upon our review of the company's statutory records and register we are not aware of shareholder approval being obtained for these transactions, should it be required. In order for us to make an assessment as to the adequacy of the disclosure of these transactions in the financial statements and to assist us in fulfilling any other statutory duties imposed on us in relation to these matters, would you please provide us with further clarification as to the circumstances surrounding these payments. In particular, our duties extend to making an assessment as to whether the transactions are at arms length, and whether the quantum of remuneration is reasonable. Could you please provide the following details, - how the transactions arose; - how the amounts involved were arrived at; and - what approval process was undertaken. In addition, could you also provide us details as to the shareholding of directors in Kamanga Holdings Pty Ltd and Bisoya Pty Ltd, to assist us in determining whether those shares are held by all members of those entities as nominees for CTC." 81 Finally, the letter referred to the auditors' duty, in the event they were unable to satisfy themselves in relation to the transactions, to "notify the ASIC of any Corporations Law consequences". 82 Allan Endresz replied to Ernst & Young's letter on 15 December 1998 describing himself as "Corporate Advisor". His reply relevantly stated: "I refer to your letter dated 24th September 1998 in respect of the related party transactions with CTC Resources N.L. and advise as follows: 1. Davis Samuel is a partnership owned equally by Quancorp Pty Ltd and Kamanga Holdings Pty Ltd. As Mr Jozsef Endresz does not control this entity pursuant to Section 243F(1)(f)(i), it is not a related party. Any reference in the Financial Statements of Davis Samuel being a related party should be removed. ... 4. With respect to the management fees of $2,205,000 paid retrospectively for the past 9 years to Kamanga Holdings Pty Ltd together with contracts committing CTC to future management fees of $245,000 per annum for the next 5 years, we advise as follows: The Related Party issues above are exempt pursuant to Section 243K as a financial benefit may be given if it is reasonable to provide that remuneration or it was reasonable to make that contract. In this regard, the services provided by Kamanga include, but are not limited to, the full time involvement of three (3) persons, namely: Jozsef Endresz, Dawn Endresz and Allan Endresz. This equates to an effective annual cost to CTC of $81,666 per person. The hourly contribution by these parties exceeds 60 hours per week per person for their professional services. It is considered that in light of these onerous hours, extensive responsibilities and market comparisons, the management contracts (both past and present) are reasonable to CTC. However, from Kamanga's perspective, these fees represent payments for services well below their true market worth. In addition, Kamanga was deprived of the use of such money for a period of 9 years with no annual reviews to market even though CTC received such services with considerable benefits to CTC and its shareholders. 5. With respect to the management fees of $260,000 paid retrospectively for the past 4 years to Bisoya Pty Ltd together with contracts committing CTC to future management fees of $65,000 per annum for the next 5 years, we confirm that the Related Party issues are exempt pursuant to Section 243K as detailed in clause 4 above. The services provided by Mr William Forge are reasonable in view of the hours contributed and remuneration payable of $65,000 per annum. I trust that the above satisfies your queries and welcome any further discussion in respect of these issues." (italics in original) 83 As the primary judge found (at [28]), "[i]t is clear that this response was not regarded as satisfactory by Ernst & Young, with the result that Mr Walsh, on 15 January 1999 wrote to Allan Endresz indicating that he had 'a number of follow-up queries' which he stated as follows:- "I. Is there any further evidence other than in your letter dated 15 December 1998 as to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd during the period ended 30 June 1998? II. When did the amounts specified in Point I become due and payable? What event triggered this date? What agreements existed that required the amounts to be paid? III. Why was the portion of remuneration paid to Kamanga and Bisoya in the year ended 30 June 1998 which related to prior periods not disclosed as a contingent or actual liability in prior period accounts?" " 84 Mr Jozsef Endresz responded to Mr Walsh on 15 February 1999, writing: "I. Further evidence with respect to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd includes the following: · As a result of Kamanga's business interests, particularly in Davis Samuel, CTC benefits (at no cost) from an extensive research data base (both legal and corporate) and professional outsourcing. Professionals accessed have included Alan Myers Q.C., Alan Archibald Q.C., Blake Dawson Waldron and Michell Sillar McPhee. In this regard, Kamanga brings to CTC an entire corporate package of not only professional advice but also a dedicated team of Board members who receive no direct salaries or fees as they undertake their duties. The extent of this professionalism is verified in the attached corporate profile of Davis Samuel. · During the past 9 years, Kamanga has incurred additional professional fees for outsourced work to the benefit of CTC. These fees have not (nor will be) invoiced to CTC as Kamanga considers them part of the overall service provided to CTC. To verify this, I refer you to Kamanga's extensive legal and corporate work including (but not limited to) numerous leading Federal and High Court cases (ie. ATO franking credits, Private Ruling System, SIB Resources N.L., Ando Minerals N.L.), drafting and completing numerous corporate proposals and funding packages (ie. Information Memorandums for raising equity and asset acquisitions), major debt settlements (ie. Westpac Banking Corporation), other debt and litigation settlements (ie. Elders Finance and Tivmoss), creditor liaison (three unlisted companies and subsidiaries with over 150 individual creditors), taxation and corporate re-structuring, extensive research and advice on ASX $37 million Damages claim, proposed implementation of marketing and profile strategies for the CTC Premium Bonds, corporate and community based sponsorship programs together with unique and innovative utilisation of Davis Samuel products including substantial proposed takeovers. · Additional professional work undertaken by Kamanga has not been factored into the management fee structure of past years nor the current 5 year retainer. To measure the substantial benefits derived by CTC and therefore the reasonableness of such fees, I refer you to the $120,000 fee rendered by Ernst & Young with respect to taxation aspects of transferring franking credits. Although the concept and a majority of the research was developed and structured by Kamanga (together with external legal advisers), Kamanga did not (nor has) received additional fees for this onerous service. Accordingly, the level of fees rendered must be placed in perspective. The working hours engaged by Kamanga personnel, together with their extensive professional input and research, ensures that the fees rendered are reasonable. · With respect to Bisoya, Mr Forge brings to CTC expertise by virtue of his external public company directorships in the resource sector. In this regard, I refer to his directorships with Growth Resources N.L., Kanowna Lights N.L., and Hallmark Gold N.L. Mr Forge delivers to CTC potentially a number of resource projects and other networking within the resource sector. Management fees paid and or payable to Bisoya are therefore reasonable when compared with fees paid to public company directors. II. The amounts specified in Point I. became due and payable upon receipt of the Invoices dated 20th April 1998. There were no previous agreements that required the amounts to be paid. The CTC board carefully reviewed and discussed the prospects of past management fees upon receipt of the proposed five year management agreements and invoices. In light of the onerous and significant commercial projects now undertaken by CTC, the board concluded that not only should a further five year professional relationship be maintained with Kamanga & Bisoya, but that these entities were entitled to previous years' management fees. III. As detailed in Point II. above, the liability had arisen on 20th April 1998 and was therefore neither a contingent nor actual liability in prior period accounts." 85 Again, as the primary judge found (at [29]), Ernst & Young were "unimpressed and unpersuaded". Mr Walsh said in his affidavit that the contents of that letter were not sufficient to enable Ernst & Young to complete the audit of CTC. He wrote to the directors of CTC again on 4 March 1999 reminding them that CTC was a public company and that "the documentation previously forwarded has not been sufficient to enable us to form an opinion as to the compliance or otherwise of the transactions with the relevant provisions of the Corporations Law." He asked: " Remuneration to director related entities 1. Is there any further as yet previously undisclosed evidence as to the reasonableness of fees paid to Kamanga Holdings Pty Ltd and Bisoya Pty Ltd during the period ended 30 June 1998? For example, could the parties involved be requested to provide more detailed invoices (ie projects/tasks/hours) concerning the services provided? 2. Why was there no disclosure in prior year financial statements regarding an actual or contingent liability to pay management fees/other remuneration to any director related entities? 3. As there were no previous agreements in place to bind CTC to paying retrospective management fees, why did CTC pay the amounts if they were not liable to do so ? 4. Are there any other potential invoices to be rendered by Kamanga Holdings Pty Ltd or Bisoya Pty Ltd relating to the period prior to 30 June 1998 or after that date which would require recognition and/or disclosure in the financial statements as at 30 June 1998." (emphasis added) 86 The letter also sought (inter alia) a list of all individuals and companies considered to be "related parties" and "a summary of the professional relationship between CTC and Kamanga Holdings Pty Ltd." Reference was also made to a possible need to notify ASIC if the information was not satisfactory. The letter sought a response by 10 March 1999. 87 It appears that CTC's solicitors responded to this letter in a letter dated 15 September 1999, which referred to the transactions between CTC and Kamanga and Bisoya and stated that "our instructions contemplate that if necessary and appropriate we should seek declaratory relief in the Courts in relation to the transaction". They sought, in effect, time to consider the matter. 88 Mr Walsh replied on 23 September 1999. He advised that CTC had "breached the time deadlines specified in the Corporations Law for issuing their annual report to members, lodging their financial report with ASIC, and holding their AGM". He indicated that, as the solicitors had requested, he would refrain from completing the audit for 14 days, pending receipt of their advice. The solicitors responded that they would not be able to comply with that time limit. 89 On 1 February 2000 Mr Walsh wrote to the directors of CTC again, referring to Ernst & Young's attempts "to finalise the audit for the year ended 30 June 1998 and 30 June 1999". The letter asked that the 30 June 1998 financial statements be completed immediately. It referred to relevant penalties under the Corporations Law which could be imposed upon directors. It enclosed a copy of a letter sent to ASIC the same day in accordance with the auditors' obligations. It pointed to the fact that "the most significant matters outstanding for the 30 June 1998 financial statements" were in relation to payments made to entities associated with directors, namely the payment of $2,205,000.00 to Kamanga Holdings and the payment to Bisoya of $260,000, together with the commitments to each company for the payment of management fees for the next five years. Again, the letter referred to the absence of shareholder approval in respect of those payments and that the information provided in respect of them was inadequate. It further indicated a lack of satisfaction on the part of the auditors that "the transactions are commercial". It sought additional information, in the following respects: " * Payment to Kamanga Holdings Pty Ltd for management fees for the year ended April 1998 and the previous 8 years for a total of $2,205,000. Responses from Jozsef and Allan were inconsistent, with Jozsef's being based on remuneration of individuals (Jozsef, Dawn and Allan) and Allan's being based on payments for work performed. Jozsef and Dawn were directors of other companies, including listed companies during those 9 years. Therefore payment based on a full-time salary, for a 60 hour week on CTC affairs, does not appear appropriate. The amounts do not appear to directly relate to work performed, as the amounts do not vary from year to year to link to the projects nominated as having been completed. We would like more information as to what CTC has paid for and when the events occurred. The payable (sic) to Kamanga includes amounts paid by Kamanga on behalf of CTC Resources. A detailed analysis of the Kamanga and other payable accounts for the 9 years is required to ensure no double counting of payments by Kamanga. * Commitment to pay Kamanga Holdings Pty Ltd management fees of $245,000 for each of the next 5 years. The term "consulting services" is used in the management contract with Kamanga. We believe that the services to be provided are too broad to establish a fixed price for future work. We would like to know what alternatives to Kamanga were considered by the CTC board. What oversight of the contract is being undertaken by CTC to ensure that it receives sufficient value for what it paid? The apparent lack of alternatives and oversight of the contract indicate that the contract may not be on an arm's length basis. * Payment to Bisoya Pty Ltd for management fees for the year ended April 1998 and the previous 3 years for a total of $260,000. Forge was and is a director of other companies, including listed companies. Therefore payment based on a full-time salary does not appear appropriate. We would like to know what evidence the board had of the hours worked by Forge and the performance of Forge before making the payment. * Commitment to pay Bisoya Pty Ltd management fees of $65,000 for each of the next 5 years. As for the retrospective management fees, we would like to know what evidence the board had of the past performance of Forge to warrant the future management fees ." (emphasis added) 90 The letter also sought "confirmation from the Commonwealth Bank to support the Capital Guarantee of the CTC Capital Bonds – Series 1 as detailed in the letter of offer to APG Clients Trust of 17 April 1998". A reply was sought by 15 February 2000. 91 On 1 February 2000 Ernst & Young wrote to ASIC indicating that until the directors of CTC furnished a final set of financial statements, the firm was unable to finalise the audit and issue a report for the year ended 30 June 1998. The letter referred to the auditor's understanding, which was correct, "that CTC Resources' assets continue to be frozen and that the company is currently not operating due to litigation proceeding in the Australian Capital Territory." This was apparently a reference to litigation related to the payment to CTC of the $6,000,000.00 on 20 April 1998. 92 Mr Walsh was cross-examined by Allan Endresz. The primary judge referred to large parts of that cross-examination (at [51] ff). It is sufficient, in my opinion, to refer to the following exchange in relation to the management fees paid to Kamanga and Bisoya: "ENDRESZ: Q. In relation to the review of those fees and the payments has this been a difficult task to balance out the commerciality in relation to the size of the fees? A. Yes it has. Q. The considerations you have given have been extensive? A. Yes. Q. You have received a lot of information from the directors? A. We have received I believe as much information as they can provide us, yes. Q. The issue is still uncertain in terms of coming to grips with this level of fees at this point? A. We believe we have received all of the evidence available to us and the current status of our opinion in relation to those is that we have not received sufficient evidence to convince us that those fees were either validly incurred or commercial …. A. In view of the fact that we have written to the company on no less than three occasions seeking that evidence, in view of the fact we visited the company's offices and had extensive conversations with the company about these transactions, in view of what we have received I think it is unlikely there is any further material to be provided to us in relation to these transactions ." (emphasis supplied) The transactions: the factual context 93 ASIC submitted the evidence before the primary judge demonstrated that the transactions took place in the following context. The appellants did not challenge that assertion. 94 CTC made no profits in all but one of the financial years preceding the transactions, the exception being 1992. Its accounts demonstrated that, whilst under the control of the appellants, CTC suffered operating losses as set out below: Year Operating Loss 1989 ($2,043,560) 1990 ($1,524,597) 1991 ($593,653) 1992 $209,917 1993 ($63,654) 1994 ($344,176) 1995 ($198,304) 1996 ($179,476) 1997 ($164,611) 95 The Notes to the Accounts suggested that the 1992 profit was primarily the result of the "forgiveness of debt" for $208,822. 96 Over the period 1989 – 1997, CTC's accounts demonstrated that after starting with assets of $1,431,282 it ended up with a net deficiency of assets of $1,427,273 as set out below: Year Net Assets 1989 $1,431,282 1990 ($93,315) 1991 ($686,968) 1992 ($477,051) 1993 ($504,705) 1994 ($884,881) 1995 ($1,083,185) 1996 ($1,262,661) 1997 ($1,427,273) 97 CTC's auditors had expressed concerns about its solvency since 1990. CTC's accounts for the years 1990 to 1996 all contained qualifications by its auditors as to the ability of CTC to continue as a going concern. In relation to CTC's 1997 accounts, the accounts as included in the Appeal Books appear to be missing the auditor's certificate. ASIC submitted that it would seem from the Directors' Report that a similar qualification was included. 98 ASIC pointed out that despite the appellants' assertions that they had laboured for CTC over 9 years without reward, the evidence demonstrated that for the period from 1990 to 1997, companies connected with the Endreszs had been paid "management fees" totalling approximately $255,000 (or, on average, $31,875 per annum) by CTC: (a) In 1990 - $6,500 was paid to Kamanga Holdings Pty Ltd. (b) In 1991 - $38,730 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (c) In 1992 - $21,275 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (d) In 1993 - $66,875 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (e) In 1994 - $107,800 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (f) In 1995 - $11,717 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (g) In 1996 - $850 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. (h) In 1997 - $1,000 was paid to CTC Nominees Pty Ltd, a trustee company of which Mr and Mrs Endresz were directors. 99 ASIC also submitted that the evidence disclosed serious limitations in the services provided or experience of Mr Forge, Mrs Endresz and Mr Endresz in relation to their various positions as directors of CTC. 100 In relation to Mr Forge, Mr Walsh gave evidence during cross-examination that: "Mr Forge came along later into the group. I am not sure of his exact background. He really hasn't – his opinions have not featured strongly in terms of the direction of the company. He is more in the nature of making up the numbers ." [ASIC's emphasis] 101 During his cross-examination, Mr Endresz gave evidence to the effect that: (a) he determined the salary of Mr Forge; (b) his determination involved "screwing down" Mr Forge; and (c) he wasn't interested whether Mr Forge was happy with his decision or not – "he takes it or leaves it." 102 During his cross-examination, Mr Forge gave evidence, although limited to the conduct of the litigation on his behalf by Allan Endresz, that he was "content to accept his judgment in the matter, whatever it may have been". 103 Insofar as Mrs Endresz was concerned, the evidence disclosed that she acted as a secretary/receptionist for CTC (and other companies). During her cross-examination, Mrs Endresz: (a) said that she attended to "all the secretarial type work"; (b) demonstrated a lack of understanding of the true financial position of CTC; (c) demonstrated a lack of commercial experience and understanding. 104 Mr Walsh gave evidence that he had not had a lot of contact with Mrs Endresz except to the extent that she directed his calls to the other directors. 105 ASIC submitted that the evidence disclosed that Mr Jozsef Endresz had limited commercial experience and a limited understanding of company finance. Mr Endresz gave evidence that "[he] had over 25 years commercial and managerial experience with international corporations", however, in cross-examination he gave evidence that this experience was experience as: (a) a "supply and distribution manager" for Sanyo in Albury/Wodonga; (b) a "supply personnel" for Boral; and (c) "share trading" with Allan Endresz. 106 Further, ASIC submitted that although between 1990 and 1997 the primary activities of CTC concerned the implementation of the Regulation 2A concept and the prosecution of the company's litigation ("the ASX Litigation") against the Australian Stock Exchange, the evidence disclosed those endeavours had been unsuccessful both in relation to the Regulation 2A concept and the prosecution of the ASX litigation. 107 CTC had not held Annual General Meetings between 23 January 1991 and 23 March 1998. The Minutes of the Annual General Meeting on 23 March 1998 immediately preceding transactions 1 and 2 did not refer to any anticipated payment of directors/management fees. At the time of this Annual General Meeting the current version of accounts (being the 1997 Accounts – which were presumably presented) disclosed that: (a) CTC had suffered another loss of $164,611; and (b) CTC had a net deficiency of assets of $1,427,273. 108 ASIC pointed to the following evidence that, between 1990 and 1997, the appellants had had retainers for, and held positions as directors in, other companies so that that they could not have been working "full time" for CTC so as to justify the management fees and retainers. Allan Endresz/Kamanga 109 In his affidavit, Allan Endresz gave evidence that: (a) he was able to make a smooth transition to a professional corporate advisor; (b) he undertook work for the Davis Samuel Partnership; (c) he undertook work for Davis Samuel Pty Ltd; (d) he undertook work for Growth Resources NL; (e) he undertook work for Sino Asean Holdings Ltd. 110 In cross-examination, Allan Endresz gave evidence that: (a) he "was" Kamanga; (b) he had a retainer with Ezybonds UK plc, earning $80,000 per month; (c) he had a retainer with Titan Corporation for $25,000 per month; (d) he had, through Davis Samuel, been involved in the takeover attempts of "Petroz" and "Cudgen"; (e) he had, through Davis Samuel, been involved in attempting to obtain export licences; (f) he had been retained by Growth Resources NL with an up front payment of $25,000 and an annual payment of $240,000; and (g) he had been retained by Superannuation Solutions for $15,000 per month. 111 Searches indicated that Allan Endresz was a director of Kamanga between 1987 and 1993 and of CTC Nominees from 1982 to 1993. Mr Endresz 112 CTC's Accounts variously disclosed that Mr Endresz held "directorships of a number of Mineral based unlisted companies". 113 Searches indicated that Mr Endresz was a director of Kamanga from 1987 and of CTC Nominees from 1982. Mrs Endresz 114 CTC's Accounts variously disclosed that Mrs Endresz held "directorships of a number of Mineral based unlisted companies". 115 Searches indicated that Mrs Endresz was a director of Kamanga between 1993 and 1996 and of CTC Nominees between 1993 and 1996. Mr Forge 116 CTC's Accounts variously disclosed that Mr Forge held "directorships of a number of Mineral based unlisted companies". 117 A search indicated that Mr Forge had been a director of Bisoya since 1985. Mr Tutt's evidence 118 ASIC called evidence from Mr Leo Edward Tutt, who the primary judge described (at [60]) as "an expert witness on the duties and activities of company directors". Mr Tutt had prepared a report in which he expressed his opinion in relation to the eight transactions by reference to three questions. I set out below the questions as formulated in relation to transaction 1. The same questions, suitably adapted, were asked in relation to each of the other transactions: " Re Transaction 1: (a) Would a careful and diligent director of CTC Resources NL ("CTC") have caused or permitted the payment, on or about 20 April 1998, of $2.205 million to Kamanga Holdings Pty Ltd ("Kamanga")? (b) Would a director of CTC, acting honestly in the exercise of his or her powers and the discharge of the duties of his or her office, have caused or permitted the payment, on or about 20 April 1998, of $2.205 million to Kamanga? (c) Do you consider the decision, by any of the directors of CTC, to make a payment, on or about 20 April 1998, of $2.205 million to Kamanga, to be an improper use of his or her position?" 