New South Wales Supreme Court CITATION : Australian Securities and Investments Commission v John Barrie Loiterton & Ors [2004] NSWSC 172 revised - 14/05/2004 20, 21, 24, 25, 26, 27, 28 and 31 March 2003 1, 2, 3, 4, 7, 8, 9, 10, 11, 14 and 15 April 2003 1, 5, 6, 7,12, 13, 14, 15, 20, 21, 22, 23, 26, 27, 28 and 29 May 2003 HEARING DATE(S) : 2, 3, and 4 June 2003 31 July 2003 15 September 2003 9 December 2003 JUDGMENT DATE : 1 April 2004 JURISDICTION: Equity Division JUDGMENT OF : Bergin J DECISION : See par. 586 CATCHWORDS : [CORPORATIONS] - Civil penalty proceedings under the Corporations Law as it existed in 1996 and 1997 relating to the preparation and publication of the statutory accounts of a public company and its subsidiaries - Application of sections 232, 318, 292, 295A, 298 and 1002G - Standing of the Australian Securities and Investments Commission to commence civil proceedings in its own name for an alleged breach of section 1002G. -Whether expert evidence required as to the 'materiality' of inside information for the purposes of section 1002G - [PRACTICE AND PROCEDURE] - Prosecutorial fairness in civil penalty proceedings against unrepresented defendants - Whether fairness achieved in prosecuting a claim for alleged contraventions of both section 232 (5) and section 1002G in respect of share trading - Application of Briginshaw standard in one but not the other case - Whether plaintiff's failure to provide a copy of transcript of a voluntary interview of a witness called by first defendant before witness was called rendered unfair the reliance on evidence in cross-examination admittedly inconsistent with that interview - [DIRECTORS] - Whether directors' conduct dishonest - Whether directors exercised appropriate degree of care and diligence - Whether circumstances existed to alert executive and non-executive directors to make further enquiry - Whether reliance can be placed on others in circumstances where there is knowledge that profits not real and/or there are circumstances that should have caused further enquiry as to nature of certain fees and profits. Companies (New South Wales) Code 1980 Companies Act 1961 (NSW) LEGISLATION CITED : Companies Act 1961 (Vic) Corporations Act 2001 (Cth) Corporations Law Adler & Anor v ASIC; Willaims v ASIC (2003) 46 ACSR 504 ASIC v Parkes (2001) 38 ACSR 355 ASIC v Sweeney [2001] NSWSC 114 Australian Growth Resources Corporation Pty Ltd (Rec and Mgrs appted) v Van Reesema & Ors (1988) 6 ACLC 529 Australian Securities Commission v Fairlie (1993) 11 ACLC 669 Briginshaw v Briginshaw (1938) 60 CLR 336 Chew v The Queen (1991) 173 CLR 626 Corporate Affairs Commission (NSW) v Transphere Pty Ltd & Eddie Solomon Holdings Inc (1988) 7 ACLC 205 Daniels & Ors (formerly practicing as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438 Duke Group Ltd (in liq) v Pilmer (1998) 27 ACSR 1 Glover v Australian Ultra Concrete Floors Pty Ltd [ 2003] NSWCA 80 CASES CITED : In re Smith & Fawcett Ltd [1942] 1 Ch 304 Marchesi v Barnes and Keogh [1970] VR 434 Marra Developments Ltd v BW Rothe Pty Ltd [1977] 2 NSWLR 616 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 R v Byrnes & Hopwood (1995) 183 CLR 501 R v Rivkin [2004] NSWCCA 7 R v Towey (1996) 21 ACSR 46, (1996) 132 FLR 434 Rankin v Cooper (1907) 149 F 1010 Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler & Ors (2002) 41 ACSR 72 Rich and Silbermann v ASIC (2003) 48 ACSR 6 R v Apostilides (1984) 154 CLR 563 White v Overland [2001] FCA 1333 Australian Securities and Investments Commission (Plaintiff) John Barrie Loiterton (First Defendant) PARTIES : Ian Robert Hall (Second Defendant) Ian Sapier (Third Defendant) Peter James Loiterton (Fourth Defendant) FILE NUMBER(S) : SC 3724/00 F P Carnovale and D J Price (Plaintiff) COUNSEL : John Barrie Loiterton (In Person) Ian Robert Hall (In Person) R J Brender (Third Defendant) SOLICITORS : Australian Securities and Investments Commisssion (Plaintiff) Gillis Delaney Brown (Third Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BERGIN J 1 APRIL 2004 3724/00 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v JOHN BARRIE LOITERTON and ORS JUDGMENT Introduction 1 These proceedings relate to the conduct and involvement of John Barrie Loiterton (JBL), the first defendant, Ian Robert Hall (Hall), the second defendant, Ian Sapier (Sapier), the third defendant and JBL's son, Peter James Loiterton (PJL), the fourth defendant, in and surrounding the preparation and publication of the accounts of Clifford Corporation Limited (CCL) and the Clifford Group of companies (Clifford) in 1996 and 1997. 2. The plaintiff, the Australian Securities and Investments Commission (ASIC), commenced these proceedings by originating process filed on 25 August 2000. The proceedings were case managed by Austin J and were continued on pleadings. The pleadings upon which the matter proceeded at trial were the plaintiff's Second Further Amended Statement of Claim filed on 7 April 2003 (SC) and the defendants' defences as filed prior to the SC but understood by all parties to apply to the SC. 2 The trial of the matter commenced before Austin J in March 2003, but was aborted on the morning of the third day by reason of a conflict having arisen. I commenced a new trial on the afternoon of the day the trial before Austin J was aborted and heard evidence over a 40 day period in March to June and September 2003. Written submissions were filed and final oral submissions were made on 9 December 2003 when I reserved my judgment. Mr FP Carnovale of counsel, leading Mr DJ Price of counsel, appeared for the plaintiff. JBL and Hall were not represented and conducted their own defences. Mr RJ Brender, of counsel, appeared for Sapier. PJL was unrepresented and did not take part in the trial. 3 At the commencement of the hearing before me all defendants taking part in the trial agreed that they did not wish to re-argue objections and were content to abide the rulings on objections made by Austin J prior to the first trial being aborted. 4 The plaintiff's allegations of contravention of the Corporations Act 2001 (the Act) by the defendants relate to the 1996/1997 accounts of Clifford and its subsidiaries. In general, the plaintiff alleges that one or more of the defendants failed to act honestly as a director in breach of s. 232(2) (dishonesty); failed to exercise appropriate care and diligence as a director in breach of s. 232 (4) (lack of care and diligence); made improper use of information acquired as a director in breach of ss. 232(5) & 1002G (insider trading); made improper use of their positions as directors in breach of s 232 (6) (improper use of position); and, in breach of s. 318(1) (failure to take reasonable steps/knowingly cause default), failed to take all reasonable steps to comply with, or to secure compliance with, or were knowingly the cause of default under ss. 292, 295A & 298 [such provisions relating respectively to causing the preparation of a profit and loss account that gives a true and fair view of the profit or loss of a company for an accounting period, causing the preparation of a consolidated profit and loss account that gives a true and fair view of the consolidated profit or loss of a group of companies for an accounting period and ensuring that accounts comply with applicable accounting standards]. 5 The SC sought orders against the defendants including the imposition of pecuniary penalties (S. 1317EA(3)(b)), prohibitions on the defendants from managing a corporation (s. 1317EA(3)(a)) and the payment of compensation (s. 1317HA). On 26 May 2003 the claims for compensation against JBL, Hall and PJL were abandoned. This abandonment arose after the plaintiff conceded that it needed to seek leave to proceed against JBL, Hall and PJL in respect of those claims for compensation by reason of their bankruptcies. Sapier is not bankrupt and the claim for compensation against him is maintained. 6 Neither JBL nor Hall raised any issue as to whether the plaintiff needed leave to proceed against them (and PJL) otherwise than for compensation, however I asked the plaintiff to provide submissions in that regard in any event. JBL was made bankrupt on 12 July 2002. Hall was made bankrupt on 16 May 2002 and PJL was made bankrupt on 10 February 2003.The relevant claim in this regard is a claim for a pecuniary penalty and it is submitted that by reason of the provisions over the relevant years from 1996, as carefully outlined in a detailed written submission dated 26 May 2003, any pecuniary penalty order that might be made in the proceedings would be taken to be made under s 1317G of the Act and, by reason of s 82(3AA) of the Bankruptcy Act 1966 (Cth), would not be a provable debt. If that is right then leave is not needed. At this stage of the proceedings I am only considering whether the defendants have contravened the Act and any question of whether a pecuniary penalty might be imposed must await the outcome of this aspect of the case and be subject to further submissions. However I am able to indicate that subject to those matters I am of the view that the plaintiff's submissions are correct and it is entitled to proceed to make a claim for the imposition of pecuniary penalties without having to seek leave to proceed. 7 A further matter that arose during the trial, once again not at the behest of JBL and Hall, was a possible issue in respect of whether these proceedings were stayed by reason of certain criminal proceedings that have been commenced against JBL and Hall. On this aspect, JBL was represented by Mr GF Jauncey, of counsel, on 15 September 2003 when submissions were made, with which the plaintiff agreed, that these proceedings were not stayed because the criminal proceedings related to matters that were not substantially the same as the matters before me. Hall did not make submissions against that position. I agreed with the submissions put by Mr Jauncey and the plaintiff on the basis of the evidence before me and the matter proceeded. 8 On the final day of the hearing of this matter, 9 December 2003, Mr R Newlinds SC appeared to inform the Court that he appeared for CCL in liquidation, to seek an order for compensation against Sapier in respect of dividends that were paid by CCL in 1997. It then became apparent that on 3 May 2002 Austin J had made an order sought in an Interlocutory Process filed on 20 March 2001, that "Clifford Corporation Limited (in liquidation) (ACN 000 750 103) be granted leave to intervene in these proceedings". Mr Newlinds SC was advised that the application was premature as it depended upon the finding that there had been a contravention of the relevant provision of the Act and that the application should await the outcome of this part of the proceedings. The applicable statutory provisions 9 The defendants' conduct, the subject of these proceedings, occurred in 1996 and 1997. The provisions of the Corporations Law (CL) pursuant to which the plaintiff pleaded its cases were repealed prior to the Corporations Act 2001 (the Act) coming into force on 15 July 2001. The Act is "taken to include" the provisions of the CL pursuant to which the plaintiff makes allegations of contraventions against each of the defendants: s 1401(2). All parties have proceeded upon that basis and addressed the content of the CL sections in force as at 1996 and 1997. The references to the sections of the Act are therefore references to the CL provisions. 10 Each of the sections the plaintiff alleges the defendants have contravened, except s 1002G (although subsequently included as a civil penalty provision), is a civil penalty provision: s. 1317D. The standard of proof is the civil standard of proof on the balance of probabilities and in hearing and determining the application for a civil penalty order, for which the declaration of contravention is a pre-requisite, the Court applies the rules of evidence and procedure that it applies in hearing and determining civil matters: s. 1317ED(1): Adler & Anor v ASIC; Williams v ASIC (2003) 46 ACSR 504; Rich and Silbermann v ASIC (2003) 48 ACSR 6. I intend to approach the matter on the basis that in civil penalty proceedings the standard of proof is that referred to in Briginshaw v Briginshaw (1938) 60 CLR 336. Dishonesty s.232(2) 11 Section 232(2) provides: 232 (2) [Officer to act honestly] 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. 12 The provisions of s. 232(2) were in all material respects the same as s 229(1) of the Companies (New South Wales) Code 1980 and s. 124(1) of the Companies Act 1961 (NSW). It is uncontroversial that s 232(2) required directors to act bona fide in the interests of the company and for a proper and not collateral purpose: In re Smith & Fawcett Ltd [1942] 1 Ch 304 per Lord Green MR at 306. Conflicting approaches arose as to whether the section meant that for the purposes of establishing a breach, it was necessary to prove conduct in disregard of a consciousness that the subject conduct was not in the best interests of the company: Marchesi v Barnes and Keogh [1970] VR 434; or conduct contrary only to an objective standard of honesty and purpose as determined by the Court: Australian Growth Resources Corporation Pty Ltd (Recs & Mgrs apptd) v Van Reesema & Ors (1988) 6 ACLC 529, per King CJ at 539. In ASIC v Parkes (2001) 38 ACSR 355, Austin J (at [23]) noted the difference of opinions in these two cases and referred to the observation made in the text of which his Honour is an author, Butterworths Ford's Principles of Corporations Law, (at [8.300]) that the latter approach is more likely to prevail now that s 232(2) is a civil penalty provision. In that case Austin J did not find it necessary to attempt a resolution of the conflicting authorities. 13 It appears that the genesis of the differing opinions was the penal nature of the predecessors to s 232(2) and the change in structure of the section over the years; such as s 124(1) of the Companies Act 1961 (Vic) as considered by Gowans J in Marchesi, and s 229(1) of the Code as considered by the Full Court of South Australia in Australian Growth Resources; see also Duke Group Ltd (in liq) v Pilmer (1998) 27 ACSR 1 at 300-303. 14 This analysis is somewhat academic because in this case the plaintiff has elected to conduct the trial on the basis that to prove a breach of s 232(2) it must establish that the defendants had a consciousness that the conduct alleged was not in the interests of the relevant company and was deliberate conduct in disregard of that consciousness. The defendants have therefore conducted their defences on that basis and the matter must, in those circumstances, be decided on that basis. Lack of care and diligence – s.232(4) 15 Section 232(4) provides: 232 (4) [Care and diligence] In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances. 16 A director is required to acquire at least a rudimentary understanding of the business of the company. If there is reason to awaken suspicion or put a prudent person on guard in respect of the affairs of the company directors may not "shut their eyes to what is going on around them": Rankin v Cooper (1907) 149 F 1010 at 1013. A director is charged with the obligation of protecting the company and must maintain a general monitoring of the company's affairs and policies, regularly review its financial reports and make inquiries where matters revealed by the reports call for inquiry: Daniels & Ors v Anderson (1995) 37 NSWLR 438 at 502- 503 per Clarke JA & Sheller JA. 17 A director may usually rely upon the judgment, information and advice of company executives and other employees appropriately entrusted. In Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler and Ors (2002) 41 ACSR 72 Santow J said at [par 372]: (10) at general law, a director is entitled to rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted. However, reliance would be unreasonable where directors know, or by the exercise of ordinary care should have known, any facts that would deny reliance on others; (Daniels t/as Deloitte Haskins &Sells at ACSR 665-6;) (11) although reasonableness of the reliance or delegation must be determined in each case, the following may be important in determining reasonableness: (a) the function that has been delegated is such that "it may properly be left to such officers": Re City Equitable Fire Insurance Co Ltd, above, per Romer J ; (b) the extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry; Re Property Force Consultants Pty Ltd, above, per Derrington J, at ACLC 1060; (c) the relationship between the director and delegate, must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on who reliance can be placed. Knowledge that the delegate is dishonest or incompetent will make reliance unreasonable: Dempster & Biala Pty Ltd v Mallina Holdings Ltd (1994) 13 WAR 124; 15 ACSR 1 at 62; (d) the risk involved in the transaction and the nature of the transaction; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 109; 14 ACSR 109 (although in this case the Chief Executive Officer in question also had a conflict of interest); (e) the extent of steps taken by the director, for example, inquiries made or other circumstances engendering "trust"; (f) whether the position of the director is executive or non-executive Permanent Building Society (in liq) v Wheeler per Ipp J, though in Daniels v Anderson , above, the majority have moved away from this distinction; 18 The majority in Daniels v Anderson observed at 505: We are of opinion that a director owes to the company a duty to take reasonable care in the performance of the office. As the law of negligence has developed no satisfactory policy ground survives for excluding directors from the general requirement that they exercise reasonable care in the performance of their office. The director's fiduciary obligations do not preclude the common law duty of care. Modern statutory company law points to the existence of the duty. In some circumstances the duty will require action. The concept of a sleeping or passive director has not survived and is inconsistent with the requirements of current company legislation such as, at the relevant time, s 229 and s 269 of the Companies (New South Wales) Code . … A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty of a director is called upon to perform. The duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by the shareholders on the experience and skill of a particular director. The duty is a common law duty to take reasonable care owed severally by persons who are fiduciary agents bound not to exercise the powers conferred upon them for private purpose of for any purpose foreign to the power and placed, in the words of Ford and Austin, Ford's Principles of Corporations Law, 6th ed (1992), at 429, at the apex of the structure of direction and management. 19 In assessing whether reliance is appropriately placed on others, it is necessary to have regard to the relevant circumstances at the time it is claimed that reliance on others was appropriate and that no further inquiry was necessary. In the case of non-executive directors, it is important to assess not only their actual knowledge but also the occurrence of relevant events which called for further inquiry and when such events became known to those directors: Daniels v Anderson at 508. Improper use of inside information – s.232(5); and insider trading s 1002G 20 Section 232(5) provides: 232 (5) [No improper use of inside information] An officer or employee of a corporation, or a former officer or employee of a corporation, must not, in relevant circumstances, make improper use of information acquired by virtue 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. 21 Section 1002G provides relevantly: SECTION 1002G PROHIBITED CONDUCT BY PERSON IN POSSESSION OF INSIDE INFORMATION 1002G(1) [Application of section] Subject to this Division, where: (a) a person (in this section called the " insider ") possesses information that is not generally available but, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities of a body corporate; and (b) the person knows, or ought reasonably to know, that: i) the information is not generally available; and ii) if it were generally available, it might have a material effect on the price or value of those securities; the following subsections apply. 1002G(2) [No purchase or sale etc of securities] The insider must not (whether as principal or agent): (a) subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell, any such securities; or (b) procure another person to subscribe for, purchase or sell, or to enter into an agreement to subscribe for, purchase or sell, any such securities. 22 The plaintiff pleaded contraventions by JBL and Hall of both of these sections. Section 232(5) is a civil penalty provision and applies to, inter alia, directors of a company. At the time of the alleged contraventions, s 1002G was not a civil penalty provision and it applied to persons who may or may not be directors. 23 The plaintiff submitted that to prove a breach of s 232(5) it is not required to prove that an advantage was obtained, but is required to prove that the conduct occurred for the purpose of gaining an advantage: Chew v The Queen (1991) 173 CLR 626. I agree with that submission. The test of whether the use of the information was improper is an objective test. A breach occurs if the director's conduct breaches the standards of conduct expected by reasonable persons of a person in the director's position with knowledge of the duties, powers and authority of the position and the circumstances of the case. The directors consciousness of impropriety is irrelevant to whether a breach has occurred: R v Byrnes & Hopwood (1995) 183 CLR 501; R v Towey (1996) 21 ACSR 46. 24 The elements to be established for a declaration of contravention of s 232(5) are: (1) that the person was at the relevant time an officer of the company; (2) that the person acquired the relevant information, such information being the sort of information that equity would protect by injunction or, as alleged in this case, information that was not, but should have been generally available to the market; (3) that the information was acquired by virtue of the person's position as an officer of the company; (4) that the person made improper use of the information, such element being judged objectively by reference to the commercial context of the conduct; and (5) that the improper use was made of the information in order to gain, directly or indirectly, an advantage for that person or some other person. 25 The plaintiff submitted that if the director of a publicly listed company had information to the effect that the published financial accounts or reports materially overstated its financial results, but the overstatement was not generally known, the director would be obliged to correct the accounts. If the director does not do so but uses the information for the purpose of gaining an advantage for another person, by causing, inducing or encouraging that person to sell shares or options in the company, it was submitted that such director makes improper use of the information. There was no contrary submission made by the defendants. 26 The plaintiff's case in this regard is that the information was that the profits of the company were overstated, that the defendants acquired that information by reason of their positions as directors, that they used that information improperly by causing others to sell shares in the company at a time when the information was not generally available to the market, to gain an advantage for those other persons. 27 Contravention of s 1002G was also pleaded and in this regard the defendants made detailed submissions on the elements to be established for a breach of this section. I have dealt with the elements to be proved in relation to a contravention of s 1002G later in this judgment. Although the insider trading provisions of the Act are now civil penalty provisions (ss 1043A & 1317E), it is fairly clear that s 1002G was not a civil penalty provision at the time of the conduct alleged to amount to a contravention of the section. There is nothing in the legislation providing for the insider trading provisions, now s 1043A, to be civil penalty provisions to suggest that there should be retrospective application to the previous differently numbered s 1002G: Financial Services Reform Act 2001. 28 The standing of the plaintiff to bring proceedings for recovery consequent upon contravention of the section appears to have been limited to doing so "in the name of, and for the benefit of" a "body corporate" that was itself entitled to bring an action for the recovery of an amount pursuant to the Act: s 1013(5) & 1013(6). The plaintiff did not bring the action in that manner. It proceeded against the relevant defendants in its own name and originally sought orders that JBL and Hall pay amounts to CCL. However on 3 May 2002 Austin J made orders granting CCL leave to intervene to seek compensation its own right. 29 The utilization by the plaintiff of s 1002G combined with s 232(5) in these proceedings has clouded the issues to the point where it seems to me to have been quite inappropriate for the unrepresented defendants to have had to meet the allegations in respect of the share and option trading. The plaintiff's written submissions of 12 August 2003 focussed heavily on the provisions of s 1002G with little or no detail of any difference between the elements to be proved in relation to the two sections. I accept that the plaintiff's additional written submissions dated 24 September 2003 outlined various aspects of the elements of s 232(5), however those submissions referred back to the written submissions of 12 August 2003 as "submissions as to the contraventions of s 232(5)". In neither of these submissions or in the original outline in respect of share and option trading handed up by Mr Carnovale to Austin J on 18 March 2003 and relied upon again before me in the opening of the plaintiff's cases have the specific elements of s 1002G been detailed or compared to the elements to be proved for contravention of s 232(5). 30 In those circumstances it is understandable that the defendants have dealt with the allegations of contraventions with detailed focus on the elements of s 1002G, albeit that both submissions recognised that the two sections were being relied upon by the plaintiff. 31 I listed the matter for further submissions on 30 March 2004. On that date Mr Carnovale submitted that the plaintiff had always proceeded on the basis that s 1002G was not a civil penalty provision. He referred to the SC and contrasted the paragraphs dealing with the civil penalty provisions and the paragraph referring to s 1002G (pars 18 & 20 and par 21). It is true that the former paragraphs state that the sections are civil penalty provisions and the latter paragraph does not make such a statement. Mr Carnovale submitted that the plaintiff is seeking a declaration of contravention of s 1002G pursuant to s 75 of the Supreme Court Act 1970 rather than seeking to deploy any of the sections of the Act. It was submitted that it was entitled to such a declaration for the protection of the public interest. I should say that this was the first time that this had been suggested since the commencement of the hearing before me. Hall, who advised that JBL would not be appearing on 30 March 2004, submitted that he had not read section 75 and did not understand what was being put. 32 In support of this submission Mr Carnovale relied upon Austin J's decision in Australian Securities & Investment Commission v Sweeney [2001] NSWSC 114 in which his Honour referred to Young J' decision in Corporate Affairs Commission v Transphere Pty Ltd (1989) 7 ACLC 205 at 209-210. In Sweeney, Austin J said: 30 It is beyond contest that this Court has plenary jurisdiction to make a declaratory order concerning contravention of the Corporations Law, by virtue of ss 23 and 75 of the Supreme Court Act 1970 (NSW). In Australian Softwood Forests Pty Ltd v Attorney-General (NSW) (1981) 148 CLR 121, the High Court expressly disagreed with the Court of Appeal of New South Wales, which had declined to grant a declaration with respect to contravention of the 'prescribed interests' provisions of the Companies Act 1961 (NSW). Gibbs CJ remarked that it was proper to grant a declaration in that case although it had been agreed that an injunction was not an appropriate remedy (at 125). 