119 Mr Tutt's response in relation to the eight transactions was: " Re Transaction 1 (a) No. The directors voting on the resolution were aware, as evidenced by the minutes of the meeting, of the conflict of interest involved in the transaction. As such they were on notice they must not allow a conflict of interest to compromise their position. They should have been aware (as directors) of some 1,200 other shareholders of CTC and of their duty of care to those members. The payment was not proposed to be payable after approval by shareholders in a General Meeting, which given the circumstances may have been a proper course . [Reference: Wambo Mining Corporation Pty Ltd v Wall Street (Holdings) Pty Ltd (1998) (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company (S.181 CL). The past trading performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered . (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support payments. The payment was in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties. I have read the argument that the amounts referred to "became due and payable upon receipt of the invoices dated 20th April, 1998. There were no previous agreements that required the amounts to be paid ." [ Reference: Jozsef Endresz' letter of 15th February, 1999 to Mr Roger Walsh (Ernst & Young] and further in that letter '... the liability had arisen on 20th April, 1998 and was therefore neither a contingent nor actual liability in prior period accounts.' I do not find that explanation compelling. I am also not persuaded that the amount involved was 'reasonable remuneration' provided to a director within the meaning of s 211 CL nor do I believe the payment of such a substantial amount was in the best interest of "CTC". The process of agreement by directors to resolve payments by CTC to director related first entity by one "unrelated party", and then a similar transaction by the other clearly suggests advantage obtained by improper procedure for personal gain. Re Transaction 2 (a) No. My opinion is based upon similar reasons as outlined above in relation to Transaction 1. (b) No. My opinion is based upon similar considerations as outlined above in relation to Transaction 1. (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support these payments. The payment was in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties. The process of agreement by directors to resolve payments by CTC to director related first entity by one "unrelated party", and then a similar transaction by the other, clearly suggests advantage obtained by improper procedure for personal gain. Re Transaction 3 (a) No. The directors voting on the resolution were aware payment was to a related party transaction, purporting to be management fees payable under an agreement which had not be (sic, been) ratified by shareholders. The amounts involved were significant, particularly compared to the trading results over the past several years . The directors should also have been aware that the only source of funds was $6,000,000.00 received by CTC under the terms of the alleged investment by the Commonwealth (Department of Finance and Administration, Business Services Trust Account). (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company. The past performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The payment , one month after Transaction 1, was irregular (not supported by a valid contract), and was a payment to the detriment of CTC, who suffered loss of funds (and consequential income) and to the immediate gain of director related parties . Re Transaction 4 (a) No. The agreement to pay management fees for the next five years to a related party without reference to shareholders continued the practice referred to above in relation to Transaction 2 . Payment of fees under that invalid contract contravened the degree of care and diligence for the same reason as referred to above in relation to Transaction 3. (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company. The past performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The payment, one month after Transaction 1, was irregular (not supported by valid contract), and was a payment to the detriment of CTC, who suffered loss of funds (and consequential income) and to the immediate gain of director related parties. Re Transaction 5 (a) No. Directors should have been aware that ratifying a loan by CTC to a related party in the manner recorded and the payment of $250,000 was in contravention of the Corporations Law . Clearly the payment allowed the related party to obtain a financial gain and disadvantaged CTC (the funds were unsecured and the grounds for payment appear unsure) . (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company ( s. 181 CL ). The past trading performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support payments. The payment was in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties. The process of agreement by directors to resolve payments by CTC to director related first entity by one "unrelated party", and then a similar transaction by the other, clearly suggests advantage obtained by improper procedure for personal gain. Re Transaction 6 (a) No. Directors should have been aware that ratifying a loan by CTC to a related party in the manner recorded and the payment of $100,000 was in contravention of the Corporations Law . Clearly the payment allowed the related party to obtain a financial gain and disadvantaged CTC (the funds were unsecured and the grounds for repayment appear unsure) . (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company (s.181 CL). The past trading performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support payments. The payment was in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties. Re Transaction 7 (a) No. The directors were aware that the Loan Agreement was undertaken with a related party [ Reference Minutes ] under which that party was obtaining a financial gain. Not only that, but the transaction was also disadvantaging the 1200 other shareholders in CTC as the party involved was suffering financial embarrassment , [Reference letter re divorce proceedings] no security was contemplated, and some doubt must have existed on the ability of the related party to repay within the terms contemplated thus also endangering shareholder interest. No suggestion of shareholder agreement was contemplated . (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company ( s.181 CL ). The past trading performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support payments. The payment was in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties. The process of agreement by directors to resolve payments by CTC to director related first entity by one "unrelated party", and then a similar transaction by the other, clearly suggests advantage obtained by improper procedure for personal gain. Re Transaction 8 (a) No. The directors were aware that the Loan Agreement was undertaken with a related Party [ Reference Minutes ] under which that party was obtaining a financial gain. Not only that, but the transaction was also disadvantaging the 1200 other shareholders in CTC as no security was contemplated and some doubt must have existed on the ability of the related party to repay within the terms contemplated thus also endangering shareholder interest. No suggestion of shareholder agreement was contemplated. (b) No. To have acted honestly the directors would have had to act in good faith and in the best interest of the company ( s.181 CL ). The past trading performance, and obligations to pay a 6.5% dividend on $6,000,000 of Redeemable convertible non-cumulative preference shares annually, (the source of the funds being disbursed) was not considered. (c) Yes. The receipt of substantial funds into the company's bank account was almost immediately followed by payments to director related parties with no independent documentary evidence to support payments. The payment as (sic, was) in my opinion highly irregular, and to the detriment of CTC (loss of funds/income) and represented an immediate gain to director related parties." (emphasis supplied) The appellants' case at trial 120 The appellants' evidence was primarily contained in affidavits filed after ASIC closed its case in circumstances to which I will refer in greater detail when considering the appellants' argument concerning penalty privilege. 121 The primary judge concluded (at [68]) that the appellants' affidavits "[were] the product of one draftsman, namely Allan Endresz". They were, according to his Honour (at [67]), "not professionally drawn and contained objectionable material, the plaintiff waiving objections, in the interests of progressing the matter." Allan Endresz's affidavit, for example, contained lengthy material which, according to the primary judge (at [91]), was "argumentative rather than evidentiary" and "of similar vein" in relation to all transactions. 122 After recounting in detail passages in Allan Endresz's affidavit, including those setting out the history of CTC and its pursuit of "an innovative and unique capital raising concept" involving a Shareholder Incentive Bonus Scheme ("SIBS") through the issue of redeemable convertible non-cumulative preference shares, the primary judge set out the following passage concerning the April 1998 transactions: "69. Early in March 1998, [Jozsef Endresz] approached me and we had a conversation with words to the following effect: He said: "I think its time CTC raised its own working capital to fund these programs and to finally pay directors and consultants. I was thinking about one of your preference share issues." I said: "Its possible. Maybe an issue of redeemable non-cumulative preference shares similar to Petroz would be the way to go. The advantage is that there is no annual accumulation of dividends and you only have to pay the dividends out of profits. Section 254T I think. Also the redemption is subject to Section 254J which basically means it is redeemable only on the terms of issue and even then, out of profits or a new issue for that purpose." He said: "Sounds good, let's look into it." I said: "How much do you think you need?" He said: "I reckon maybe 5-10 million or even more if we can." 70. Early on the morning of 20 April 1998, I had a conversation with the Second Defendant with words to the following effect: He said: "We've had a lot of calls from shareholders concerned that you're not formally engaged as corporate advisor on a long term contract. They want to tie you down on SIBS and get the first rights to all your projects. There's been a lot of press on your takeovers." I said: "Dad, I'd be happy to do a deal, but I'll need to get paid for all the work I've done over the years and so should you. It's only fair, given what we've done for CTC and you know what my takeovers can now do. Just look at how high we took Petroz. There'll be a few conditions: (a) Kamanga is a party to the agreement; (b) The designated Principal Officer is myself; (c) A review at the end of 12 months; (d) A retainer of $245,000 payable monthly in advance; (e) CTC to get a first right of refusal to all my projects; (f) A schedule of services; (g) Kamanga to receive $2,205,000 for past services provided over the last nine years by both of us." He said: "You know I can't vote with Kamanga involved?" I said: "Yes, but there's not much choice. With Davis Samuel, Kamanga is our main tax structure. Anyway, it should be a straight forward commercial decision." He said: "I'll think about it and come back to you." [later the same morning] He said: "I'm comfortable with the proposal from Kamanga's point of view. Could you knock up a draft invoice and an agreement for me to consider and if it's OK I'll pass it on to Bill and Dawn."" 123 The primary judge regarded Allan Endresz's evidence concerning transaction 1 as illustrative of the evidence in relation to all the transactions and set out (at [91]) the following extract: "Transaction 1 [$2,205,000] 77. At all material times during the relevant period of transaction 1, [Mr Forge and Mrs Endresz] acted honestly in the exercise of their powers and discharge of their duties and at no stage made improper use of their positions to gain, directly or indirectly an advantage for themselves or any other person or to cause detriment to CTC. They exercised a degree of care and diligence that a reasonable person in a like position in CTC would have exercised in CTC's circumstances. Transaction 1 was a general exception in accordance with Sections 243K and or 243N of the Corporations Law where [Mr Forge and Mrs Endresz] gave due consideration to: (a) The Consultancy Agreement being subject to and conditional upon transaction 1; (b) Kamanga being a related entity of CTC pursuant to Section 243F of the Corporations Law ; (c) [Allan Endresz] acting in a professional capacity as a corporate advisor to CTC in accordance with the instructions of [Mr Forge, Mr and Mrs Endresz] and at no stage being: (i) A director, secretary, executive officer or employee of CTC; or (ii) Concerned in or taking part in, the management of CTC: or (iii) Involved in transaction 1. (d) [Mr Jozsef and Allan Endresz] being related parties of Kamanga; (e) [Mr Forge and Mrs Endresz] not being related parties of Kamanga and at no stage being: (i) A director, secretary, executive officer, or employee of Kamanga. (ii) Concerned in or taking part in, the management of Kamanga. (f) [Mr Forge and Mrs Endresz] not having any material personal interest in transaction 1 and being legally permitted to participate in the 20 April 1998 Board Meeting; (g) [Mr Jozsef Endresz], not having any involvement in transaction 1, at the commencement of the 20 April 1998 Board Meeting fully disclosed to [Mr Forge and Mrs Endresz] that he had a material personal interest in transaction 1 and the Consultancy Agreement and immediately removed himself from the meeting in accordance with Section 232A(1) of the Corporations Law and Articles 83 and 107 in Exhibit 3 . (The CTC Articles); (h) The salaries of each non-executive director being set at $7,500 per annum ["Base Salaries"] in accordance with Article 76 in Exhibit 3 as approved by shareholders at the AGM1; (i) Directors performing extra services where CTC shall, in accordance with Article 77 of Exhibit 3 , remunerate such directors by a fixed sum as may be determined by the directors which is in addition to the salaries set in item (i) above ["Additional Salaries"]; (j) The aggregate salary of the joint managing director being set at $75,000 per annum ["Managing Director Salary"] in accordance with Article 95 in Exhibit 3 as approved by shareholders at the AGM1; (k) [Mr Forge and Mrs Endresz] being expressly empowered by Article 115[3] in Exhibit 3 to pay for any services rendered to CTC, including services rendered by executive directors, at their discretion; (l) [Mr Forge and Mrs Endresz] being expressly empowered by Article 115[20] in Exhibit 3 to contract on behalf of CTC with any person or persons or body corporate for the provision to CTC of any services whatsoever; (m) The services provided by Kamanga during the period 20 December 1989 to 20 April 1998 inclusive ["9 Year Period"] where: (i) [Mr Jozsef Endresz] was a full time executive director during the 9 Year Period and did not receive any Base or Additional Salaries; (ii) [Mrs Endresz] was a full time executive director during the 9 Year Period and did not receive any Base or Additional Salaries; (iii) [Allan Endresz] was a full time executive chairman during the period 20 December 1989 to 10 June 1993 inclusive and did not receive any Base or Additional Salaries; (iv) [Allan Endresz] was engaged as a corporate advisor during the period 11 June 1993 to 20 April 1998 inclusive and did not receive any fees or retainers despite being engaged by "arms length" clients on annual retainers in excess of $245,000 per annum; (v) The average weekly wages in February 1998 for non-managerial employees being in excess of $700 per week in accordance with the Australian Bureau of Statistics; (vi) Kamanga provided CTC with a loan re-draw facility and guaranteed its liabilities. As at 30 June 1997 and 1 March 2002, CTC owed Kamanga $1,101,657 and $221,253 respectively. During the period 20 December 1989 to 26 July 1992 inclusive, the loan re-draw facility was provided to CTC on an unsecured basis on commercial terms. Kamanga continues to provide CTC with a $1,000,000 secured loan re-draw facility and guarantees its liabilities; (vii) Kamanga [and its director related entities] was engaged by CTC to provide management services for its listed ASX companies in the Emu Hill Group. Whilst Kamanga had received management fees from CTC during the 9 Year Period totalling $254.747 comprising $6,500, $38,730, $21,275, $66,875, $107,800, $11,717, $850 and $1,000 for the years ended 30 June 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 respectively, CTC had, in turn, received significant management fees totalling $481,495 as a consequence of Kamanga's services. CTC received $154,000, $190,995, $58,500 and $78,000 for the years ended 30 June 1990, 1991, 1992 and 1993. The management fees received by Kamanga do not in any way reflect the services provided directly to CTC. In fact, CTC made a profit of $226,748 as a result of the Kamanga services provided to companies within the Emu Hill Group; (viii) Kamanga provided extensive administrative and professional services and sought no reimbursements for legal costs incurred for the benefit of CTC; (n) CTC shareholders giving the Board an overwhelming mandate at AGM2 and AGM3 to vigorously pursue the corporate objectives of CTC. To achieve this, [Mr Forge and Mrs Endresz] endorsed their shareholders' eagerness in securing the professional services of the Fourth Defendant on a long term contract whilst rewarding him for his past services; (o) CTC never being insolvent nor at risk of insolvency. A deficiency in shareholder funds does not reflect insolvency nor impair the intangible value of SIBS or the $1 billion damages claim against the ASX. For the years ended 30 June 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 it has been the opinion of the directors that the ability of CTC to pay its debts as and when they fall due is dependent upon the ongoing support of Kamanga which continues to meet all its obligations; (p) CTC's future commitments: (i) There are no current or contingent liabilities outstanding with respect to the redeemable convertible non-cumulative 'A' Class preference shares ["Preference Shares"] dividend entitlements. Whilst the holder of the Preference Shares is entitled to receive an annual non-cumulative preferential dividend of 6.5%, these dividends are paid annually, but only from future profits derived by CTC. In the event of CTC not making a profit in any given year, then no dividends are payable and the annual dividend entitlement lapses; (ii) Subject to the outcome of proceedings in the ACT Supreme Court, there are reasonable grounds to believe that Davis Samuel Pty Ltd will ensure that a capital guarantee is put in place on behalf of CTC prior to redemption of the Preference Shares." (bold in original) The primary judge's assessment of the appellants' evidence 124 The primary judge observed (at [92]) that the details set out in Allan Endresz's affidavit in relation to the eight transactions had not been provided to Ernst & Young in response to their audit queries nor put to Mr Walsh in cross-examination. The same comment applied to the material provided in the affidavits of the first, second and third appellants. 125 The primary judge noted (at [115]) that Allan Endresz sought to rely upon certain articles of CTC as founding a right in the directors to enter into the transactions without reference to the shareholders. He held that these articles could not prevail over the relevant sections of the Corporations Law and Corporations Act, where contraventions of those sections were established. 126 His Honour also referred (at [116] ff) to Allan Endresz's reliance in his affidavit upon judgments said to be favourable to the SIBS concept and, apparently, supportive of an entitlement to make and receive the payment involved in the first transaction. In respect of ASIC's proceedings in the Victorian Supreme Court in relation to the prospectus sought to be issued by SIB Resources NL, Allan Endresz said, in paragraph 35 of his affidavit, that: "On 26 June 1991, Justice Ryan of the Victorian Supreme Court dismissed the application by the Plaintiff and the Prospectus was then subsequently registered. See ASC v SIB Resources N.L. & Ors [1991] 103 ALR 374." 127 Allan Endresz also said: "On 9 December 1996 CTC launched a $35 million [now $1 Billion] damages claim against the ASX. The ASX sought to summarily strike out the claim, but in a Judgment handed down on 11 April 1997, the application was dismissed. See CTC Resources NL v Australian Stock Exchange Ltd; Odyssey Nominees Pty Ltd v Australian Stock Exchange Ltd [1997] 15 ACLC 743 [WA Sup Ct] Sanderson J, 11 April 1997]]." 128 The primary judge looked at each of those cases, but concluded (at [120]) that they did not support "a general assertion that the payment made to Kamanga in the first transaction was justified on the basis of unremitting endeavours made on behalf of CTC and its shareholders". 129 The primary judge expressed considerable doubt (at [122]) that a conversation with Mr Jozsef Endresz such as that to which Allan Endresz deposed would have taken place in the way Allan Endresz suggested. In his Honour's view "[I]ts purported record, in his affidavit, has all the appearance of contrivance and artifice." His Honour was also not prepared to accept, in the absence of any supporting evidence, that the company's shareholders were requesting that the company enter into a contract with Kamanga in order to secure the future services of Allan Endresz and Mr Endresz. He was: "… far from persuaded that the shareholders knew anything of the arrangements for payment that were to be put in train on 20 April 1998 or that CTC would receive $6,000,000.00 on that day. To the contrary, the shareholders must have been well and truly aware, because of the AGM, which had recently taken place, that the company had significant accumulated losses and negative shareholder equity." 130 He noted (at [123]) that Allan Endresz's justification of the payment to Kamanga in transaction 1 and, presumably, the payment to Bisoya in transaction 2 and the subsequent payments and advances to those entities in the other transactions, appeared to be summed up in a passage in his written submissions, which read: "Aren't people who continue to nurture a company in the face of great difficulties, and who forgo fees during those years in order to keep faith with the shareholders, entitled to fees when the opportunity presents itself in the interests of the company? That opportunity being not just the liquidity of the company but the fact that they honestly believed that the matters they had been working on for some time would now come to fruition." 131 The primary judge said (at [124]) that the evidence of the four personal appellants left him "in some degree of doubt" as to whether the CTC Board Meeting of 20 April 1998 was "actually held or whether the minutes were simply constructed to give effect to arrangements otherwise concluded". 132 Insofar as Mr Jozsef Endresz was concerned, the primary judge concluded (at [124]) that the "underlying concept was that 'any time money had arrived into the company's coffers, [transactions 1 and 2] will be put into place'", as the following questions and answers reveal: "Q. In any event, the idea that you discussed with your son, perhaps in March 1998, was that as soon as there was sufficient money in the company's bank account, Kamanga would be paid, past and future? A. Yes. Q. Presumably you discussed Mr Forge's position as well, and his company did you? A. That's correct. Q. The same idea, I suppose, was agreed to at the same time namely, that Mr Forge will be fixed up both for the past and the future as well? A. That's correct." 133 The primary judge held (at [127]) that the effect of Mr Jozsef Endresz's evidence was that there was also an understanding with Mr Forge that when there was money in the company "we will first priority pay ourselves what we are owed." 134 Insofar as Mrs Endresz was concerned, the primary judge noted (at [129] – [130]) that prior to going to the April 1998 meeting she did not know what it was to involve and that in relation to the payment of $2,205,000 to Kamanga she took the view that insofar as "Joe and Allan hadn't been paid for nine years work" that "now was an opportune time", "it's fair and reasonable…[t]hey had to be paid for what they have done and now CTC was cashed up, we were liquid." She also expressed the view, in a number of ways, that it was in the best interests of the company that the past and future amounts in contemplation be paid to Kamanga. It was in fact a bonus for CTC and the shareholders in that the services of her husband and Allan were being obtained cheaply. According to the primary judge, she did not seem to be aware that CTC had given some seven million shares to Kamanga. 135 Mrs Endresz knew the $6,000,000.00 would have to be repaid eventually and that there were interest obligations attached to it. She believed, apparently, that CTC would be able to repay the $6,000,000.00 because it had plenty of projects tied in with Kamanga and Davis Samuel. The primary judge (at [133]) gained "the strong impression that Mrs Endresz did not have any significant grasp of the business affairs of CTC and was very much reliant upon her son and husband for any knowledge of the company, its affairs or its relationship with Kamanga or Davis Samuel." 136 Mr Forge said that he had no forewarning that Mr Endresz would produce the Kamanga invoice and consultancy agreement at the April meeting. He said he was carrying his own agreement with him in his brief case, where it had been for some weeks and he simply produced it at the meeting because it was an opportune moment to do so. He did not produce an invoice to the meeting but believed that he would have mentioned the figures of $65,000 per annum and the back payment of $260,000 before leaving the meeting, so that Mr and Mrs Endresz could discuss his claim in his absence. So far as the $6,000,000.00 was concerned, he was confident that the company would be able to repay it when it fell due. The primary judge (at [134]) "found his evidence, in general, most unimpressive." 137 The primary judge summarised the appellants' evidence (at [135]) as follows: "135 I am left with the overwhelming impression from the evidence of these four defendants that, in circumstances where CTC had had no significant income for many years, the receipt of the $6,000,000.00 was seen as a golden opportunity for the payment to the director-related entities of Kamanga and Bisoya of significant sums of money for the benefit, ultimately, of the defendants themselves. I am of the view that the claims made in their affidavit and oral evidence that [the] payments were made for the benefit of the company and its shareholders are no more than colourable after-thoughts. I do not accept their evidence in this regard. In particular, I am totally unpersuaded that any of these matters of justification for the payments were in the minds of the first, second and third defendants at the time the resolutions of 20 April 1998 were passed if, in fact, they were passed at a properly constituted meeting." (emphasis supplied) Credit 138 The primary judge also formed a "uniformly adverse" view of the appellants' credibility ([69]). He gained the "very strong impression" ([100]) that, in their capacity as directors of CTC, Mr and Mrs Endresz were very reliant upon the advice and assistance of their son. Insofar as Allan Endresz was concerned, the primary judge found that when he was disqualified from acting as a director in 1993, the role he adopted of commercial advisor in relation to CTC was "no more than an artifice to avoid the consequences of his disqualification". His Honour held that using such an artifice "would be entirely consistent with … his general attitude to regulatory restrictions" and that "[r]ather than seeking to comply with the law, he would search for ways of avoiding it". 139 The primary judge was not impressed by Allan Endresz's demeanour under cross-examination, finding (at [107]) that "[h]e gave the appearance of defending a carefully prepared position, rather than providing frank answers as to his role in the affairs of CTC". Related party transactions: conclusions at trial 140 The primary judge found (at [109]) that Kamanga and Bisoya were related parties of CTC. Insofar as Kamanga was concerned, that finding was based upon the facts that Mr Endresz had been a director of Kamanga since 23 June 1987 and owned 40% of its shares. At all relevant times Allan Endresz owned the remaining 60% so that Kamanga was an entity under the control of Mr Endresz as a director of CTC (see s 243F(1)(a) of the Corporations Law) and of Allan Endresz, his son, (see s 243F(1)(e)) and thus fell within the terms of s 243F(1)(f). Insofar as Bisoya was concerned, Mr Forge, a director of CTC, owned 50% of its shares, while Mrs Forge owned the other 50%. The combined effect of ss 243F(1)(a), (d) and (f) was to make Bisoya a related party at the relevant time. 141 His Honour concluded (at [111]) that Kamanga and Bisoya received financial benefits pursuant to s 243G of the Corporations Law in the following respects: " Kamanga (a) Transaction 1 – involved the payment of $2,205,000 by CTC Resources NL to Kamanga Holdings Pty Ltd on 20 April 1998; (b) Transaction 3 – involved the payment of $40,833.34 by CTC Resources NL to Kamanga Holdings Pty Ltd on 26 May 1998; (c) Transaction 5 – involved the payment of $250,000 by CTC Resources NL to Kamanga Holdings Pty Ltd on 28 October 1998; (d) Transaction 6 – involved the payment of $100,000 by CTC Resources NL to Kamanga Holdings Pty Ltd on 30 October 1998; and (e) Transaction 8 – involved the payment of $150,000 by CTC Resources NL to Kamanga Holdings Pty Ltd on 13 November 1998. Bisoya (a) Transaction 2 – involved the payment of $260,000 by CTC Resources NL to Bisoya Pty Ltd on 20 April 1998; (b) Transaction 4 – involved the payment of $10,833.34 by CTC Resources NL to Bisoya Pty Ltd on 28 May 1998; and (c) Transaction 7 – involved the payment of $75,000 by CTC Resources NL to Bisoya Pty Ltd on 30 October 1998." 142 The primary judge noted that in the correspondence with Ernst & Young to which I have earlier referred, the claim had been made that some of the transactions fell within the "reasonable remuneration" exception for the purposes of s 243K of the Corporations Law. Mr Walsh had rejected that application. His Honour was not certain (at [112]) whether the appellants persisted with that argument but held, in any event, that s 243K applied to remuneration paid to persons in their capacity as officers of the body making the payment and that neither Kamanga or Bisoya was such a "person". His Honour then turned to consider whether the "arm's length" exception in s 243N could apply and held (at [112]) that "there is nothing that satisfies me that the transactions could be regarded as at arm's length". 143 The primary judge held (at [136] – [137]) that transactions 3, 4, 5, 6 and 8 were payments to related parties. He found that there was no evidence the transactions could properly be described as arm's length transactions (s 234N). Accordingly he held that transactions 3 and 4 could not be justified on the basis that they fell within the statutory exceptions. Insofar as transactions 5, 6 and 8 were concerned, the primary judge held (at [137]) that there was no acceptable explanation for CTC making unsecured loans from its resources to entities in which its directors had a commercial interest. He concluded that the transactions were prima facie unlawful and that no acceptable explanation had been given for them. 144 The primary judge made the following findings (at [138]) about transaction 7: "138 Transaction 7 This unsecured loan from CTC to Bisoya was made to assist Mr Forge in relation to a property settlement with his estranged wife. As Mr Forge said in evidence, it was paid "for Bisoya's benefit to relieve a loan account that was owed to Lorraine Olive Forge. 139 In relation to this loan Mr Endresz said that he lent the money to Mr Forge who had asked for it 'for personal reasons'. He didn't ask what the loan was for because he didn't want to get involved in it. He didn't worry about security for this loan of public company funds because of the existence of the management contract with Mr Forge and his company Bisoya. In adopting this approach, he displayed the same attitude to the public company funds as he did in relation to the loans to Kamanga, where his explanation was 'Kamanga needed some short term working capital, the money was asked for and we put it in'." 145 His Honour's reference to Mr Endresz displaying the same attitude to transaction 7 as he had to the loans to Kamanga makes it plain, in my view, that, again, he considered the loan was prima facie unlawful and unexplained. Directors' duty contraventions: conclusions at trial 146 The primary judge held (at [140] – [145]) that ASIC had established that the appellants had breached s 232(2) of the Corporations Law to the Briginshaw standard. In reaching this conclusion, he applied King CJ's interpretation of s 229(1) of the Companies (SA) Code (which was in the same terms as s 232(2) of the Corporations Law) in Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLR 261 at 272 where his Honour said: "The section therefore embodies a concept analogous to constructive fraud, a species of dishonesty which does not involve moral turpitude. I have no doubt that a director who exercises his powers for a purpose which the law deems to be improper, infringes this provision notwithstanding that according to his own lights he may be acting honestly." 147 The primary judge said (at [141]) that he was satisfied that he could follow the Van Reesema test because he was not dealing with criminal proceedings. It is not clear what his Honour meant by that qualification. Nothing turns upon it for the purposes of considering the appeal. 148 Insofar as s 232(6) was concerned, the primary judge applied R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 at 514 – 515 where Brennan, Deane, Toohey and Gaudron JJ, speaking of s 229(4) of the Companies (SA) Code (the precursor of s 232(6)), said: "Impropriety does not depend on an alleged offender's consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. When impropriety is said to consist of an abuse of power, the state of mind of the alleged offender is important: the alleged offender's knowledge or means of knowledge of the circumstances in which the power is exercised and his purpose or intention in exercising the power are important factors in determining the question whether the power has been abused. But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that he has no authority to do." 149 The primary judge concluded (at [144] – [147]): "144 In my opinion, the contraventions are amply demonstrated. In general terms, I am satisfied that the first, second, third and fourth defendants simply regarded the acquisition by CTC of the amount of $6,000,000.00 on 20 April 1998 as amounting, virtually, to a provision of funds for their own private use. The amounts covered by the transactions were paid out, in the form of fees or loans to related entities, without regard to the fact that the $6,000,000.00 itself was subject to repayment and also carried with it obligations to pay interest. Despite protestations in the case that shareholder approval was not required because of the attitude of shareholders in the past, I am of the view that the question of shareholder approval was not even considered in relation to any of these payments or loans. All that mattered was their own perceived entitlement to payment for past and future services. 145 Having regard to the width of the definition of "contravention" in s 79 of the Corporations Law , set out above, I am quite satisfied that each of the defendants, with the exception of Kamanga, against whom action is necessarily stayed, has been "directly or indirectly, knowingly concerned in and party to the contraventions "involved in the transactions, in which they are named in the originating process. The first, second and third defendants were each involved by reason of their directorships in CTC and in Kamanga or Bisoya. The fourth defendant, Allan Endresz was, in my view, clearly involved in transactions 1,3 5,6 and 8, because of what I have found to be his disguised, but nevertheless ongoing, managerial role in both CTC and Kamanga. 146 So far as concerns the alleged contraventions of ss 232(2), 232(4), 232(6), 243ZE(3) and 243ZE(2) of the Corporations Law , in each of the transactions, I am assisted by the expert testimony of Mr Tutt and Mr Walsh, in conjunction with the facts that I have found, in determining whether relevant contraventions have been committed by the respective defendants. 147 I am satisfied that, with the exception of paragraphs 5, 15, 25, 30 and 40 in the list of transactions in the Originating Process, which relate to Kamanga and are not relied on, the plaintiff has proved the contraventions alleged. Relevant failures to act honestly and with a reasonable degree of care and diligence have been established in relation to the making of the payments and loans, as have the making of improper use of the officers' positions to gain advantage for Kamanga and Bisoya. Also involvement in or reckless concern in the payments and loans to Kamanga and Bisoya as related parties, has been amply demonstrated." Involvement 150 The appellants challenged the basis upon which the primary judge had found them to have contravened the Corporations Law. The appellants advanced the following ground of appeal concerning Allan Endresz: "8. Having regard to the fact that the allegations against each appellant were that they had contravened provisions of the Corporations Law as officers or employees of CTC Resources NL, his Honour erred in holding that Allan Endresz was involved in transactions 1, 3, 5, 6 and 8 for the reason, as his Honour found (also erroneously), that he had a disguised and ongoing managerial role in both CTC Resources NL and Kamanga [paragraph 145]." 151 Although expressed to apply only to the primary judge's conclusion concerning Allan Endresz, the appellants' submissions addressed this ground as if it applied not only to Allan Endresz but also to the directors who withdrew from CTC's board meeting when the resolutions approving the payment of management fees to Kamanga and Bisoya were respectively passed i.e. Mr Jozsef Endresz and Mr Forge. 152 Further, as the argument developed, it was apparent that the appellants' complaints concerning what can be described as the "involvement issue" went beyond the scope of ground 8. First, they contended that the primary judge had erred in finding that Allan Endresz, who was not a director of CTC, was nevertheless an "officer" for the purposes of s 232 of the Corporations Law. 153 Secondly, they complained that the primary judge had erred in concluding the appellants had contravened s 232 of the Corporations Law on the basis of accessorial liability whereas the case ASIC had pursued against them depended upon them being liable as principals. 154 Thirdly, they submitted that the primary judge had erred in concluding that the appellants had contravened s 232 of the Corporations Law on an accessorial basis absent a finding that they had knowledge of the material factual ingredients of the contraventions. Role of Allan Endresz: the primary judge's findings 155 The primary judge concluded (at [145]) that Allan Endresz had played a "disguised, but … ongoing managerial role in both CTC and Kamanga". He reached that conclusion in the following manner. 156 On 11 June 1993 Allan Endresz was convicted (inter alia) of six offences under s 11(2) of the Companies (Acquisition of Shares) (Victoria) Code 1980. The convictions led to him being prohibited, under s 227(2)(c) of the Companies (Victoria) Code 1981, from being a director or taking part in the management of a corporation for a period of five years from the date of the conviction. Accordingly, he resigned from the directorships he then held in CTC and Kamanga. 157 Before the primary judge Allan Endresz asserted that as a result of this prohibition he ensured that between 11 June 1983 and 11 June 1998 he was not a director, secretary, executive officer or employee or concerned in the management of any corporation. Rather, he embarked on a new career as a professional corporate advisor which led to the formation of the Davis Samuel Partnership, which consisted of Kamanga and a company Quancorp Pty Ltd, a trustee company for the family trust of a close friend. 158 Before the primary judge ASIC contended that Allan Endresz was, during the period of the transactions, an "officer" of CTC for the purposes of ss 232(2), (4) and (6). It relied upon s 232(1) of the Corporations Law which relevantly provided: ""officer", in relation to a corporation, means: (a) a director, secretary or executive officer of the corporation …". 159 "Executive officer" was defined in s 9 of the Corporations Law. Prior to 30 June 1998, "executive officer" meant: "… a person, by whatever name called and whether or not a director of the body … who is concerned, or takes part, in the management of the body …". 160 This definition was amended in 1998, with the result that after 30 June 1998 the relevant definition of "executive officer" was: "… a person who is concerned in, or takes part in, the management of the body (regardless of the person's designation and whether or not the person is a director of the body)." 161 The primary judge accepted (at [97]) Mr Walsh's description of Allan Endresz as "his main point of contact with CTC". Mr Walsh gave evidence that he saw Allan Endresz as playing a major role in the management of CTC's affairs. In his oral evidence he referred to Allan Endresz as always having had "a very strong role in relation to the company's activities", being "much more of a leader than a follower in relation to those activities." He described him as "the person who has sought out opportunities which perhaps others wouldn't have seen, in order to convert those opportunities to financial good for the company". The primary judge noted that the "significant letter from CTC to the auditors of 15 December 1998 went out over [Allan Endresz's] signature" and concluded he was its author. He also concluded after seeing Mr Jozsef Endresz giving evidence that the letter of 15 February 1999 forwarded by Mr Jozsef Endresz to Ernst & Young must have been wholly or in large part composed by Allan Endresz. 162 The primary judge found (at [98]) that CTC's main activity in the period 1993 – 1998 related to the SIBS Scheme - work he concluded was Allan Endresz's brainchild and "could only be performed to any significant degree by him". Further, his Honour concluded that the conversation Allan Endresz alleged he had with his father in relation to setting up the 20 April 1998 transactions went beyond mere advice and entered "well into the field of management". 163 His Honour also accepted (at [99]) evidence given by Mr Barned, the bank manager in 1998 for what he referred to as the "Endresz Group", who said "that, during that year, he managed the business banking of CTC, 'liaising on the majority of occasions with Allan Endresz, whom [he] understood to be a representative of CTC'." Mr Barned also recalled discussions with Allan Endresz about the issue of the CTC Capital Bonds and the possibility that the Commonwealth Bank would guarantee the issue. 164 The primary judge noted that Mr and Mrs Endresz were "very reliant upon [Allan Endresz's] advice and assistance". He found (at [100]) "that, upon [Allan Endresz] being disqualified [from acting] as a director in 1993, he adopted the role of commercial advisor in relation to CTC which … was no more than an artifice to avoid the consequences of his disqualification." He noted (at [102] – [103]) that Allan Endresz was the main contact point with the company's auditor for the audit of the 1998 accounts, a role to which the Board appointed him. He was the only person amongst the four defendants who had any accountancy qualifications. 165 The primary judge rejected (at [98]) Allan Endresz's evidence that he was merely a corporate advisor to CTC and that he did not take part in its management during the period of the transactions. He made a significant finding adverse to Allan Endresz's credit in this respect saying (at [107]): "107 I was not impressed by his demeanour under cross-examination. He gave the appearance of defending a carefully prepared position, rather than providing frank answers as to his role in the affairs of CTC. Indeed, the very fact of his acting for the other defendants in these proceedings bespeaks their dependence upon him and his underlying and pervasive managerial role in the affairs of CTC." 166 He held (at [108]) "that, during the period of the transactions in question, Allan Endresz was acting as an "officer" of CTC". 167 Having made that finding, the primary judge then considered a number of matters of defence before he stated his conclusion that the contraventions had been established. I set out the passages in which his Honour held that the contraventions had been established when recording his findings at trial. I repeat them for convenience. He held (at [144], [145] and [147]): " 144 In my opinion, the contraventions are amply demonstrated. In general terms, I am satisfied that the first, second, third and fourth defendants simply regarded the acquisition by CTC of the amount of $6,000,000.00 on 20 April 1998 as amounting, virtually, to a provision of funds for their own private use. The amounts covered by the transactions were paid out, in the form of fees or loans to related entities, without regard to the fact that the $6,000,000.00 itself was subject to repayment and also carried with it obligations to pay interest. Despite protestations in the case that shareholder approval was not required because of the attitude of shareholders in the past, I am of the view that the question of shareholder approval was not even considered in relation to any of these payments or loans. All that mattered was their own perceived entitlement to payment for past and future services. 145 Having regard to the width of the definition of 'contravention' in s 79 of the Corporations Law , set out above, I am quite satisfied that each of the defendants, with the exception of Kamanga, against whom action is necessarily stayed, has been 'directly or indirectly, knowingly concerned in and party to the contraventions' involved in the transactions, in which they are named in the originating process. The first, second and third defendants were each involved by reason of their directorships in CTC and in Kamanga or Bisoya. The fourth defendant, Allan Endresz was, in my view, clearly involved in transactions 1,3 5,6 and 8, because of what I have found to be his disguised, but nevertheless ongoing, managerial role in both CTC and Kamanga. … 147 I am satisfied that, with the exception of paragraphs 5, 15, 25, 30 and 40 in the list of transactions in the Originating Process, which relate to Kamanga and are not relied on, the plaintiff has proved the contraventions alleged. Relevant failures to act honestly and with a reasonable degree of care and diligence have been established in relation to the making of the payments and loans, as have the making of improper use of the officers' positions to gain advantage for Kamanga and Bisoya. Also involvement in or reckless concern in the payments and loans to Kamanga and Bisoya as related parties, has been amply demonstrated." Involvement: the appellants' submissions 168 Mr Biscoe QC's written submissions complained that the findings the contraventions had been established could not be sustained where: (a) the primary judge had not found that Allan Endresz had knowledge of all the "essential material factual ingredients of the contraventions" and had "erroneously considered it sufficient to find that Allan Endresz had an ongoing managerial role in CTC and Kamanga"; (b) the primary judge had misconceived the issue as to whether Allan Endresz was involved in the transactions rather than the contraventions; (c) the factual findings the primary judge made concerning Allan Endresz's role in CTC's activities did not warrant the conclusion that he was an officer of CTC as distinct from an advisor; (d) the primary judge erred in concluding that Mr Jozsef Endresz and Mr Forge who had absented themselves from CTC's meetings when the resolutions concerning the transactions were considered were "involved" under s 79 "simply because they were directors of CTC and Kamanga or Bisoya". 169 In his oral submissions Mr Biscoe QC also submitted that there was a threshold question based upon the fact that ASIC's case in relation to ss 232(2), (4) and (6) was that the appellants were liable as principals, whereas its case against them in relation to what were said to be the related party transactions turned on accessorial liability pursuant to s 243ZE(3). He submitted that the primary judge had not appreciated that distinction and had found that the appellants had contravened ss 232(2), (4) and (6) of the Corporations Law on the basis that they were "involved in" the relevant transactions rather than as principals. In other words, Mr Biscoe QC submitted, the primary judge had found against the appellants in relation to ss 232(2), (4) and (6) on a case which had not been put against them. 170 Mr Biscoe QC submitted that in order for Allan Endresz, Mr Jozsef Endresz and Mr Forge to have been involved in the transactions for the purposes of s 79, they had to have actual knowledge of all "the essential material factual ingredients of the contraventions" relying upon Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 and Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661. 171 As I understood Mr Biscoe QC's argument, this submission sought to challenge the primary judge's conclusions in relation to both s 232 and s 243ZE(3) but not insofar as Mrs Endresz was concerned. Mr Biscoe QC did not challenge the findings in relation to Mrs Endresz, presumably because she was in the boardroom when all the resolutions were passed. Involvement: ASIC's submissions 172 ASIC's response to Mr Biscoe QC's threshold point was twofold. First it contended that the case had not proceeded by way of pleadings but, rather, by way of summons. Next it drew attention to s 1317DB of the Corporations Law which provided: "SECT 1317DB Person involved in contravening a provision taken to have contravened the provision For the purposes of this Part, a person who is involved in a contravention of a particular provision of this Law or a corresponding law is taken to have contravened that provision." 173 Insofar as Allan Endresz's role was concerned, ASIC submitted that the evidence upon which the primary judge relied amply supported his finding that Allan Endresz was an officer of CTC. 174 ASIC submitted that even if, which was not conceded, the primary judge had found the appellants had contravened ss 232(2), (4) and (6) on the basis of involvement, that conclusion was supported by s 1317DB. 175 ASIC also submitted that Allan Endresz effectively counselled and procured the transactions which led to the approval of the management fees. He discussed the proposal with his father and helped draft the management agreement and the Kamanga invoice. 176 Finally ASIC submitted that the evidence established that Mr Forge and Mr Jozsef Endresz had knowledge of the factual ingredients of the transactions, drawing attention to the evidence that the men who absented themselves from the Board meeting at which the transactions had been approved had participated in their pre-arrangement. Involvement: consideration The threshold issue 177 If ASIC's submission on the appellants' threshold issue was intended to found the proposition (which I accept was not expressly articulated) that the primary judge was entitled to find against the appellants on a basis not identified in the Originating Process, I would reject it. 178 Although s 1317ED provided that in hearing and determining the application, the Court was to apply the rules of evidence and procedure applied in hearing and determining civil matters, such rules make it plain that ASIC was required, if it proceeded by Statement of Claim, to plead any matter which, if not pleaded specifically, may take the defendant by surprise: Supreme Court Rules Pt 15 r 13. ASIC did not proceed by Statement of Claim, nor by Summons which is the only other mode of commencement of proceedings permitted: Supreme Court Rules Pt 4 r 1. Rather, ASIC commenced the proceedings by a document described as "Originating Process" which was supported by an affidavit. There was no statutory warrant for that document but no complaint was made about it on appeal nor, in my view, could a complaint be made about it at this stage. It was, in substance, a Summons: cf Romeo and Juliet, Act 2, scene 2 ("a rose by any other name" etc). 179 Commencement in that manner did not entitle ASIC to depart from the fundamental proposition that it was required to put the appellants on notice of the case they had to meet: Banque Commerciale SA (in Liq) v Akhil Holdings Ltd [1990] HCA 11; 1990) 160 CLR 279 at 286; Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116 at [21] ff per Heydon JA (as he then was) with whom Mason P and Young CJ in Equity agreed. The proceedings were proceedings to recover orders in the nature of penalties: see Rich v Australian Securities and Investments Commission, above; see also Australian Securities and Investments Commission v Loiterton [2004] NSWSC 172 at [40] where Bergin J observed that in "civil penalty proceedings clarity of approach takes on more significance". 180 When close attention is paid to that part of the judgment in which the primary judge expressed his conclusions that the contraventions had been established it is plain that his findings concerning the contraventions of ss 232(2), (4) and (6), subject to one matter, related to the appellants' liability as principals. The conclusion that the appellants had, as a matter of law, been involved in the contraventions concerned the related party transactions, contraventions of which could only be established on the basis of accessorial liability. This is made plain by paragraph [147] where the primary judge made his final findings and distinguished between the s 232 contraventions and the related party contraventions. His Honour only invoked the notion of involvement in that paragraph in the context of the related party transactions. 181 The exception to which I referred in the previous paragraph concerns his Honour's reference (in [145]) to Allan Endresz having been "clearly involved" in transactions 1, 3, 5, 6 and 8 (all of which related to payments to Kamanga) because of his earlier finding that Allan Endresz was "an officer" of CTC. At that stage the primary judge assimilated Allan Endresz's role as a found "officer" in CTC with that of the first, second and third appellants who were "each involved by reason of their directorships in CTC and Kamanga or Bisoya". On one view it might be thought that at that stage the primary judge was referring only to the transactions referred to in the originating process which invoked the notion of involvement, being the related party transactions. Even if that was not the case, however, the position is in my view made plain by paragraph [147] which clearly distinguishes between liability as principals for the purposes of s 232 and liability on an involvement basis for the purposes of the related party transactions. 182 Mr Biscoe QC's threshold question fails. Officer of CTC: legal principles 183 The question whether Allan Endresz was an "officer" of CTC turned on whether or not he was concerned in or took part in its management: s 9 definition of "executive officer" in the Corporations Law. 184 Neither the appellants or ASIC addressed submissions to the legal concepts involved in that definition. Nor, indeed, did ASIC assist the primary judge with references to authority on the meaning of "executive officer". 185 The concepts of being concerned in or taking part in the management of a corporation have been considered in different statutory contexts. 