31 In Corporate Affairs Commission v Transphere Pty Ltd (1989) 7 ACLC 205, 209, Young J dealt with the question more fully. He observed that, while a declaration will not ordinarily be made that a defendant has committed a crime, there is jurisdiction to do so in a proper case. In his Honour's view, older cases which discouraged a statutory authority from commencing proceedings for declaratory relief are no longer applicable, in view of the changed social climate, and the Court will now grant declaratory relief at the suit of the statutory authority which exists to regulate an industry, in an appropriate case: at 214. In his Honour's view, the fact that the subject matter of the declaration is of public interest is an important consideration in favour of the granting of declaratory relief, even though the order may be of only slight utility: at 213. In that case the Court declined to make a declaratory order, because (inter alia) the declaration would affect investors who were not parties to the proceedings. That consideration is not present here. The approach taken in the Federal Court is very similar: Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1993) 113 ALR 257. 32 Section 1324 (1) of the Corporations Law empowers the Court, on the application of the Commission or a person whose interests have been affected, to grant an injunction restraining a person from engaging in conduct that constitutes a contravention of the Law. Section 1324 (2) empowers the Court to grant a mandatory injunction requiring a person to do something required to be done by the Corporations Law. By s 1324 (6) (a), the power to grant an injunction restraining a person from engaging in conduct may be exercised whether or not it appears to the Court that the person intends to engage again, or continue to engage, in conduct of that kind. Obviously there will be discretionary considerations for and against the grant of injunctive relief, but there is no doubt about the power to grant the relief, as Cohen J confirmed in Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722, 728. 33 No submissions were directed to the availability of relief by way of disqualification order under the provision that was s 230 of the Corporations Law at the relevant time. I have no reason to think that such relief could not be granted, if appropriate facts are established. Again, the grant of relief at the final hearing will depend upon discretionary considerations. 34 The present proceedings have been brought by the public regulator to enforce the corporations and securities legislation. According to s 1 (2) of the Australian Securities and Investments Commission Act 1989 (Cth), in performing its functions and exercising its powers, the plaintiff must strive to achieve various objectives, including: · to promote the confident and informed participation of investors and consumers in the financial system; · to administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and · to take whatever action it can take, and is necessary, in order to enforce and give effect to the laws that confer functions and powers on it. 35 These provisions imply that it is appropriate for the Commission to take civil proceedings for declaratory and injunctive relief in respect of past events, even if there is no risk of repetition, where the outcome may establish that the conduct complained of was wrongful (and thereby mark the Court's and the community's disapproval of it) and may deter other wrongdoers. It is appropriate for the Court to take these matters into account in the exercise of its discretion to grant or refuse such relief. 33 Without debating the approach adopted by Austin J, I should say immediately that this case is different. Here there is a raft of civil penalty provisions in respect of which the plaintiff seeks declarations of contravention for the purpose of seeking banning orders, monetary penalties and in the case of the only defendant who is not bankrupt, compensation. There is then the claim for a declaration of contravention of s 1002G. Mr Carnovale submitted that such a claim has always been made "in the alternative" (tr. 2236). Having regard to that submission, the history of the plaintiff's claims in reliance upon s 1002G requires analysis. 34 In the Originating Process the plaintiff claimed that JBL had contravened "each of Sections 232(5) and 1002G" (par 1.3). In the Statement of Claim annexed to the supporting affidavit filed in August 2000, the claim was made that JBL had contravened s 232(5) (par 53) and that "further" he had contravened s 1002G (par 54). The Statement of Claim sought declarations that JBL had contravened "each of Sections 232(5) and 1002G in relation to Clifford Corporation" (par 1.3). The plaintiff also sought orders "pursuant to 1005 and 1013(5) and (6)" that JBL pay to Clifford Corporation such amount by which the price at which the shares were sold was greater than the price at which they would have been likely to have been sold at the time of the sales if the Inside Information had been generally available (the share price). The Act required the plaintiff to bring such a claim "in the name of, and on behalf of" Clifford Corporation. As I have said that was not done and CCL was granted leave to intervene in 2002. 35 In the Amended Statement of Claim the plaintiff introduced a similar claim against Hall and in that pleading and in all subsequent pleadings including that upon which the parties went to trial in March 2003 the claims were that JBL and Hall contravened "each" of sections 232(5) and s 1002G and declarations are sought for contravention of each of those sections. The second Further Amended Statement of Claim was filed in Court during the trial on 7 April 2003 and the plaintiff abandoned its claims for orders pursuant to s 1013(5) against JBL and Hall that they pay the share price. (This amendment arose out of a question I raised in respect of leave being necessary to proceed against bankrupts rather than any matter relating to whether the proceedings in respect of the claims for those orders were properly constituted.) 36 With this history in mind it is very difficult to see how Mr Carnovale could have submitted on 30 March 2004 that "it has always been made clear" that the claims in respect of alleged contraventions of s 232(5) and s 1002 "were alternatives". It was simply not the case. Mr Carnovale submitted that his written submissions made it clear and relied on paragraph 1 of his submissions on Share trading dated 12 August 2003. That written submission did not make such position clear at all. It stated that the share trading "occurred in circumstances giving rise to contraventions" by JBL and Hall "of the insider trading provisions of s 1002G or the directors' duties provisions of s 232(5), or both" (emphasis added). The written submissions, consistently with the pleadings, sought declarations of contraventions of both sections (see page 14). 37 Section 75 of the Supreme Court Act 1970 has only ever been mentioned in the section in the Originating Process dealing with the "Details of the Application" and then only in a paragraph where it was suggested "orders" would be sought in the most vague way. It has not been mentioned again until Mr Carnovale made his oral submissions on 30 March 2004. Even assuming that the original claims for orders under s 1013(5) & (6) were properly constituted, about which I have some real doubt, once the claims for those orders were abandoned, the plaintiff's approach was never made clear, and certainly there was no mention of section 75. On 30 March 2004 Mr Carnovale made the following submission: I wonder if I can add this your Honour, if I may; the reason, of course, why ASIC relied in the alternative on section 232 (5), three alternatives; section 1002G, or both. The reason for that is the recognition, of course, that there were no consequential penalties available in these proceedings if ASIC succeeded on 1002G only. All ASIC would ever get was a declaration. 232(5), of course, was relied on in recognition that it is a civil penalty provision and that if conduct which might be common to both provisions was proved, then that does attract a civil penalty and whilst the unrepresented defendants may not have appreciated that, that indeed was the reason. Section 232(5) wasn't pleaded as part of the share trading just for something to do, it was there because it provided a civil penalty consequence if we succeeded on it. It has always been made clear that they were alternatives and therefore there can be nothing unfair. Should you Honour find that ASIC can't rely on the 1002G, there can be nothing unfair about its reliance on the other provision, given the way it has pleaded and submitted all the way through. (emphasis added) (tr. 2236) 38 I do not accept that it has "always been made clear" that these claims were alternative claims. I have referred to the concept of prosecutorial fairness in civil penalty proceedings later in this judgment in dealing with the Origin Fee. As I have said the plaintiff accepts that it has a duty of fairness to the defendants in civil penalty proceedings. This has been a long trial with aspects to it (as described in the Introduction) that impeded the exposure of this problem until all submissions were in and under consideration. Notwithstanding that the defendants have not raised this question, I am not satisfied that it was fair to them to have had to meet these two claims together in the way in which they have developed. In proceedings where litigants are unrepresented, particularly in civil penalty proceedings, care needs to be taken to ensure that the prosecution case has clarity and is fair. It is clear from the defendants' written submissions that they did not understand that the plaintiff was seeking a declaration pursuant to s 75, nor that the claims against them for contravention of s 232(5) and s 1002G were in the alternative. There was also a blurring of the elements of the two sections in a manner that was unfair to the defendants. 39 The Court's approach to civil litigation has developed to the extent that where a party perceives that an opponent may misapprehend the issues then it is necessary to dispel that misapprehension. It is a "cards on the table" approach to litigation: Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116; White v Overland [2001] FCA 1333; Glover v Australian Ultra Concrete Floors [2003] NSWCA 80. In civil penalty proceedings clarity of approach takes on more significance. What has happened in this aspect of the plaintiff's claims is that it has sought to prove the elements in relation to s 1002G, that does not require the Briginshaw standard to be applied, and then sought in what I regard as a rather confused way, to have a back up claim pursuant to s 232(5), to which the Briginshaw standard does apply for, as Mr Carnovale put it, "conduct that might be common to both provisions" (tr. 2236). 40 In these circumstances I am satisfied that the appropriate way to deal with this aspect of the plaintiff's cases against JBL and Hall for alleged contraventions in respect of Shares and Options trading is to deal with the allegations in detail under that heading later in this judgment but to refuse to make any declarations. Improper use of position – s.232(6) 41 Section 232(6) provides: 232 (6) [No gain by improper use of position] 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. 42 The impropriety to be proved for a breach of this section in this civil penalty proceeding is to be judged objectively: Robins v Incentive Dynamics Pty Ltd(in liq) (2003) 21 ACLC 1030, per Mason P (with whom Giles and Stein JJA agreed); and there may be a finding of contravention even if no actual gain was obtained. In R v Chew, Mason CJ, Brennan, Gaudron and McHugh JJ held at 633: It is a corollary of the interpretation which we favour that the accrual of an advantage or the suffering of a detriment is not an element of the offence. Thus, an officer who makes improper use of his or her office in order to gain an advantage is guilty of an offence, even if his or her purpose be thwarted as , for example, the grant of an injunction preventing execution of an instrument or implementation of a transaction. … [o]nce one concludes that there is a purposive element in the offence, it is necessary to establish not merely that the accused intended that a result should ensue, but also that the accused believed that the intended result would be an advantage for himself or herself or for some other person or a detriment to the corporation. Failure to take reasonable steps – s 318(1) 43 Section 318 relevantly provides: 318 (1) [Contravention] Subject to this section, if a director of a company fails to take all reasonable steps to comply with, or to secure compliance with, or has knowingly been the cause of any default under, any of the provisions of this Part (including any of those provisions as applying by virtue of section 1058) other than Divisions 1 and 2 and section 317, the director contravenes this subsection. 318 (2) [Civil penalty provision] Subsection (1) is a civil penalty provision as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening it, or of being involved in contravention of it. 318(3) [Defence] In any proceedings against a person for failure to take all reasonable steps to comply with, or to secure compliance with, the provisions of this Part relating to the form and content of the accounts or consolidated accounts of a company by reason of an omission from the accounts or consolidated accounts (including any of those provisions as applying by virtue of section 1058), it is a defence if it is proved that the information omitted was immaterial and did not affect the giving of a true and fair view of the matters required by Division 4 or 4A to be dealt with in the accounts all consolidated accounts, as the case may be. 44 The test to be applied in deciding whether a director took reasonable steps to comply with, or to secure compliance with the relevant provisions of the Act, is an objective test but one that is to be applied by reference to the particular circumstances of the case: Australian Securities Commission v Fairlie (1993) 11 ACLC 669 at 681. 45 The sections that are relevant to the allegations made by the plaintiff that the directors failed to take reasonable steps to comply with or caused a failure of compliance with the provisions of the Act, are as follows: Part 3.6 Corporations: Division 4 – Accounts of a company SECTION 292 PROFIT AND LOSS ACCOUNT 292 Subject to section 293A, a company's directors shall, before the deadline after an accounting period, cause to be made out a profit and loss account for that accounting period that gives a true and fair view of the company's profit or loss for that accounting period. SECTION 293A SECTIONS 292 AND 293 DO NOT APPLY TO HALF-YEAR OF CHIEF ENTITY 293A(1) [Half-year of chief entity] Sections 292 and 293 do not apply to a half year of a company if the company is a chief entity in relation to that half-year. 293A(2) [Application of sec 294(2)-(4)] However, subsections 294(2), (3) and (4) apply to that half-year: (a) as if the reference in subsection 294(1) to a company's accounts being made out under sections 292 and 293 in relation to an accounting period were instead a reference to the company's directors causing to be made out a consolidated profit and loss account and consolidated balance-sheet under sections 295A and 295B in relation to that half-year; and (b) subject to such modifications (if any) as are prescribed. SECTION 294 STEPS TO BE TAKEN BEFORE ACCOUNTS MADE OUT 294(1) [Steps to be taken] This section shall be complied with before a company's accounts are made out under sections 292 and 293 in relation to an accounting period. 294(2) [Bad and doubtful debts] The directors shall take reasonable steps: (a) to find out what has been done about writing off bad debts and making provision for doubtful debts; and (b) to cause all known bad debts to be written off and adequate provision to be made for doubtful debts. 294(3) [Current assets] The directors shall take reasonable steps to find out whether any current assets, other than bad or doubtful debts, are unlikely to realise (whether directly or indirectly) in the ordinary course of business their value as shown in the company's accounting records and, if so, to cause: (a) the value of those assets to be written down to an amount that they might be expected so to realise; or (b) adequate provision to be made for the difference between their value as so shown and the amount that they might be expected so to realise. 294(4) [Non-current assets] The directors shall take reasonable steps: (a) to find out whether the value of any non-current asset is shown in the company's accounting records at an amount that, having regard to the asset's value to the company as a going concern, exceeds the amount that it would have been reasonable for the company to spend to acquire the asset as at the end of the accounting period; and (b) unless adequate provision for writing down the value of that asset is made – to cause to be included in the accounts such information and explanations as will prevent the accounts from being misleading because of the overstatement of the value of that asset. Pt 3.6 Corporations: Division 4A – Consolidated accounts of a company and the entities it controls SECTION 295A CONSOLIDATED PROFIT ANS LOSS ACCOUNT 295A(1) [Consolidated profit and loss account to be made] The company's directors must cause to be made out, before the deadline after that accounting period, a consolidated profit and loss account that gives a true and fair view of the profit or loss, for that accounting period, of the economic entity constituted by the company and the entities it controlled from time to time during that accounting period (even if the company did not control the same entities throughout that accounting period). 295A(2) [Entity not controlled throughout accounting period] To avoid doubt, if the company did not control a particular entity throughout that accounting period, the consolidated profit and loss account must relate to the entity's profit and loss for each part of that accounting period throughout which the company controlled the entity, but not to the entity's profit or loss for any other part. Section 298 Financial statements to comply with applicable accounting standards 298(1) [Directors to ensure compliance with accounting standards] Subject to section 297, a company's directors shall ensure that the company's financial statements for an accounting period are made out in accordance with applicable accounting standards. 46 The plaintiff makes allegations against the defendants that they caused default in compliance or that they failed to take reasonable steps to secure compliance with the accounts provisions of the Act. It is necessary to decide what steps were in fact necessary to secure compliance with the accounts provisions of the Act and what steps ought reasonably to have been taken to secure compliance. The tests are objective and in the latter respect the test is applied by reference to the particular circumstances of the case. What is reasonable to expect from a director in securing compliance will depend on all such circumstances: ASC V Fairlie (1993) 11 ACLC 669 at 681-682. 47 The allegations in this case do not require a lengthy analysis of the meaning of the term a "true and fair view" of the profit or loss of the relevant company. This is not a case in which sophisticated arguments have been advanced as to whether particular accounting methods or practices affected the "true and fair view" of the profit or loss. This case is in the main based on whether the transactions, the subject of the allegations, from which profits were brought to account, were real or fictitious and, in relation to those directors who were not directly involved in the creation of the alleged fictitious profits, whether there was information or circumstances that should have alerted them to the existence of those fictitious profits or the need to make further enquiry in relation to those profits. The Corporate Structure 48 It is important to understand the corporate structure of Clifford to assess the nature of the allegations the plaintiff makes against the defendants. This structure is set out in a diagram attached to this judgment however the following is a narrative form of the structure during the relevant period. 49 Clifford Minerals Limited was incorporated on 13 January 1970 and was a listed company until 13 January 1993 when its Australian Stock Exchange (ASX) listing was suspended. Clifford Minerals Limited changed its name to Clifford Corporation Limited (CCL) on 1 December 1994. At that time its principal activity was restricted to minor mineral exploration and its liabilities greatly exceeded its assets with accumulated losses in excess of $5 million. 50 CCL subsequently acted only as a holding company and the principal activities were carried out through its subsidiaries. It derived income from charging administration and management fees to the subsidiaries and from dividends paid to it by the subsidiaries. The largest shareholders in CCL in the relevant period were Leisuremark Pty Limited, formerly Leisuremark Limited, (Leisuremark); Leisuremark Australia Pty Limited (Leisuremark Australia); Notretoil Investments Pty Limited (Notretoil) and The Store of Knowledge, formerly Delostar Pty Limited (Store of Knowledge). JBL, Hall and Sapier were directors of CCL in the relevant period. 51 The shareholders of Leisuremark in the relevant period were JBL, Hall, PJL, Notretoil and The Store of Knowledge. The directors were JBL, Hall and PJL and the secretaries were from time to time Sapier, Craig John Ellis (Ellis) and JBL. The shareholders of Leisuremark Australia during the relevant period were JBL and Notretoil and the directors were JBL, Hall and PJL. 52 The shareholders of Notretoil during the relevant period were JBL and Mrs Loiterton and the directors were JBL and Mrs Loiterton. Hall was secretary from 1993 to 1996 and JBL became secretary on and from 1996. The Store of Knowledge shareholders and directors during the relevant period were Hall and members of his family. 53 In December 1994, CCL acquired all the issued shares in Signature Group Australia Limited (Signature) which carried on the business of acquiring leasehold interests in central business district office premises, fitting out the premises and sub-letting the premises to a broad range of tenants. The acquisition of Signature was funded by a public share issue and CCL was listed on the ASX on 4 August 1995. The shareholders of Signature in the relevant period were Leisuremark Australia, Notretoil, Store of Knowledge and Barford Estate Pty Limited, a company associated with JBL. JBL, Hall and PJL were directors of Signature from 18 May 1994 to 1 November 1996 and all of the defendants were directors of Signature between 1 November 1996 and 17 November 1998. 54 Interior Design Construction Pty Ltd (IDC) of which the sole shareholder was Leisuremark was incorporated in 1995. It worked for Signature in completing the fit-out of the leased premises. The leases for the premises were held by private companies which were subsidiaries of Signature. 55 On 28 June 1996, CCL acquired all the issued shares in Ansair Pty Limited (Ansair) which later became known as Saydair Commercial Seating Pty Limited. Ansair carried on a large scale manufacturing business producing buses and airline and railway seats. JBL, Hall and Sapier, with others, were the directors of Ansair during the relevant period and Ellis and Sapier were the secretaries. 56 On 14 October 1996, CCL acquired all the issued shares in JRA Limited (JRA), later known as Austral Pacific Group Limited (APG). It also carried on a large scale manufacturing business producing buses, coaches and fire engines. From about 1996 JBL, Hall and Ellis were the directors and Sapier and Ellis were the secretaries. 57 In June 1996, Austchas Pty Ltd (Austchas) was purchased as a shelf company. It was 100% owned by CCL and its sole purpose was to hold property at 75 Marigold Street, Revesby (the Revesby property) acquired as part of the acquisition of JRA by CCL on 14 October 1996. The directors included JBL, Hall and Sapier. 58 An administrator was appointed to APG on 26 November 1998 and to CCL on 9 December 1998. A liquidator was appointed to Signature and Austchas on 4 May 1999. Overview 59 The plaintiff relies upon six areas of facts, matters and circumstances from which it is alleged the contraventions of the Act arise. Those six areas have been identified and referred to in the proceedings as (1) Pre-acquisition Fees; (2) Signature Exclusivity Fees; (3) Origin Fee; (4) Revesby profit; (5) Share and Option trading; and (6) Dividends. Pre-acquisition fees 60 Clifford's 1995/96 consolidated accounts and CCL's 1995/96 accounts, dated 29 September 1996 and signed by JBL and Hall on behalf of the board, included as part of Clifford's consolidated income for the year and CCL's income for the year, an amount of $737,000 purportedly charged by CCL to Ansair as fees for "management and consultancy services" purportedly provided by CCL to Ansair prior to CCL's acquisition of Ansair on 28 June 1996 (the 1995/96 pre-acquisition fee). The plaintiff does not rely on the 1995/96 pre-acquisition fee as a contravention of the Act by the defendants. It is relied upon only as relevant background to the pre-acquisition fees, referred to below, that were brought to account in the 1996/97 year. I will deal with this aspect of the plaintiff's approach later when considering the pre-acquisition fees in detail. 61 The plaintiff alleges that the invoice for the 1995/96 pre-acquisition fee of $737,000 was backdated to 28 June 1996, a date prior to the acquisition of Ansair by CCL. That fee was included as income in CCL's 1995/96 accounts and was not eliminated in Clifford's consolidated accounts because it was treated as arising from a transaction between the companies when Ansair was not part of Clifford. The plaintiff claims that during the acquisition period there was no agreement with and no request by Ansair for CCL to provide services to it. 62 The plaintiff alleges that three pre-acquisition fees were inappropriately brought to account and are relied upon as contraventions of the Act by the defendants. These pre-acquisition fees were included in Clifford's December 1996 half-year consolidated accounts, dated 26 June 1997, signed by JBL and Hall on behalf of the board and were also included as part of Clifford's consolidated income in Clifford's 1996/97 consolidated accounts, dated 10 October 1997 and signed by Hall and Sapier on behalf of the board. The pre-acquisition fees purportedly charged were: $1,450,000 charged by CCL to JRA (the CCL fee), $800,000 charged by Ansair to JRA (the Ansair fee) and $252,300 charged by Signature to JRA (the Signature fee). The plaintiff alleges that these three pre-acquisition fees contributed $2,502,300 to Clifford's half-year consolidated revenue of $33.771 million and consolidated after-tax profit of $8.405 million and contributed $2,502,300 to Clifford's 1996/97 consolidated revenue of $85.227 million and consolidated after-tax profit of $11.511 million. 63 The plaintiff also alleges that CCL's 1996/97 accounts included the pre-acquisition fee of $1,450,000 charged by CCL to JRA as part of CCL's income for the year and contributed to CCL's 1996/97 revenue of $8.223 million and after-tax profit of $4.120 million. 64 The plaintiff alleges that all the pre-acquisition fees were fictitious and the defendants knew, or ought to have known, that they were fictitious. The plaintiff alleges that in allowing these pre-acquisition fees to be brought to account in the manner referred to above, each of the defendants, except for PJL, contravened the Act. I will deal with the specific contraventions alleged against each of the defendants later in this judgment when I am considering the pre-acquisition fees contravention allegations in detail. Signature Exclusivity Fees 65 Clifford's December 1996 half-year consolidated accounts, dated 26 June 1997 and signed by JBL and Hall on behalf of the board, included amounts totalling $1,541,000 purportedly derived by Signature from IDC for the grant to IDC of the exclusive right to carry out the fit-out and refurbishment of Signature's leasehold properties (the Exclusivity fees). The inclusion of those fees contributed $1,541,000 to Clifford's half-year consolidated revenue of $33.771 million and consolidated after-tax profit of $8.405 million. Clifford's 1996/97 consolidated accounts, dated 10 October 1997 and signed by Hall and Sapier on behalf of the board, included as part of the consolidated income for the year, Exclusivity fees totalling $2,801,100. Those fees contributed $2,801,100 to Clifford's full-year consolidated revenue of $85.227 million and consolidated after-tax profit of $11.511 million. 66 The plaintiff claims that the Signature Exclusivity fees had no connection with IDC being Signature's exclusive fit-out contractor and that the defendants did not intend the fees to have such a connection. The plaintiff also alleges that the defendants did not intend the fee to encourage IDC to perform work on time or to penalise IDC for late performance. It is alleged that the defendants' sole intention was to create documents and to cause the making of entries in accounting records so as to increase the reported, but not the real, profits of Signature and consolidated profits of Clifford. The plaintiff makes an alternative submission that if the fees were charged as consideration for the grant, or continued grant, of the exclusive right to do the fit-out work, and if IDC had the capacity to pay, the fees were nevertheless manifestly excessive by commercial standards. 67 The plaintiff alleges that all defendants contravened the Act in causing or allowing the Signature Exclusivity fees to be brought to account in the manner outlined above. I will deal with the specific allegations against each of the defendants later in this judgment when I am considering the Signature Exclusivity fees contravention allegations in detail. Origin fee 68 Clifford's 1996/97 consolidated accounts, dated 10 October 1997 and signed by Hall and Sapier on behalf of the board, included as part of Clifford's consolidated income for the year, an amount of $770,000 received by Signature from Origin Telecommunications Pty Limited (Origin). The Origin fee was received pursuant to a purported agreement for a grant by Signature to Origin of the exclusive right to provide Signature, CCL and JRA/APG with telephone services for five years. That fee contributed $770,000 to Clifford's 1996/97 consolidated revenue of $85.227 million and consolidated after-tax profit of $11.511 million. Origin was a company associated with JBL's brother, Phillip Loiterton (PL). 69 The plaintiff alleges that Origin was merely a conduit for the payment of the Origin fee by JBL to Signature to increase Signature's reported profit and therefore Clifford's reported consolidated profit. It is alleged that the fee was in the nature of a gift from JBL or from Origin with funds provided by JBL. It is alleged that the amount was not part of the ordinary trading operations of Clifford and was not disclosed in the consolidated accounts, or Signature's accounts. The plaintiff makes an alternative submission that if the Origin fee was received as consideration for the grant of the exclusive rights, it was not an arm's length dealing and was manifestly excessive by commercial standards. 70 The plaintiff alleges that JBL and Hall contravened the Act in respect of causing or allowing the Origin fee to be brought to account in the manner described above. Once again I will deal with the specific allegations made against JBL and Hall later in this judgment when I am considering the Origin fee contravention allegations in detail. The Revesby profit 71 Clifford's 1996/97 consolidated accounts, dated 10 October 1997 and signed by Hall and Sapier on behalf of the board, included an amount of $2,967,300 ($2,968,300 less $1,000 administration expenses) as before-tax profit on the purported sale by Austchas of the Revesby property to Peregrine Pty Ltd (Peregrine). A tax expense of $1,068,228 was recorded as attributable to that profit bringing the Group's after-tax profit for the year to 11.511 million, such figure including $1,899,072 as after-tax profit from the sale of the Revesby property. 72 Michael Majdalani (Majdalani) was recorded in the annual return of Peregrine as a shareholder and director. Austchas was a wholly-owned subsidiary of CCL from 26 June 1996 when it was acquired as a shelf company. The plaintiff alleges that there was no reasonable prospect that Peregrine would complete the contracts at any time up to and including the date when Clifford's 1996/97 consolidated accounts were signed on 10 October 1997. It is alleged that the consolidated accounts therefore over-stated the consolidated profit by the amount of the profit attributed to the sale of the Revesby property, namely $1,899,072. It is alleged that Austchas 1996/97 accounts, also dated 10 October 1997 similarly overstated its profit. 73 The plaintiff makes an alternative submission that if it is found that Peregrine intended to complete the contracts and if that was reasonably likely when the consolidated accounts were signed, the transaction giving rise to the reported profit was a related-party transaction and should have been, but was not, so disclosed in the consolidated accounts pursuant to paragraph 4.17 of accounting standard AASB 1017 Related Party Disclosures as required by reason of s. 298. 74 The plaintiff alleges that Hall and Sapier acted dishonestly in the affairs of Austchas and also acted dishonestly in the affairs of CCL in relation to their approval of Clifford's 1996/97 consolidated accounts because those accounts included the profit on the sale of the Revesby property or because they failed to disclose the related-party nature of the transaction. The plaintiff alleges that Hall, Sapier and, in a different respect, JBL contravened the Act. I will deal with the specific allegations against each of these defendants later in this judgment when I consider the Revesby profit contravention allegations. Share and Option trading 75 The plaintiff alleges that JBL and Hall contravened s.1002G by their involvement in the sale of shares or options in CCL in circumstances amounting to insider trading. The plaintiff relies upon a number of transactions from August to November 1997 inclusive in which private companies associated with JBL and Hall sold shares and options in CCL shortly after public announcements of Clifford's expected 1996/97 consolidated after-tax profits and shortly after the publication of CCL's 1996/97 accounts and Clifford's 1996/97 consolidated accounts. Once again I will deal with the specific allegations against JBL and Hall later in this judgment when I consider the share and option trading contravention allegations in detail. Dividends 76 Dividends were paid by CCL subsidiaries to CCL in the year ended 30 June 1997. Dividends were also paid by CCL to its shareholders in the calendar year 1997. In all instances the dividends were reportedly paid out of profits. There were four dividends; (1) $1.5 million from Signature to CCL on 28 February 1997; (2) $1,899,072 from Austchas to CCL on 30 June 1997; (3) $1,425,825 from CCL to its shareholders on 30 April 1997; and (4) $2,905,509 from CCL to its shareholders on 17 December 1997. 77 The plaintiff alleges that each of the defendants, except PJL, contravened the Act by authorising the payment of these dividends. I will deal with the specific allegations against each of these defendants later in this judgment when I consider the dividends contravention allegations in detail. The defences 78 JBL and Hall deny the allegations made by the plaintiff generally and deny they were dishonest in any of their dealings as directors. They also deny that they failed to exercise appropriate care and diligence as directors. Additionally there are denials of any failure to take reasonable steps to comply with the provisions of the Act in the preparation of accounts and denials that they sold shares or options in circumstances amounting to insider trading or in breach of the Act. 79 Sapier denies allegations of dishonesty but did make some concessions that he failed to exercise appropriate care and diligence, the detail of which is referred to later in this judgment when I am considering the specific allegations made against Sapier. 80 PJL did not take part in the trial and was not represented either at trial or during final submissions. However he was given notice of the regime for written submissions and made a relatively short written submission. In that submission PJL, amongst other things, submitted that he had "unwittingly relied upon others when carrying out his duties as a director" and assumed that what he had been asked to do from time to time was "correct". He claimed that he played a "very minor role in the whole affair" and that at the time of the events, the subject of the allegations of contravention, he was only 31 or 32 years of age and had little experience in commercial matters. He submitted that he had "learned much" from his involvement and "now" appreciated that as a director of the company he could not simply rely upon others and had to exercise independent judgment. Relevant accounting standards and principles 81 The relevant Accounting Standard 1024 required consolidated accounts for a financial year to be prepared by combining the accounts of the parent company and its subsidiaries and presenting the result as one set of accounts. If the parent company controlled a subsidiary for only part of the financial year the consolidated profit and loss account had to include the subsidiary's profit or loss for only that part of the year. The effect of all transactions between companies in the one group had to be eliminated in consolidated accounts because their object is to represent the results of the group as the single economic entity. 82 Accounting Standard 1017 "Related Party Disclosures" (Ex. A: 16252-308), applicable at the time, recognised that such transactions "are a common feature of the activities of many entities" and some "common types of transactions" were noted to include, "sales, purchases and transfers of property; services received or furnished; use of assets by lease or otherwise; intercompany loans; provisions of credit facilities; guarantees; maintenance of bank balances as compensating balances for the benefit of another; and options" (par 6.6.2). The Standard records that its purpose is to require disclosure in the "financial report" of information relating to "relationships, transactions and balances with related parties of the reporting entity" and also "other director-related transactions" (par 3.1). The Standard also recorded the following: 3.1.1 The existence of related party relationship may expose a reporting entity to risks, or provide opportunities, which would not have existed in the absence of the relationship. Related party relationships may, therefore, have a material effect on the performance, financial position, and financing and investing of a reporting entity. … Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. 3.1.2 A material effect on performance, financial position, and financing and investing may occur as a result of transactions taking place between related parties where such transactions would not have occurred, or would not have occurred on the same basis, in the absence of the related party relationship. Such an effect may also occur as a result of one of the related parties directing the other party to transact with a particular party or to transact on particular terms or conditions. Furthermore, one party may direct the other not to transact with certain other entities, and this also could have a material effect on the performance, financial position, and financing and investing of a reporting entity. 3.1.3 Whether a related party relationship exists needs to be determined in the light of the prevailing circumstances. In considering each possible related party relationship, attention will need to be directed to the substance of the relationship and not merely its legal form. 83 Paragraph 4.17 provided relevantly: … where there have been transactions during the financial year with the directors of the entity (or, for consolidated accounts, directors of any entity in the economic entity) or their director related entities, other than transactions concerning shares, units options or other equity instruments as holders of shares, units, options or other equity instruments of any entity in the economic entity, the financial report must disclose the following in respect of those transactions: (a) each different type of transaction: (b) the nature of the terms and conditions of each different type of transaction; and (c) for each combination of type of transaction and nature of terms and conditions: (i) the names of the directors concerned; and (ii) the aggregate amount recognised. 84 The Standard also referred to the fact that knowledge of the nature of related party transactions and the relationship between the transacting parties may affect the perceptions held by users of the accounts or consolidated accounts with respect to the risks and opportunities facing a reporting entity (par 6.6.5). Craig John Ellis 85 The plaintiff's evidence against each of the defendants relied mainly upon the evidence of Craig John Ellis (Ellis). Ellis holds a Certificate of Accounting from Sydney College of Technical and Further Education that he completed in 1985. Between 1977 and 1982 he was employed firstly in a mid sized firm of chartered accountants and then by a private chartered accountant with principal responsibilities in auditing and business systems, accounting, taxation and company secretarial matters. 86 Between 1982 and 1990 he was the Finance and Administration Manager with Shorelink/Koala Tours, one of the largest private bus and coach transport operators in New South Wales. In this employment he was responsible for finance and administration and also for the acquisition and integration of a competitor bus operator and the acquisition of a new work site with the construction of workshop, fuelling and administration facilities. 87 Between 1990 and 1995 he was the principal of a privately owned retail business. Ellis agreed that this involved a "minor hiccup" because of a lack of experience (tr. 72) and it is apparent that litigation ensued in respect of this business operation and was still troubling Ellis in 1998 (Ex. A: 13792). 88 Ellis commenced employment with Signature on 13 February 1995 as an accountant. He agreed that at that time Signature was relatively small and quite specific in its operations. Its main core business was acquiring, by way of head lease, CBD Properties in various locations on the Australian mainland, fitting out of the premises into small suites and subletting the premises to other operators (tr. 73-74). At that time Signature's income came from rental income or from contributions from the head lessors. 89 Ellis worked for Signature from 13 February 1995 to about July 1996 and during that period he also provided services to CCL. The services he provided to CCL were similar to those provided to Signature and included the establishment of proper accounting and management systems, the day to day accounting work, the preparation of minutes of meetings of directors and acting as a cheque signatory. 90 Between July 1996 and November 1996 Ellis was employed as the group accountant for CCL. In November 1996 he became the chief financial officer of Clifford and held that position until 9 December 1998. In addition to the responsibilities already referred to, Ellis had responsibilities in relation to Clifford for budgeting; financial reporting to management; project work relating to the raising of finance; cash flow management; liaison with stockbrokers; ASX listing compliance work; audit timetabling and liaison with auditors; management and supervision of all of the accounting/finance staff for Clifford; and membership of CCL's Audit Committee from the date that it was formed. 91 Ellis held various other positions including: From 28 June 1996 to 30 November 1998, secretary of Ansair with responsibilities including management of Ansair's accounts, management of staff, signing of cheques and reporting to the directors of CCL on Ansair matters; From 1 October 1996 to 9 December 1998, secretary of CCL; From 1 October 1996 to 4 May 1999, secretary of Signature; From 1 October 1996 to 2 March 1998, secretary of IDC with responsibilities including overseeing the preparation of IDC's financial accounts; On 11 October 1996 and from 14 October 1996 until 26 November 1998, secretary of JRA/APG with responsibilities including management of accounts, management of its staff, signing of cheques, and reporting to the directors of CCL on JRA/APG matters. From 5 November 1996 until 26 November 1998, director and chief financial officer of APG; From 24 December 1997 to 4 May 1999, secretary of Austchas with responsibilities including the oversight of the preparation of financial accounts; From 18 February 1997 to 2 March 1998 and 12 May 1999 to April 2000, secretary of Leisuremark; and From 31 October 1996 to 2 November 2000, director of Clifford Corporation Superannuation Pty Limited with responsibilities including re-focusing the investment strategy of the fund totalling approximately $16 million. 92 Ellis ceased employment with CCL on 9 December 1998 following the appointment of Mr R Dean-Willcocks of Star Dean-Willcocks as administrator of CCL. Between December 1998 and February 1999, he was engaged by the administrator on a contract basis to assist him with accounting matters relating to CCL that involved answering the administrator's queries about Clifford's affairs, providing explanations for relevant transactions and directing the administrator to relevant records and entries in the books of account. 93 Between March 1999 and November 1999 and to a lesser extent up until early March 2000, Ellis was engaged on a contract basis by several companies associated with and at the direction of Hall to carry out work at Hall's offices at 52 Phillip Street Sydney. That involved financial and administrative work for the set up of AG Securities Pty Limited, a privately owned start-up engineering and marketing company that had developed and patented a unique material for use in the corrective services industry. It also included the preparation of financial statements and other accounting work directed by Hall in respect of Leisuremark, IDC, Delostar, the Store of Knowledge, Blenheim Holdings Limited and AG Securities Pty Limited. 94 During this period Ellis also examined and reconciled share trading transacted by Leisuremark with appropriate adjusting entries after consultation with Hall. He re-examined all of the accounts for Leisuremark which included going through each individual transaction for the share and option trading by Leisuremark. 95 Between November and December 1999 Ellis was engaged on a contract basis to Worldwide Concerts doing accounting work and since March 2000 Ellis has been employed as Head of Finance & Administration by Morningstar Research Pty Limited, a company operating in Sydney. 96 During Ellis' employment with Signature and Clifford he had an office located on the same floor as JBL at 66 Hunter Street Sydney and he worked very closely with JBL. JBL attended the office for the majority of each week if he was not away on vacation or business trips. When he was in the office Ellis spoke to JBL many times a day, almost always in his office, about Clifford matters. When JBL was away from the office it was a common occurrence for Ellis to speak to him about Clifford matters on the telephone and/or to fax documents and information to him. Ellis gave the following evidence: It was my invariable practice to always keep Loiterton fully informed about everything I did or was told in relation to Clifford Corporation. He channelled most of his directions and requests for information through me. 97 Ellis or JBL drafted CCL's announcements to the ASX. Ellis would do so only after having received instructions from JBL as to what JBL wanted included in the draft. Quarterly reports to shareholders and special reports to shareholders were sent to the individual shareholders and to the ASX. These reports were invariably prepared by JBL. 98 Ellis claimed that JBL invariably informed him of the final profit forecasts that he wanted CCL to make to the market or include in its prospectuses or what dividends he wanted to be forecast and declared and when. In that regard Ellis said that JBL said to him on numerous occasions words to the effect: "That's the sort of profit I want to make. That's the sort of dividend I want to pay and that is what the market is looking for". 99 Ellis claimed that during the period 1 July 1996 to 31 December 1997 there were cash flow pressures within Clifford that were relieved from time to time by funds and working capital raised from a number of sources. Those sources included money lent to CCL in connection with the purchase of JRA, including the purchase of the Revesby property; money received from an issue of shares in 1996 pursuant to the 1996 prospectus; a placement issue of ordinary shares and preference shares in 1997 to a number of institutions; an issue of subordinated capital notes in 1997 to two institutions; and money lent to CCL pursuant to a trade facility provided by Heller Financial Services Limited (Heller) in July 1997. 100 Ellis also claimed that during his employment period, Signature was never able to reach its forecast targets from trading. In this regard Ellis was present on several occasions during 1996, 1997 and 1998 when JBL and PJL had conversations about forecasts for rental income for Signature in which PJL advised JBL that the forecast rent figures were unrealistic and that those sorts of rents could not be achieved. In response to this JBL advised PJL that he would just have to "work harder and push the rents up". Ellis claimed that on one occasion in early to mid 1996 he was present in JBL's office when PJL was presenting his revenue projections for 1996 for Signature and its subsidiary companies to JBL. JBL informed PJL that the rents should be higher and that he was to increase them to a particular figure. PJL advised JBL that such rents were not achievable. 101 Ellis also claimed that on several occasions during his employment period he presented JBL with working papers showing the trading results of CCL for the particular trading period. He claimed that JBL would say that it was not "good enough" and that "we're going to have to do something in order to come up with suitable revenues and profits in line with our forecasts". 102 One of the conditions specified in the letter of offer from Heller was the provision of monthly group management accounts including balance sheet and detailed profit and loss accounts. The settlement of that particular facility from Heller occurred on 14 October 1996 when the acquisition of JRA was completed. Prior to this time Ellis had not prepared formal management accounts and had only prepared reports containing financial information for Clifford on an ad hoc basis for JBL's information. After 14 October 1996 the content of the management accounts evolved progressively in sophistication and volume to the point where they included such information as cash flows and graphs. For the period October 1996 to May 1997 inclusive, the management accounts were prepared on a monthly basis by either Andrew Ho (Ho) or Leigh Drake (Drake), the financial accountants for CCL. The individual company accounts for JRA/APG were received from the branch accountants through Greg Browne (Browne), the Group Manager Finance and Administration for APG after the acquisition of JRA. 103 The management accounts for the individual companies in Clifford included a Profit & Loss Statement and a Balance Sheet. For Clifford they included a consolidated Profit & Loss Statement, a consolidated Profit & Loss Appropriation and sometimes a detailed or summarised Consolidated Balance Sheet. 104 JBL cross-examined Ellis in relation to the assistance he has provided to the plaintiff. Ellis agreed that he understood that the information that he was providing to the plaintiff was without coercion and was not under duress or under threat. He said that he willingly executed the affidavits upon which the plaintiff relies in these proceedings. He believed at all times that the affidavits were true and were not embellished and did not omit any relevant facts (tr.690). 105 In August 2000 Ellis, through his then solicitor, Mr K Henderson, entered into an agreement with the plaintiff. The terms of that agreement are contained in a letter of 22 August 2000 from the plaintiff to Mr Henderson and included the following: The Commission has informed you that it is contemplating joining Mr Ellis in civil penalty proceedings in relation to the 1997 Accounts. Today, you informed the writer that Mr Ellis has indicated that he is "minded to be of assistance" to the Commission. To this end, the Commission requires Mr Ellis to agree to the following terms and conditions, and to give written undertakings to the following effect: i) that he will assist the Commission (and its members of staff) by providing upon request all information of which he is aware relating to any aspect of the Investigation ("the Information"); ii) that in providing the Information, he will give a full and truthful account of all matters, and without omission or embellishment of any kind; iii) that he will give evidence in the Legal Proceedings (by induced statement, affidavit (on oath or by affirmation), and oral evidence, as the case may be), as and when required by the commission, the DPP or Court order; iv) that the evidence he gives in the Legal Proceedings will be a full and truthful account of all matters, and without omission or embellishment of any kind; v) that he agrees not to be involved in the management of, or be an officer of, any public company incorporated in, or carrying on business in, the Commonwealth of Australia for a period of 7 years. The Commission is prepared to date the "banning" from 9 December 1998 (being the date of the appointment of the voluntary administrator to Clifford). It is also prepared to consider any future application by Mr Ellis to review the period of the banning should he agree to undertake, and pass, nominated training courses in corporate governance, compliance and ethics. The Commission is prepared also to discuss with you the means by which this agreement is to be given effect. Subject to Mr Ellis' agreeing to, and thereafter giving full effect to, the undertaking, the Commission for its part agrees: i) that in the first instance, it will obtain the Information in the form of one or more induced statements, such statements to commence with the following acknowledgment: 1. This statement made by me accurately sets out the evidence which I would be prepared, if necessary, to give in court as a witness. 2. The statement is true to the best of my knowledge and belief and I make it knowing that, if it is tendered in evidence, I shall be liable to prosecution if I have wilfully stated in it anything which I know to be false or do not believe to be true. 3. This is an induced statement and is made by me on the promise that it will not be used in evidence against me, apart from the circumstances referred to in paragraph 2 above . ii) that provided it is satisfied that Mr Ellis has given a full and truthful account of all matters, and without omission or embellishment of any kind, it will make available the Information to the DPP (in the form of the induced statements), but will advise the DPP that it does not propose to recommend any criminal prosecution of Mr Ellis in relation to the 1997 Accounts: iii) that it will prepare affidavit(s) (to be sworn or affirmed by Mr Ellis, as agreed to above) for use in Legal Proceedings (other than criminal proceedings), on the understanding that such affidavits, once executed by Mr Ellis, will not form part of any brief of evidence sent to the DPP; iv) that, if requested to do so by Mr Ellis, it will use its reasonable endeavours to seek from any Court hearing evidence in the Legal Proceedings a certificate pursuant to section 128 of the Evidence Acts of New South Wales and of Australia; v) that, provided Mr Ellis gives evidence in the Legal Proceedings (being evidence that in its opinion is a full and truthful account of all matters, and without omission or embellishment of any kind), and complies with (i) to (v) on page 2, it will not commence civil penalty proceedings, or other civil or administrative action, against Mr Ellis in relation to the 1997 Accounts, Revesby or Signature/IBYO. The Commission, having regard to its own timetable, is greatly concerned with the delay in the resolution of Mr Ellis' position. I request that you please contact the writer this afternoon after Mr Ellis has had time to consider the terms of this letter and to take legal advice. (Ex.D1-6) 106 Ellis agreed to this arrangement within days of 22 August 2000. On 22 April 2002 Ellis advised the plaintiff that he was no longer prepared to assist until he "sorted out" what he had in front of him at the time (tr.691). It is apparent that Ellis received a letter from the plaintiff dated 23 April 2002 reminding him of his August 2000 agreement to assist the plaintiff. Ellis gave the following evidence in cross-examination by JBL; Q: So pressure was applied, was it not, to ensure that you continued to honour, as it says, the terms of your agreement. A: I certainly wasn't happy getting the letter. Q: So you recall the letter, do you. A: I just said I recalled. Q: Sorry. A: I said I recalled received a letter. Q: You weren't happy getting the letter. Was it threatening? A: Was it threatening: It certainly referred back to the original agreement, which, as I recall, was either – I was going to be in the situation of being joined as a defendant, or assisting, and I did not want to be joined as a defendant, so I determined that I would continue to assist. Q: So the letter placed you in quandary, did it not? A: It did. Q: In fact, it caused some pain in the next day or two did it not in making a determination as to which direction you were going to go? A: I had to consider what I was going to do, yes. Q: In fact, you were under some duress, were you not? A: No, I don't think I was under duress. Q: What were you under? A: I was in a quandary. Q: You didn't feel threatened at all? A: I had to make another decision. I had to make a decision, either be joined as a defendant, or continue with what I was doing. Q: And as a consequence of this letter, do you recall how long ASIC gave you to respond in a positive manner? A: No, I don't. Q: Would it not be unusual for them to not give you more than a day or so? A: I don't know. Q: I put it to you that they gave you one business day, do you recall? A: No I don't. Q: As a consequence of this letter, you made a decision to proceed, did you not? A: Yes. Q: It was, in fact, as a consequence of this letter that you proceeded to conclude and swear the affidavits and sign the statements of evidence, was it not? A: Again, when I received the letter I had two alternatives; one, to either be joined – one, to either be joined as a defendant, or to continue doing what I had been doing for a long time. Q: I put it to you that if you had not received this letter, that you may not have gone ahead and executed sworn, the affidavits, or signed the statements of evidence. A: No, because what I had said to ASIC was that I didn't want to do anything at present until I was able to sort out my personal affairs. (tr.694-695) 107 Ellis agreed that he signed the affidavits "in accordance with what I understood this agreement was" (tr.666). He understood that he would be banned from being a director for a period of seven years, however, he also understood that the period of seven years may be reviewed by the plaintiff (tr.683). Ellis agreed with the proposition put to him by JBL in cross-examination that in giving the evidence of the type that he has given in these proceedings would cause the business community to consider him as a "business pariah" and that it was not a healthy position to be in (tr.687). 