186 In Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821 Ormiston J considered the meaning of s 227 of the Companies (Victoria) Code which provided: "A person who is an insolvent under administration shall not be a director or promoter of or be in any way (whether directly or indirectly) concerned in or take part in the management of, a corporation without the leave of the Court." 187 Ormiston J concluded (at 830) that for the purposes of s 227: "… the concept of 'management' … comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs." 188 His Honour pointed out (at 831) that the degree of participation encompassed in the expression "take part in" needed little elaboration other "than that it both connotes and proscribes the active participation of a prohibited person in the management of a corporation" and that "[s]uch participation would have to be real and direct, but not necessarily in a role in which ultimate control is exercised, although it would have to be more than the administrative carrying out of the orders of others responsible for a company's management". 189 As to the concept of being "concerned in" his Honour regarded (at 832) the expression as having "a much wider operation" and "connot[ing] participation at a variety of levels and at differing intensities", some of which "may be relatively modest". He referred approvingly to Quilliam J's observation in R v Newth [1974] 2 NZLR 760 that the expression "prohibits a person 'from taking any hand in the real business affairs of the company'" but noted, in contrast, the phrase did not have as wide a meaning as "having something to do with": cf George Hill and Co v Hill (1886) 55 LT 769 at 771 as applied in Pioneer Concrete Services Ltd v Galli [1985] VR 675 at 707. 190 In Ormiston J's opinion (at 832) the prohibition in s 227 extended to "activities involving some responsibility, but not necessarily of an ultimate kind whereby control is exercised" and "[a]dvice given to management, participation in its decision-making processes, and execution of its decisions going beyond the mere carrying out of directions as an employee, would suffice." Negotiating "terms with bankers or providers of credit, although those terms had to be confirmed" would suffice. His Honour emphatically rejected the proposition that "the denial of ultimate responsibility for decisions" took an insolvent (or convicted person) outside the ambit of the s 227 prohibition. 191 In Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474 Burchett J was required to consider whether the respondent was caught by the insolvent trading provision, s 556 of the Companies (NSW) Code, which imposed both criminal and civil liability for a debt upon "any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred" in circumstances where, in substance, there were reasonable grounds to expect that the company would not be able to pay its debts as and when they become due. 192 Burchett J said (at 476 - 477): "Section 556 is a section which imposes criminal liability, including imprisonment. It would be quite inappropriate to give to the statement of an ingredient of such an offence, 'any person who was a director of the company, or took part in the management of the company', some loose meaning ignoring that context. Particularly is this so when the rationale must be that the person whom the section singles out is an offender because of the significance of his role in the company which incurred the debt. If his role is a junior one, giving him no real influence on the decision, or if his role is that of an outside professional, who might advise, but would certainly not be taking the decision, there is no reason to think that the language of the section should be stretched to include him." 193 His Honour distinguished (at 477) Commissioner for Corporate Affairs (Vic) v Bracht, above, on the basis that s 227 of the Companies (Victoria) Code had to be "given a fairly wide scope if those affected by the way in which companies are managed are to be given the protection the provision is designed to give them". He concluded (at 477) that it was not appropriate to apply that approach as it would have the effect of imposing personal liability on persons who had no control of the decisions which were taken to incur the relevant debt. His Honour concluded (at 477) that, having regard to the context, the expression "took part in the management of the company" in s 556 should be interpreted as embracing "persons whose management role may be likened to that of a director". 194 Holpitt Pty Limited v Swaab & Ors was applied by Gummow J (sitting at first instance in the Federal Court) in Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425 at 441, another case concerning insolvent trading, on this occasion s 592 of the Corporations Law, which was, relevantly, in the same terms as s 556. His Honour held (at 441) that to be found to have taken part in the management of a company it was necessary to find that the person had some decision-making role of a management nature in the company. 195 Holpitt Pty Limited v Swaab and Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler were applied by Hodgson J (as his Honour then was) in Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290 at 323 again in the insolvent trading context. Officer of CTC: conclusion 196 Although the primary judge did not refer to the authorities to which I have referred it is clear that his conclusion turned on him finding that Allan Endresz had a significant role in managing its affairs, both of a business and administrative nature. 197 The concepts of being "concerned in" and "taking part in the management" of a corporation as they appeared in s 9 of the Corporations Law were divorced from the contexts which influenced the outcomes in Commissioner for Corporate Affairs v Bracht and the insolvent trading cases. 198 Although he found Allan Endresz had played a managerial role in CTC, the primary judge did not make an express finding that that role could be likened to that of a director nor conclude that Allan Endresz played a "decision-making role of a management nature", as the insolvent trading cases require, to found the conclusion that he had taken part in the management of CTC. 199 It is unnecessary to decide whether the phrase "take part in the management" as it appeared in s 9 should be given the wide construction adopted in Commissioner for Corporate Affairs v Bracht or the narrower construction adopted in the insolvent trading cases. 200 It is sufficient for present purposes to accept Ormiston J's approach in Commissioner for Corporate Affairs v Bracht concerning the width of the expression "concerned in … the management" of CTC. It is plain, if one was to take merely the primary judge's finding that Allan Endresz had conceived CTC's main activity for the period 1993 – 1998, the SIBS Scheme, and had been responsible for its continued promotion, to conclude that he had been "concerned in" activities which involved both policy and decision-making related to CTC's business affairs as a whole. That is sufficient to constitute him an "executive officer" of CTC. It is also plain that Allan Endresz's role in conducting CTC's relationship with its banker was also sufficient to support the conclusion that Allan Endresz was concerned in CTC's management. 201 The challenge to the primary judge's finding that Allan Endresz was an "officer" of CTC should fail. Involvement: knowledge 202 In ASIC v Adler, above at [209], Santow J (as he then was) held that to be "involved" within the meaning of s 79 of the Corporations Act in a contravention of the Corporations Act, it was necessary that a person know of "the actual events, though only the essential ones, which constitute that offence." His Honour said that that "[k]nowledge may be inferred from the fact of exposure to the obvious, though that [did] not obviate the need for actual knowledge of the essential facts constituting the contravention", referring to Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473 at 507–8; 58 ALR 641 at 656 per Wilson, Deane and Dawson JJ. In a later passage, his Honour dealt again with the issue of accessorial liability saying: " [357] In Yorke v Lucas … in construing the equivalent provision in the Trade Practices Act 1974 (Cth) to s 79, the High Court held that where it is sought to make a person liable as an accessory to a contravention it is necessary to establish that the person had intentionally participated in the contravention. To establish intentional participation, the court held that it must be proven that the person has knowledge of the essential matters that make up the offence or breach (in that case of s 52(1) of the Trade Practices Act). At 670, the majority comprising Mason ACJ, Wilson, Deane and Dawson JJ, observed that the words require: '… a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.' The majority went on to say: 'There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention.' [358] That knowledge is actual and not constructive. But a combination of suspicious circumstances and the failure to make appropriate inquiry when confronted with the obvious, makes it possible to infer knowledge of the relevant essential matters: Pereira v DPP (1989) 82 ALR 217 at 219; 63 ALJR 1 at 3." 203 As I have earlier concluded, the primary judge's conclusion that the appellants had been involved in the transactions was appropriately directed to the related party transactions. Although his Honour referred to the nature of their involvement as having been, in relation to the first three appellants, "by reason of their directorships in CTC and in Kamanga or Bisoya" and, in the case of the fourth appellant, because of "his disguised but nevertheless ongoing managerial role in CTC and Kamanga", it is plain, even if one had regard only to paragraph [144] of his judgment, that his Honour had found that each appellant had knowledge of all the material facts of the transactions. Moreover, his Honour was expressing, in summary form, his thorough examination of the circumstances in which each transaction had come about. That included, in particular, his conclusion that the transactions had been agreed prior to the relevant meetings and that, in effect, Mr Jozsef Endresz and Mr Forge's absences from CTC's meetings at the time the resolutions respectively benefiting their companies were passed were no more than window dressing to give the appearance that they had not voted on transactions in which they had a pecuniary interest. 204 Accordingly, the challenge (unexpressed in a ground of appeal) to the finding that the appellants had contravened the related party provisions, on the basis that there was no express finding that they had knowledge of the material facts, should be rejected. The test as identified by Santow J in ASIC v Adler was amply made out. 205 Ground 8 should be rejected. Directors' duty contraventions: grounds of appeal 206 The principal challenge to the primary judge's conclusion that the appellants had contravened ss 232(2), (4) and (6) of the Corporations Law was made in the following grounds of appeal: "7. On the evidence, his Honour erred in holding that the transactions contravened the statutory provisions and did not fall within the statutory exceptions and that no acceptable explanation had been given for them and that they could not properly be described as arms length transactions [paragraphs 112 and 135 to 137]. 9. His Honour erred in not taking into account sufficiently or at all that the appellants respectively absented themselves from the meetings of the Board of Directors when the Board decided to make the subject payment to their respective interests and that CTC's Articles of Association permitted the transactions and the directors to proceed as they did. 10. Having regard to the last mentioned matter, his Honour, in accepting Mr Tutt's evidence, failed to take into account that Mr Tutt was in error in proceeding on the basis that the directors voting on the transactions were aware, as evidenced by the minutes of the meetings, of the conflict of interest involved in the transactions. [this ground was not pressed] 19. Given that the appellants had laboured for so long for CTC in anticipation of fees when the opportunity presented itself, his Honour was an error in holding against them that the receipt of the $6,000,000.00 was seen as a golden opportunity for the payment to the director-related entities of Kamanga and Bisoya for the benefit ultimately of the defendants, and in holding that their evidentiary claims that the payments were made for the benefit of the company and its shareholders were not more than colourable afterthoughts and that none of the matters of justification for the payments were in the minds of the first, second and third defendants on 20 April 1998 [paragraph 135]. 20. His Honour erred in expressing " some degree of doubt" as to whether the meeting of 20 April 1998 was actually held or whether the minutes were simply constructed to give effect to arrangements otherwise concluded [paragraph 124] when such propositions were not put to the appellants in cross-examination and when his Honour in fact found that it was held [paragraph 18]. 21. His Honour erred in his interpretation of s. 232(2) [paragraph 141] and in holding that the appellants had contravened all the sections as alleged in the originating process." 207 Ground 7 overlapped both with ground 19 and with the challenge to the primary judge's conclusion that the appellants had breached s 243ZE(3) insofar as paragraph [135] summarised his Honour's assessment of the appellants' explanations for the transactions. Directors' duty contraventions: the appellants' submissions 208 The appellants submitted that the findings that the transactions contravened the Corporations Law were not justified. They contended that the primary judge erred in his assessment of the evidence and that, notwithstanding his Honour's advantage of observing the demeanour of the witnesses (let alone his credit findings), the contemporary materials, objectively established facts and apparent logic of events did not justify his conclusion: cf Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 129. 209 Mr Biscoe QC submitted that CTC's articles 77, 83 and 95 were relevant to the question whether the appellants had contravened the Corporations Law. He referred to Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 125 where Tadgell J said that: "What constitutes the proper performance of the duties of a director of a particular company will be dictated by a host of circumstances, including no doubt the type of company, the size and nature of its enterprise, the provisions of its articles of association, the composition of its board and the distribution of work between the board and other officers." 210 He argued that the relevant directors complied with articles 82 and 83 in disclosing their interest in transactions 1 and 2 and absenting themselves from the April 1998 Board meeting. He submitted that the CTC Board had been empowered to approve the retrospective consultancy and management fee payments by article 77 which provided: "77. If any Director being willing shall be called upon to perform extra services or to make any special exertions in going or residing abroad or for any of the purposes of the Company, the Company shall remunerate such Director by a fixed sum as may be determined by the Directors and such remuneration may be either in addition to or in substitution for his share in the remuneration above provided." Transactions 1 and 2: retrospective management and consultancy fees 211 Mr Biscoe QC's fundamental proposition in relation to transactions 1 and 2 was that the CTC Board appeared to have exercised a business judgment when it approved those transactions on 20 April 1998. He used the expression "business judgment" in the sense to which Barwick CJ, McTiernan and Kitto JJ referred in Harlowe's Nominees Pty Limited v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 at 493: "Directors in whom are vested the right and duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. " (emphasis supplied) 212 While the appellants accepted that the receipt of the $6,000,000.00 was a "golden opportunity" to make the payments they argued that did not make transactions 1 and 2 wrong. 213 Mr Biscoe QC submitted that a reasonable director could have regarded the retrospective consultancy fee and management fee payments to Kamanga and Bisoya as reasonable. He contended that if directors or officers laboured for years for the benefit of a company without remuneration in the hope of reward when times improved, a decision by the Board to remunerate them retrospectively in light of improved financial circumstances was not unreasonable. 214 Mr Biscoe QC argued that the "undisputed evidence was that Kamanga had provided the very considerable services of the Endreszs for over nine years and Bisoya had provided the services of Forge for over four years in the face of great difficulties". He submitted that the primary judge was in error in taking the view that this evidence did not justify transactions 1 and 2. 215 Mr Biscoe QC referred to the Board resolution of 20 April 1998 in relation to Kamanga which referred to the "enormous management contribution provided by Kamanga over the company's most difficult and turbulent years in its corporate history". He drew attention in justification of that contribution to the evidence of the services provided by Kamanga set out in a hand-written document exhibited to Allan Endresz's affidavit. He also referred to the passages in Allan Endresz's affidavit which referred, among other activities, to the SIBS concept and the problems CTC had encountered with both the ASC and the ASX to pursue that concept. It will be recalled that these matters did not impress the primary judge as justifying the retrospective management fees. 216 Mr Biscoe QC pointed out that Mr Forge was the managing director of CTC and that while the CTC Board resolution of 16 April 1998 provided for his remuneration (via Bisoya) of $65,000 pa, in contrast, on 16 August 1986 a general meeting of CTC shareholders had approved remuneration for managing directors of $75,000 pa. In other words the April 1998 resolution approved retrospective payments at $10,000 pa less than approved by the shareholders 12 years earlier. 217 Mr Biscoe QC submitted that the primary judge appeared to have found the appellants were in breach of their statutory duties because "he did not accept that the idea that the payments were made for the benefit of the company and its shareholders were in their 'minds' at the time of the resolutions of 20 April 1998" (emphasis in original). 218 Mr Biscoe QC contended that the "contemporaneous, objective evidence of the 20 April 1998 resolutions" evidenced that "the idea that the payments were made for the benefit of the company was in the minds of the appellants at that time and therefore were not 'colourable afterthoughts'." 219 Mr Biscoe QC also relied upon the fact that the minutes of the April 1998 board meeting recorded that Mr Endresz "properly" absented himself during consideration of the resolution for the retrospective payment to Kamanga and that Forge "properly" absented himself during consideration of the resolution for the retrospective payment to Bisoya while Allan Endresz was not present at the board meeting of 20 April 1998. Transactions 3, 4, 5, 6 and 8: future management and consultancy fees 220 Mr Biscoe QC submitted that the findings that transactions 3 and 4 contravened the Corporations Law were not justified. He drew attention to the fact that transactions 3 and 4 were the first two months' payments by CTC to Kamanga and Bisoya pursuant to the consultancy agreement and management agreement approved on 20 April 1998. As they were prospective, they differed in nature from the retrospective payments comprising transactions 1 and 2. They appear to be payments pursuant to orthodox consultancy or management agreements. The appellants submitted that the primary judge had made no finding that the payments were excessive. 221 Insofar as transactions 5, 6 and 8 were concerned the appellants also submitted that the primary judge overlooked the undisputed evidence that they were repaid. Transaction 7: Bisoya loan $75,000 222 The appellants made the same complaint, namely that the primary judge overlooked the "undisputed evidence" that the loan the subject of Transaction 7 was repaid. Interpretation of s 232(2) 223 The appellants complained that the primary judge had erred in law in applying the objective test of the word "honestly" in s 232(2) as enunciated by King CJ in Australian Growth Resources Corporation Pty Limited v Van Reesema, above, as opposed to the subjective test held to be appropriate in Marchesi v Barnes [1970] VR 434. 224 Insofar as the contravention of s 232(2) was concerned, the appellants submitted that the primary judge had made no finding that they had been subjectively dishonest. They referred to Mr Walsh's evidence that none of the appellants were subjectively dishonest, a view which it appears the judge was prepared to act upon. 225 They submitted that on the basis of the test in Marchesi v Barnes the finding that they had contravened s 232(2) was erroneous and should be set aside. Directors' duty contraventions: ASIC's submissions 226 ASIC submitted that the primary judge's conclusion that the appellants breached the Corporations Law was soundly based in the evidence to which I have earlier referred. 227 ASIC also submitted that CTC was not subject to any legal obligation to pay any management fees to related entities for "past services". In this regard, it drew attention to Ernst & Young's correspondence of 15 January 1999, 4 March 1999 and 1 February 2000 to which I have earlier referred. Nor, ASIC contended, did the appellants have any factual entitlement to retrospective management and consultancy fees. They pointed out that CTC's accounts for the period from 1990 to 1997 did not include: "(a) any provision for outstanding fees due to directors; or (b) any provision for outstanding fees due for "management"." 228 ASIC also relied upon the appellants' failure to itemise the work said to have been undertaken – information Ernst & Young had sought in their letters dated 15 January 1999, 4 March 1999 and 1 February 2000, in support, I infer, of its contention that the appellants had not done work for CTC which would justify the quantum of the fees paid. 229 ASIC submitted that the payment of the management fees was effectively made from CTC's capital. It pointed out that CTC's 1998 Accounts disclosed that despite the receipt of $6,000,000.00 CTC's losses increased from $164,611 in 1997 to $6,866,355 in 1998 and CTC suffered a significant deterioration in its asset position with its net deficiency increasing from $1,427,273 in 1997 to $4,297,277 in 1998. 230 ASIC also contended that the payments were "authorised" and made without regard to the fact that as a consequence of the issue of the 600,000 preference shares to the Commonwealth, CTC was required to: (a) pay to the Commonwealth annual non-cumulative preferential dividends of 6.5%; and (b) unless converted, fund the repayment of $6,000,000.00 to the Commonwealth on 20 April 2002. Interpretation of s 232(2) 231 ASIC's submissions did not seek to resolve what it accepted was a "conflict" between the decision in Marchesi v Barnes and Australian Growth Resources Corp v Van Reesema. ASIC argued, however, that for the reasons advanced by the authors of Fords Principles of Corporations Law (Ford, Austin and Ramsay – 9th Ed, Butterworths at para 8.300) the introduction of s 1317FA in the Corporations Law in conjunction with s 232(2) becoming a civil penalty provision might lead to King CJ's approach in Van Reesema being preferred. 232 Alternatively, ASIC submitted that the primary judge had found the appellants had acted with subjective dishonesty so that the Marchesi v Barnes test was satisfied. Consideration: directors' duty contraventions 233 As will by now be apparent the appellants' attack on the primary judge's conclusion was broad ranging. It fell squarely within the approach impugned by Heydon JA in Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of New South Wales, above, at [61] of inviting this Court "to survey for itself, afresh, all the evidence on particular points and arrive for itself at particular conclusions about them, without essaying the necessary task of positively demonstrating that the trial judge was wrong". 234 The appellants' approach calls to mind, too, the necessity for appellate caution in reversing the primary judge's evaluation of the facts having regard to the advantage he derived from presiding over the trial, an advantage to which respect is still accorded: see Fox v Percy, above at [23] per Gleeson CJ, Gummow and Kirby JJ, at [65] – [93] per McHugh J; cf Callinan J at [131] – [148], particularly where his Honour made credit findings adverse to the appellants: Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449 at [68] – [76] per McHugh and Kirby JJ. 235 The primary judge's conclusion that the transactions could not have been believed by the appellants to have been in CTC's best interests was inevitable in my view having regard to the parlous financial situation under which CTC had operated for many years. Further, the appellants treated the $6,000,000.00 without any regard to the obligations attached to its receipt. The $6,000,000.00 was required to be repaid to the Commonwealth in 4 years. It was also subject to an obligation to pay annual, non-cumulative, preferential dividends of 6.5%, at least in years when a profit was made and a dividend declared (see article 122). 236 Prima facie, CTC was obliged to place the $6,000,000.00 in the share premium account or into the capital account, not to pay large quantities of it out to companies in which its directors had a pecuniary interest. It is true that the directors whose companies were to be the beneficiaries of the funds absented themselves from the meetings at which the relevant resolutions were passed, but his Honour also clearly formed the view that even if the 20 April 1998 meetings actually took place, they were merely rubber stamping exercises giving effect to arrangements already made, at least insofar as Mr Endresz, Allan Endresz and Mr Forge were concerned: see judgment at [124] – [127]. 237 In the light of his doubts about the holding of the 20 April 1998 meetings coupled with his views that, in any event, the decision to approve the payment of the management and consultancy fees had been arranged prior to the receipt of the $6,000,000.00, his Honour was clearly entitled to take the view that had the relevant appellants indeed absented themselves from CTC's meetings at the time the subject payments were resolved, that was of little moment in the overall assessment of their conduct. 238 In my opinion the appellants' reliance upon CTC's articles is of no avail. I have earlier identified the substance of articles 77, 82 and 83. While it may be the case that the constraints imposed on a fiduciary in dealing with a person to whom fiduciary duties are owed may be ameliorated to some extent insofar as a director and the director's company are concerned by the Memorandum or Articles of Association of the Company (Furs Limited v Tomkies [1936] HCA 3; (1936) 54 CLR 583 at 592), such articles cannot relieve a director from the obligation to act in the interests of the company as a whole: Re Bright Pine Mills Pty Limited [1969] VR 1002 at 1013; see Australian Growth Resources Corporation Pty Limited v Van Reesema, above, at 268 – 269. 