108 Ellis claimed that JBL had a "dominating personality, instructing me what I had to do, how, why and when". He said that instructions from JBL "were always put forward as a demand, or as a dominating instruction rather than as a request to do things" (tr.183). He agreed that this was JBL's "management style" and as to his level and independence he gave the following evidence: Q: Mr Ellis, you were the Chief Financial Officer of a public company with a turnover of 85 million dollars with nearly a thousand staff. Is it not true that you took a level of independence when it came to the completion of the work necessary in your job as the Chief Financial Officer and in my absence in fact as the number one person in the operation? A: Answer the first question, yes and answer the second question, no . Q : In my absence would you seek instructions from someone else? A: Yes. Q: Who would that be? A: Mr Hall, Mr Sapier. Q: So you would go to the directors in my absence? A: At times actually spoke with you over the phone when you were overseas. Q: Absolutely, I am sure that is true but in broad terms you were independent, your position became increasingly independent did it not? A: I had a certain level of autonomy, yes. (tr.184) 109 In June 1998 Ellis attended JBL's home in the Southern Highlands in a very distressed state. After this visit Ellis sought medical assistance and was diagnosed as having "depression" that led to him having a couple of weeks off. He said he was sure that the circumstances that led up to that diagnosis were the strain and the stress of the events surrounding Clifford (tr.616). Whilst on sick leave, Ellis wrote a letter to JBL and Hall dated 22 June 1998 in which he apologised for the events of the previous week. That letter included the following: Justifying Profits after Release of Forecasts For the past 12 months all of Clifford's reported profits have had to be manufactured in one shape or another in order to support forecast profits releases, some of the transactions from June 1997 have yet to be finalised & here we are at June 98. Profits have not come from operational trading. … Putting a FD into Clifford I think is a very positive move, from Clifford's point of view I think it will bring in a greater level of expertise that I don't have & from a personal point of view take away most of the above areas. But I suppose that the future plans of Clifford I hope will not require the accounting gymnastics that I've had to perform & the pressure of "other" manufactured results will not be as great. … The Market Talking to brokers knowing their expectations of profits/cash levels will not be reported. It has become increasingly difficult to communicate with brokers/analysts on profit & cash flow expectations for 1998 the closer we get to 30 June. When I speak to brokers everything has to be positive & upbeat, being very careful not to be to (sic) committal & yet I know in my own mind that what they anticipate the results for 1998 to be will not be achieved in the way they expect them to be (ie operational trading profits & positive cashflow from operations). This then leads to the integrity of you, me & the company being questioned. Personally I do see myself as an integral part of Clifford, however I do feel as if the current position has a lot to do with me failing to raise sufficient capital & get better banking relationships under way. And of course the longer it goes on in the current climate the harder it will become, if we cannot produce the results as expected. It seems as if all I've done in the last 12 months is to put together the support for expectations & and not been able to see any natural success occur, & if I hadn't been able to put together the support of everyone's expectations I would have failed in my job. I suppose everybody goes through these types of times, unfortunately it's my turn. Clifford has such a great future but it is the present that has worried me. In all of the development that has happened over the last 6/12 months the future looks so good, but the present could bring it all unstuck. The last few months have certainly drained me physically & mentally. (Ex.A: 13791-92) 110 JBL cross-examined Ellis in relation to this episode as follows: Q: Mr Ellis, I put it to you that some time in the first half of 1998, calendar 1998, you suffered from some form of disability, to use a word for a moment, which may or may not have been known to you and certainly was not known to the directors and that this caused some problems for you which, again, the directors and yourself may not have- been aware, but which emanated itself in a serious situation in and around May of this year? A: Yeah, under the – under the strain of various things, and pressure, I suffered what was diagnosed as depression and led to me having a couple of weeks off. Q: Well I think it was a little more serious than that, was it not? A: Well, I was diagnosed with depression. I had I think two weeks off. Q: Mr Ellis, let's go back for a moment. You have not been able to recall anything in this first half of 1998, have you? A: Yes, that's right. Q: Do you put that down to some medical condition which emanated itself? A: I'm sure the circumstances that led up to my being diagnosed with depression was caused by the strain and the stress of the events surrounding Clifford. Q: Do you think that the memory loss that you are exhibiting was something to do with that? A: I wouldn't know. Q: Did you ever give consideration to that? A: No I didn't; I haven't. (tr.616) 111 Ellis maintained his claim throughout his evidence that he simply did not have a memory of the majority of things that occurred in the first half of 1998 (tr.625). 112 JBL made a general attack on the integrity of Ellis' evidence. He submitted that Ellis' recollection was selective. For instance, Ellis could not recall any of the discussion that he had with an officer of the plaintiff in August 2000 in respect to the proposed "deal" with the plaintiff. That evidence included the lack of memory of telling that officer that he wanted help; that he did not think he had done anything wrong; and that he was only ever acting under instructions from JBL (tr.672). Indeed, Ellis said that he did not recall the conversation with the officer of ASIC at all (tr.673). 113 JBL relied upon the lack of memory that Ellis demonstrated in his evidence in respect of the conversation with officers of the plaintiff and also in respect of other aspects of his evidence, for instance of the whole of the first half of 1998, in contrast to the contents of his affidavits which it was submitted are "precise". It was submitted that the integrity of Ellis' evidence is questionable by reason of his selective memory, his lack of memory and also by reason of the fact that his future is dependent upon giving evidence that will "assist" the plaintiff. JBL referred to this as "the loaded gun approach". It was submitted that Ellis' future is dependent upon whether the plaintiff is satisfied that he has assisted them in these proceedings. 114 It is my view that in any case where a wrongdoer or a party to wrongdoing gives evidence to assist the prosecutor in either in criminal or civil penalty proceedings, the fact that the giving of such evidence is critical to the wrongdoer escaping liability must be taken into account in assessing the veracity of the evidence given by that person. In assessing the veracity of Ellis' evidence I intend to take the fact that a condition of his agreement with the plaintiff for him to avoid being joined as a defendant in these proceedings and/or possible criminal proceedings, was the giving of his evidence in these proceedings in the plaintiff's case against each of the defendants. Minutes of Meetings 115 CCL and companies within the Clifford Group were required to cause Minutes of all proceedings of General Meetings and of director's meetings to be entered within books kept for that purpose within one month after the relevant meeting was held: s 258(1)(a). If all the members of proprietary companies within the Group signed a document containing a statement that they were in favour of a prescribed resolution in terms set out in a document, that resolution was deemed to have been passed at a General Meeting of the company held on the day on which the document was signed: s 255(1). Each of the companies within the Group was required to keep the Minute Book at its registered office. 116 The way in which Clifford Minutes were kept was a little different. Ellis said that there were three types of Minutes: one that reflected actual meetings; another that recorded "matters" and one that he referred to as "circulating minutes" (tr. 208). He agreed that the circulating Minute was a Minute containing a resolution by directors with spaces for them to sign and return it to the company secretary (tr. 208). Ellis said that as far as he was aware, meetings of directors were always minuted but management meetings were not minuted (tr. 209). He also said that if a particular transaction took place, such as a sale, the details would be taken from the transaction documents and would be formulated into a Minute. That would be a Minute that he would describe as a "matter minute" (tr. 210). However Ellis' explanation of the types of Minutes was at times far from clear. He said: I explained earlier, there were three types of minutes. A circular resolution is a set of minutes that occurred when the meeting actually occurred as a set of minutes. That then sets out events of an action. (tr. 213) 117 Ellis claimed in his affidavit that there were Minutes in existence showing him "in attendance" but that he did not attend those meetings. In cross-examination it became clear that he drafted the Minutes and recorded that he was "in attendance". He was asked why he did that and he gave the following evidence: It was and I will use the standard operating procedure, I will use the words. In drafting a lot of the minutes which was recording that an event and transaction was always the directors and myself in attendance to give the impression that there was a meeting, an actual meeting had taken place. And at the directors meeting and at the time – most times there were only three directors. I was not a director, I was a company secretary. That was the reason I was there in attendance. (tr. 214) 118 JBL gave evidence on the topic of the manner in which Minutes were prepared in paragraph 17 of his statement (D1-9) as follows: (b) There were three forms of minutes kept by Ellis: (1) An ordinary minute of a meeting. Minutes were drafted based on a meeting where the item(s) were discussed and determined. These meetings were formal meetings usually held in one of the Clifford boardrooms. More often than not, minute notes were taken and Ellis would draft the minutes subsequently. These were later presented to me for signing either directly or through Mrs Mackey. (2) A minute of a decision(s) made resulting from an informal meeting or discussion, which may have included a telephone contact with one or more other directors. Ellis always drafted these minutes and occasionally grouped more than one meeting into the same minute. The practice became imbedded. (3) A circulating minute which required each director to initial or sign. On occasion only a majority would sign or initial. 119 JBL conceded in his cross-examination that in the light of the way in which Minutes were prepared within Clifford, it was very difficult to know whether a meeting recorded to have taken place ever occurred (tr. 1342). He was cross-examined about certain Minutes of meetings that included a reference to Sapier being present by telephone. He conceded that he had not spoken to Sapier about the matter contained in the Minute and he did not recall a meeting occurring on the day in question (tr. 1291). He gave the following evidence: Q: Why would you want to sign minutes suggesting that there had been some kind of discussion between yourself, Mr Hall and Mr Sapier by telephone in the terms of these minutes? A: It was a method that Mr – that had developed in the company in respect of simple matters. They were conglomerated into one meeting and presented in this form. Q: It was something that Mr Ellis had a habit of doing, was it? A: It was, yes. Q: As CEO of the Clifford group and as a director of Austchas, didn't you think it appropriate to tell Mr Ellis to stop creating fictitious minutes? A: In hindsight it was something I should have attended to, yes. Q: Why didn't you? A: I don't recall at the time, and I don't think it was something that exercised my mind. I certainly didn't ask him to change the system. (tr. 1291-1292) 120 The way in which the Minutes were prepared has some significance because the defendants placed reliance upon some Minutes to suggest that certain action had been taken at particular times. It is the plaintiff's case that at least one of the meetings of directors of CCL minuted to have occurred on 28 June 1996 did not take place. Audit Committee 121 The 1996 financial statements of CCL reported that "at the date of this report" CCL had an Audit Committee consisting of Hall, described as a non-executive director, Sapier, described as a non-executive director and joint company secretary and Ellis, described as joint company secretary. The Audit Committee's responsibilities were stated to be: (i) to oversee the existence and maintenance of internal controls and accounting systems; (ii) to oversee the financial reporting process; (iii) to nominate external auditors; and (iv) to review the existing external audit arrangements (Ex. A: 8399). The reference to the Audit Committee's composition and responsibilities in the CCL 1997 Annual Report was in identical terms except that Hall was described as an executive director (Ex. A: 5107). 122 When Ellis commenced his employment in 1995 there was no Audit Committee and, although it was suggested to him in cross-examination by JBL that he established the Committee, he could not recall whether that was the case. It is apparent that the Audit Committee operated at least from December 1996 to December 1997 and Ellis accepted that it was his responsibility to ensure that the Committee reviewed the accounts or audit items from time to time (tr. 167). 123 During 1996 and 1997 and up to June 1998 Paul Mervyn Meldrum (Mr Meldrum) and Carl Stuart Jepson (Mr Jepson) of the firm Roberts Nissen were the auditors. Ellis' recollection was that the Audit Committee meetings were held during the period of the audit or the audit review period. Those periods were 75 days from 1 January and 75 days from 30 June each year (tr. 364). The attendances at those Audit Committee meetings included the auditors and the internal accountants from time to time, Gregory Browne, Leigh Drake and Andrew Ho. Ellis agreed in cross-examination that if the auditors had a query during the audit period they would raise it with the relevant person on the staff and, if it remained unresolved, the auditors would bring it to the Audit Committee for consideration (tr. 423). 124 I shall now turn to consider the specific allegations against each of the defendants in respect of the six areas of conduct alleged to be in contravention of the Act. In doing so I should make clear that, although these aspects of the plaintiff's cases are to be considered in this manner under separate or individual headings, the conduct of the defendants in respect of those matters should not be viewed in isolation from what else was happening and the conduct of the defendants in respect of those other matters where relevant. Pre-Acquisition Fees 125 The first of the pre-acquisition fees was charged by CCL to Ansair in the financial year ending 30 June 1996 (the 1995/1996 pre-acquisition fee). In opening the plaintiff's case Mr Carnovale said that this fee is not part of the plaintiff's claims against the defendants and that the evidence in relation to this fee was "put forward to show the background and to show the participation of the directors or some of them in entering that kind of fee in the records of Clifford" (tr. 33-34). JBL gave evidence that he took the view that the $737,000 Ansair fee was "not part of this case" and that he had not "delved into it or done much regarding it at all" (tr. 1221-1222). However his final submissions dealt with this matter. 126 The plaintiff relied upon Ellis' evidence contained in an affidavit sworn on 1 July 2002 in relation to this fee. When Austin J dealt with objections to affidavits Mr Brender objected to the paragraphs dealing with the 1995/96 pre-acquisition fee on the ground of relevance. At the time that Austin J was dealing with the objection Mr Carnovale submitted that the evidence, so far as Sapier was concerned, was relevant to what Sapier knew about the method of dealing with pre-acquisition fees at the time the later pre-acquisition fees were charged. Neither JBL nor Hall raised any objection to this evidence. Austin J rejected the general relevance objection raised by Mr Brender and the evidence was admitted. Acquisition of Ansair 127 On 27 or 28 May 1996 CCL entered into a written agreement for the purchase of the issued shares in Ansair, such agreement to be completed in late June 1996. 128 Ellis claimed that in mid-June 1996 he had a conversation with JBL in which JBL said that the market would expect an announcement of the forecast for the end of year profit at the Extraordinary General Meeting (EGM) on 28 June. JBL asked Ellis "How are we going? What is the result going to be?" Ellis responded: "I will put something together for you to look at". Ellis claimed the following conversation then took place: JBL: I want you to charge Ansair for management services provided by Clifford. Ellis: What sort of management services would Clifford have provided to Ansair? JBL: Such things as my time, your time, Phillip Biber's time, Joe Crogan's time. Come up with something. 129 Ellis made enquiries of CCL personnel and then prepared a worksheet, which he no longer has, of the information that he had obtained and costed the total work at about $200,000. He showed the worksheet to JBL and JBL altered the figure to $737,000. Ellis claimed that at the time JBL altered the figure he did not say anything as to how he had arrived at the altered figure. 130 Shortly before 26 June 1996 Ellis prepared a workpaper in which he presented "three profit scenarios" for JBL's consideration as to what profit forecast CCL should make to the market for the year ended 30 June 1996. Two of the scenarios included income of $737,000 from Ansair. The comments on the worksheet written by JBL included a note to Ellis in the following terms: Agree to release Col 1 if approved by directors. Sapier here tonight/circulate minute. Sign-off all directors and yourself. I will then OK release next mon. Alt 2 is not acceptable. Also need much better June trading picture and budgets next week. (Ex A: 289) 131 Ellis prepared a Minute purporting to record a meeting of CCL directors held on 28 June 1996 at which JBL, Hall and Sapier (by phone) were stated to be in attendance. This Minute was signed by JBL and Hall and dated 28/8/96. It included the following: A workpaper was presented for consideration by the board for the basis on which the release to the Stock Market for the preliminary results to 30 June 1996 should be viewed. Alternatives were considered with the "profit" column deemed to represent the fairest position with adjustments if required. In any event the Board was assured that the release figure in respect of preliminary profits of $2,833,426 was appropriate. IT WAS RESOLVED that the "profit" column be used as the basis for the release to the market. (Ex A: 287) 132 The CCL Extraordinary General Meeting occurred on 28 June 1996. At that meeting the shareholders confirmed the purchase of Ansair and the Minutes record the following: Ansair Pty Ltd The Chairman advised that the company intends to settle the Ansair transaction by the issue of shares and take control of the company today. It is the first of a planned one or more of the acquisitions within the bus manufacturing industry. Principal business of Clifford was always to diversify the company. The bus manufacturing industry has been in the doldrums for approximately 8 years and has 26 plants around Australia. Huge overseas markets exist in which to export old buses to Asia. Australia is well placed to meet growing demand from Asia because we, like those countries, are right-hand drive countries. Australia and Japan can service the huge burgeoning market from China to India, who try to take 6 – 8,000 buses per year. We produce not more than a tenth and increasingly it creates a demand in Australia for manufacture which was not there 5 – 8 years ago. Ansair is a company that has good management, has been established fifty years as a subsidiary of Ansett for all of that period. It is well respected, has good management structure, good reporting systems and financially sound. Had we not been successful in obtaining any other companies in the bus manufacturing industry, we needed to be sure that the re-structured company would earn close to $2m. Next year it will add at least $74m of forward contracts each of which is to be completed over 3 years. Excellent factories. Planned to increase shifts in Tullamarine. Consistent monthly profit, good cashflow. Of the 8 major manufacturers in Australia Ansair is 3rd. Custom Coaches is 2nd and JRA limited is 1st. … Profits We look like announcing a net asset backing on closure today of 35 cents per share. We have indicated some minor trading today which will alter figures but you may assume that the profits are up, excluding current acquisition, by more than 38% over last year, or something above that. We will close our books at 4.00pm this afternoon and we will be in a position to issue a notice to the Stock Exchange by 4.30 pm. (Ex A: 7927–7928) 133 On 28 June 1996 an announcement was faxed to the ASX which included the following: 1995/1996 Results The company will announce its annual results later today and shareholders could expect a substantial increase in profits over the previous year, from current operations. Directors anticipate that the addition of Ansair and JRA Limited will further materially increase profits in the ensuing year. (Ex A: 291) 134 Later on 28 June 1996 a further CCL announcement was faxed to the ASX in the following terms: FOR RELEASE PRELIMINARY RESULTS FOR TWELVE MONTHS ENDED 30 JUNE 1996 Clifford Corporation Limited advises that the preliminary consolidated net profit after tax of the group for the twelve months ended 30 June 1996 was $2,833,426 representing earnings of 4.78 cents per share on the average capital on issue during the period. The result represents an increase of 38.3% over the previous twelve months to 30 June 1995 and exceeds budget estimates by approximately 4.0% for the same period. This result compares with $2,048,117 for the previous year and $1,306,278 for the half year to 31 December 1995. Consolidated shareholder's equity is expected to be $25,074,000 as at 30 June 1996 representing net asset backing of 34.7 cents per share. Directors intend to declare a final interim dividend of 1.75 cents per share after the annual audit has been concluded. The Share Dividend Plan of the company will operate for this dividend, which is intended to be distributed in October/November 1996. The results are subject to final audit and detailed reporting. (Ex A: 288) The 1995/1996 pre-acquisition fee 135 On about 10 or 11 July 1996 Ellis prepared the following document: 28 June 1996 Ansair Pty Ltd P.O. Box 63 Tullamarine VIC 3043 MEMORANDUM OF ACCOUNT For the supply of financial, secretarial and administrative services together with detailed advice on accounting and taxation planning for the year ended 30 June 1996 as carried out over the period March to June 1996: TOTAL: $737,000.00. (Ex A: 316) 136 Ellis said he prepared a more detailed draft memorandum in about July/August 1996 which he said was "based on the outcome of enquiries" he had made of CCL's personnel. He telephoned Sapier and informed him that JBL wanted to charge a management fee of $737,000 to Ansair and that an invoice was needed to support the charge. He asked Sapier whether he would have a look at the draft that he had prepared to see what he thought. Sapier instructed Ellis to send him a copy and he would have a look at it. Ellis faxed his detailed memorandum and shortly thereafter Sapier rang him back and made suggestions, the only one of which that Ellis could remember was that he could include "general advice on best business practices". Sapier prepared a note dated 12 August 1996 entitled "Management Fee" for "CCL". Many of the topics referred to in that document (Ex. A: 420) are in the more detailed Memorandum of Account. Sapier's note includes a statement that: "Auditors to be made aware. Disclosure in financial statements." 137 The more detailed Memorandum of Account from CCL to Ansair prepared by Ellis was dated 28 June 1996 and was in the following terms: MEMORANDUM OF ACCOUNT With the purpose of being actively involved in the daily operational and business activities of the company, services provided (other than due diligence and pre-requisition inquiries) based upon the degree of responsibility and skill involved, responsibility of engaging external consultants and other professionals and meeting all of their costs and other matters as required including: · Time involved of J B Loiterton, C J Ellis and J E Crogan (consultant) in travel to both Tullamarine, Tamworth and Revesby re discussions to inspect, document and assess the operational and managerial functions of the company. · Time spent by P A Biber, Corporate Counsel of Clifford in the review of present and forward contractual obligations of the company, together with assessing the viability of maintaining existing contracts. · Briefing and initial preparation with the company auditors for the year end requirements for future audit purposes, including the planning of stocktakes, the requirements for accounts receivable/accounts payable and bank account reconciliation, together with the required verification of other assets and liabilities. · Renegotiation of the company's accounts payable terms of payment. · Discussion with Clifford's tax advisers in reference to the responsibilities and potential liabilities arising in the company towards group tax, payroll tax and FBT. · Discussions to ensure that stocktake procedures are properly in place in order for the correct counting and verification of inventory, including work in progress and finished goods. · Review of all production, administration and selling operations of the company, including budgets, budgetary reporting and internal procedures, together with the review of all company's contracts and contractual obligations. · Initial discussion with State Rail Authority personnel with the aim of improving contract terms, specifically payment and delivery terms. · Discussions with the ANZ Banking Group, the company's bankers, in order to extend banking arrangements past settlement date for a further 90 days. · Reviewing and updating the company's cashflow requirements, specifically for the month of July 1996 and generally for the budgeted period July to December 1996. · General advice on best business practices. · Out of pocket expenses, interstate travel and all other costs included. AMOUNT $737,000.00 (Ex. A: 283) 138 Ellis gave affidavit evidence that when he prepared this account he had "little regard" to whether the invoice was factually correct or whether CCL had any entitlement to charge Ansair for any work described in it. He also gave evidence that he was not aware of any written or oral agreement between Ansair and CCL prior to 28 June 1996 for the provision of any management or other services by CCL to Ansair. He said that he was not aware of any services having been provided by CCL to Ansair prior to 28 June 1996. His evidence was that the reference in the memorandum to him travelling to Tullamarine, Tamworth and Revesby prior to the acquisition of Ansair was not true. He said he did not travel to Tamworth at all and he did not travel to the other locations until 2 or 3 July 1996, after the acquisition. 139 In conducting the audit of CCL's accounts for the year ended 30 June 1996 the audit manager, Mr Jepson made the following note on 23 September 1996: During the year (i.e. 27/6/96) CCL charged a management fee of $737k to Ansair for management services to be provided. Ansair was taken over on 28/6/96 and on the grounds of materiality was not due to be consolidated which seemed reasonable. CCL had changed their classification at ASX from property owning to management/financial services. $737k is very large in profit terms (nearly 25%). The Company does not believe it is abnormal because that is what they are about. Furthermore a similar charge will be raised against JRA for their services in '96/'97 year ($737 not abnormal due to incidents). Conclusion Would prefer abnormal disclosure. However, RN was satisfied that its disclosure within the Related Party Note & the JRA invoice to come & change of ASX classification would seem to make the Company's treatment reasonable. (Ex. D1-5) 140 There is an additional note made by Mr Jepson next to the commentary on abnormal items on a copy of AASB 1018 (D1-5). The first of the paragraphs within that commentary refers to items that "may have to be considered abnormal by reason of their size and effect on the results of the financial year". The next paragraph sets out examples of items that may fall within the definition of "abnormal items". The note next to the commentary made by Mr Jepson reads: "arguable, as to whether Ansair invoice does not comply with this criteria. However, CCL arguments persuasive & no further action made. See Related Party Disclosure" (D1-5). On a further note made by Jepson there appears: "6) abnormal item re: Management Fee. Disclos Rltd Pty" (D1-5). This note is recorded as having been "reviewed by" Meldrum on 27 September 1996 who placed a tick next to this item and initialled it. 141 Note 28 to the 1995/96 CCL accounts entitled "Related Party Transactions" recorded the $737,000 amount and included the following: Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. … Prior to the acquisition Clifford provided management and consultancy services to Ansair Pty Limited. (Ex A: 8422) 142 JBL denied that he proposed the fee for Ansair and claimed that Ellis "proposed the principle of charging fees for work done during the Acquisition period, which would otherwise have been incurred after acquisition, as being a correct accounting" (Ex. D1-9: par. 30). JBL gave evidence that "the amount of discussion with Ellis" about this matter was "relatively limited" even though he was the progenitor of this suggestion in the first instance (tr. 1209). JBL's evidence continued: The fact of the matter is from that point on the development of these acquisition fees was a matter for professional accountants and the auditors and that's precisely what happened. (tr. 1209) 143 JBL claimed that the pre-acquisition fees incurred in relation to Ansair included "administrative and executive costs". He claimed that the fee was "disclosed to the auditors and accepted by them without any qualification" (Ex. D1-9: par. 33). He also claimed that "as part of the audit of the accounts of Clifford, this amount was considered and accepted by the auditors" (Ex. D1-9: par. 35). He claimed that the $737,000 fee was made up of: (i) estimates of two months of executive time at $200,000, totalling $400,000; (ii) consultant fees and charges of $60,000; (iii) administrative and travel cost recoveries of $160,000; (iv) unrecovered legal and other costs of $67,000; and (v) other unspecified costs of $50,000 (Ex. D1-9: par. 34). 144 JBL was cross-examined in relation to the makeup of the $737,000 and gave the following evidence: Q: Take the first entry there in paragraph 34, estimates of executive time, two months at $200,000 a month. I take it that $200,000 did not represent a cost to Clifford Corporation of the executives' time but rather some kind of mark-up? A: It is a profit fee. Q: Do you have any idea of what kind of mark-up it is? A: No, I don't. Q: If the accounts for Clifford Corporation for 1995/1996 indicated total administration costs per month of $67,500 what proportion of that do you think would be executive costs? A: I've no idea. It is irrelevant. It is the profit fee from my point of view. Q: The amount of profit fee, how is it worked out? A: How is any fee struck? There is a profit charged. All I am saying in 34 is that was my recollection of the method by which it was broadly based. Q: Wasn't the fee struck at a figure that would allow Clifford to report a reasonable profit for the year in your opinion? A: No, I don't believe so. … Q: Why was it struck at all? A: To recover the cost of acquisition of these, rather than those be appropriated against annual profits. These assets were all destined in the long term to be re-sold. Q: Lets take, for example, the cost to Clifford of your time. Let's assume that for two months you did nothing but work on the acquisition of, say, Ansair, and let's say that, according to the records, Clifford paid you a total of $50,000 for these two months. Normally that kind of expense would be written off in the profit and loss account, wouldn't it? A: Normally, in a trading sense. Q: Yes. A: But this was not, and was not a trading. Q: But if you took the view that the cost to Clifford of your time was really to do with the acquisition of Ansair, and you took the view that that cost should be capitalized, the appropriate course would be to add it to the cost in the balance sheet, rather than write it off in the profit and loss account, isn't it? A: It has been added to the balance sheet. The asset has increased by that sum. Q: You say that your time was capitalized? A: I am saying to you that the 737,000 fee – and I presume that's what we are talking about? Q: Yes. A: Has added to the cost of Ansair, in my understanding, as distinct from being – I mean, that's the definition of capitalization. … Q: And it was your view that your time was properly related to the acquisition of a target company, such as Ansair, then the way to deal with those expenses would be to capitalize them as part of the cost of that company, wouldn't it? A: That's your opinion, it isn't my opinion, necessarily. Q: That's what capitalization means, in your understanding? A: Not necessarily at all. The view that was taken here was that they were profit costs. They did not necessarily relate specifically, as I understand it, to day-to-day costs. They were no different to a consultant charging for a service rendered, and they were charged, and in my view, at a – and supported by the professional accountants on which we relied, or I relied, and by the auditors, as being reasonable. Q: If your concern was to ensure that the cost of your time was not written off in the profit and loss account, what was the point of marking up those costs? A: I didn't do anything. (tr. 1184-1186) 145 JBL emphasized the reliance placed upon the "professional accountants" and the auditors and that they "supported" the fee as reasonable. In March 1997 in response to some questions raised by ASIC in respect of the CCL 1996 accounts and in particular in respect of the $737,000 fee charged to Ansair, Ellis, as company secretary of CCL, signed a letter to ASIC which included the following: Management and Consultancy Fees provided to Ansair Pty Ltd: 0.74m Ansair Pty Ltd (formerly Tudor Red Pty Ltd) ("Ansair") acquired the business and net assets of the Ansair bus operations from Ansett Australia Ltd, effective 21 August 1995. Ansair was funded and owned by certain West Australian interests. Those former owners of Ansair were keen to merge their bus operations with those of JRA Ltd which was under receivership at that time as they saw the possibility of obtaining significant cost savings and advantages. The directors and management of Clifford were requested to assist in this process and provide certain management expertise and experience in the planning, operations and contract negotiations of Ansair, including assessment of operational managerial functions, contractual obligations and reviewing, but not exhaustively, all production, administration and selling operations of the company. As the business of Clifford is that of investment management, the management fee of $737,000 forms part of the normal operating revenue of Clifford. 146 Mr Jepson gave evidence that Roberts Nissen was asked to comment on this letter in draft before it was sent to ASIC (tr. 1532). When asked whether he was satisfied that this section of the letter in relation to the Ansair fee was true Jepson said: The work that Clifford undertook with Ansair prior to June 30 1996 was prior to my appointment with Roberts Nissen, and I raised concerns about the nature of that transaction. Mr Meldrum was satisfied that management services had been provided prior to June 30, 1996 and was comfortable with the figure. (tr. 1533) 147 Mr Jepson also gave evidence that it was his understanding that prior to 28 June 1996 CCL had been requested by Ansair to provide it with management services in return for Ansair's promise to pay CCL a fee (tr. 1533). JBL gave evidence that he did not tell Ellis that the directors of Ansair had requested the provision of management services. He said that he believed Ellis knew of this arrangement from his own knowledge and had been involved in the majority of discussions (tr. 1278). Acquisition of JRA 148 The Minutes of the EGM on 28 June 1996 included the following in respect of the proposed acquisition of JRA: JRA Limited JRA has a chequered history. Has assembly plants in Brisbane, Adelaide and Sydney. We have acquired the company after a very long and tenuous negotiation between BNZ and owners of shares culminating on Wednesday night and executed documentation yesterday on a preliminary basis and are now in the process of executing final documentation which will occur next week with settlement on 31 July 1996. The acquisition is very important for Clifford. JRA manufactures school buses and express coaches in Adelaide and Brisbane City buses in Brisbane and will complement Ansair very well. They have a huge management structure, which we will be rationalising and there will be some redundancies. By that time we hope the two groups together will mean substantial savings. Over the longer term, we will be rationalising two operations, transferring and modernising assembly lines and changing some processes, employing experts in the field and we have the important management team which can do both. We will formulate a business plan to start shortly. Clifford has removed the debt from Ansair by substituting debt from the ANZ group at the end of today we will come into the new year effectively with no corporate debt. We expect to have $2.5m on deposit in cash. We have paid $1.0m as a deposit for JRA. The company's Auditors are commencing audit procedures next week in Ansair. The acquisition of JRA Limited will increase group assets to over $65.0m and shareholders funds to $34.0m. It has cost $10.6m to buy and it brings net assets of approximately $11.0m. JRA has good assets, due diligence has been completed with the expectation that plant and equipment will be discounted just a little. Our expectation is that Clifford's turnover will rise from $11.0m last year to this year on an equivalent basis to $30m and turnover next year will be fairly close to $110.0m. We have contract bookings that show the $110.0m to be about 84/85%, fairly comparable end result – will rise to 41 cents estimated at the moment after a potential rights issue, which will occur as part of the funding. We have funding for part of the $10.6m, part of the assets we are buying are factories. We are not keen on the industry properties and have made arrangements to sell them immediately and have sold for $10.5m. Will have to borrow some money, about $9.0m at settlement and pay that back and again we will be debt free. Need to provide a much higher level of working capital. We will not be involved again with letters of credit, foreign exchange, hedging contracts and other facilities, we have to cover them for about $5.0m in guarantees in addition to $2.0m of guarantees and we will need about $3.0m for initial working capital, going to profits to you later on the potential of a non-renouncable rights issue likely to be $4.0m and likely to be 1:4. Commencing discussions with brokers shortly and we are confident that that can be put together. View to remain as close as possible to debt free, including rationalisation, external experts and ensuring that all works properly in order to increase bottom line–profits next year. If we only added Ansair for an EBIT of $5.0m in the next year and we are not taking into account JRA which we do not want to make a projection next year to this year. Will be releasing some information straight after this meeting and straight after close of business this afternoon we will be issuing a profit announcement. (Ex. A: 7927-8) 149 The share sale agreement between CCL and the relevant entities comprising JRA was executed on 11 July 1996 (Ex.A: 327). The completion date for the acquisition of JRA was extended and was the subject of an extension agreement entered into on 30 August 1996. (Ex.A: 8210). In that agreement the parties, JRA and CCL, agreed that the completion date was to be extended to take place by 5:00pm on 15 October 1996 with time being of the essence. Clause 11 of that agreement provided: 11. Clifford may nominate a person to be appointed by a director of the Company and such director will undertake his duties in a care-taking role subject to the following conditions: (a) Mr Owen Quinn will be the Chairman of the Board of the Company; (b) Mr Owen Quinn, as the Chief Executive Officer, will have ultimate discretion with respect to the implementation of management decisions of the company; (c) any recommendations made to the Company by Clifford or its consultants are to be put to Mr Owen Quinn in writing for his consideration. A copy of any such recommendations are to be provided to BNZ and Deloitte Touche Tohmatsu (DTT) by Clifford; (d) if any recommendations made by Clifford under paragraph (c) are not accepted by Mr Owen Quinn, Clifford will not have any claim against the Company, Mr Quinn or any other party in respect of that recommendation; (e) Clifford or its consultants will have no management role or ability to direct management of the Company prior to actual completion; and (f) the Clifford nominated director of the Company will, before he is appointed as director, provide to Holdings, as shareholder of ordinary shares in the Company, a signed and undated resignation as director of the Company. (Ex.A:8211-8212) 150 JBL was cross-examined about Clause 11(e) and gave evidence that he was of the view that it was included in the agreement because of the level of acrimony that had developed between Mr Quinn and himself over management areas (tr.1156). His cross-examination continued: Q: You were quite keen to get access to the executives and staff and information about JRA were you not? A: I already had. Q: And you were keen to talk to the people in the various JRA plants and give them your ideas about what they should be doing. A: And I my staff and executives and consultants were already doing that. Q: And Quinn was taking umbrage at that wasn't he? A: I think that's a good way of putting it. (tr.1156) 151 In paragraph 51 of his statement (D1-9) JBL claimed that: "Directors determined the principle of charging fees by Clifford to APG and Ansair during a formal meeting of directors in Sydney on Friday, 28 June 1996". The Minute records, inter alia, that "Clifford shall levy reasonable and proper fees and charges" that are "required to achieve the completion of the acquisition of JRA Ltd and Ansair Pty Ltd and any other future acquisition" (Ex. A: 307). 152 JBL claimed a meeting took place at CCL's boardroom on Friday, 28 June 1996, as recorded in the Minute purporting to record such meeting (Ex. A: 299). Ellis claimed that this was not a Minute of a meeting and that such a meeting did not take place (tr. 802). Hall said that he could not recall that such a meeting took place but accepted that he initialled the Minute and dated it 28 July 1996 (tr. 1836). 153 The Minute has some significance in respect of the plaintiff's case against the defendants in respect of the pre-acquisition fees. It included: JRA Limited (JRA) Pre-Costs Clifford shall levy reasonable and proper fees and charges together with on costs and appropriate margins reflecting the cost, time and effort provided in respect of the pre acquisition planing, pre-acquisition, acquisition documentation, funding negotiations and all such ancillary actions required to achieve the completion of the acquisition JRA Limited and Ansair Pty Limited, and any other future acquisition. The company will render accounts specifically but not limited to the following: o Time involved of J B Loiterton, C J Ellis and J E Crogan (consultant) in travel to Geebung (Queensland), Royal Park (South Australia), Tullamarine (Victoria), Tamworth (NSW) and Revesby (NSW) re discussions to inspect, document and assess the operational and managerial functions of the company. o Time spent by P A Biber, Corporate Counsel of Clifford, in the review of present and forward contractual obligations of the company, together with assessing the viability of maintaining existing contracts. o Renegotiation of the company's accounts payable terms of payment. o Discussion with Clifford's tax advisers in reference to the responsibilities and potential liabilities arising in the company towards group tax, payroll tax and FBT. o Discussions to ensure that stocktake procedures are properly in place in order for the correct counting and verification of inventory, including work in progress and finished goods. o Review of all production, administration and selling operations of the company, including budgets, budgetary reporting and internal procedures, together with the review of all company's contracts and contractual obligations. o Initial discussion with NSW State Government, Macquarie Bank and State Rail Authority personnel with the aim of improving contract terms, specifically payment, delivery terms and leasing facilities. o Specific discussions relating to NSW bus contract for the 2000 Olympics. o Discussions with the BNZ Bank, the company's bankers, in order to extend banking arrangements past the settlement date for a further 90 days. o Reviewing and updating the company's cashflow requirements, specifically for the month of July 1996 and generally for the budgeted period July to December 1996. o General advice on best business practices. o Out of pocket expenses, interstate travel and all other costs included. … Ansair Pty Limited – Acquisition Directors noted that the settlement of the acquisition of Ansair was due this day. All requirements had been met, including shareholder ratification. Upon completion of the JRA acquisition, directors resolved that the assets and liabilities (excluding any liabilities of Ansett) be sold to JRA Limited at completion of that purchase and that Ansair Pty Limited then cease to trade except to the extent required to hold contracts and other items until expiry. The sale price shall be determined on the basis of appropriate book and other valuations. Ansair staff will be transferred to JRA and to the current JRA superannuation fund at that time. JRA Limited – Acquisition Management Charges JRA will agree to pay reasonable management fees to group members having due regard to as may from time to time be determined as fair and reasonable. On or before completion, all costs and expenses, commissions, fees and charges incurred in the planning of the acquisition, the acquisition documentation, staff expenditure, travel and all other costs incidental to the acquisition, shall be invoiced to JRA for payment by JRA at settlement. The fees to be levied by Clifford Corporation Limited shall include an appropriate on cost and margin. Clifford will make a charge in respect of the period 1 July 1996 to the date of settlement for all expenses incurred including without limitation, wages and salaries, on costs, consulting fees, rent, central accounting, central purchasing and any other administration cost that have been incurred. The company will determine from time to time the appropriate percentage of such costs to be borne by group members. (Ex A: p. 299-311) 154 Ellis' affidavit evidence in relation to these Minutes was that: "the style and wording" are similar to that used by JBL; JBL gave him a copy of the draft minutes "in the period July to September 1996"; he, Ellis, took the draft home "to digest over a day or so" and he then made some suggestions to JBL in relation to the inclusion of superannuation in the sections dealing with salary packages; and the dot points in the section describing the nature of the costs to be levied to JRA were "either drafted by" Ellis using the memorandum he drafted for Ansair or by giving a copy of the invoice to JBL "to facilitate his drafting of these sections". Ellis claimed that "to the best of my recollection" no meeting of the directors took place on 28 June 1996 or any other date at which the resolutions in those minutes were considered or passed in his presence. 155 JBL said that he recollected resolutions "as being largely reflected by the Minutes" of the meeting. He said that he recalled discussions on all major sections of the matters in the Minutes and that some areas were expanded during the final drafting by Ellis, over the next few weeks (Ex. D1-9: 55-59). 156 Ellis agreed in cross-examination that he had "input" into the Minutes but they were not drafted as a consequence of a directors' meeting. He gave evidence that they were originally drafted by JBL and that the matters in the Minutes were not discussed around about July but rather discussed close to the date of the acquisition of JRA in October 1996 (tr. 802). His memory was that some of the matters within the Minutes were being discussed right up to the date of acquisition and accordingly he "supposed" that he was alleging that the date upon the Minutes of 28 July 1996 was in fact a backdating (tr. 802-803). 157 JBL gave the following evidence in his statement: 60. The Minutes were ultimately signed by myself and initialled and dated 29 July 1996, by Hall. I recall Ellis presented the Minutes for signing at the management meeting in my office late in the morning of Monday 29 July 1996. 61. There was some basic discussion as to the form and quantum of management fees as well as discussion on a number of matters within the Minutes. I recall that Ellis, as was usual, had notes on various items from which he made some comments. (Ex. D1-9) 158 JBL referred to a conversation that he alleged occurred on 29 July 1996 between Ellis, himself and Hall in respect of the fees and said that he was aware that Ellis was in the process of implementing some of the other resolutions within the Minutes, including the executive salary agreements. The conversation alleged was not put to Ellis in his cross-examination. It was suggested to JBL in cross-examination that this conversation did not take place and that the meeting at which he claimed the Minutes were signed by himself and Hall did not take place. 159 It is a little extraordinary that JBL would not have cross-examined Ellis on this alleged meeting at which he claimed the Minutes were signed, notwithstanding that JBL was not legally represented. It is the detail of what occurred at this particular management meeting and the fact that he has a recollection of the Minutes being signed at it that make it all the more extraordinary. JBL claims that he remembers this particular meeting in his office late in the morning of Monday 29 July 1996. The fact is that the Minutes were not dated 29 July but 28 July, which, in 1996, was a Sunday. JBL established in his evidence that it was rare for him to be anywhere near the office on a Sunday and no one else has suggested that such a meeting took place on a Sunday. It has not been suggested to Hall that he made a mistake when he wrote 28 July and that he really intended to date the Minutes 29 July. This apparently small mistake has some interesting ramifications for JBL's evidence. 160 The date on the Minutes suggests that JBL's evidence about his recollection of a meeting in his office on the Monday is at the very least simply wrong. It is apparent there was no meeting on the Sunday and it is more probable than not that Hall simply backdated these Minutes when they were prepared and did not check to see if the date 28 July 1996 was a Sunday. 161 As referred to in the Overview, there are three fees upon which the plaintiff relies in its claims that the defendants contravened the Act. The first is the fee charged by CCL to JRA of $1.45 million (the CCL fee); the second is the fee charged by Ansair to JRA of $800,000 (the Ansair fee); and the third is the fee charged by Signature to JRA of $252,300 (the Signature fee). The CCL ,Ansair and Signature fees 162 Ellis gave affidavit evidence that in late October 1996 the following conversation took place: JBL: I want you to charge management fees of $1.1 million from Clifford to JRA for all the expenses that we have incurred during our investigations of JRA. The invoice should show the fees as having been charged prior to Clifford acquiring JRA. I want you to charge management fees of $800,000 from Ansair to JRA in respect of the Orana bus design, to be dated prior to Clifford Corporation acquiring JRA. 163 Ellis said that JBL did not explain to him how he had arrived at the figures of $1.1 million and $800,000. However the $1.1 million was subsequently increased on one or more occasions and "ultimately ended up" being $1.45 million. Ellis said that he did not recall when, how or why that had happened. Ellis also gave affidavit evidence that at the time JBL instructed him to charge the two fees to JRA the following conversation took place: Ellis: I don't think we can justify the $1.1 million. We haven't done that much work. They are costs of acquiring JRA and shouldn't be included as revenue anyway. JBL: I want to see it as pre-acquisition revenue in Clifford Corporation. 