239 Articles 77, 83 and 95 provided some background to the factual matrix in which the appellants claimed the transactions took place. However, the primary judge's factual findings make it plain that he did not accept the appellants had any regard to these provisions. 240 In my view the articles upon which the appellants relied did not detract from the primary judge's conclusion that the appellants had contravened the Corporations Law. As his Honour held (at [115]) those articles could not prevail where contraventions of the Corporations Law were established. 241 As to ground 20 the primary judge was, in my view, entitled to express doubts about whether or not the April 1998 meeting took place. His findings that the concept of payment of the retrospective management fees and retainer had been, in effect, decided weeks before the $6,000,000.00 was received (see [124]) and that the appellants' evidence seeking to justify the transactions were "colourable after-thoughts" provided ample reason in my view for his Honour to doubt whether the April 1998 meeting was in fact held. It may be, as the appellants submit, that it was not put to the appellants that the meetings were not held. However, there could have been no doubt at the trial that ASIC's case was that the appellants' account of and justification for the transactions should not be believed. The primary judge accepted that case. His doubt about whether the April 1998 meeting took place was a passing, and by no means determinative, observation made as part of his consideration of the overall evidence concerning the transactions. 242 In my view the appellants have not demonstrated any error by the primary judge in making the findings referred to in Ground 19. They have not demonstrated that his Honour's conclusions ought be reversed. There was ample evidence to support the inferences his Honour drew. Moreover his Honour's conclusions were based, in part, upon his rejection of the appellants' credit. Contrary to Mr Biscoe QC's submission, his Honour's findings were not undermined by the contemporary materials, objectively established facts and apparent logic of events. Rather the contemporary materials and objectively established facts provided a cogent basis upon which his Honour was entitled to conclude that the appellants had contravened ss 232(2), (4) and (6) and s 243EZ(3) of the Corporations Law. 243 Grounds 9, 19 and 20 should be rejected. Contravention of s 232(2) 244 In Marchesi v Barnes, above, Gowans J considered the meaning of the requirement to "act honestly" in the observance of the duties of a director as required by s 124 of the Companies Act 1961 (Vic) (relevantly a precursor to s 232(2)). He said (at 438): "… [T]o 'act honestly' refers to acting bona fide in the interests of the company in the performance of the functions attaching to the office of director. A breach of the obligation to act bona fide in the interests of the company involves a consciousness that what is being done is not in the interests of the company, and deliberate conduct in disregard of that knowledge . This constitutes the element of mens rea in the criminal offence created by the statute. If the term "fraud" is applicable in this situation, it is only so in the sense of a "fraud on the power". In effect, the common law obligation in respect of acting honestly, as with the common law obligation to act with due diligence has been made a statutory duty, and failure to perform it, provided there is the proper mental element, has been made a criminal offence." (emphasis supplied) 245 The appellants submitted that the Marchesi v Barnes test was correct and had been followed in Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503, Southern Resources Limited v Residues Treatment & Trading Co Limited (1990) 3 ACSR 207, Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811 and Fitzsimmons v R (1997) 23 ACSR 355. They drew attention to Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 at 642 where Dawson J after referring to the passage in Van Reesema upon which the primary judge relied said: "For my own part I cannot, with respect, equate dishonesty in the context of s 229(1) [the precursor of s 232(2)] with mere impropriety. … the use of power for an impermissible purpose, viewed objectively as it should be, may be improper, but it is not necessarily dishonest. Whether the element of dishonesty is adequately encompassed by the remarks of Gowans J in Marchesi v Barnes is something which does not fall for decision in this case, but it is, I think, necessary to give to the word 'honestly' in a provision creating a criminal offence a somewhat wider scope than King CJ was prepared to give it in Australian Growth Resources Corporation Pty Limited v Van Reesema ." 246 The appellants submitted that unless the distinction Dawson J drew in Chew was maintained, there would be no difference in the circumstances of the present case between the application of s 232(2) and s 232(6) which deals with impropriety, which the appellants accepted was determined by an objective test and "does not depend on an alleged offender's consciousness of impropriety": R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 at 514 – 515; see also Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230 at [39] ff and McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579. 247 Assuming in the appellants' favour that the Marchesi v Barnes test requiring the demonstration of subjective dishonesty to attract liability under s 232(2) is correct, in my opinion the primary judge's findings demonstrate that he did find the appellants to be subjectively dishonest in relation to the impugned transactions. Critically, his Honour held that: "135 I am left with the overwhelming impression from the evidence of these four defendants that, in circumstances where CTC had had no significant income for many years, the receipt of the $6,000,000.00 was seen as a golden opportunity for the payment to the director-related entities of Kamanga and Bisoya of significant sums of money for the benefit, ultimately, of the defendants themselves. I am of the view that the claims made in their affidavit and oral evidence that payments were made for the benefit of the company and its shareholders are no more than colourable after-thoughts. I do not accept their evidence in this regard. In particular, I am totally unpersuaded that any of these matters of justification for the payments were in the minds of the first, second and third defendants at the time the resolutions of 20 April 1998 were passed if, in fact, they were passed at a properly constituted meeting…. 144 In my opinion, the contraventions are amply demonstrated. In general terms, I am satisfied that the first, second, third and fourth defendants simply regarded the acquisition by CTC of the amount of $6,000,000.00 on 20 April 1998 as amounting, virtually, to a provision of funds for their own private use. The amounts covered by the transactions were paid out, in the form of fees or loans to related entities, without regard to the fact that the $6,000,000.00 itself was subject to repayment and also carried with it obligations to pay interest. Despite protestations in the case that shareholder approval was not required because of the attitude of shareholders in the past, I am of the view that the question of shareholder approval was not even considered in relation to any of these payments or loans. All that mattered was their own perceived entitlement to payment for past and future services." (emphasis supplied) 248 Those findings demonstrate that the primary judge was clearly of the view that the appellants' approval of the transactions was not bona fide and that they approved the transactions knowing that what they were doing was not in the interests of CTC. It is hardly remarkable that his Honour took the view that the appellants' versions of events were "no more than colourable after-thoughts" particularly in light of the fact that their explanations had not emerged during the stream of the correspondence between CTC and Ernst & Young. 249 Ground 21 should be rejected. Contraventions of ss 232(4) and (6) 250 Mr Biscoe QC did not identify any specific complaint about the primary judge's conclusion that the appellants had breached ss 232(4) and 232(6). He did not complain about the primary judge's application of R v Byrnes which required his Honour to apply an objective test in determining whether the appellants had respectively breached the standards of conduct that would be expected of a person in their position. 251 The Court drew Mr Biscoe QC's attention on more than one occasion during the hearing of the appeal to the fact that in its view there were no specific attacks directed to the primary judge's conclusion that the appellants had breached ss 232(4) and 232(6). As I understand Mr Biscoe QC's response, it was that the appellants' challenge to the primary judge's conclusion in this respect was based on their general submission that they had acted with propriety and with due care and diligence in their approach to the transactions. 252 I have already drawn attention to Giles JA's observations in Adler & Anor v Australian Securities & Investments Commission; Williams v Australian Securities & Investments Commission, above, at [17] that the appellants bear the burden of showing that the primary judge's conclusions ought to be reversed and that this involves demonstrating factual error on the part of the primary judge. In my view the appellants have failed to demonstrate that the primary judge erred in the conclusions he reached in relation to the contraventions of ss 232(4) and 232(6). Admission of Mr Tutt's evidence 253 The challenge to the primary judge's conclusion concerning the admissibility of Mr Tutt's opinion evidence was made in the following grounds of appeal: "11. His Honour should have held that Mr Tutt's opinion evidence referred to in paragraphs 60 to 63 of the judgment was inadmissible because it was about ultimate legal issues to be determined by the Court, or he was not qualified to express such opinions, or should have refused to admit it under s 135(a) of the Evidence Act [paragraphs 60 to 62]. 12. His Honour should have formed the opinion and taken into account that Mr Tutt appeared to be biased having regard to the evidence of litigation between a subsidiary of a company of which Mr Tutt was chairman and a company of which Allan Endresz was a director [pages 64 and 65]. 13. His Honour erred in refusing to permit cross-examination of Mr Tutt as to remuneration of executive directors, including Mr Tutt, of a public company in periods when that company had incurred a loss of some $400 million [transcript 181 – 184/15]. [This ground was not pressed] 14. In accepting the evidence of Mr Tutt, his Honour erred in failing to take account of the fact that Mr Tutt was addressing himself to provisions of the Corporations Act or post 1998 Corporations Law whereas the proceedings against the appellants were for alleged contraventions of provisions of the Corporations Law in 1998." 254 Before the primary judge, Allan Endresz challenged Mr Tutt's evidence as biased relying upon the fact that Mr Tutt was chairman of Royal & Sun Alliance Insurance Australia Holdings Limited ("RSA") and the matters set out in paragraph 84 of his affidavit, in which he asserted: "RSA and its subsidiaries, Royal & Sun Alliance Financial Services Limited and Tyndall Superannuation Limited are involved in legal proceedings with Strategic Superannuation Solutions Pty Ltd ["SSS"], of which I am a director. These proceedings involve the recovery by SSS of an outstanding debt owed by RSA in excess of $2 million [with interest and costs] and separate legal proceedings detailed at item 39 of Exhibit APE1 (Exhibit "8")." 255 The primary judge held (at [114]) that the proceedings to which this passage referred were interlocutory and the ex tempore judgment, included in Exhibit "8", appeared to cast no light on Allan Endresz's submission. He concluded that "nothing emerged which could reasonably found a holding of bias, actual or ostensible." He regarded Mr Tutt "as an impressive witness, whose expert testimony could be completely relied upon". 256 The appellants submitted that in the light of the evidence of what they described as "Mr Tutt's conflict", his evidence "did not have that degree of impartiality which the Court should require before giving it weight". 257 In my view, the primary judge's conclusion that the appellants had not demonstrated bias on Mr Tutt's part was correct. The litigation to which paragraph 84 of Allan Endresz's affidavit referred was not a matter in which Mr Tutt was involved. It is true that it involved a subsidiary of RSA, but that fact alone was insufficient in my view to found any reasonable apprehension that he was biased against Allan Endresz, SSS or any of the other appellants. 258 Ground 12 should be rejected. 259 Ground 13 arises from this cross-examination of Mr Tutt. Allan Endresz also cross-examined Mr Tutt on this topic. Mr Tutt said he was not involved in the particular transactions, was not a director of the company involved and had become aware of the litigation two weeks before. The primary judge asked Allan Endresz why the questions were being asked. Having established that Allan Endresz sought to establish that Mr Tutt was biased, his Honour asked him whether he wanted to ask Mr Tutt any further questions. Allan Endresz said he did not. It is plain that, contrary to ground 13, the primary judge did not stop Allan Endresz cross-examining Mr Tutt. 260 Ground 13 should be rejected. 261 I have earlier set out Mr Tutt's evidence in detail. In summary he answered "No" to questions in relation to each transaction whether (a) a "careful and diligent director of CTC" would have caused or permitted the transaction, and (b) a director of CTC "acting honestly in the exercise of his or her powers and discharge of the duties of his or her office" would have caused or permitted the transaction, and "Yes" to the question whether (c) a director or employee by causing or permitting CTC to make the payment would have made "improper use of his or her position". 262 The appellants submitted that the primary judge should not have admitted Mr Tutt's evidence because it went to the ultimate legal issue. Alternatively, they argued his Honour should have excluded the evidence in the exercise of his discretion under s 135(a) of the Evidence Act 1995 (NSW) on the ground that its probative value was substantially outweighed by the danger that it might be unfairly prejudicial to the appellants. The appellants accepted that they did not object to the admissibility of Mr Tutt's evidence on this basis or make an application under s 135(a) at the trial. 263 While ASIC noted these submissions had not been advanced at trial, it did not formally object to the Court considering them. Rather, ASIC contended that evidence which went to the ultimate legal issue was not inadmissible: s 80 Evidence Act 1995 (NSW), which states that evidence of an opinion is not inadmissible only because it is about "an ultimate issue". 264 The appellants argued that the reference to "an ultimate issue" in s 80(a) means the ultimate fact in issue and not the ultimate legal issue to be determined by the Court. They relied upon Blackie v Police [1966] NZLR 910 at 919 – 920 where Turner J said: "I approach the problem with an acute sensibility that there is always danger in allowing an expert witness, or indeed any witness, to answer the very question which the Court is called upon to decide. Once this is done and an answer given which is accepted by the court, the chances of success on an appeal on fact are slight indeed, since there is direct and acceptable evidence on the very point at issue. The consequences of the answer may therefore be nothing less than disastrous from the point of view of the defendant. The only justification which can be advanced for allowing the question must be the impossibility or extreme difficulty of arriving at the truth in any other way; and even in such cases it is indispensable that there must be both a high degree of skill and a complete impartiality in the witness called." 265 The appellants pointed out that it has been held that the Court should reject expert opinion evidence that a solicitor was negligent: Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735 at 738; O'Brien v Gillespie (1997) 41 NSWLR 549 at 556 per Levine J. They submitted that an expert may not give an opinion on an ultimate issue where that involves the application of a legal standard, for example that a defendant is negligent: R W Miller & Co Pty Ltd v Krupp (Aust) Pty Ltd (1991) 34 NSWLR 129 at 130 – 131 per Giles J (as his Honour then was); Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) Allstate Judgment No 33) (1996) 64 FCR 79 at 84 per Lindgren J. See also Naxakis v Western General Hospital [1999] HCA 22; (1999) 197 CLR 269 at 306 per Callinan J [110]; Cross on Evidence (Aust ed) 29,058; Odgers Uniform Evidence Law (4th ed, 2000) 184 – 186. 266 In Allstate Life Insurance Co v ANZ Banking Group Ltd Lindgren J said: "... reference to the legislative background shows that the reference in s 80(a) [of the Evidence Act 1995 Cth] to the 'ultimate issue' was intended to refer to opinion by non-legal expert witnesses or non-expert witnesses on an ultimate issue of fact expressed in language which applies a legal standard." 267 In Barbosa v Di Meglio [1999] NSWCA 307 at [84] – [85] Priestley JA, after referring to this passage from Allstate Life Insurance Co v ANZ Banking Group Ltd and to O'Brien v Gillespie (1997) 41 NSWLR 549 pointed out (at [85]) that "neither Levine J nor Lindgren J was dealing with the application of s 80 to expert opinions of non-lawyers." His Honour appeared to be of the opinion that Lindgren J and Levine J's views should be confined to cases concerning expert evidence given by lawyers concerning the ultimate issue. Ultimately it was not necessary for him to express a considered view on the point. 268 ASIC drew attention to Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at 745 [89] where Heydon JA said "[t]hough Professor Morton's views often go to ultimate issues, they are not on that ground inadmissible: Evidence Act 1995 (NSW) s 80" and to R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317 at 326 – 327 where Mason P said: "[40] In New South Wales opinion evidence is not inadmissible only because it is about a fact in issue or an ultimate issue ( Evidence Act , s 80(a)). However, judges should exercise particular scrutiny when experts move close to the ultimate issue, lest they arrogate expertise outside their field or express views unsupported by disclosed and contestable assumptions (see Steffen v Ruban [1966] 2 NSWR 622 at 626, Arnotts v Trade Practices Commission (1990) 24 FCR 313 at 350-1, HG v The Queen (1919) 197 CLR 414 at 427-8, Makita )." 269 In Adler v ASIC, above, ASIC's expert dealt with questions which Giles JA described (at [617]) as going: "… fairly directly to the contraventions of the Act alleged in relation to the transactions. As an example, question 1 was, "Would a reasonably careful and diligent director of officer of HIH or HIHC in the position of Mr Adler have caused or procured the payment on 15 June 2000 of $10 million by HIHC to PEE?" 270 Giles JA said (at [622]) that the fact the expert evidence went "fairly directly to the contraventions did not make it inadmissible, see s 80(a) of the Evidence Act although care must be taken 'when experts move close to the ultimate issue'", referring to R v GK, above. He held (at [629]): "proper professional conduct in the sense of due care and obedience to customary practices and ethical rules [was] a field of specialised knowledge [and that] … a company director should have specialised knowledge and be able to speak of directors' duties of due care and proper conduct and their application". 271 The appellants submitted that Adler v ASIC went too far in holding that evidence as to such a question was admissible. Adler v ASIC is a recent unanimous decision of this Court. Mr Tutt's evidence was framed in almost identical terms to the evidence considered in Adler v ASIC. Adler v ASIC is, therefore, a binding authority directly contrary to the appellants' submission. It is consistent with the other Court of Appeal decisions to which I have referred. 272 As Austin J pointed out in Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 at [27] expert evidence directed to answering a question of law or fact that is directly before the court for decision "… is likely to be inadmissible not because it goes to the ultimate issue, but because it will not be wholly or substantially based on the expert's specialised knowledge, or it will be irrelevant": Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (1996) 64 FCR 79 at 83. 273 I would, however, express reservations about Mr Tutt being asked to express an opinion about whether the appellants had acted "honestly". If he was being invited to give evidence about the appellants' subjective state of mind any response would have been clearly inadmissible. However it is plain, in my view, that Mr Tutt was being asked to express an opinion based on the objective facts of each transaction as it applied to a careful and diligent director. 274 It was not suggested that Mr Tutt's evidence went beyond his expertise or, save as to one matter with which I deal below, was unsupported by the evidence: cf R v GK, above. 275 I was prepared to consider the appellants' ultimate issue argument because it raised only a question of law: cf Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1. However, I would not entertain the appellants' argument that the primary judge ought to have excluded Mr Tutt's evidence pursuant to s 135(e) of the Evidence Act: see Whisprun Pty Limited v Dixon [2003] HCA 48; (2003) 77 ALJR 1598 at [51]. 276 In my view, in any event, Mr Tutt's evidence had evidentiary value and was not of such little weight as to be excluded under s 135: see O'Brien v Gillespie, above, at 558. 277 Finally, in saying (at [114]) that he regarded "Mr Tutt as an impressive witness, whose expert testimony could be completely relied upon", the primary judge was dealing with the appellants' challenge to Mr Tutt based on the allegation that he was biased. He was not saying that he adopted Mr Tutt's evidence uncritically as to the ultimate legal issue concerning the contraventions. It is plain that the primary judge concluded that the appellants had contravened ss 232(2), (4) and (6) of the Corporations Law by applying the relevant legal principles to the facts as he found them. Although he accepted Mr Tutt's evidence, it was only one of the matters he took into account: see eg paragraph [146] of his judgment; and cf Australian Securities and Investments Commission v Vines, above, (at [29]). 278 Further, insofar as the appellants complain (Ground 14) that Mr Tutt considered provisions of the Corporations Act or post 1998 Corporations Law whereas the proceedings against the appellants were for alleged contraventions of the 1998 provisions of the Corporations Law, it is plain that that did not distract the primary judge from considering the issues under the relevant provisions of the Corporations Law. 279 Grounds 11 and 14 should be rejected. Repayment of loans 280 The appellants complained that the primary judge overlooked the "undisputed evidence" that the loans in transactions 5, 6, 7 and 8 were repaid. This was said to go to the question of whether ASIC had proved the s 232 contraventions in relation to those transactions. It was also said to go to penalty. It was not the subject of a specific ground of appeal. 281 The "undisputed evidence" to which the appellants referred was an assertion in Allan Endresz's affidavit that the transactions had "been repaid in full as intended" and three pieces of correspondence between Kamanga and CTC respectively. It should be noted, in this context, that Kamanga was the trustee for the Allan Endresz Family Trust ("AEFT") from 1998 – 2001, while Bisoya was the trustee of the Forge Family Trust ("FFT"). 282 Transactions 5 and 6 were referred to in two documents. The first document was a letter on CTC's letterhead signed by Mrs Endresz addressed to the directors of Kamanga and dated 27 October 1999 which purported to confirm that the outstanding balance of the loan of $350,000 as at 27 October 1999 was $320,000 on the basis that principal of $30,000 was paid on 11 March 1999 and "interest in full was received on 26 November 1998". The letter also purported to vary the terms and conditions of the loan agreement by making the principal and interest payable upon determination of litigation in the ACT Supreme Court between CTC and the Commonwealth and to provide that simple interest payable at 7% per annum for the term of the loan calculated on monthly rests was payable at the time the principal was to be repaid. 283 The second document purported to be an "invoice" on Kamanga's letterhead dated 4 May 2001 described as "a reconciliation of account movements between Kamanga and CTC". It showed an amount of $391,583.41 said to be owed by CTC to Kamanga as at 3 May 2001 and then narrated: "LESS: Repayment in full of loan at call advanced by CTC to Kamanga on 27 October 1998 Being outstanding principal 27 October 1999 $ 320,000.00 Being interest for the period 27 November 1998 $ 54,496.44" to 4 May 2001 @ 7% per annum 284 Transaction 8 was dealt with in a letter dated 15 February 1999 on Kamanga's letterhead signed by Jozsef Endresz referring to the loan to Kamanga of 13 November 1998 of $150,000. It purported to show two payments of $60,000 each having been made in respect of the loan, it appeared to set off two invoices for consultancy fees of approximately $41,000 and an amount of some $8,500 as having been paid to CTC's solicitors leaving, after the addition of interest payable on the reducing balance of the principal sum, CTC owing Kamanga approximately $18,000. 285 The evidence of "repayment" of the Bisoya loan (transaction 7) was contained in an assertion in Allan Endresz's affidavit to that effect and an account statement dated 1 March 2002 on Bisoya's letterhead to CTC purporting to be a "reconciliation of monthly account movements between the Forge Family Trust and CTC" which included the following: "Repayment of loan advanced 27 October 1998 $75,000.00 in full Interest (calculated at 7% as agreed over three $17,533.56" years and 124 days) 286 As will be apparent from my description of the documents said to constitute evidence of repayment, the appellants did not seek to put forward any documents which constituted primary accounting records. 287 In contrast to this "evidence", it might be noted that in the financial accounts provided to the shareholders in connection with the ratification resolutions, the notes to the accounts for CTC's financial statements which the directors (Mr Barton and Mr Erdeljac) opined represented a true and fair view of CTC's financial position as at 30 June of each of the1999-2001 financial years showed in relation to "related party loans receivable": "$320,000 is owed by AEFT on normal commercial terms and is unsecured." 288 The same reports for the 1999 – 2002 financial years showed: "$75,000 is owed by FFT on normal commercial terms and is unsecured." 