164 Ellis said that after receiving these instructions from JBL he issued instructions to the internal accountant, Andrew Ho, for CCL to raise an invoice to charge JRA the management fee to be dated prior to 14 October 1996. Ellis also informed Gregory Browne (Browne), a director and internal accountant for CCL, that Ho was to raise an invoice. Ellis gave the following evidence in respect of these two charges: 63. The raising of these two charges from Clifford Corporation and Ansair to JRA and dating them prior to the acquisition of JRA increased the revenue for Clifford Corporation and Clifford Group for the year ended 30 June 1997. Had these charges been dated after the acquisition of JRA, the resulting revenue would have still appeared in Clifford Corporation's own account for the year, but would have been eliminated in Clifford Group's consolidated accounts for the year. 64. Prior to Ansair's acquisition by Clifford Corporation on 28 June 1996, Lothbury, a corporate advisory firm, and Ansair had carried out due diligence into the possibility of acquiring JRA. Following Ansair's acquisition by Clifford Corporation, Lothbury and Ansair made available to Clifford Corporation information they had obtained from their due diligence of JRA. This information, together with information provided by JRA's administrator, Skinner, formed the basis for much of the analytical and review work that was carried out by Clifford Corporation's personnel relating to JRA, prior to the acquisition of JRA by Clifford Corporation. 65. From my observation, it was difficult for Clifford Corporation to conduct due diligence on JRA prior to its acquisition. I was aware from my involvement with Loiterton in the acquisition of JRA that requests made by Loiterton to JRA for Clifford Corporation's personnel to be involved in the management of JRA prior to completion of the acquisition had been rejected by Skinner. I was also aware at the time that Clifford Corporation had no managerial presence in JRA until the acquisition was completed. 165 From late October to early March 1997 Ellis gave instructions to the accounting personnel of CCL to provide him with the necessary accounting and other documentation "to support the pre-acquisition fees" that were being charged for the period 1 July 1996 to 14 October 1996. He gave evidence that Browne was particularly tardy in providing the information and that he had to constantly remind him to do so over many months. On 6 March 1997 on a memorandum headed "Austral Pacific Group Ltd", Ellis wrote to Browne in the following terms: Please ensure that Brisbane's Creditors Ledger as at 14 October 1996 shows the following amounts owing: 1. To Clifford $1.45 million 2. to Ansair $800,000; and 3. to Signature $252,300. Would you also please ensure that Sundry debtor's List is produced by Ansair showing the amount to JRA Limited of $800,000. You will also have to make sure that the two invoices are produced. Please see Andrew Ho about the $1.45 million to have that produced and come up with a format for the $800,000. (Ex. A: 1761) 166 Ellis gave evidence that at about the time of this memorandum he spoke with Browne and informed him: "We are charging JRA the fee for the transfer of technology for the Orana bus design as we will be moving the manufacture of the Orana to Geebung". On 19 March 1997 on CCL's letterhead Ellis wrote a memorandum to Ho and Browne re "Clifford charge to JRA Limited" in the following terms: It is imperative that an invoice is raised from Clifford to JRA Limited prior to 14 October 1996 in the amount of $1.45 million. Could you please raise a draft invoice using, as a template, the invoice issued to Ansair Pty Ltd back in June 1996. The invoice must provide a detailed summary in words of the work performed in order to justify the charge. This invoice is then to be passed to Greg Browne, who is to obtain a JRA trial balance as at 14 October 1996 showing this invoice of $1.45 million owing to Clifford Corporation Limited. For the sake of the exercise, a typed creditors report may be required in support of the 14 October 1996 balance sheet and creditors amount appearing thereon. In your discussions with Greg, there must also be invoices raised by Signature of $252,300 and Ansair Pty Ltd of $800,000, both for various services rendered for the post-acquisition period. These invoices must also appear on the creditors report and a copy kept on file for easy access if required. (Ex. A: 2023) 167 The term "post-acquisition period" in this memo was a typographical mistake and Ellis gave evidence that it should have read "pre-acquisition period". On 24 March 1997 Ellis sent another memorandum to Ho on CCL letterhead re: "31 December 1996". It was in the following terms: Please ensure that all journal entries and adjusting entries have been placed in a general journal for Clifford and Signature and a final trial balance is printed for each company, which reflects the final results as released to the Australian Stock Exchange. Once this has occurred, please instruct and ensure that no processing occurs prior to 31 December 1996. (Ex. A: 1462) 168 In March 1997 funds were transferred from JRA/APG's bank account to Signature's bank account in the amount of $252,300. Instructions to the bank included an instruction for the simultaneous transfer of the same amount from Signature's bank account to CCL's bank account and $200,000 from CCL's bank account to JRA/APG. The effect of the transfers of funds was that JRA/APG paid to Signature the amount of $252,300, Signature paid the same amount to CCL and CCL paid $200,000 to JRA/APG. 169 A meeting of the Audit Committee was held on 26 August 1997. Those present were Hall, Sapier, Ellis and the auditors, Meldrum and Jepson. The Minutes of that meeting include the following: Fees to Ansair - $800,000 Payable by APG, $1.4 million Payable by CCL Auditors consider $800,000 management fee payable to Ansair from APG hard to justify .. [also a $1.45 million fee re CCL]. Discussion that this had been dealt with in October 1996, that CJE had issued instructions to show documentation etc. Greg Browne/Leigh Drake to follow up and rectify. At present there is a journal entry significantly after the 'event' which needs to be fully documented. (Ex. A: 3728) Ansair 7. CJE discussed the invoice issue $800,000 and instructions to GDB. 8. GDB confirmed that a creditors list for $800,000 exists as a working paper. There have been sufficient amounts adding up to $800,000 during the year from APG to Ansair to treat the 'invoice' to be paid. Paper trial to be laid documenting transaction. This matter is crucial. 9. As to the $1.45 million, we have the invoice, debtors in CCL and creditors in APG. Again a matter of checking funds and allocating where they went. (Ex. A: 3730) 170 Following this Audit Committee meeting, Ellis prepared some of the requested documentation and once again requested Browne and Drake to prepare some of the documentation. He said to Drake and Browne: As the transactions occurred prior to the acquisition of JRA, the invoices should be taken up in Trade Debtors for Clifford Corporation and Ansair, and in Trade Creditors for APG. Payments made by APG to Clifford Corporation and Ansair after 14 October 1996 should be re-allocated against the invoices in settlement of the debts. 171 An invoice for $1.45 million dated 1 October 1996 from CCL to JRA was created by Ho not earlier than 19 March 1997. Ho used as a guide the Ansair invoice in respect of $737,000 pre-acquisition fee. The $1.45 million pre-acquisition fee dated 1 October 1996 from CCL to JRA was created, with input from Ellis, Ho and Browne, on a Clifford computer not earlier than 8 August 1997. A draft invoice for $800,000 dated 11 October 1996 from Ansair to JRA was prepared by Browne on a Clifford computer not earlier than 7 September 1997. An invoice in final form for $800,000 pre-acquisition fee dated 11 October 1996 from Ansair to JRA was prepared on Ellis' instructions on a Clifford computer not earlier than 9 September 1997. An invoice in final form for $252,300 pre-acquisition fee dated 11 October 1996 from Signature to JRA was created on a Clifford computer not earlier than 21 February 1997. 172 The invoice for the CCL fee was in the following terms: With the purpose of being actively involved in the daily operational and business activities of the company, services provided (other than due diligence and pre-acquisition inquiries) based upon the degree of responsibility and skill involved, the responsibility of engaging external consultants and other professionals and meeting all of their costs and other matters as required including: · Time involved of JB Loiterton, CJ Ellis and JE Crogan (consultant) in travel to Geebung, Revesby and Royal park in relation to discussions to inspect, document and assess the operational and managerial functions of the company. · Time spent by PA Biber, Corporate Counsel of Clifford in the review of present and forward contractual obligations of the company, together with assessing the viability of maintaining existing contracts. · Briefing and initial preparation with the company auditors for requirements for future audit purposes, including the planning of stocktakes, the requirements for accounts receivable/accounts payable and bank account reconciliation, together with the required verification of other assets and liabilities. · Discussion with Clifford's tax advisers in reference to the responsibilities and potential liabilities arising in the company towards group tax, payroll tax and fringe benefits tax. · Time involved of GD Browne (consultant) at the JRA Head Office, Geebung in documenting and assessing the company's policies and procedures of financial and management accounting. · Discussions to ensure that stocktake procedures are properly in place in order for the correct counting and verification of inventory, including work in progress and finished goods. · Review all of production, administration and seeling operations of the company, including budgets, budgetary reporting and internal procedures, together with the review of all company's contracts and contractual obligations. · Initial discussions with personnel with the aim of improving contract terms, specifically payment and delivery terms. · Discussions with the Bank of New Zealand, the company's bankers in order to extend letter of credit facilities beyond settlement date and to arrange transition procedures. § Reviewing and updating the company's cash flow requirements, specifically for the month of October 1996 and generally for the budgeted period October to December 1996. § General advice on best business practices. § Out of pocket expenses, interstate travel and all other costs included. AMOUNT $1,450,000.00 (Ex.A: 691-692) 173 There are two invoices for the Ansair fee of $800,000 each dated 11 October 1996. The evidence establishes that these invoices were created no earlier than September 1997. The first of these invoices was in the following terms: To services provided including: · in respect of the Orana, provision of engineering drawings and services, and training at Tamworth of manufacturing personnel from Austral Denning · review of operations of JRA Limited by Ansair directors and executives including CW MacKinnon, D Fisher, B Martin, C Vevers and N Elmer Amount $800,000 (Ex.A:693) 174 The second invoice for the Ansair fee was in the following terms: TO: Provision of services and transfer of information in respect of the following: · Provision of engineering drawings, detailed training of building techniques and manufacturing processes; · Personnel training of various JRA Limited staff including manufacturing personnel, engineers and management in respect of the Orana bus design, including: (a) advanced techniques in body constructions; (b) safety methods; and (c) cost saving elements in relation to the design and manufacturing process; · Extensive work provided by senior management to JRA Limited including but not limited to B Martin, C Vevers, N Elmer and G Behrendt in providing accurate and detailed information in relation to Orana bus design and the suitability and practicality of the Orana being a suitable and efficient body construction for manufacturing in the JRA Brisbane factory; · Discussions and meetings again with JRA Limited senior management relating to the direct transfer of these engineering methods and cost saving methods inclusive of relevant drawings and engineering techniques; This memorandum of account relates to all expenses inclusive of travel, executive time, overhead recovery and profit and requires no further fee to be paid in relation to this technology transfer to JRA Limited; The basis of the fee incorporates any future gain that may be occasioned by JRA Limited using and benefiting from the abovementioned technology. TOTAL AMOUNT DUE: Eight hundred thousand dollars $800,000.00. (Ex.A:694-695) 175 The invoice for the Signature fee was dated 11 October 1996. The evidence establishes that Hall created this invoice or caused it to be created not earlier than 21 February 1997. It was in the following terms: To our fees and costs in attending meetings and inspecting property, appointing valuers, briefing valuers, finalising value presentation and request submission with respect to industrial property listed below. Property: Industrial Complex at 356 Bilsen Road Geebung Brisbane Lot 1 on RP 758812 Lot 4 on RP 201822 county Stanley, Parish of Kedron $210,000.00 To our fees and costs in redirecting valuers to value on a vacant possession basis the Above properties for hypothecation purposes $42,300.00 Total $252,300.00 (Ex.A:696) 176 Ellis gave evidence that he was not aware of any written or verbal agreement prior to 14 October 1996, or at all, between CCL and JRA, Ansair and JRA or Signature and JRA for the provision of services claimed in each of the three invoices. The evidence of Owen Quinn 177 On 12 July 1996 JBL advised the Managing Director of Ansair, Mr Barrie Martin, that he would attend Brisbane with the administrator of JRA, Mr Keith Skinner, the following Monday for a meeting with the Board to resolve the principal method of hand-over by JRA. JBL advised Mr Martin that "we will be taking quasi control of the Board on Monday at that time" (Ex.A:380). JBL also advised Mr Martin that he should be given certain access within the financial areas and areas of management documentation and that Mr Joe Crogan and Ellis would be going to Geebung for that purpose. Ellis gave evidence that he did not make that trip to Geebung (tr.268). Although there is a letter in evidence from Mr Skinner approving such visit, Ellis gave evidence that he understood that approval had been withdrawn (tr.269). 178 JBL advised the Administrator that Mr Browne had been appointed as a consultant to work with the JRA accounting staff "to act as Financial Controller and complete the 30 June 1996 financial statements". JBL also advised Mr Skinner that Mr Browne would commence that assignment on 23 July for a period of approximately two to three months and sought Mr Skinner's agreement to that appointment. In a letter dated 22 July 1996 Mr Skinner "denied" agreement to such appointment but advised JBL that he agreed to Mr Browne visiting JRA "to gain an understanding of the operations" and that Mr Browne's visit was limited in that regard (Ex.A:405). 179 JRA included an Austral Denning Division in Queensland and a PMC Division in Adelaide. It also had a Hino Bus Australia division in Sydney. JBL visited the PMC Division in Adelaide in July 1996. 180 On 7 August 1996 Owen Quinn, the Chief Executive of JRA, wrote to the Administrator, Mr Skinner, confirming that he had been given to understand that an issue had been raised regarding the ongoing management of the JRA Group business in relation to the surplus manning at PMC in Adelaide. Mr Quinn advised that this had come as a surprise to him because it was a topic discussed with JBL during his trip to Adelaide and in particular on a trip on 24 July 1996. Mr Quinn advised Mr Skinner that JBL had informed him that he, Mr Quinn, should not make any retrenchments because JBL did not want CCL to be seen as "Hatchet Men". Mr Quinn advised Mr Skinner that whilst the marketplace continued to be depressed the PMC problem would continue but that the "management team are actively managing the problem and seeking to minimise the impact on the company's accounts (Ex.A:418). 181 Mr Quinn gave affidavit evidence in the proceedings and was not required for cross-examination. His evidence was that from 11 July 1996 to 14 October 1996 he continued to have primary responsibility for the management of JRA. During this period he had a number of conversations with JBL both in person and on the telephone in which he advised JBL of management issues as they arose. He also provided assistance and information for the handover of management to CCL at settlement. During that period he was subject to the directions of the Board of JRA. 182 On 26 September 1996 Blake Dawson Waldron, solicitors for the Administrator and JRA, wrote to Mr Biber, the Corporate Counsel for CCL and Clifford. In that letter Blake Dawson Waldron drew Mr Biber's attention to Clause 11 of the extension conditions concerning the management of JRA, in particular Clause 11(a), (b), & (c). The letter pointed out that "these provisions apply to any recommendation of Clifford concerning management of JRA Limited, including any recommendation concerning any redundancy program". (Ex.A:8266). Mr Biber responded by letter dated 30 September 1996 advising that the comments in this regard had been passed on to his client (Ex.A:8274). 183 JBL was cross-examined as follows: Q: Would you not agree that what was going on before 14 October was where an intending buyer was making plans as to what he would do when he took over? Its as simple as that, isn't it? A: It was expending time and effort on pre-acquisition management. Q: I think you said that you were doing a lot of things as if you owned JRA in the weeks up to 14 October with the passive consent of Mr Quinn; is that right? A: I think I said "tacit". (tr.1155 ) 184 It is apparent that in mid 1996 Brisbane City Council had called for tenders in relation to an order for new buses. Austral Denning, based at Geebung in Queensland had tendered for that order. The successful tenderer was Ansair which by 28 June 1996 had been acquired by CCL. During JBL's visit to the PMC site in Adelaide there was a discussion with Mr Quinn about this tender and the bus that had been designed by Ansair known as the "Orana". Mr Quinn advised JBL that JRA/PMC had anticipated winning the Brisbane City Council order and that there may be gaps in the production at the Geebung factory because of the different designs between the bus manufactured by PMC and the bus manufactured by Ansair. Mr Quinn advised JBL that they were then working hard to fill the production gaps that had been left. JBL suggested that there might be a transfer of some of the Orana manufacture to Austral Denning. 185 Mr Quinn's evidence was that in August/ September 1996, in order to investigate the feasibility of JBL's proposal for the transfer to Austral Denning, he agreed to send some engineers on the staff of Austral Denning division of JRA to Tamworth and Tullamarine premises of Ansair to conduct a feasibility study. He said that this was in response to a request from JBL that JRA consider the feasibility of the proposal. Mr Quinn gave evidence that he authorised the engineers to conduct the feasibility study on the basis that something might occur after the JRA acquisition had been completed and at the request and instigation of officers of Clifford. Mr Quinn gave the following evidence: I never agreed that JRA would pay for investigating whether such a transfer would be feasible if the purchase was completed. At no time did anyone ever suggest that the feasibility study would be the subject of a charge from Ansair to JRA. 186 Mr Harvey of Austral Denning, together with a number of engineers, visited the Ansair sites at Tullamarine and Tamworth in the week prior to 18 September 1996. Mr Harvey advised Mr Quinn and JBL by memorandum dated 18 September 1996 that he believed that transfer would not cause any problems of significance and would greatly alleviate workload shortage problems in Brisbane (Ex.A:584-585). In a document entitled "Proposal and Discussion Document" Mr Harvey stated that the proposal assumed as a pre-requisite, the sale completion and the amalgamation of all national facilities and customer acceptance of multi site manufacture (Ex.A:588). 187 JBL wrote to Mr Quinn on 18 September 1996 expressing the view that, if acceptable to Mr Quinn, instructions should be issued in accordance with the recommendation for transfer. JBL also suggested that Mr Quinn authorise Mr Harvey to proceed to Tamworth for training and "rejigging expenses in accordance with his budget". It is apparent that by 8 October five manufacturing personnel had completed a product familiarisation and training period at Ansair's Tamworth facility. Mr Quinn said he was happy to let JRA employees visit the Ansair site in order to familiarise themselves with product which "might be transferred to Geebung after sale completion". Mr Quinn said that he saw this as an investment in the future of JRA after the sale and was prepared to authorise the costs incurred in having those employees absent from their usual positions. 188 Mr Quinn gave evidence that he did not ever see either the original or a copy of the invoice from Ansair to JRA dated 11 October 1996 for $800,000. His evidence was that he never approved such an invoice for payment and to his knowledge it was not approved by anyone at JRA. The first time he saw the document, or a copy of it, was when it was shown to him by officers of the plaintiff in 1999. Mr Quinn also gave evidence that at no time did JRA agree to pay Ansair for the provision of any engineering drawings or "services" or training in respect of the Orana. He agreed that it was possible that officers of JRA saw and received copies of the engineering drawings during their training but that JRA did not agree to pay for such drawings from CCL. As to the visit of the executives referred to in the memorandum, Mr Quinn gave evidence that there were a number of visits by representatives of Clifford as part of a due diligence exercise conducted prior to acquisition and as part of the familiarisation process. 189 Mr Quinn gave evidence that at no time did JRA agree that it would pay for the visits of representatives of CCL or Ansair to review operations or for any other reason. He said that at no time was it ever suggested to him that JRA would pay for the visits of Ansair directors and executives or CCL directors or executives to review operations of JRA. Mr Quinn did not approve JRA entering into any agreement or arrangement with Ansair for the provision of the services described in the memorandum and made the point that until such time as the sale was completed JRA was a business competitor of Ansair. Mr Quinn's evidence was that to the extent that any training of JRA staff and transfer of information from Ansair to JRA occurred prior to settlement, it did so only on the basis that JRA was shortly to become a member of Clifford. 190 At no time did Mr Quinn or, to his knowledge anyone else at JRA authorise Signature, or any other Clifford company to obtain a valuation of the Geebung property, referred to in the memorandum for the Signature fee, nor did he have any dealings with anyone from Signature, or any other Clifford company, in relation to the obtaining of a valuation. Mr Quinn gave evidence that JRA already had its own valuation of the property dated 7 September 1995 and that if another valuation had been required he would have taken steps to obtain it by the appointment of a valuer. Mr Quinn knew of no reason why JRA would have needed to appoint Signature or any other Clifford company to obtain a valuation, let alone for a fee of the amount contained in the memorandum. Mr Quinn never saw any valuation and he gave evidence that he knew of no valuation of the Geebung property which might have been obtained by Signature. 191 Mr Quinn did not see the invoice for the CCL fee for $1.45 million or a copy of it during the time that he was the CEO of JRA. He did not approve payment of that invoice and he first saw it or a copy of it when he was shown it by officers of the plaintiff in 1999. Mr Quinn's evidence was that JRA did not engage CCL or agree to pay CCL in relation to the "services" set out in the invoice or for any other service prior to the acquisition of JRA by CCL. Mr Quinn gave evidence that officers and representatives of CCL were not involved in the daily operation of business activities of JRA prior to the acquisition. He had the ultimate responsibility for the daily operations and business activities of the company and at no time did he agree to engage the services of CCL or any other officers or external consultants of CCL to provide any services to JRA. 192 Mr Quinn expressed the view, without objection, that the description of the services in the invoice seemed to relate to work done by or for CCL as part of its due diligence or in preparation for the acquisition of JRA. His evidence was that he did not approve and would not have been prepared to approve JRA paying for work of that kind that was being done for the benefit of CCL. The evidence of Keith William Skinner 193 Keith William Skinner is a partner of the chartered accounting firm Deloitte Touche Tomhatsu and with Errol George Chant, another partner of Deloitte, was appointed as Receiver and Manager of JRA in October 1992. A scheme of arrangement was approved by this Court in July 1993 pursuant to which Mr Skinner and Mr Chant were appointed the scheme administrators. The scheme came to an end on 4 July 1996. 194 Mr Skinner gave evidence in these proceedings by way of affidavit sworn on 18 June 2002 and was not required for cross-examination. 195 Although the scheme of arrangement for JRA had come to an end on 4 July 1996, Mr Skinner was still the Receiver and manager of JRA Holdings Ltd. It was in that capacity he wrote to JBL denying the requested appointment of Greg Browne as a consultant to complete the 30 June 1996 financial statements. Mr Skinner did not see either the short or long version of the Ansair fee invoice for $800,000 until they were shown to him by officers of the plaintiff. He never approved such an invoice for payment either in his capacity as Receiver and Manager of JRA Holdings or as Scheme Manager of JRA up to 4 July 1996. His evidence was that to his knowledge it was not approved by anyone at JRA. 196 Mr Skinner also gave evidence that he did not approve JRA entering into any arrangement with Ansair for the provision of services or transfer of information for a fee and to his knowledge it was not approved by anyone at JRA. He did not see the original or a copy of the Signature fee invoiced to JRA in the amount of $252,300. He did not approve such an invoice for payment and to his knowledge it was not approved by anyone at JRA. At no time did he or to his knowledge anyone else at JRA authorise Signature, or any other Clifford company, to obtain a valuation of the Geebung property. He did not have any dealings with anyone from Signature, or any other Clifford company, in relation to the obtaining of a valuation. 197 Mr Skinner did not ever see the invoice for the Clifford fee in the amount of $1.45 million. He did not approve such an invoice for payment and to his knowledge it was not approved by anyone at JRA. At no time did he, or to his knowledge, anyone at JRA engage CCL or agree to pay CCL in relation to the services set out in the invoice or for any other service, prior to the acquisition of JRA by CCL. The evidence of Charles William MacKinnon 198 Charles William MacKinnon was a director of Ansair between July 1995 and May 1997, a director of CCL between 28 June 1996 and 24 February 1997, and a director of JRA/APG between November 1996 and 14 May 1997. Mr MacKinnon gave affidavit evidence, sworn 10 June 2002, and was not required for cross-examination. 199 Mr MacKinnon gave evidence that he did not see the shorter or longer version of the CCL invoice to Ansair for $737,000.00 until it was shown to him by officers of the plaintiff in 2002. His evidence was that he became aware of a management fee of $737,000.00 in or about July 1996 but that he had no recollection of discussing that fee at the time with any person associated with either Ansair or CCL. His evidence was that as a director of Ansair, or otherwise, he did not make any arrangements with CCL about the provision of services prior to 28 June 1996. 200 Mr MacKinnon's evidence also dealt with the two invoices from Ansair to JRA for $800,000.00. He did not see those documents until they were shown to him by officers of the plaintiff in 2002. He knew nothing about any charge to be made by Ansair to JRA for training, information or drawings in the period to 14 October 1996. He did not see the CCL invoice to JRA for $1.45 million until it was shown to him by officers of the plaintiff in 2002. Throughout his time as a director of APG he knew nothing about any agreement or arrangement between CCL and JRA for the provision of services of the kind set out in the invoice. He knew nothing of any agreement or arrangement for charging a management fee to JRA for any work carried out by CCL in connection with the acquisition of JRA in the period to the date of acquisition on 14 October 1996. 201 Mr MacKinnon did not see the invoice from Signature to JRA in the amount of $252,300.00 until shown to him by officers of the plaintiff in 2002. At no time when he was a director of APG did he become aware of any agreement or arrangement between Signature and JRA for the provision of valuation services in relation to the property at Geebung. 202 In final submission JBL claimed that his decision not to cross-examine Mr MacKinnon was an error of judgment. However he submitted "there is little between our recollections". In other parts of his submission he stated that his evidence should be preferred to that of Mr MacKinnon where it is conflict. The fact is that JBL did not cross-examine Mr MacKinnon and no application was made to have him attend for cross-examination. Audit of pre-acquisition fees 203 The audit manager Mr Jepson reported to the audit partner, Mr Meldrum. Mr Jepson managed the audit of CCL and its subsidiaries for the year ended 30 June 1996 and 30 June 1997. He was also the audit manager for the mid or half year reviews in respect of 31 December 1996 and for reviews up until the time that he completed his employment with Roberts Nissan on 31 December 1997. Mr Jepson gave evidence that during the process of the audits and the reviews he took notes and those notes were provided to Mr Meldrum as part of the discussions in relation to the audit or review and Mr Meldrum would sign those notes. 204 It was also Mr Jepson's practice to attend Audit Committee meetings from time to time and to meet with the directors. The process of the audit management included visits to the various sites and review of work papers completed either at the site or when the Roberts Nissan employees returned to Sydney. It included discussions with accountants outside of Clifford's Head Office operations and if Mr Jepson was not satisfied with the enquiries at the sites, he would bring those issues back to Head Office for further review and discussion. Mr Jepson dealt with Mr Browne and for Signature, Hall and Ellis. If he had a query that required further attention he would discuss it with Ellis. He agreed that the audit staff were given what he considered to be proper access to the Group for the purposes of making enquiry. 205 Mr Jepson gave evidence that he had regular meetings with Mr Meldrum but that it was more a matter of keeping him abreast of the audit and giving him an outline what he was planning to do rather than Mr Meldrum having to attend to matters himself. Mr Jepson described the process as him having to complete the audit and Mr Meldrum providing guidance. During JBL's cross-examination of Ellis he was shown some notes prepared by Mr Jepson on 23 September 1996 (Ex.D:1-5). That note was headed "Abnormal Item" and was in the following terms: On 28/6/96 Ansair were invoiced $737,000 in respect of management services provided by Clifford prior to acquisition. The invoice was dated in respect to work outlined prior to this date. The effect of this transaction was to "charge a subsidiary" for an amount, that due to Ansair not being consolidated, was taken up as income in the Group a/cs. As there had never been any prior management charges · its size $737 of total income in Clifford excluding dividends of $448K · Its unusual nature In a consolidated basis the invoice was <10% of total revenues, although really 25% of profit after tax The directors argued that it would be disclosed anyway in Related Party Note and that given the change in the Stock Exchange …. financial services, that such fees were to be expected Furthermore, JRA Ltd would be similarly invoiced in 1996 Conclusion: I believe that it is probably abnormal, but given disclosure in the Related Party Note, the directors' argument is not entirely without merit. 206 Ellis did not recall attending a meeting with Mr Jepson but assumed he would have been the person having the meeting (tr.286). He gave the following evidence: Q: Is this, those words that I mention there, is this not, are those words not a reference directly to the 1.45 million invoice that you talk about? A: Yes Q: So the answer is yes, therefore is it true from this paper that the auditors are, knew not only of the Ansair fee on the date of the acquisition, 28/06/96 as noted, but they also had been prewarned and, in fact, there had been a prediscussion of the fact that the JRA Ltd would be similarly invoiced in 1996? A: Based on this, yes. Q: And if one can take the, transpose the terminology that was used in Ansair, it says, "in respect of management services provided by Clifford prior to acquisition in respect of Ansair" does it not? A: It does. Q: Would it be reasonable to assume therefore in the absence of any other notation at that time the audit manager assumed when he used the words similarly invoiced that it would be similar to those words? A: Reasonable to assume, yes. (tr.287) 207 Ellis gave evidence that in relation to each of the pre-acquisition fee invoices he informed the auditors that the invoices related to work that was carried out on JRA, or Ansair, prior to the date of their acquisition. (tr.356). He then gave the following evidence: Q: That would not have satisfied .. the auditors would it? A: No Q: What else did you say to them, or provide to them in support of these invoices, in the period that we are talking about? A: I don't believe I provided anything to them. Q: Did you cause anything to be provided? A: Not that I recall. (tr.356) 208 JBL challenged Ellis' claim that the invoices were false in the following cross-examination: Q: And therefore, is it reasonable to assume that the audit material, which they audited, which supported these documents, was sufficient to satisfy a careful and diligent examination? A: What was the start of the question please? Q: Is it reasonable to assume? A: Yes. Q: It is. Therefore, within the records of the company there must have been sufficient information to satisfy the auditors regardless of whether you say you raised a false or not false invoice. A: Yes. Q: And, therefore, your statement that the invoice was false, I put it to you that it was not false? A: I reject that. Q: But, Mr Ellis how can you reject it when the auditors, by your own admission, had sufficient information, sufficient supportable information to satisfy themselves – whether or not you supplied it is immaterial – but they did have sufficient supportable material. Now either the invoice is not false or the auditors are lying? A: I can't answer for the auditors. (tr.373) 209 Mr Jepson gave evidence that his focus was rather on whether the work had been performed prior to the acquisition rather than the date of the invoice. He said that he was "certainly aware" that some work had been carried out prior to 14 October 1996 in respect of JRA. His evidence was that he was satisfied that the amount charged by Ansair to JRA was a "proper charge" (tr.1480). He knew from his time in Melbourne that Messrs. Martin and Vevers and others were involved in visiting sites, talking about changes to the line-up, in particular the Adelaide sites which were not due diligence type of visits. He was of the view that it was of a management-type nature and he said he was "comfortable that management services had been performed" (tr.1480) He was satisfied that the fee charged by Signature to JRA in the amount of $252,300 was justified in respect of the audit. He recalled discussing the matter of the three fees charged to JRA with Mr Meldrum. 210 In cross-examination, Mr Jepson said that the $737,000 fee charged by CCL to Ansair was prior to his appointment with Roberts Nissan but that he raised concerns about the nature of that transaction with Mr Meldrum. He said that Mr Meldrum was satisfied that management services had been provided prior to 30 June 1996 and was comfortable with the figure (tr.1533). His understanding was that CCL had been requested prior to 28 June 1996 when the takeover occurred to provide Ansair with management services in return for Ansair's promise to pay CCL a fee (tr.1533). He had assumed that somebody had invited CCL, Signature and Ansair to provide the management services to JRA prior to acquisition (tr.1534). 211 Mr Jepson had some concern in relation to the pre-acquisition fees in the June 1997 audit and was of a view that they should be shown as abnormal income of the Group rather than as normal income of the Group. He said that the directors were not in favour of that idea. The fees charged to JRA were disclosed in the "controlled entities" section of the accounts because Mr Jepson took the view that JRA was a controlled entity at June 1997 and that the transactions should be disclosed. Mr Jepson said that the fees were always going to be disclosed whether they had fallen into the controlled entities section or the director related entity section of the accounts (tr.1537-1538). He agreed that if the fee had been incurred at a time when JRA was part of Clifford then the fees would have been eliminated in the consolidated accounts. However he understood that the fees had been incurred at a time prior to JRA being acquired (tr.1538). 212 Mr Meldrum was also called in the defendant's case. In his evidence in chief he said that he considered that the accounts were correct and that he regarded it as appropriate to sign them as auditors of Clifford. Mr Meldrum understood the pre-acquisition fees were for services provided by the company charging the fee and that understanding came from what Mr Jepson had told him (tr.1581). 213 Although Mr Meldrum denied that he had failed to properly supervise Mr Jepson and also denied that he had failed to carry out and perform his duties as an auditor adequately, he did agree that in March 2003 he had consented to orders being made against him in the Companies Auditors & Liquidators Disciplinary Board in relation to the conduct of the audit of Clifford for the 1997 year. Those orders included a statement that it was the decision of the Board that it was satisfied that Mr Meldrum had failed during the course of that audit to carry out or perform adequately and properly the duties of an auditor. In particular that he failed to "independently verify the underlying circumstances and validity of three pre-acquisition fees, totalling $2,502.3 million relating to subsidiary companies, Ansair and APG acquired during the year" (Ex.P). Mr Meldrum said that he consented to those orders because he did not have the financial resources to defend himself against the allegation. He said that he relied on what was reported to him by Mr Jepson to form his conclusion about the appropriateness of the pre-acquisition fees (tr.1582). Accounting Entries for the fees 214 The accounting entries were dealt with by a number of witnesses including Mr Michael Potter, a partner of the forensic accounting division of Ferrier Hodgson. There is no controversy about how the fees were brought to account, the controversy is that the plaintiff claims the fees were fictitious and thus the accounts did not give a true and fair view of the relevant company's financial position. JBL and Hall deny that the fees were fictitious. Sapier does not suggest they were real and concedes that the financial accounts did not give a true and fair view of the relevant company's financial position. 215 There was no real challenge to the methodology used by Mr Potter nor to the conclusions that he reached in respect of the various pre-acquisition fees being included in the profits of the relevant companies. Mr Potter concluded that the CCL fee and the Signature fee were included in the profits of Clifford for the six months ending 31 December 1996 and in the Consolidated Profit and Loss Account for Clifford for the period ending 30 June 1997. The CCL fee was also included in the profit of CCL for the six months period ending 31 December 1996 and in the twelve months period ending 30 June 1997. Mr Potter also concluded that the Signature fee was included in the Signature accounts as forming part of Signature's loss for the six months ending 31 December 1996 and for the 12 months period ending 30 June 1997. 216 By reason of a lack of documentation, Mr Potter was unable to draw conclusions in respect of whether the Ansair fee was included in the profits of Clifford. 217 The plaintiff submitted that because the fees were fictitious charges they never formed part of the consolidated profits of Clifford and thus the financial statements did not give a "true and fair view" of the consolidated profits, as required by s295A. The real question in respect of this aspect of the case is whether the CCL fee of $1.45 million included in CCL's profits and the Clifford profits failed to give a true and fair view as required. 218 The memorandum for the CCL fee of $1.45 million refers to work having been carried out by JBL, Ellis, Joseph Crogan, the corporate Counsel Phillip Biber and a consultant Greg Browne. The plaintiff accepted in its submissions that all of these people had significant involvement in JRA-related work in the pre-acquisition period. Messrs Crogan and Browne were paid fees for the services provided by them through their companies. Those fees were capitalised as costs of acquiring JRA even though they related in part to work in relation to Ansair. Mr Biber's fees for the services he provided were paid to his company through which he provided the services. Those costs were capitalised as costs of acquiring JRA. It is apparent that no fees were paid to JBL or Ellis. 219 The overwhelming evidence is that there was no agreement between CCL and JRA, Ansair and JRA and Signature and JRA for services to be provided to JRA by any of those companies prior to JRA's acquisition. Certainly there is evidence that demonstrates that work was done by CCL and Ansair in respect of the Orana bus, however Mr Quinn's evidence leads me to the irresistible conclusion that such services were provided to assist, not JRA, but the acquiring company. Indeed JBL agreed that there was no agreement between the companies for the provision of services prior to acquisition. 220 Each of the invoices purported to charge a company that had not agreed to such charges. The invoices were not sighted by the relevant officers of JRA prior to the acquisition or at all, until they were shown to the relevant officers by officers of the plaintiff some years later. JBL's involvement 221 JBL's evidence was that it was Ellis who suggested "the principle" of charging pre-acquisition fees. Ellis denied this. In final submissions JBL submitted that Ellis' claim that he was constantly dominated by JBL was false. JBL submitted that he drove Ellis hard but that Ellis was a self-starter, intuitive, active and appeared to live his job. JBL claimed that he was reliant upon Ellis for all fiscal and administrative information. He submitted that Ellis was autonomous, operating as an independent divisional head. He claimed that even if the court finds that he, rather than Ellis, thought of the principle of pre-acquisition fees it was never his intention to create fictitious charges. He submitted that the evidence establishes that he always intended that any charges were properly supportable. In this respect he placed emphasis on the fact that the auditors had reviewed the pre-acquisition fees and "accepted them". 222 JBL also emphasised the fact that it was the directors who determined the principle of charging pre-acquisition fees at the meeting on Friday 28 June 1996. Ellis gave evidence that the draft minutes of the purported directors' meeting on 28 June 1996 were completed prior to 14 October 1996, the date of the settlement of the JRA acquisition. JBL submitted that this was a process decided upon prior to the completion date and one that was supportable by reason of the costs incurred prior to the acquisition of JRA. 223 In this regard JBL embarked on a detailed cross-examination of Ellis in relation to a series of invoices and charges in the period from July 1996 to the date of completion of the acquisition of JRA (tr. 309-356). JBL suggested that the total amount of "expenses" identified in the various invoices and items referred to in that cross-examination was greater than the amounts contained in the invoices for the pre-acquisition fees and sought thereby to justify the amounts in the pre-acquisition fees' invoices. Ellis was taken to each of the amounts and he gave the following evidence: Q. Mr Ellis, we have been discussing this JRA transaction in the sense of the capitalisation of expenses incurred during the timing of this transaction is five months? A. Yes. Q. Right, and have we not established that the administrative expenses, be whatever source, are of the order of 2.9 million? A. Yes. Q. That is the figure that one could use, subject of course to checking all those figures, but the order of- A. You have just used the word "capitalisation". In terms of the capitalisation of expenses, out of all the expenses that we have gone through, the total, approximately 2.9 million, the majority of that 2.9 million was treated as a capital item against the cost of acquisition. Q. I'm sorry, I don't understand, can you explain that? A. Yes. When Clifford acquired JRA, it acquired it for a figure. Included in that transaction were all the transaction costs, such as legal fees, stamp duty, appropriation fees, that related specifically to the actual acquisition of JRA. When Clifford booked the transaction for the acquisition of JRA, it took into account those expenses, or those costs, and offset them against the capital acquisition cost. i.e., goodwill on acquisition and/or premium –I'm sorry, discount on acquisition. So, therefore, the costs associated with the transaction, i.e., stamp duty, legal fees, appropriation fees, actually sat on the balance sheet of Clifford, and were not expenses through P & L, which was a proper accounting treatment. What all those expenses were, I don't recall, but I'm sure they're around somewhere (tr. 328-329) 224 This cross-examination occurred on the seventh day of the trial at which time the plaintiff was unaware whether JBL would be giving evidence or calling evidence in his defence. The case management of this matter occurred prior to the decision of the Court of Appeal in Rich and Silbermann v ASIC [2003] NSWCA 342 and JBL was not required to indicate his position until after the close of the plaintiff's case. In fact it was just prior to the close of the plaintiff's case that JBL indicated that he would be giving evidence. In those circumstances the plaintiff had no advance notice of how JBL might seek to characterise the pre-acquisition fees. Once this cross-examination occurred the plaintiff's investigator, Grant Anthony Jackson, analysed all the costs referred to in cross-examination for the purpose of identifying whether they had been brought to account in the CCL and Clifford financial statements. 225 Mr Jackson provided a statement entitled "Expenditure in relation to the acquisition of the shares in JRA Ltd" together with supporting documents from the records of CCL annexed to his affidavit sworn on 5 May 2003 (Ex. L). In a detailed analysis Mr Jackson referred to each of the amounts to which Mr Ellis had been taken by JBL in his cross-examination and indicated whether each had been capitalised in CCL's accounts and if so, where the amounts could be found within the accounts. It is clear from Mr Jackson's analysis that the suggestions made in cross-examination are not justified. These amounts are unable to be relied upon by JBL as justification for the pre-acquisition fees. 226 Although JBL did not object to Mr Jackson's affidavit and although Mr Jackson was not required for cross-examination, JBL gave evidence that he did not agree with the figures in the affidavit and that they may be "all right or all wrong" (tr.1182). No accounting evidence or investigative analysis of the figures was provided by JBL and in the circumstances I am satisfied that Mr Jackson's evidence should be accepted. In his own cross-examination JBL seemed to change the characterisation of the pre-acquisition fees from that which he had sought to suggest to Ellis in cross-examination. He suggested that the pre-acquisition fees were "profit costs" and that they did not "necessarily relate specifically", as he understood it, "to day-to-day costs" (tr. 1185-1186). He said: They were no different to a consultant charging for a service rendered, and they were charged, in my view, at a-and supported by the professional accountants on which we relied, or I relied, and by the auditors, as being reasonable. (tr. 1186) 227 JBL gave the following evidence in cross-examination in relation to JRA: Q. I think you said something like that, that "we were", "we did everything we were able to do as though we owned it? A. Yes Q. Of course you could not fire any staff for example? A. No. Q. You couldn't go and do anything with the plant and equipment of JRA, could you? A. Absolutely not. Q. In fact all you could really do was talk to the people there, look what they were doing and make your own plans for the future? A. And influence those staff. Q. You said I think "for all intents and purposes we were in control of JRA". At what point of time do you say that for all intents and purposes you were in control of it? A. Getting towards this period, this last several weeks. That's my opinion. Q. You know of course, don't you, that if one company is in control of another that under the consolidation accounting rules the results of one must be consolidated with the results of the other? A. I think you have taken the word "control" out of context. I took it on the basis, or I made the statement on the basis of control in inverted commas. We were in a position where we were influencing the company at that stage I think is probably a better way of putting it-control in inverted commas. (tr 1157-58) Q. … you acknowledge, do you not, that there was no agreement between the companies JRA and Clifford before 14 October 1996 for the charging of any fees? A. Correct. (tr. 1178) 228 JBL would have the Court believe that Ellis embarked upon acts of revenge against him by giving false evidence about, inter alia, the pre-acquisition fees. It is hardly an act of revenge to put himself into a situation where, as he conceded, he will be regarded by the business community as a business pariah. Certainly he has avoided prosecution and has avoided being joined as a defendant in these civil penalty proceedings. However I am not satisfied that it has been demonstrated that his evidence was false. Ellis' evidence is supported by each of the former officers of JRA. 229 The creation of the pre-acquisition invoices and the entries in the accounts reflecting the pre-acquisition fees were made for the purpose of boosting profits at a difficult time in Clifford's history. I am satisfied that these fees are fictitious and there was no proper basis for charging or invoicing JRA. I am also satisfied that the reliance by JBL and Hall in their evidence on the fact that the auditors "approved" these fees does not assist them. The auditors were kept in the dark or alternatively were provided with false information. Mr Jepson gave evidence that it was his understanding that there had been a request made of CCL, Ansair and Signature to provide the pre-acquisition services. How Mr Jepson reached that view is not disclosed on the evidence. JBL suggested in his evidence that because Ellis was part of the discussions with the auditors, it was more probable than not that it was Ellis who gave Mr Jepson that understanding. Irrespective of whoever gave Mr Jepson that understanding, it was false information. 230 The capacity to raise these false fees was facilitated not only by Ellis' willingness to create false transactions and fictitious invoices but also by auditors failing to require independent proof of the agreement alleged to have been in place for the provision of the pre-acquisition services. It is clear that Mr Meldrum was the responsible auditor supervising Mr Jepson. By the time Mr Jepson became the audit manager for CCL and Clifford, the original 1995/1996 pre-acquisition fee had been charged. Mr Jepson understood that Mr Meldrum was satisfied about the validity of the fee and the amount of the fee. Mr Jepson was concerned with how the fees should be dealt with in the accounts, rather than whether the fees had been charged pursuant to a real agreement. 231 The Minutes purporting to record a meeting of CCL directors on 28 June 1996 might have given the auditors some indication that the directors had turned their minds to the charging of fees by CCL to Ansair and JRA. JBL relied upon those Minutes as a record of a meeting that did occur. The Minutes were cobbled together by Ellis in discussion with JBL in August and September 1996. Those Minutes suggest that Sapier was present at the meeting. However there were also Minutes of a meeting of CCL directors purportedly held on the same day at which it was resolved that CCL would charge IDC $240,000 for administration services rendered during the year (Ex. A: 293). Sapier was recorded as being present "by telephone". 232 I have referred earlier to the untidy manner in which CCL kept Minutes. That manner facilitated the creation of Minutes purporting to record meetings that simply did not occur. It also causes real doubt about whether any of the Minutes can be relied upon as recording anything accurate. However it seems to me in all the circumstances of the evidence that the Minute purportedly held on 28 June 1996 recording a meeting of CCL directors at which the management fees were discussed is not a Minute of an actual meeting. I am satisfied that such a meeting did not occur. 233 The evidence in relation to these fees and in relation to the other aspects of this case establishes that JBL ran this Group in a rather frenzied fashion. The profits as reported were not real profits and were boosted by a number of transactions that were not real or justified including the pre-acquisition fees. When it became clear that the burden on Ellis in 1998 of having to "find" cash to boost the operation of the company and pacify the bankers was crushing to the point where he was diagnosed with depression, JBL arranged for an injection of funds into the company from his own financial resources as referred to in his memo. 234 JBL submitted that the evidence discloses that at all times he had the company's best interests at heart and that the plaintiff has failed to prove that he dishonestly dealt with these pre-acquisition fees. It could hardly be in the best interests of a publicly listed company to have included within its financial accounts fictitious transactions and fees based on fictitious documents created for no other reason than to boost the appearance of a company's profits. These were not real profits. They were false profits and thus not in the best interests of the company. 235 JBL is an experienced businessman. His capacity to understand issues has been well demonstrated throughout the case, particularly in the way that he has conducted his own defence in this matter. He presents in evidence as a highly intelligent man who thinks strategically. I am satisfied that JBL knew that without an agreement between JRA and each of CCL, Ansair and Signature, the pre-acquisition fees were not justified. To attempt to justify these pre-acquisition fees by the identification of the various amounts he put to Ellis in cross-examination and then to suggest that they were really profit costs without any detailed analysis of these costs in a proper accounting sense by the calling of expert or other evidence, in my view, demonstrates a lack of real commitment to a belief that they were justified. 236 It is all very well to claim that he relied upon professional accountants and auditors to suggest that a finding of dishonesty would not be made against him. I have no doubt that JBL knew that in the absence of an agreement between JRA and CCL/Ansair/Signature, those companies were not entitled to render fees to JRA and were not entitled, post acquisition to shuffle money between the companies and not eliminate the amounts in the consolidated accounts. The window dressing that went on in this Group was calculated to lay a paper trail to suggest that these fees were justified and in accordance with agreements with companies when there simply were no such agreements. This included the letter to the plaintiff in March 1997 in which it was suggested that Ansair had requested CCL to provide the services. This was simply not true. JBL's suggestion that he was effectively above it all with the belief that what was happening was both honest and justified is simply unbelievable. 