289 Thus whereas the "undisputed evidence" purported to show transactions 5 and 6 had been repaid as at 4 May 2001, according to the financial statements $320,000 was still owing as at 30 June 2001. Further, whereas the "undisputed evidence" purported to show transaction 7 had been repaid as at 1 March 2002, according to the financial statements that amount was still owing as at 30 June 2001. 290 ASIC did not object to the evidence of repayment at trial. Mr Stack submitted that the evidence did not demonstrate repayment but conceded that having regard to the fact it had been admitted before the primary judge his submission could only go to its weight. He described it as "close to the fairytale line of country". 291 In my view, it is unnecessary to determine whether the evidence demonstrated that the loans had been repaid. Even if that were the case it did not detract from his Honour's conclusion that, when made, the loans were made in breach of the Corporations Law. 292 If the loans had been repaid then that might, as Mr Biscoe QC submitted, be a matter which could be taken into account in dealing with penalty. The evidence in the financial statements to which I have referred was not before the primary judge, but would appear to cast some doubt on the "undisputed evidence" relied upon by the appellants. As will become apparent later in these reasons, in my view the issue of penalty should be remitted for reconsideration. The parties should take such course as they think fit at that stage in relation to this issue. Related party transactions 293 The appellants' challenge to the primary judge's conclusion that they had breached s 243ZE of the Corporations Law (which I have earlier pointed out overlapped with a challenge to the conclusion that they had contravened ss 232(2), (4) and (6)) was: "7. On the evidence, his Honour erred in holding that the transactions contravened the statutory provisions and did not fall within the statutory exceptions and that no acceptable explanation had been given for them and that they could not properly be described as arms length transactions." 294 The appellants did not dispute the primary judge's conclusion that Kamanga and Bisoya were related parties. They complained, however, that his Honour had not addressed the questions posed by s 243K and s 243N, whether the terms and conditions of the financial benefit were no more favourable to the related party than those on which it was reasonable to expect CTC would give the benefit directly if dealing with the related party at arm's length in the same circumstances. 295 The appellants made two complaints about the primary judge's conclusions that neither the s 243K or the s 243N exceptions had been established. 296 First, they argued that his Honour misconstrued s 243K on the basis that the reference to "a person in a capacity as an officer" was apposite to apply to a corporate service entity which the officer controlled. They relied upon the definition of "person" in s 85A of the Corporations Law which included a "body politic or corporate as well as an individual". 297 ASIC submitted that the word "person" in s 243K could not be read in isolation from the words in "a capacity as an officer of the body …". It referred to the definition of an officer of a corporation in s 82A of the Corporations Law which relevantly includes "a director, secretary, executive officer or employee of the body or entity …" but does not include either a "body politic or corporate". 298 ASIC also submitted that the primary judge's conclusion that the appellants had failed to satisfy the s 243K exception was entirely correct in circumstances where they had failed to adduce any evidence to support the proposition that transactions 1 – 4 constituted "reasonable remuneration". 299 I do not accept ASIC's submission in its entirety. The appellants did seek to justify transactions 1 – 4 on the basis that the management fees were "reasonable remuneration" in the circumstances of their hard labours on behalf of CTC, however, the primary judge rejected that explanation (at [120] – [125]). He accepted Mr Walsh's statement that he had never received evidence which established that the fees were either validly incurred or commercial. 300 In my view the primary judge was entitled to accept that evidence and conclude that the s 243K exception had not been established. 301 Insofar as s 243N is concerned ASIC submitted that the appellants did not elicit any evidence that any of the transactions was provided to the related parties "on terms and conditions no more favourable to the related party than those on which it [was] reasonable to expect [CTC] … would give the benefit directly if dealing with the related party at arm's length in the same circumstances". In my view, that submission is correct. That, in essence, is what the primary judge said when he held (at [122], [136], [137] and [139]) that there was "nothing that satisfies me that the transactions could be regarded as at arm's length". 302 In the light of my conclusion that the primary judge was correct in concluding that the appellants had not established transactions 1 to 4 constituted "reasonable remuneration" or were at "arm's length" it is not necessary to determine the question whether the appellants' submission that "person" in s 243K can include a body corporate is correct. 303 Ground 7 should be rejected. Penalty privilege 304 The appellants raised the following two grounds of appeal relating to penalty privilege: "5. His Honour should have held that the appellants had a privilege against exposure to penalties and therefore should not have (a) directed them to file and serve affidavits before ASIC closed its case, and (b) formed an adverse view of them for not complying with his direction. 6. On the grounds stated above, his Honour should have dismissed the proceedings or granted the appellants' application for a stay of proceedings or stayed his said directions." 305 A related ground appeared to be that: "18. It having been indicated to his Honour by Allan Endresz that affidavits had not been filed as directed by the Court to achieve protection against self-incrimination in view of the pending criminal proceedings [transcript 11 March 2002 page 8] and it not having been put to Allan Endresz that it had been calculated to achieve an advantage for the defendants, his Honour should not have held that Allan Endresz had disregarded the direction to file affidavits with the calculation of achieving an advantage for the appellants [paragraph 66]." 306 While the written submissions suggested these grounds were addressed to the primary judge's first judgment, it emerged as they were developed, both in written submissions and orally, that they revolved around the manner in which the primary judge dealt with the appellants' application to file evidence made at the close of ASIC's evidence. By that stage, despite consent directions made on 4 June 2001 (at a time when the appellants had legal representation) requiring them to file and serve affidavits before the trial commenced, no evidence had been filed or served on their behalves. 307 Allan Endresz was then given leave to file affidavits on behalf of the other appellants and himself. This necessitated an adjournment. 308 ASIC's response to these grounds of appeal is that the appellants consented to the order that they file affidavit evidence and did not raise the issue of penalty privilege. 309 Mr Biscoe QC contended in response that ASIC should have drawn the existence of the privilege to the primary judge's attention and to the attention of the, by then unrepresented, appellants. 310 He submitted that the proposition that there was a privilege against filing affidavits in advance of ASIC's case in civil penalty proceedings had been upheld by Sackville J in Australian Competition and Consumer Commission v Amcor Printing Papers Group Limited [1999] FCA 672; (1999) 163 ALR 465 following Heerey J in Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (No 2) (1997) 77 FCR 217; see also Australian Securities and Investments Commission v Plymin [2002] VSC 56; (2002) 4 VR 168; Australian Competition & Consumer Commission v FFE Building Services Limited [2003] FCAFC 132; (2003) 130 FCR 37; cf Sidebottom & Anor v Commissioner of Taxation of the Commonwealth of Australia [2003] VSCA 2; (2003) 173 FLR 335. 311 ASIC relied upon Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 at [678] where this Court had held that the principle of prosecutorial fairness which applies in criminal trials did not apply to proceedings the legislature has declared are to be conducted as civil proceedings: see s 1317ED, Corporations Law, s 1317L Corporations Act. 312 Mr Stack also submitted that when the proceedings were before the primary judge the law was uncertain as to whether there was a privilege against filing statements in civil penalty proceedings, a position he suggested persisted at the date of hearing the appeal, referring to Sidebottom & Anor v Commissioner of Taxation, above. 313 The appellants also suggested, somewhat faintly, that the primary judge erred in overlooking the availability of penalty privilege. However it should be noted that when the appellants did raise the "right to silence" issue to which ground 18 appeared to relate, it was in the context of an application that the proceedings be stayed because of criminal proceedings relating to secret commissions (apparently connected to the receipt of the $6,000,000.00) and civil proceedings (for the recovery of the $6,000,000.00) which were pending in the Australian Capital Territory. At that stage the primary judge noted that the appellants had neither identified their defence to ASIC's claims nor put on any evidence. They were not complaining of the order that they file affidavits. Indeed the primary judge concluded that they were prepared to allow the matter to proceed ex parte: judgment, 12 March 2002, p 10. 314 The primary judge observed (at [66]): "Allan Endresz could have been in no doubt as to the Court's prior directions. His disregard of them was, in my view, quite deliberate and calculated to achieve an advantage for the defendants." 315 Mr Biscoe QC submitted that the primary judge ought not to have formed an adverse view of Allan Endresz when he had exercised a recognised legal right. He also contended that the criticism the primary judge had directed to Allan Endresz in this respect had extended to all the appellants because "the judge rather equated everybody with Allan Endresz". 316 Mr Biscoe QC submitted that the effect of the appellants having been required (wrongly in his submission) to file affidavits led to the primary judge making an adverse view of the appellants which coloured his assessment of their credibility to such an extent that his determinations should be set aside. 317 In my view these grounds of appeal should be rejected. It was not until the close of ASIC's case that the appellants said, in effect, that despite their non-compliance with the June 2001 directions, they wanted to file affidavits. By that stage the time had passed when a point might have been made, whether by ASIC or the appellants, that the penalty privilege principles to which I have referred meant that, most probably, the order for the filing of affidavits by the appellants should not have been made. 318 However the appellants were not cognisant of that point of principle. Rather they had, as his Honour was in my view entitled to conclude, to all intents and purposes deliberately flouted a court order. His Honour was equally entitled to conclude, based on his observations of at least Allan Endresz, that he had flouted the Court's order in a manner "calculated to achieve an advantage for the defendants." Moreover, although it is true that the primary judge made remarks which were critical of Allan Endresz in this respect, they were, in the scheme of things, de minimis in the light of his Honour's adverse conclusions concerning Allan Endresz's credit which he formed after observing him giving oral evidence (see [69]). I also do not accept Mr Biscoe QC's submission that the primary judge drew adverse inferences against all the appellants based on the non-compliance with the direction to file affidavits. 319 Finally I note that ground 6 was not addressed in either the appellants' written or oral submissions and, although not formally abandoned, was clearly not pressed. Proof 320 The appellants complained that although the primary judge said that he bore in mind that proof to the Briginshaw standard was required ([143]) his Honour erred in not applying that standard (ground 16). 321 Following the Court reserving its decision, the High Court delivered its judgment in Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 77 ALJR 1629 ("Labrador") in which it held that in order to obtain a conviction for an offence under the Customs Act 1901 (Cth) or Excise Act 1901 (Cth) the Chief Executive Officer of Customs had to establish the elements of the offence beyond reasonable doubt. The appellants drew that decision to the Court's attention which then directed either party to supply such written submissions as were thought appropriate. 322 The appellants submitted, in substance, that Labrador supported their contention that the Briginshaw standard applied and was "rigorous" and, further, that every element of the alleged contravention had to be proved to the Briginshaw standard. 323 They conceded that the conclusion in Labrador that the elements of the offence had to be established beyond reasonable doubt did not apply because of s 1332 of the Corporations Law/Corporations Act which provides: "Where, in proceedings other than proceedings for an offence, it is necessary to establish, or for the Court to be satisfied, for any purpose relating to a matter arising under this Act, that: (a) a person has contravened a provision of this Act; or (b) default has been made in complying with a provision of this Act; or (c) an act or omission was unlawful by virtue of a provision of this Act; or (d) a person has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to a contravention, or a default in complying with, a provision of this Act; it is sufficient if the matter referred to in paragraph (a), (b), (c) or (d) is established, or the Court is so satisfied, as the case may be, on the balance of probabilities." 324 They relied upon Hayne J (with whom Gleeson CJ and McHugh J agreed) who (at [144]) referred to the fact that if the civil standard of proof applies: "… it would follow from Briginshaw v Briginshaw , and like cases in that line of authority, that proof of an issue to the 'reasonable satisfaction" of the tribunal of fact 'should not be produced by inexact proofs, indefinite testimony, or indirect inferences' and that the tribunal must feel that 'actual persuasion' of which Dixon J spoke in Briginshaw ." (footnotes omitted) 325 They submitted that in the context where, as they had submitted during the hearing of the appeal, the primary judge had found the appellants liable as having been "knowingly concerned" in the transactions, Labrador reinforced their argument that that conclusion could not be supported where it was based on his reference to the respective appellant's role as a director of CTC, or, in the case of Allan Endresz, his managerial role. 326 ASIC submitted that Labrador had no relevance to the appeal. 327 I have earlier concluded that his Honour had found that each appellant had knowledge of all the material facts of the transactions. Further, in my view there is no basis for suggesting that Foster AJ did not do as he said and bear in mind that proof to the Briginshaw standard was required. 328 Ground 16 should be rejected. Ratification: introduction 329 The appellants also sought to reverse the primary judge's decision on the basis that this Court "should hold that CTC's shareholders have ratified the transactions whereby the alleged contraventions cannot be maintained" (Ground 21A). 330 Over ASIC's objection the Court admitted evidence tendered by the appellants which they said demonstrated that the shareholders of CTC had ratified all the transactions on 26 June 2003. The evidence was in the form of an affidavit of Mr Richard Barton, a director of CTC, sworn on 27 June 2003. The appellants also tendered the transcript of proceedings before Finn J in the Federal Court on 24 April 2003 in winding up proceedings between ASIC and CTC (ASIC v CTC Resources NL, Federal Court of Australia, No A3001/2002). 331 The Court admitted the evidence concerning ratification reluctantly, having regard to the appellants' lack of diligence in bringing forward the issue. The Court was strongly inclined to the view that the appellants had elected to conduct the trial on the basis that the transactions had not been ratified and that it was too late to seek to change the outcome by post judgment ratification. It admitted the evidence, however, because ASIC was on notice of the use to which the appellants would seek to put the ratification evidence by its participation in the Federal Court winding up proceedings and did not oppose that course. Thus, as Mr Biscoe QC submitted, it was arguable that a Verwayen type estoppel arose in the appellants' favour at least concerning their ability to seek to pray the ratification evidence in aid on appeal. 332 Mr Biscoe QC submitted that on the basis of the ratification evidence the Court should either treat the fact of ratification as absolving the appellants of any contraventions of the Corporations Law or as constituting a mitigating factor on penalty. 333 ASIC submitted that the purported ratification was ineffective because it was too late, was not based on full disclosure of the material circumstances and prejudiced the interests of, at least, the Commonwealth in relation to its $6,000,000.00. It also submitted the purported ratification was ineffective because CTC's shareholders could not ratify contraventions of the Corporations Law. Ratification: the evidence 334 The concept of seeking to ratify the contraventions appears to have emerged in the Federal Court winding up proceedings to which I have referred. The evidence upon which the appellants relied was that on 26 June 2003, at the adjourned EGM, CTC's shareholders had ratified the transactions with the 17% shareholders in CTC, Mr Endresz, Allan Endresz and Mr Forge abstaining from voting. 335 The information provided to CTC shareholders for the 26 June 2003 EGM was said to accord with directions and undertakings given in the Federal Court winding up proceedings before Finn J. It is not clear how the ratification issue came to be the subject of directions and undertakings in the Federal Court winding up proceedings. Nothing turns on that save for the fact, as I have already said, that it put ASIC on notice that a course was being pursued by the directors of CTC which was plainly intended to seek to defeat these proceedings. 336 According to Mr Barton's affidavit the original ground for the winding up application was that CTC had not appointed replacement directors following the orders banning the appellants from acting as directors made in these proceedings. It had originally been intended to put the ratifying resolutions to an Extraordinary General Meeting of CTC in December 2002. However in November 2002 Finn J directed that the ratifying resolutions could not be put to the shareholders until they were given up to date financial information. 337 On 14 December 2002, Mr Barton and a Mr Michael Erdeljac and Mr Sean McShane were elected directors of CTC at the December EGM. That EGM was then adjourned in order to comply with Finn J's directions. 338 In anticipation it appears of the ratifying resolutions being put to the December 2002 EGM and before Finn J's directions, a letter signed by Mr Barton and Mr Erdeljac was provided to CTC's shareholders. It included the following statements: "… CTC is under siege. Although we have provided full details in the attached Explanatory Statement, it is suffice [sic – as in original] to say that … ASIC is seeking to wind up CTC. If the 1998 transactions, election of directors, change of registered office, $200,000 capital raising and opposition to ASIC wind up application resolutions are not approved, CTC will be wound up and we will lose our substantial capital investment and any prospects of recovery through litigation against the ASX and Commonwealth." 339 The Explanatory Statement which accompanied this letter included the following statements: "Since 20 December 1989, Mr William Forge, Mr Jozsef Endresz, Mrs Dawn Endresz and Mr Allan Endresz ("Former Directors") tirelessly devoted their time and money to steer [CTC] through some turbulent periods to make "CTC Premium Bonds" a commercial reality. For the first 9 of those years, they received no remuneration …[the Explanatory Statement then referred to litigation the Commonwealth had commenced to recover the $6,000,000.00] … Simultaneously, the Commonwealth alleges that the Former Directors had "skimmed" or "siphoned" off millions of dollars within days of the alleged fraud. Contrary to these statements, the payments made by the Company were on arm's length terms representing reasonable remuneration ($82,000 per annum for each of Jozsef, Dawn and Allan Endresz over 9 years and $65,000 per annum for William Forge over 4 years) and unsecured loans subsequently repaid in full with interest at commercial rates. … Funded by the secured creditor, the Allan Endresz Family Trust (presently owed $234,033.41), the Company launched a US$4.3 Billion damages counter claim against the Commonwealth … SHAREHOLDERS ARE URGED TO VOTE IN FAVOUR OF ALL RESOLUTIONS TO SEND A CLEAR AND UNEQUIVACLE [sic –as in original] MESSAGE TO THE COMMONWEALTH THAT: · THE 1998 TRANSACTIONS WERE AT ARMS LENGTH AND COMMERCIAL ; · THE COMPANY MUST NOT BE WOUND UP; AND · THE US$4.3 BILLION DAMAGES CLAIM WILL BE VIGOROUSLY PURSUED." … [Under a heading referring to the present proceedings] … Due to financial restraints imposed by defending simultaneous criminal proceedings in the ACT Supreme Court detailed above, Mr Allan Endresz represented himself and the other Former Directors… My fellow shareholders can rest reassured that the Company, Former Directors, advisors, lawyers and nominated directors are determined more than ever to succeed with the US$4.3 Billion damages counter claim and ASX damages claim. LEAVE NOTHING TO CHANCE, VOTE IN FAVOUR OF ALL RESOLUTIONS ." [emphasis in original] 340 Notwithstanding the appointment of the new directors in December 2002, ASIC persisted with its winding up application, contending that financial and audited accounts for CTC had not been lodged for the year ended 30 June 1998 and subsequent years. 341 After Finn J's November 2002 directions and apparently in anticipation of the adjourned EGM to consider the ratifying resolutions being held on 26 April 2003, Mr Barton arranged for the shareholders to be provided with the following information: (a) Accounts for CTC for the year ending 30 June 1998 which were audited by Ernst & Young in March 2003. The balance sheet showed total shareholders' equity at ($4,297,277). It included the $6,000,000.00 received from the Commonwealth in April 1998 as a current liability. The Notes to the Financial Statements noted that although the bonds were due to be redeemed on 17 April 2002, the redemption had been held in abeyance pending determination of CTC's counter claim against the Commonwealth for $4.3 billion, which had been filed in the proceedings in the ACT Supreme Court in which the Commonwealth sought to recover the $6,000,000.00. Mr Walsh of Ernst & Young who signed the audit opinion heavily qualified the accounts, saying: "… we are unable to and do not express an opinion as to whether the financial report of CTC … which has been prepared on a liquidation basis, is in accordance with: (a) the Corporations Act 2001 including: (i) giving a true and fair view of the company's financial position as at 30 June 1998. …" Among the matters to which Mr Walsh referred as leading him to qualifying the accounts were the transactions the subject of these proceedings; (b) A directors' letter to shareholders which included the directors' expression of their belief that CTC: "… should continue to vigorously pursue recovery of damages suffered by the Company because of the actions of the ASX in its delisting of the Company … Indications have been received that the Company's action has good prospects of securing compensation. If a substantial judgment is obtained a requotation of the company on the stock market would likely follow." 342 ASIC apparently objected to the proposed April EGM proceeding on the basis that the shareholders had not been fully informed of the effect of the ratification. 343 As a result of further directions made by Finn J on 24 April 2003 additional information was provided to the shareholders: (a) A second directors' letter which noted that "Mr Justice Finn's primary concern was to ensure that shareholders were fully informed" [in relation to up to date audited accounts, legal advice and Foster AJ's judgment]. Under the heading "Current Financial Obligations", the letter stated that the directors together with a secured creditor (which it emerged in the course of the hearing of the appeal was the Allan Endresz Family Trust) had "attended to all current liabilities …". The letter referred to CTC's compensation claims against the ASX and the Commonwealth and noted that recent "professional advice suggests that the Company has excellent prospects of receiving compensation" … [and that] "your directors are quietly confident of being successful and are committed to rewarding shareholders at the appropriate time". It advised that the damages claims against the ASX and the Commonwealth were AUD$1 billion and US$4.3 billion respectively. The letter advised: "If successful, this represents an enormous return to all shareholders who have been seriously misled and legally frustrated by the concerted actions of the ASX, Commonwealth and ASIC. Your continuing support is unequivocal and driven by the highly innovative, visionary and creative nature of this Company." (b) Audited financial reports for CTC for the years ended 30 June 1999 – 2002 respectively. The balance sheet (erroneously referred to as "statement of cash flows") in the 2002 accounts identified the company's obligations in relation to the Commonwealth's $6,000,000.00 shares as a non-current liability. The Notes to the Accounts asserted that the shares were "only redeemable out of profits or the proceeds of a new issue of shares made for the purpose of the redemption in accordance with ss 245J and 245K of the Corporations Act ". The accounts were qualified by the new auditor, Graham Fuller & Associates Pty Limited, in almost identical terms as Mr Walsh's qualification of CTC's 1998 accounts. The new auditors issued a similar qualification in relation to their audits of CTC's accounts for the financial years 1999 – 2001; (c) A copy of Foster AJ's judgment and the Notice of Appeal; (d) An Opinion from a Canberra counsel which the author appears to have understood he was retained to provide on the basis that Finn J had expressed the view that the resolutions purporting to ratify the transactions should not be placed before the shareholders unless they were "fully informed". It is not necessary to set out the opinion in any detail. It is sufficient to note that while counsel was of the view that s 239 of the Corporations Act implicitly permitted a Court to take into account ratification, he also expressed the opinion that it was unusual for shareholders to ratify conduct which had already been held to contravene a statute, let alone in circumstances where that ratification might prejudice the company's existing creditors when the company was insolvent or near insolvent. He referred to Kinsela v Russell Kinsela Pty Limited (in Liq) (1986) 4 NSWLR 722 and Nicholson v Permakraft (NZ) Ltd (in Liq) [1985] 1 NZLR 242. Counsel also referred, albeit obliquely, to the effect of the proposed ratification on any subsequent attempt by CTC to sue one or some of the persons involved in the transactions. He said: "It is possible, and indeed probable that, in the event of the proposed ratification occurring, and then later … CTC wishes to sue one or some of the persons as involved in the transactions referred to in Foster AJ's decision, such a defendant might well seek to raise an estoppel against the company, based upon the ratification. However, that would appear to be adequately dealt with by the provisions of s 239(1) and (2), whereby the Court is not bound to find for such a defendant and by s 239(2) the Court must have regard to how well informed members were and also whether the ratifying members were acting for proper purposes. " (italics in original) 344 The ratification resolutions in relation to transactions 1 and 2 (resolutions 2 and 3) took a common form to the following effect: "That, for the purposes of the Corporations Act 2001, the Company confirms and ratifies the payment [the details of the transaction were set out] being past management fees calculated [the basis of calculation was set out]." 345 The ratification resolutions in relation to transactions 3 and 4 (resolutions 8 and 9) again took a common form using the introductory phrase set out above then referring to the respective payments and describing them as "consultancy fees for the months of May 1998 and June 1998". 346 Insofar as transactions 5 – 8, the unsecured loans, were concerned, the ratification resolutions (resolutions 12 - 15) again took a common form using the introductory phrase set out above, referring to the details of each loan and concluding with the phrase "being an unsecured loan subsequently repaid in full with interest". 347 On 26 June 2003 the special resolutions purporting to ratify the impugned transactions were carried at CTC's EGM (the "ratification resolutions"). The minutes record that the Chairman, Mr Erdeljac, informed those present that the resolutions had previously been adjourned to provide the shareholders with information as directed by Finn J and that "the orders of Finn J had been complied with". 348 Mr Barton said in his affidavit that the Commonwealth had been given notice of the Extraordinary General Meetings. He did not say whether the materials provided to the shareholders to which I have referred were provided to the Commonwealth. 349 Mr Barton was cross-examined by Mr Stack. He was asked whether he had sought any advice as to whether CTC was entitled to seek compensation from the appellants. He agreed he had received legal advice that CTC was entitled to commence proceedings against the appellants for the recovery of the monies that had been paid to them in circumstances found to have constituted breaches of the appellants' duties to CTC. He said that no such proceedings had been commenced: "… because there's been an injunction over the assets, basically a freezing of assets and our direction was more focused on receiving or pursuing avenues that would be more - would be profitable in the way of recovery to the company, that is the ASX case - damages case in principle, and the litigations - actions." Ratification: the appellants' submissions 350 The appellants relied upon Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 150 where Lord Russell said of the Regal directors who had committed a breach of fiduciary duty "[t]hey could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting". They also referred to Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 at 295 where Mason, Deane and Dawson JJ said of a director who had committed a breach of his fiduciary duties in issuing shares for an improper purpose (to ensure his former wife and their daughters would not gain control of the company on his death), that "any ratification of the purported allotment of shares would need to have been by the company acting through its shareholders". 351 They also submitted that even if directors had acted in bad faith and from an improper motive in making an allotment of shares, any such impropriety could be and had been waived by a majority of the votes of shareholders at a general meeting relying on Bamford v Bamford [1970] Ch 212 which was applied by the Court of Appeal in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666. They referred to Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583 at 592.4 where Rich, Dixon and Evatt JJ said: "Except under the authority of the provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce". 352 They also relied upon Whitlam v Australian Securities & Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559 at [153] where Hodgson JA, Ipp JA and Tobias JA said in their joint judgment: "153 … Even in voting their own shares, directors do not generally owe a duty to act in the interests of the company. In North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589, the Privy Council found to be legitimate the narrow approval by shareholders of a contract between a director/shareholder and the company to buy a boat from him, in circumstances where most of the votes cast in favour of the resolution were those of the director/shareholder himself. The Court found that all shareholders, including a majority shareholder, are entitled to vote in the manner they wish, provided it is not unfair, improper, illegal, fraudulent or oppressive towards those shareholders opposing the resolution: see H A J Ford, R P Austin & I M Ramsay , Ford's Principles of Corporations Law , 11th ed (2003) Sydney, LexisNexis Butterworths, at 548. As there noted, that decision has not been departed from in Australia, although there may be circumstances in which a director/shareholder may come under a fiduciary duty to other shareholders (see Brunninghausen v Glavanics (1999) 46 NSWLR 538), and there have been some statutory qualifications to the principle." 353 The appellants drew attention to the conflicting authorities with respect to ratification of breach of directors' statutory duties. They referred to Miller v Miller (1995) 16 ACSR 73 at 89 where Santow J stated that: "ratification cannot cure a breach of statutory duty, more especially one imposing criminal liability …" 354 They submitted the "contrary and preferable view" was that expressed in Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 at 772 per Debelle J that: "There is, however, a nice question whether shareholders can relieve a director from a breach of his duties. But, as the statutory duties reflect the duties of a director at common law and in equity, I do not think there is any impediment to the shareholder excusing a breach of statutory duty". 355 Finally the appellants submitted that members of a solvent company have wide freedom to take honest but stupid business risks in authorising or ratifying acts of directors provided the acts are not fraudulent, referring to Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 per Lawton and Dillon LJJ, Pascoe Ltd (in liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246; (1999) 33 ACSR 357 at 384 – 88; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 732G, Ford's Principles of Corporations Law 11th ed 2003 [8.394] and Gower's Principles of Modern Company Law (6th ed 1997). 356 The appellants submitted that the evidence demonstrated that CTC was solvent when the ratification resolutions were passed. They said the accounts showed that all current liabilities had been paid. In particular they contended that the $6,000,000.00 received from the Commonwealth in April 1998 (which was still outstanding) was a non-current liability and was not payable except out of profits or a share issue for that purpose. It would be fair to say that the justification given for the latter stance was somewhat convoluted. 357 The appellants accepted that the 600,000 redeemable, convertible, non-cumulative, non-voting preference shares which they had "issued" to the Commonwealth on receipt of the $6,000,000.00 were redeemable for $10 cash four years from the date of issue and carried rights to an annual, non-cumulative, preferential dividend of 6.5% paid annually. They argued that at the time the moneys were received s 192(2) of the Corporations Law provided that a company should not redeem preference shares except out of profits that would otherwise be available for dividends or out of the proceeds of a fresh issue of shares made for the purposes of the redemptions. Section 192(4) provided that any premium payable on redemption was payable only out of profits or out of the share premium account. 358 The appellants accepted that, in accordance with Accounting Standard AASB 1033 (effective from January 1998), the $6,000,000.00 should be treated as a liability rather than as equity. They contended that Ernst & Young erroneously showed the $6,000,000.00 as a current liability in the 30 June 1998 balance sheet audited in March 2003. They contended that the $6,000,000.00 should have been shown as a non-current liability because it was not redeemable until 17 April 2002. Whereas the 30 June 1998 balance sheet showed that the share premium account stood at $1,378,951.00, the appellants submitted that that was not the relevant time for looking at the share premium account because the shares were not redeemable until 17 April 2002. 359 Next, the appellants pointed out that on 1 July 1998 s 192 was repealed and replaced by, inter alia, ss 254C, 254K and 1447 of the Corporations Law. Section 254C provided that shares of a company have no par value. Consequently, it was no longer possible to issue shares at a premium. Section 254K(b) provided that a company may only redeem redeemable preference shares out of profits or the proceeds of a new issue of shares made for the purpose of the redemption. Section 1447 provided that a company may use the amount standing to the credit of its share premium account immediately before commencement of the new legislation to provide for the premium payable on redemption of redeemable preference shares immediately before commencement. 360 The Corporations Act retained the old ss 254C and 254K but had no provision equivalent to s 1447. Thus, the appellants submitted that, on 17 April 2002 when the Commonwealth preference shares were redeemable, in law they were only redeemable out of profits or the proceeds of a new issue of shares made for the purpose of redemption: they were not redeemable out of the share premium account. As a matter of fact they were not redeemable because CTC had no profits and there had been no new issue of shares for the purpose of redemption. Thus, the appellants argued the preference shares were a long-term (i.e. non-current) liability and correctly treated as such in the 30 June 2002 accounts audited by Mr Fuller. 361 Equally the appellants argued the annual dividends attaching to the preference shares were only lawfully payable out of profits and if declared by the company in general meeting: ss 254T and 254V Corporations Act; CTC Article 122. Being non-cumulative dividends, any possibility of a dividend for a particular year lapsed if there was no profit that year or no declaration was made to pay the dividend for that year out of that year's profits. Ratification: ASIC's submissions 362 While ASIC accepted that Mr Barton's affidavit established that on 26 June 2003 the majority of CTC's shareholders purported to ratify the transactions, it submitted that the ratification resolutions were ineffective. It advanced a number of reasons in support of that proposition, including: (a) shareholders could not ratify the misappropriation of company money; (b) ratification was not permissible even by a majority of shareholders if the result would be oppressive or otherwise in fraud of the minority of shareholders; (c) the ratification resolutions had been passed in the absence of full and frank disclosure to the shareholders; (d) the ratification resolutions had not been passed within a reasonable time after the unauthorised acts having regard to the following matters: (i) the transactions which gave rise to the declarations of contravention occurred in 1998, five years before the purported "ratification"; (ii) Ernst & Young first raised concerns about the transactions on 24 September 1998; (iii) the appellants were examined by ASIC about the transactions between February and March 2000; (iv) these proceedings were commenced on 26 April 2001; (v) these proceedings were heard for nine days between 11 March 2002 and 1 May 2002; and (vi) judgment was delivered by Justice Foster on 28 August 2002. (e) ratification could not be used to cure a breach of statutory duty; (f) the ratification resolutions were not approved by all ordinary shareholders; and (g) the ratification resolutions were not approved by the Commonwealth. 363 ASIC pointed out that on 17 April 1998 CTC sent a letter to the Commonwealth which confirmed that it had been issued with 600,000 non-voting redeemable convertible non-cumulative "A" class preference shares at an issue price of $10 per share with $0.01 as par value and $9.99 as premium. In accordance with paragraph 6(b) of CTC's Article 2A in a winding up of CTC the Commonwealth's entitlement to the redemption amount was payable in priority to all holders of all other classes of shares. 364 It drew attention to the fact that in 1999 the Commonwealth had commenced proceedings in the Supreme Court of the Australian Capital Territory against CTC and the appellants (among many others) (the "recovery proceedings") claiming that the $6,000,000.00 had been misappropriated in April 1998 and seeking numerous orders, including a declaration that that payment was void and illegal and an order that each defendant repay the monies received by that defendant. 365 ASIC submitted that the effect of the ratification by the majority of the shareholders in CTC constituted a fraud on the minority shareholders, including the Commonwealth, because ratification sought to prevent the Commonwealth from being able to recover from the appellants the monies which they had wrongly received from CTC. 366 ASIC also submitted that ratification would be ineffective where a company was insolvent or close to insolvency and the ratification may prejudice the interests of third parties. 367 ASIC submitted that there could be little doubt that CTC "was insolvent, or near insolvent, or of doubtful solvency" based upon the most recent version of CTC's accounts for the financial year ending 30 June 2002. It contended that even if the Commonwealth was only a shareholder, as a priority shareholder its interests had to be considered. 368 It contended that CTC's 1998 accounts were incorrect in that they did not include an entry for the share premium received by CTC from the Commonwealth, being $5,994,000. ASIC submitted that ss 191 and 192 of the Corporations Law (which continued to operate pursuant to s 1447 of the Corporations Act) and Chapter 10 of the Corporations Act provided, in effect, that the Commonwealth was entitled to the repayment of its premium out of the share premium account as well as out the profits of CTC. On that basis ASIC contended that if the 1998 accounts had treated the issue of shares as a liability, CTC's liabilities exceeded its assets by $4,297,277. 369 Further, ASIC submitted that ratification was not possible for the related party transactions. It contended that ss 243Q to 243X of the Corporations Law demonstrated a scheme which only enabled shareholder approval for the related party payments before the payment was made. It submitted that ratification after the payment could not override the statutory scheme. Ratification: consideration 370 In my view the ratification resolutions were ineffective for a number of reasons. Misappropriation/fraud on the minority 371 The primary judge's conclusion that the transactions resulted from the appellants taking advantage of the "golden opportunity" afforded by the receipt of the $6,000,000.00 was tantamount to a conclusion that they had misappropriated the monies the subject of the transactions. 372 In Miller v Miller, above, at 89, Santow J said: "Ratification is not available where it would constitute a fraud on the minority ( Ngurli Ltd v McCann (1953) 90 CLR 425), or misappropriation of company resources ( Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791), or was entered into by an insolvent company to the prejudice of creditors ( Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722), or defeated a member's personal right ( Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) ) …, or was oppressive or where the majority in general meeting acted for the same improper purpose as directors ( Residues Treatment & Trading Co Ltd )." 373 Young J (as he then was) referred to this passage with approval in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 122 FLR 253 at 262 – 263 (appeal dismissed on other grounds in Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1997) 16 ACLC 252). 374 Further, in Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425 at 438 the Court (Williams ACJ, Fullagar and Kitto JJ) observed that: "But the powers conferred on shareholders in general meeting and on directors by the articles of association of companies can be exceeded although there is a literal compliance with their terms. These powers must not be used for an ulterior purpose. 'The term fraud in connection with frauds on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power'…Voting powers conferred on shareholders … must be used bona fide for the benefit of the company as a whole. In Greenhalgh v. Arderne Cinemas Ltd . … Evershed M.R., in a case relating to a special resolution altering the articles of association, said: 'In the first place, I think it is now plain that 'bona fide for the benefit of the company as a whole' means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, 'the company as a whole,' does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person's benefit' " 375 After pointing out (at 439) that "[s]hareholders even where they are also directors … as individuals in general meetings can usually exercise their votes for their own benefit" the Court noted that the shareholders' freedom in this respect was limited by "those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities [and] must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded." The Court continued (at 439), in a passage relied upon by ASIC: "Nor can the majority of shareholders exercise their voting power in general meeting so as to commit a fraud on the minority. They must not exercise their vote so as to appropriate to themselves or some of themselves property, advantages or rights which belong to the company." 376 In my view the ratification resolutions were ineffective because they sought to cure the appellants' wrongful taking of CTC's resources. Further, the shareholders did not exercise their voting power for the benefit of the company as a whole in the sense referred to in Ngurli Ltd v McCann. The Commonwealth either remained a preference shareholder or was a creditor of CTC if it had validly rescinded the preference share allotment. The shareholders were not asked to take into consideration the interests of the Commonwealth either as a preference shareholder or as a creditor in recouping its $6,000,000.00. Indeed they were encouraged to focus on the claims CTC had against the Commonwealth. 377 I also note that "[r]atification is not effective where to permit it would unfairly prejudice a third party": Bowstead & Reynolds on Agency (Sweet & Maxwell, 17th ed, 2001 - "Bowstead & Reynolds") article 19. The ratification resolutions, if effective, could have the effect of depriving CTC of its right to recover the monies paid away pursuant to the transactions. This could in turn prejudice the Commonwealth in pursuing its rights in the recovery proceedings against CTC in relation to the $6,000,000.00. Ratification: breach of statutory duty 378 Different views have been expressed as to whether ratification can be effective where a court has found directors have acted in breach of their statutory duty. In Miller v Miller, above, at 89 Santow J said (without referring to authority): "It is also clear enough that ratification cannot cure a breach of statutory duty, more especially one imposing criminal liability. The most it can do is remove from the scope of technical dishonesty such actions as issuing shares for a purpose which is not a proper one, in the sense of not being for the benefit of the company as a whole." 379 The Full Court of South Australia (Doyle CJ, Prior and Vanstone JJ) referred to Santow J's statement with approval in Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334 at [49]. (Special leave to appeal to the High Court was granted on 11 August 2004: see HCATrans 295). 380 A different view was expressed by Debelle J in Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 at 772 (appeal dismissed on other grounds: [1999] SASC 519; (1999) 75 SASR 246; (1999) 33 ACSR 357) albeit as obiter and without referring to Miller v Miller. His Honour said that "as statutory duties reflect the duties of a director at common law and in equity, I do not think that there is any impediment to the shareholders excusing a breach of statutory duty." The proceedings were not civil penalty proceedings. 381 Mr Biscoe QC submitted that ASIC brought the civil penalty proceedings to protect CTC. That is incorrect. That was only one of the purposes. Another important purpose of the proceedings was to ensure that officers of a company who contravene corporations legislation in the manner found by the primary judge are barred from having that opportunity again, not only in relation to the company of which they were an officer at the time of the transactions, but also in relation to other companies. In this sense civil penalty proceedings involve public rights. The shareholders cannot remove the declaration of contravention by ratifying the original acts. Once a declaration of contravention is made, the Court is entitled to act upon its finding to grant the relief ASIC seeks. 382 It is relevant in this context to note that s 1317JA of the Corporations Law empowered the Court to relieve a person from liability where it appeared that the person had or may have contravened a civil penalty provision. Relief was only available where, inter alia, the person had acted honestly. Section 1317JA supports the proposition that contraventions of the civil penalty provisions cannot be ratified by shareholders. The only relief available to escape liability is that for which the legislature provided. 383 Having regard to the primary judge's conclusion that each of the appellants had failed to act honestly in relation to the transactions the Court could not have relieved them from their liability for the contraventions pursuant to s 1317JA. In my view this supports Santow J's approach in Miller v Miller. 384 I would conclude that even if the shareholders could, contrary to what I have already found, ratify the private law breaches of the directors' duties, the ratification resolutions were ineffective to cure the breaches of statutory duty. Timing of ratification resolutions 385 Further I note that while it may be, as Ford suggests ([9.330], that "[r]atification by the shareholders after the conduct has occurred will extinguish the breach of fiduciary duty, but cannot eliminate the contravention of the statutory provisions [but], a court can be expected to take the shareholders' opinion into account in determining whether to make a civil penalty order under Pt 9.4B", that opportunity was not afforded to the primary judge because of the time the ratification resolutions were passed. 386 It is a requirement of effective ratification that it must occur within a reasonable time of the unauthorised act: Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 at 665 per Sheller JA (with whom Kirby P and Meagher JA agreed), referring to Re Portuguese Consolidated Copper Mines Ltd; Ex parte Badman; Ex parte Bosanquet (1890) 45 Ch D 16 at 31, 34; Life Savers (Australasia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431 at 438; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 282; affirmed (1987) 165 CLR 107. Hutley JA pointed out in the Life Savers case (at 438E) that "a rigid rule as to what is reasonable cannot be laid down". 387 Many corporate ratifications have been designed to defeat pending proceedings. This is permissible, certainly pre-trial or pre-judgment: see Bowstead & Reynolds, article 18(2). Counsel was unable to refer the court to any case where ratification had been effective post-judgment. 388 Where the ratification resolutions seek to strike at the foundation of civil penalty proceedings, it is incumbent upon those seeking to condone the conduct upon which the proceedings are based to bring the issue before the primary judge for consideration in the overall context of the transaction. 389 In my opinion CTC's shareholders' purported ratification of the impugned transactions was also ineffective as being too late in time. Disclosure 390 In order for ratification to be valid it must be based on full disclosure of all material circumstances: Bamford v Bamford [1970] Ch 212 at 238; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 at 672 & 704 and Miller v Miller (1995) 16 ACSR 73 at 89. 391 In Bamford v Bamford, above, at 238, Harman LJ spoke of directors who discover they have acted wrongly being able "by making full and frank disclosure and calling together the general body of the shareholders [to] obtain absolution and forgiveness of their sins …". 392 Bamford v Bamford was applied in Winthrop Investments Ltd v Winns Ltd, above. Samuels JA said at 684: "… if the directors are to get the protection which they seek, the [ratifying] resolutions must reach well beyond any question of commercial interest. They are ineffective, unless they can be regarded as having authorised a breach of duty, or as having waived its consequences . I would myself have thought it clear beyond argument that, the purpose of the meeting being to excuse the directors, that purpose must have been clearly stated, and the nature of the contemplated breach of duty clearly disclosed by the directors seeking to be absolved." (emphasis supplied) 393 Glass JA observed (at 672) that the principle that a shareholder resolution was not valid unless there had been "disclosure of material facts to enable shareholders to make a properly informed decision" looked at the substance of what was placed before the meeting. 394 The requirement that the directors make "full and frank disclosure" required the directors to seek ratification in circumstances where they accepted the findings of the primary judge. In other words they had to admit to the shareholders: (a) That they had not been entitled to the remuneration the subject of transactions 1 – 4 and that the loans were related party transactions (meaning in that sense that they accepted the primary judge's conclusion in this respect); and (b) That each of the transactions had been undertaken in circumstances where they had not acted honestly (s 232(2)), had failed to exercise a reasonable degree of care and diligence in the exercise of their powers and the discharge of their duties (s 232(4)) and had made improper use of their positions as officers of CTC (s 232(6)). 395 It will be plain from the extracts of the information provided to the shareholders that such disclosure was not made to the shareholders. Rather, they were provided with extensive material which included: (a) Assertions that the directors had laboured for years without remuneration - an assertion the primary judge had clearly rejected both in rejecting the appellants' explanation of the transactions and in the light of the evidence to which I have earlier referred concerning the payments they had in fact received during that period; (b) Assertions that transactions 1 – 4 represented "reasonable remuneration" whereas the primary judge had clearly rejected the appellants' assertions to that effect when he rejected "a general assertion that the payment made to Kamanga in the first transaction was justified on the basis of unremitting endeavours made on behalf of CTC and its shareholders" ([120]) and found "that the first, second, third and fourth defendants simply regarded the acquisition by CTC of the amount of $6,000,000.00 on 20 April 1998 as amounting, virtually, to a provision of funds for their own private use" ([144]); and (c) Assertions that the loans were on "arm's length terms", an assertion the primary judge rejected when he found that there was "no acceptable explanation for the making of these unsecured loans from the resources of CTC, a public company, to the entities in which the directors had a commercial interest" ([137]). 396 The materials placed before the shareholders did not accept the primary judge's conclusions. Rather they placed before the EGM the explanations his Honour had rejected. It is true they did so in the context of also giving the shareholders a copy of his Honour's judgment but, in the light of the assertions rejecting his Honour's findings of breach, it cannot be said that the effect of the ratification resolutions was to authorise the appellants' breaches of duty. 397 Moreover the ratification resolutions were put to the shareholders packaged with material exhorting the value of the causes of action against the ASX of AUD$1 billion and the counter-claim of US$4.3 billion against the Commonwealth in the latter's action to recover the $6,000,000.00. As to the former, Ernst & Young had been told by CTC's legal representatives that "proving CTC had incurred loss as a result of their delisting would be difficult" (see judgment at [23]) – information which is in contrast to the assertion made to the shareholders that "professional [it is noted that the '"professional" is not identified to be a lawyer] advice suggests [CTC] has excellent prospects of receiving compensation". As to the latter, little more needs be said than to note that the core allegation against the Commonwealth to found the counter-claim appears to be that by deceiving CTC into accepting the $6,000,000.00 which in turn led to the directors entering into the transactions and, as a result of these proceedings being disqualified from acting as directors, CTC had suffered loss in the amount of US$4.3 billion. It is not clear what was sought to be gained by quantifying a counter-claim against the Commonwealth proceeding in the ACT Supreme Court in US dollars. 398 Significantly, however, the materials placed before the shareholders failed to make any adequate reference to the rights CTC had against the appellants arising from the appellants' breaches of duty. 399 As a result of the declarations of contravention made by the primary judge, s 1317HD(1) of the Corporations Law required the appellants to account to CTC for any profit made by any of the appellants and/or any loss or damage CTC suffered because of the act or omission constituting the contravention. Such monies can be recovered as a debt: s 1317HD(1A). 400 Further, CTC also had remedies in equity against the appellants to recover any profits made in breach of their fiduciary duty: see Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583 and Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 at 632. 401 In this context it should be recalled that the shareholders were told both in the directors' letter and in counsel's opinion that Finn J was concerned they be "fully informed" prior to considering the ratification resolutions. They were entitled to assume that Finn J's concern was addressed in the information they were given. Yet the shareholders were not told of CTC's rights against the appellants pursuant to s 1317HD or its rights in equity. Nor were they told that the effect of the ratification resolutions, if effective, could be that they would lose those rights. This omission is egregious standing alone. It is of particular concern when it is appreciated that Mr Barton had received legal advice that CTC was entitled to commence proceedings against the appellants for the recovery of the monies that had been paid to them. He did not ensure that advice was placed before the shareholders. Although counsel's opinion referred to the possibility of CTC wishing to sue one or some of the appellants, it did not identify the nature of such an action – in particular that such an action could lead to CTC recouping the management fees and retainers paid under the first four transactions (assuming for present purposes in the appellants' favour that the four loans were repaid). The information provided to the shareholders embellished the prospects of recovering damages in the order of billions of dollars from the ASX and the Commonwealth, but failed to mention the most obvious means of recouping CTC's assets. 402 In my opinion it was necessary for the ratification to be effective that the shareholders be fully informed both of CTC's rights consequent upon the declarations of contravention and that the effect of the ratification resolutions could be that CTC would lose both its statutory and equitable rights. The shareholders were never given that information. Accordingly, in my view the disclosure to CTC's Extraordinary General Meeting was inadequate. The ratification resolutions could not waive the consequences of the contraventions and were, therefore, ineffective. Ratification: conclusion 403 Having regard to the reasons I have given for concluding the ratification resolutions were ineffective, it is not necessary to express a view about ASIC's other submissions challenging their efficacy. 404 In my view the ratification resolutions were ineffective. Ground 21A should be rejected. Declarations, banning orders and pecuniary penalties 405 The primary judge made the following declarations: "1 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 2 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 3 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 4 The first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $2,205,000 to the fifth defendant, on or about 20 April 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 5 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 6 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 7 The first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 8 The first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $260,000 to the sixth defendant, on or about 20 April 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 9 The sixth defendant has, by receiving $260,000 from CTC Resources N.L. ACN 009 061 036, on or about 20 April 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 10 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 11 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 12 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 13 The first defendant, second defendant third defendant, and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 14 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 15 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 16 The first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 17 The first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 18 The sixth defendant has, by receiving $10,833.34 from CTC Resources N.L. ACN 009 061 036, on or about 28 May 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 19 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 20 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 21 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 22 A declaration, pursuant to subsection 1317EA(2) of the Corporations Law , that the first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 23 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 24 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 25 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 26 The first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 27 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 28 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 29 The first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 30 The first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 31 The sixth defendant has, by receiving $75,000 from CTC Resources N.L. ACN 009 061 036, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 32 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 33 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 34 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036. 35 The first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036." 406 The primary judge acceded to ASIC's application for banning orders pursuant to s 1317EA(3)(a) of the Corporations Law. He concluded (at [153]) that although Allan Endresz's contraventions were fewer in number than those of the first, second and third defendants, they were significantly more serious. He found that Allan Endresz was "in effect, the leader in the series of contraventions in which he was involved, relating to the disbursement of the monies received on 20 April 1998" and "also … a willing participant in the later payments and loans to Kamanga." He concluded that Allan Endresz had "shown a distinct pre-disposition to flout the law, having regard to his earlier convictions" and that "his total lack of contrition and his generally arrogant attitude towards these proceedings, do not suggest that he is likely to restrain himself from committing commercial misdemeanours in the future." Although he took into account the view of CTC's auditor, Mr Walsh, that Allan Endresz was not actually dishonest (a view his Honour regarded as "perhaps over benign"), he held that the period of prohibition should be substantial. He ordered that Allan Endresz be prohibited from managing a corporation for sixteen years from the date of his judgment. 407 In relation to the other individual defendants the primary judge concluded (at [154]) that their continuance in corporate management would pose a lesser, nevertheless significant, threat to the public interest. He found that "each was significantly wanting in the discharge of his and her duties as director of [CTC] and [had] demonstrated no proper understanding of what those duties required". He ordered that each should be prohibited from managing corporations for a period of eight years from the date of his judgment. 408 His Honour considered that the contraventions were sufficiently serious to warrant the imposition of the following pecuniary penalties pursuant to s 1317EA(3)(b): "Transaction 1, He imposed a pecuniary penalty of $120,000 upon Allan Endresz, William Forge, Jozsef Endresz and Dawn Endresz,. Transaction 2, He imposed a pecuniary penalty of $30,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited. Transaction 3, He imposed a pecuniary penalty of $10,000 upon William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz. Transaction 4, He imposed a pecuniary penalty of $5,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited. Transaction 5, He imposed a pecuniary penalty of $30,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz. Transaction 6, He imposed a pecuniary penalty of $20,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz. Transaction 7, He imposed a pecuniary penalty of $10,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited. Transaction 8, He imposed a pecuniary penalty of $20,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz." Penalty: grounds of appeal 409 The appellants advanced the following grounds of appeal in relation to penalties the primary judge imposed: "22. His Honour erred in imposing penalties on the appellants without first inviting them and giving them an opportunity to be heard as to penalties after he had determined liability. 23. His Honour erred in finding that, having regard to his earlier convictions, Allan Endresz had a distinct predisposition to flout the law and in holding this against him when imposing penalties [paragraph 153]. 24. His Honour erred in finding that Allan Endresz had a generally arrogant attitude towards the proceedings or in holding it against him on penalty [judgment paragraph 153]. 25. His Honour erred in finding that the appellants failed to show any contrition and Allan Endresz had a total lack of contrition without first giving them the opportunity to express contrition following the Court's determination of liability. 26. His Honour erred in holding that Allan Endresz's total lack of contrition and generally arrogant attitude towards the proceedings did not suggest that he was likely to restrain himself from committing commercial misdemeanours in the future [paragraph 153]. 26A The judge erred in holding that Allan Endresz was the leader in relation to the five transactions in which he was said to have been involved. 27. By reason of the abovementioned errors in relation to Allan Endresz, his Honour erred in holding that having regard to those factors, the period of prohibition of Allan Endresz must be substantial or as great as he imposed [paragraph 153]. 28. In considering liability and penalties, his Honour erred in failing to consider and take into account that all the loans [transactions 5, 6, 7 and 8] had been repaid with interest. 28A His Honour failed to take into account re Bisoya Pty Ltd that under legislative changes introduced in 2000 it would not have had any liability. 29. The penalties imposed by his Honour were manifestly excessive." Separate hearing on penalty: consideration 410 Both ASIC and the appellants provided written submissions to the primary judge to which they then spoke. ASIC's written submissions addressed both the issues of contravention and penalty. The appellants' written submissions only addressed the issue of whether the contraventions had been proved. They did not address the issue of penalty despite the fact that during the debate about the filing of the appellants' evidence which took place on 9 April 2002 after ASIC closed its case, the primary judge expressly drew Allan Endresz's attention to the fact that if and when the penalty issue arose he had "no evidence at all on that". 411 The appellants' written submissions appear to have been handed to the primary judge on 1 May 2002 which was the last day of the hearing. They were described by the primary judge as "a very comprehensive set of submissions both on law and fact". However it is plain from the transcript that his Honour had not had the opportunity to read them in detail before he reserved his decision. While his Honour expressly asked Mr Burbidge QC for ASIC to address the issue of the appropriate relief if he found the contraventions established, no like oral invitation was addressed to the appellants. 412 The appellants submitted that the primary judge erred in not having a separate hearing on penalty after he had found the contraventions proved. They contend that this was the "fair and correct procedure" which was followed in Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 and in ASIC v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124. 413 In Rich v Australian Securities and Investments Commission, above, at 1363 [41], McHugh J observed that: "… what the judges actually do [when ordering disqualification and fixing periods of disqualification under the corporations legislation] is little different from what judges do in determining what orders or penalties should be made for offences against the criminal law. Elements of retribution, deterrence, reformation and mitigation as well as the objective of the protection of the public inhere in the orders and periods of disqualification made under the legislation." 414 Once it is recognised that the task in which the primary judge was engaged at this stage of the trial bore the hallmarks of the sentencing process in a criminal trial, the principles attendant upon that process were invoked. It is a fundamental proposition of sentencing "… that the punishment [must] fit the crime. Apart from mitigating factors, it is the circumstances of the offence alone that must be the determinant of an appropriate sentence": Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51 at 58. As Gibbs CJ said in R v De Simoni [1981] HCA 31; (1981) 147 CLR 383 at 389, "[T]he general principle [is] that the sentence imposed on an offender should take account of all the circumstances of the offence …". 415 The circumstances of the offender are equally important to the question of the appropriate sentence. In Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447 at 452, the High Court in a joint judgment approved Dwyer CJ's statement in Reynolds v Wilkinson (1948) 51 WALR 17 at 18 that: "Crimes bearing the same general description have not equally evil content or characteristics, and offenders also differ in themselves." 416 These propositions were affirmed extra-curially by Gleeson CJ when he said, "the punishment is supposed to fit not only the crime, but also the criminal": see "Individual Justice" (1995) 69 ALJ 421 at 424. 417 Declarations of contravention can lead to the imposition of substantial penalties both by way of disqualification orders and pecuniary penalties such as those which were imposed in this case. In such circumstances the principles that the punishment should fit both the "offence" and the "offender" are reflected in the proposition that it is the duty of a court to hear the "guilty party" on penalty after the "charge" has been proved. 418 This appears clearly from Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 at 382 where Hutley JA (with whose judgment on this point Samuels JA agreed at 391, Mahoney JA dissenting) said, "[t]he right to be heard in palliation of misconduct is established by authority nearly a century old." Applying that principle, his Honour also said (at 382), in the context of a domestic tribunal, that the tribunal had a duty to hear a person found guilty on the question of penalty and that a "person found guilty cannot really address until he knows of what he has been found guilty". 419 While Hutley JA accepted that a person might waive the right to a hearing on penalty, his Honour said (at 382 – 383) it was incumbent in effect upon the tribunal to draw the right specifically to the person's attention. He said that the tribunal should be guided by "the minimum standards required of the more summary and informal courts" and that it was "… for such a court to take the initiative in maintaining those standards". He referred approvingly to Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679, where, at the end of the complainant's evidence, magistrates dismissed the case without hearing her solicitor. Bagnall J in the Divisional Court said (at 682; 400): "It seems to me where a court has to act, as all courts have, in accordance with settled practice or rules of natural justice, and that practice or those rules give a person a right to be heard, it must be wrong for the court to proceed to a decision without positively affording that right and that it would be wrong for the court to proceed relying upon the advocate in question to assert his rights." 420 Hall v New South Wales Trotting Club Ltd was followed by Holland J in Malone v Marr [1981] 2 NSWLR 894. His Honour said (at 902) that two things followed from the views expressed by the majority: "First, the requirements of natural justice are not satisfied by showing that when the accused appeared before the tribunal to answer the charges he knew that the tribunal had power to impose a penalty upon him if he should be found to be guilty or that he could have addressed the tribunal on matters going to the question of punishment at the same time as he was heard upon the charge made against him if he had chosen to do so. Second, if the tribunal, after making a finding of guilt, fails in its duty with regard to a hearing on penalty as above described and, in consequence, the decision on penalty is invalid, the tribunal may, if it chooses, rectify its error by re-opening the question of penalty, inviting the accused to tender evidence and/or address on the question of penalty and thereafter re-consider and decide that question." 421 See also Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332 at 344 where Martin J applied Hall v New South Wales Trotting Club Ltd and Malone v Marr in the circumstance of disciplinary proceedings against a legal practitioner. 422 ASIC submitted that the appellants had been given ample opportunity to reply to ASIC's submissions on penalty. It relied upon the facts that the appellants knew from the Originating Process that relief in the nature of penalties was sought, that Mr Burbidge QC's opening address made plain that ASIC sought the imposition of penalties, that the primary judge had informed Mr Alan Endresz that he did not have any evidence on the issue of penalty and the provision of ASIC's written submissions which addressed the issue of penalty at length. 423 ASIC submitted that the case was similar to Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157 where Dunford J distinguished Hall v New South Wales Trotting Club Ltd and Malone v Marr. His Honour accepted (at [20]) that "it is generally desirable that addresses on penalty follow a determination of guilt so that the person accused knows precisely the ambit of the findings to which submissions on penalty need to be addressed". He held, however, (at [21]) that "the rule [to which Hutley JA referred] is not inflexible, and provided there is an ample opportunity to address on penalty, there is no breach of any rules of natural justice or procedural fairness". In Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120 when hearing an application in a proposed appeal from Dunford J's decision for orders having the effect of precluding the Tribunal from making any further orders in the proceedings before it or publishing its outstanding decision as to penalty, Giles JA said (at [14]) he regarded Dunford J's "decision on this point [as] unarguably correct" in circumstances where "the claimant had had the fullest opportunity to address on penalty". 424 Hall v New South Wales Trotting Club and Malone v Marr make plain that the matters upon which ASIC relies are insufficient to displace the appellants' right to be heard separately on the issue of penalty once they were aware of the contraventions which had been found against them. 425 Further it was, in my view, incumbent upon the primary judge to approach the determination of the contravention issue and penalty in the two-stage process dictated by Hall v New South Wales Trotting Club Ltd. He should also have drawn the appellants' attention to their right to elicit evidence and make submissions on the issue of penalty. 426 It was also, in my opinion, incumbent upon ASIC in the circumstances of this case to draw his Honour's attention both to the principles of law referred to in Hall v New South Wales Trotting Club and Malone v Marr as well as to the circumstances of other civil penalty proceedings in which it had been involved in which there were separate hearings on the issue of penalty: see Australian Securities & Investments Commission v Adler [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities & Investments Commission v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515. 427 The consequence of the failure to conduct a separate penalty hearing means that the issue of penalty must be revisited. It is appropriate, as counsel for the appellants submitted (and ASIC did not demur), that that exercise be undertaken by remitting the matter to the Equity Division to be heard by a judge different from the primary judge. 428 This conclusion means it is not necessary to deal with grounds 23 – 29. Other grounds of appeal 429 The appellants raised the following miscellaneous grounds of appeal: "15. His Honour erred in stating that the $6,000,000.00 carried with it obligations to pay interest [paragraphs 144, 132]. 17. His Honour erred in finding that Allan Endresz had indicated in his oral evidence that he had not obtained representation because in his view the proceedings should never have been brought and that this seemed a strangely arrogant attitude which did not reflect well upon his credit [paragraph 69], when in fact what Allan Endresz had indicated in his oral evidence was a view that these proceedings should not have proceeded with other matters, meaning the criminal proceedings pending against him." 430 Ground 15 turned on the proposition that the non-cumulative dividend on the redeemable preference shares was not interest. Accepting that to be the case, his Honour's statement, as Mr Biscoe QC conceded in the course of argument, could not have a material effect on the outcome of the appeal. 431 The same can be said of the complaint regarding his Honour's understanding about why Allan Endresz had not obtained legal representation. To the extent that this ground seeks to undermine the primary judge's conclusion about Allan Endresz's credit, it is plain from reading the judgment on appeal that the adverse view his Honour formed of Allan Endresz's credit was based on the entirety of the evidence including his observation of Allan Endresz's demeanour. 432 Moreover his Honour's observation was made when he was referring to the difficulties under which he was labouring due to the appellants not having legal representation. It is plain from Allan Endresz's cross- examination that the absence of legal representation was not due to lack of finance. Although his Honour's remark did not express the entirety of Allan Endresz's statement in my view his Honour was entitled to form the opinion that "[I]n view of the civil penalties that were being sought against him and the other defendants, this [choosing not to have legal representation] seemed a strangely arrogant attitude". 433 As with ground 15, this remark does not have a material effect on the appeal. 434 Grounds 15 and 17 should be rejected. Orders 435 I propose the following orders: (1) Appeal dismissed save as to ground 22. (2) Matter remitted to the Equity Division for hearing on penalty only. Costs 436 The appellants have already been ordered to pay the costs of the adjourned hearing on 30 June 2003. 437 As to the costs of the appeal, the appellants have failed on the majority of grounds which occupied the substantial part of the hearing. In my view they should bear three-quarters of the costs of the appeal. 438 As to the trial, the point on which the appellants have succeeded was not argued at all. In my view the primary judge's order that the appellants pay ASIC's cost of the proceedings below including reserved costs should not be disturbed. ********** Last Modified: 12/15/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.