237 To require Ellis and Hall, as I am satisfied he did, to charge these pre-acquisition fees and to fix the particular figures at which the fees were to be charged, which I am also satisfied he did, demonstrates a desire to have profits of a particular amount reflected in the accounts as opposed to recording real transactions with regard to real costs that were incurred pursuant to real agreements. To suggest that Ellis thought all this up on his own, as he did suggest, and further to suggest that Ellis' evidence against the defendants in this case was motivated by revenge, is not justified on the evidence. 238 JBL's cross-examination of Ellis elicited from him the fact that he found himself in a "quandary" when he had to decide whether to assist the plaintiff or be joined in these civil penalty proceedings and possible criminal prosecution. If Ellis was truly motivated by revenge to the point where he would give false evidence against the defendants to save his own skin it is difficult to accept that he would have found himself in the quandary that JBL proved he was in. JBL's cross examination of Ellis also elicited facts that support the conclusion that Ellis was driven by JBL to the point of exhaustion and it is little wonder that he reached that state after compromising his integrity in acquiescing in the corporate slights of hand that I am satisfied JBL directed. 239 The specific claims made against JBL in respect of the pre-acquisition fees include that he breached section 232(2) of the Act in that he failed to act honestly in approving the accounts that contained the pre-acquisition fees because he knew that the accounts that contained those fees did not give a true and fair view of the financial position of CCL or Clifford. The plaintiff claims that JBL committed those breaches as a director of CCL and that his conduct as a director of Ansair, Signature and JRA in causing those companies to reflect these fees as properly incurred when they were not, was also in breach of section 232(2). 240 I am satisfied for the reasons given above that the plaintiff has established that JBL knew these pre-acquisition fees were not true or justified fees and that they did not form the true profit of CCL and the Group. I am satisfied that as a director of CCL, JBL knew that it was not in the interests of CCL and the Group to have these fees recorded in the accounts as part of the profits of the company and the Group and that he acted in disregard of that consciousness or knowledge. 241 I am also satisfied that, as a director of Ansair, JBL knew that there was no agreement for that company to pay the $800,000 fee, that such fee was not justified or in the interests of the company and that he acted in disregard of that knowledge. I am also satisfied that, as a director of Signature and JRA, JBL knew there was no agreement for those companies to pay the pre-acquisition fees of $252,000 and $1,450,000 respectively, that such fees were not justified or in the interests of those companies and that he acted in disregard of that knowledge. 242 The plaintiff also claims that, as a director of CCL, JBL contravened section 318(1) of the Act because there was default in compliance with section 295A in respect of the December 1996 half year and the 1996/1997 full year consolidated accounts in relation to each of the pre-acquisition fees. It is claimed that JBL was knowingly the cause of the default or that he failed to take all reasonable steps to comply with or secure compliance with section 295A of the Act. The default in this instance is the failure of the directors of CCL to cause to be made out a consolidated profit and loss account that gave a true and fair view of the profit or loss of the economic entity or the entities it controlled. Whilst ever the pre-acquisition fees were contained in the profit of CCL and Clifford there was no true and fair view of the profit or loss. 243 Having regard to the findings I have made I am satisfied that JBL was knowingly the cause of that default and that a declaration of contravention in those terms should be made. Although it is perhaps not necessary to identify the actual steps that JBL should have taken to ensure compliance having regard to my findings that he acted dishonestly, those steps were to ensure that fees that were not in fact justified and were not the subject of agreement with those companies should not have been included in the financial statements. 244 The plaintiff also claims that, as a director of CCL, JBL contravened section 318(1) because there was default in compliance with section 292 in respect of CCL's 1996/1997 full year accounts in relation to JRA pre-acquisition fee of $1,450,000. Having regard to the findings I have made, I am satisfied that JBL was knowingly the cause of this default and that a declaration of contravention in those terms should be made. Hall's Involvement 245 In final submissions Hall conceded that as at 10 October 1997 he was aware of the existence of all of the pre-acquisition fees. He submitted that at all times he relied on Ellis and/or JBL as to the integrity and the legality of all the fees and that no evidence exists that they or anyone else advised him to the contrary. He submitted that the evidence is "sparse" in relation to his involvement with the CCL fee to JRA and the Ansair fee to JRA. However he conceded that he calculated the basis for the invoice for $252,300 from Signature to JRA and his evidence in chief was as follows: On the matter of pre-acquisition, I believe it was in 1999 that I became aware, as a result of a section 19 examination, that there were concerns about the so-called pre-acquisition fees. Up to that time, I was aware of the fees, I was aware of the amount of the fees and I'd had discussions with both Mr Loiterton and Mr Ellis about the fees. At no time at those discussions was I informed of anything other than that these fees were to be formulated, or had been formulated, and at one occasion I was requested, and from my memory I believe it was Mr Loiterton, to prepare a fee for Signature to charge JRA. I was given fairly limited instructions in respect of that fee and from discussion, however, I believed that the fee was to be more in the form of a fee similarly charged by a consultant or a financial consultant. However, I am unable to recall how I formulated that fee, except that I believe I did it on the basis of a relationship to valuation and a percentage, and the figure of 5 per cent springs to mind. I do not recall at the time having any concerns about the raising of that invoice for work done prior to 14 October 1996, and I don't recall having any concerns about the dating of that invoice being made prior to 14 October. I am aware that the invoice was prepared probably two, maybe three months after that date. I am aware that fees inclusive of the Signature fee, the JRA fee, and the Ansair fee were discussed at audit committee meetings. I do not recall the detail of those discussions, but at no stage do I recall any discussion that said these fees were wrong or in error. I am now aware of the fact that the invoices for the other two fees, that is, other than the Signature fee, were prepared at a much later date than October 14, 1996, but I am unable to recall when I became aware of that. (tr.1429) 246 During cross-examination Hall conceded that all he did was to telephone two valuers, Colliers and Burgess Rawson. Both valuers were asked to review an earlier valuation prepared by Raine & Horne. Burgess Rawson provided written advice in a letter dated 5 June 1996 based entirely upon the review of the valuation prepared by Raine & Horne and only inspected the property externally. The fees charged by Burgess and Colliers amounted to a little over $3,000. 247 Hall said that he worked out the fee by applying a percentage of the value of the property. At the time that Hall was calculating the figure for the invoice, Signature and JRA were part of Clifford and under the control of the same people (tr.1831). Hall admitted that the fee was greater than an arm's-length fee. His rather disarming evidence was as follows: Q: The only reason, at it were, that you were able to put through this non-arm's-length fee was because the same people controlled Signature as controlled JRA at the time the fee was put through. A: I think that's the fact, so I don't think it was in my head to worry about that, but they were the facts. Q: The same applies, does it not, to the $1.45m fee that Clifford charged JRA, namely that you didn't concern yourself with whether that was an arm's-length fee for the work set out in the invoice? A: I didn't concern myself very much with that fee at all. Q: You didn't concern yourself with the $800,000 fee that Ansair charged JRA, did you? A: That's correct (tr.1832) Q: When you say it was not an arm's-length transaction, you also agree, don't you, that not only were the parties themselves not at arm's-length because they were part of the Group, but the fee itself is excessive by arm's-length standards? A: I think I made the comment that I considered it exorbitant. Q: What about back in late '96 and early '97 did you consider it exorbitant then? A: No, I said I didn't think it was exorbitant then. … Q: Why not, given that you would have realised back then that JRA could have obtained the equivalent services from someone else for a fraction of the price? A: I didn't realise at that stage or, or I didn't give it any thought. JRA were going to – the values had occurred and the matter was completed and the work was being done and I was charging for the work that had already completed. Q: But why not sit down and work out a charge that was a reasonable charge had the transaction occurred between arm's-length parties? A: I thought it was at the time. I thought using a percentage on the valuation was a reasonable way of doing it. Q: Why is that a reasonable way if the equivalent services could be obtained from someone else for a fraction of the cost? A: I can't answer the question in a sense of why isn't it the reason. It's the only way that I knew how to raise it. (tr.1834) 248 Hall gave evidence that JBL informed him that he would like him to charge for the time he spent in arranging the valuations for JRA. He said that he informed JBL that he was going to use a 4 or 5 per cent calculation on the valuation. He neither saw nor heard of any resistance to the preparation and backdating of October 1996 invoices and did not recall the auditors questioning the commerciality of the size of the fees of $1.45m and $800,000. He said that he did not have any discussions with Sapier of any great length on the topic of pre-acquisition fees. 249 On the topic of the Minute of the meeting purporting to evidence a directors' meeting on 28 June 1996, Hall did not have any recollection of attending that meeting. He did however sign the minute and date it 28 July 1996. 250 The plaintiff submitted that Hall's evidence that he did not know any other way of calculating the fee was not credible. It was submitted that the size of the fee in comparison with Signature's actual costs of the work, strongly suggested that Hall well knew the impropriety of the exercise in which he was engaged. It was submitted that those facts support a finding that Hall did not hold a genuine belief that the charging of the pre-acquisition fees was in any way a legitimate accounting procedure. 251 The plaintiff submitted that Hall was well aware of the existence of the other two fees and must have suspected that they fell into the same category as the one that he prepared. It was submitted that there is no evidence that the auditors were told of the absence of any pre-acquisition agreement or pre-acquisition request for the provision of the services. On the contrary, the auditors assumed that there had been a pre-acquisition request. 252 The plaintiff submitted that Hall knew that the exercise of charging the pre-acquisition fees was wholly artificial and had only one purpose, to artificially increase the reported profits of CCL and Clifford. It was submitted that Hall produced a fictitious invoice for an amount that bore no meaningful relationship to Signature's costs, and therefore the Clifford costs of any pre-acquisition work concerning the valuation of the Geebung property. 253 Hall submitted that the plaintiff was quite wrong in the submission that he thought the Signature pre-acquisition fee was false or artificial. He submitted that the evidence does not support that conclusion and that the plaintiff is "blinded by their view and out of touch with fee charges". He submitted that he was entitled to rely on the advice of experts and trained professionals and it is evident that in financial matters he took and followed the advice of Ellis and Sapier, both of whom he considered expert in this area. He submitted that he was entitled to rely on the advice of the auditors and emphasised the evidence that he gave that Mr Meldrum gave him advice that there was nothing in the accounts that would in any way concern him. 254 Hall also submitted that the evidence proves that he prepared the Signature invoice at the request of JBL and with the knowledge of Ellis. He submitted that the form of the invoice was consistent with the discussions in or around July 1996 and that it was entirely credible that the percentage basis was the only way to calculate the fee. He submitted that this type of fee was consistent with fees charged by entrepreneurial people such as brokers and financial advisors and that it was for work that was considered a key to the settlement of JRA. 255 I am not considering Hall's conduct in respect of these fees in isolation. Although the facts that I have referred to above relate directly to the pre-acquisition fees, the time frame in which the fees were raised crosses over with the time frame in which the Signature Exclusivity fees were raised. Hall's conduct during the period in respect of these fees and others is able to be viewed as a whole to decide whether Hall's claims that, for instance, he knew of no other way to raise the fee, or that he had no reason to believe that there was anything in the accounts that would give him concern, should be accepted. 256 I have found that Hall created false documents in the Signature Exclusivity fees referred to later in this judgment. I am satisfied that the evidence Hall gave in respect of those documents cannot be accepted. Hall knew that at least in respect of the exclusivity fees that were brought to account that there were matters in the accounts that should have given him concern. He knew that Mr Meldrum would not know that he had created false documents to pretend that there was an agreement to charge those exclusivity fees when there was in fact no agreement at the time he claimed there was such an agreement. To suggest in defence of these claims in relation to the pre-acquisition fees, that he relied upon Mr Meldrum when he told him there was nothing in the accounts that would concern him, in the light of my findings about Hall's involvement in the creation of those false documents does not assist Hall at all. Rather it suggests that Hall continued on with the pretence, even in the witness box. 257 I have no doubt that Hall was well aware that there was no agreement to charge the Signature pre-acquisition fees and that he was well aware there was no justification for charging that fee. I also have no doubt that he knew that it was not in the best interests of CCL or Signature to have within its accounts fees that were not agreed to or justified. I am satisfied that he created the invoice to put forward a pretence that this was a fee that was justified when he knew it was not. In this regard I am satisfied that Hall contravened section 232(2). 258 Although I have serious doubts about Hall's honesty in relation to the other pre-acquisition fees I am not satisfied to the standard referred to in Briginshaw v Briginshaw that the plaintiff has proved that he knew those fees were fictitious or not real profits of the company. However I am satisfied that the plaintiff has proved that Hall contravened section 232(4) in respect of those other pre-acquisition fees. He knew very well that the Signature pre-acquisition fee was not the subject of any agreement between CCL and Signature and he had also been involved in creating false documents to pretend there had been an agreement between Signature and IDC in respect of the Signature Exclusivity fees (referred to later in this judgment). This should have put him on notice that further inquiry was needed into the other pre-acquisition fees and although he attended the Audit Committee meetings there was no evidence that he asked about the existence of such agreements in relation to those other pre-acquisition fees. This is all a little academic because Hall did not even inform the auditors that there was no agreement between CCL and Signature to charge the pre-acquisition fee and he certainly did not inform them that he had created false documentation in an effort to justify the Signature Exclusivity fees. 259 I am satisfied that it is appropriate to make declarations against Hall of contravention of section 232(2) in respect of the Signature pre-acquisition fee and of contraventions of section 232(4) in respect of the other pre-acquisition fees. I am also satisfied that there should be a declaration that Hall contravened section 318(1) because there was default in compliance with section 292 in respect of CCL's accounts and default in compliance with s 295A in respect of Clifford's consolidated accounts in relation to the Signature pre-acquisition fee in that he was knowingly the cause of those defaults. Sapier's involvement 260 Sapier agreed in evidence that if there had been no agreement between CCL and JRA for the provision of services pre-acquisition, then any agreement made between them after acquisition could not create a pre-acquisition transaction. He agreed with the proposition that such fees could not be recorded as income of Clifford in its consolidated accounts. He gave the following evidence: Q: It is the case, isn't it, that in the period 1996 and 1997 you understood that these charges, pre-acquisition charges, against JRA were being recorded irrespective of any agreement between the two companies pre acquisition? A: No. Q: You certainly didn't assume there was a pre-acquisition agreement did you? A: No. I don't think I had any idea. Q: Do you say you just didn't turn your mind to it? A: I recall that the matter of the fees was raised in audit committee meetings and dealt with between Clifford executive accountants and officers and the auditors. The issue of documentation was discussed. The review process took place. I was receiving feedback that the matter was satisfactory to all parties. I was happy. I was more than happy with that. I didn't' pursue it beyond that. (tr.2033) 261 The plaintiff submitted that Sapier's state of mind was that it did not matter to him whether there had been a pre-acquisition agreement or not. It was submitted that there were many warning signs that should have alerted Sapier to the need to make further and more detailed enquiries into the propriety of the fees. They were being recorded as charges from one Clifford company to another and were noted in the "related party" section of the accounts and consolidated accounts both in the 1995/96 accounts and the 1996/97 accounts. Invoices were being created as late as August 1997 and the amounts in these invoices represented a significant slice of reported after-tax profits. The fees were being charged to a company which had recently been acquired by CCL but they were being charged in respect of the period leading up to acquisition. 262 The plaintiff submitted that all of these matters should have struck Sapier as unusual enough to warrant further enquiry. He ought to have turned his mind as to whether, in the pre-acquisition period, there were any dealings between JRA and Clifford of a kind that created an obligation on the part of JRA to pay for any of the pre-acquisition work. 263 It was submitted on Sapier's behalf that he was merely helping with documentation in respect to the $737,000 fee, which is not the subject of any claims for declarations. It is apparent that he made no inquiry at that time either as to the nature of any agreement to decide what was appropriate to include in the invoice he assisted Ellis to draft. It was also submitted that discussion of two of the fees in the presence of the auditors and employed accountants gave comfort to Sapier that the matter was under scrutiny by the auditors. Sapier accepts the plaintiff's submissions that the evidence shows that the fees were fictitious. However it was submitted that such concession was made after enormously detailed investigation, huge resources having been expended and compulsory processes utilised. It was also submitted that the plaintiff's submissions have the benefit of a large degree of hindsight. While in hindsight these matter should have struck Sapier as unusual and in a perfect world he ought to have turned his mind to them, the fact is he did not, for reasons that are quite explicable. Those reasons were the reliance upon employed accountants, knowledge that the auditors were looking into the matter and having no reason to believe that the quite unusual occurrence of the creation of fictitious invoices had occurred. 264 Sapier did not admit the contraventions, however he conceded that the accounts were not true and fair. He did not admit that he failed to exercise appropriate care and diligence or take reasonable steps in respect of his obligations. 265 The plaintiff claims that, as a director of CCL, Sapier has contravened section 232(4) by approving the various accounts in which the pre-acquisition fees were brought to account as part of the profit of CCL and Clifford. The plaintiff also claims that Sapier contravened section 318(1) because of the default in compliance with section 295A and section 292 referred to earlier in the claims against JBL and Hall, on the basis that he failed to take all reasonable steps to comply with those sections or secure compliance with those sections. 266 I accept that the plaintiff has had the benefit of gathering evidence in an investigative process utilising compulsory powers. I also accept that the plaintiff has had the benefit of Ellis' evidence. However, as a director, Sapier had an obligation to do more than he did by way of inquiry as to the basis upon which these very large fees could be justified. A basic question was whether there was an agreement between the companies for the charging of such fees. It may be suggested that even if he had asked relevant questions he would not have been informed accurately. That may or may not be so, but the question for consideration is whether he failed to exercise the appropriate degree of care and diligence in the exercise of his powers and duties as a director. 267 It seems to me that a reasonable person in Sapier's position knowing of the discussion between Sapier and Ellis in respect of the $737,000 fee when Sapier assisted in drafting the invoice in respect of that fee, would be put on notice that JBL was requiring fees of a certain amount to be charged and then entries were made to accommodate such a figure. That in itself would have been enough to alert a co-director, executive or non-executive, to take care. I am not satisfied that Sapier exercised appropriate care in this respect. His evidence extracted above that he did not have any idea whether there was a pre-acquisition agreement in place, in my view, indicates that he did not exercise appropriate care and diligence in the exercise of his duties as director in this regard. It was suggested that he was entitled to trust his co-directors and assume that there were agreements in place. I do not agree that he was entitled to simply assume that there were agreements in place. These fees were very large indeed and a basic question for a director and member of the audit committee to ask was where is the relevant agreement for the charging of these very large fees. 268 I am satisfied that some of the Minutes of CCL were not accurate records of meetings at which matters were discussed, in particular the charging of these fees. If Sapier had checked these Minutes diligently and with care he would have known that they did not record matters of business at a meeting at which he was present. He did not do that and had he done so he would have been alerted to the manner in which the business of this public company was being run – with fictitious minutes. That would and should have put him on notice in respect of these very fees. 269 Sapier should have taken steps to ascertain the basis on which such fees could be charged and once it was established that there were no agreements with any of the companies for the charging of those fees he should have ensured that such profit was not included in the profit of the Group. I am also satisfied that he failed to take all reasonable steps to secure compliance with sections 295A and 292 in respect of the pre-acquisition fees in contravention of s 318(1). Declarations of contravention will be made for breaches of s 232(4) and 318(1). Signature Exclusivity Fees 270 Signature was incorporated on 17 May 1994 and was acquired by CCL on 5 December 1994. It carried on the business of office leasing and business centre development. All the defendants were directors of the company during the period 1994 to 1998; JBL, Hall and PJL for the whole period and Sapier from 1996 to 1998. Sapier was company secretary from 1994 to 1998 and CJE was joint secretary from 1 October 1996 to November 1998. 271 On 4 January 1995 Signature entered into a Construction Management Agreement (CM Agreement) with Leisuremark Australia, the directors of which were JBL, Hall and PJL. The CM Agreement was assigned to IDC, a wholly-owned subsidiary of Leisuremark, as and from 1 July 1995 (Ex. A: 7538). The directors of IDC at that time and until March 1997 were JBL, Hall and PJL, and Sapier was the secretary. 272 The CM Agreement recited that Signature was desirous of engaging IDC as principal contract manager and building contractor to arrange for and direct all the design, lodgements, contracts and other matters required to carry out all works necessary to satisfy the requirements pursuant to the agreements and lease documents (Ex. A: 7449). The CM Agreement was for a period of 5 years from January 1995 and provided that IDC's obligations and responsibilities to Signature included the carrying out of all such works as required for and on behalf of Signature. 273 There is in evidence a Minute of a meeting of directors of CCL (JBL, Hall & Sapier (by phone)) purportedly held on 14 December 1995 that notes that CCL had considered the benefits arising from the purchase of IDC from Leisuremark (Ex. A: 218). The Minute referred to the price of $758,622.85 with a request that CCL underwrite a debt of $300,377.15. The Minute records that it was resolved "that the Company should proceed with acquisition of IDC from its vendors at the purchase price stated above". A further Minute in evidence is of a meeting of directors of IDC (JBL, Hall & PJL) on 29 January 1996 and records the resolution that the Deed of Sale of Shares in IDC from Leisuremark to CCL for $758,622.85 with CCL assuming a debt of $300,377.15 "be signed and the common seal attached thereto" (Ex. A: 208). 274 On 20 February 1996 CCL published a press release to the ASX advising that agreement had been reached for the purchase of IDC "effective from 1 January 1996". The release also referred to IDC's profit of $204,654 for the half year with an expectation to earn "an increased profit in the ensuing six months" and that it would "thus contribute to consolidated year profits" of Clifford (Ex. A: 211). 275 A Minute recording a meeting of directors (JBL, Hall and Sapier (by phone)) of CCL on 5 June 1996 records the resolution that the Notice of an Extraordinary General Meeting of CCL to be held on 28 June 1996 was to include as one of its purposes to "approve the purchase of" IDC (Ex. A: 231). The ASX was notified of the EGM and a copy of the Notice was provided to it at that time. An ASX Listing Rule required that if the purchase price of IDC exceeded 5% of the net assets of CCL as at the date of the last audited accounts, an independent report as to the fairness and reasonableness of the proposed acquisition was required to be presented at the EGM (tr. 1338). 276 In June 1996 the purchase price was 7.1% of the net assets of CCL and the ASX required such a report to be presented to the shareholders at the EGM. This matter was withdrawn and the shareholders were not asked to approve the purchase of IDC at the EGM on 28 June 1996. In a Minute purporting to evidence a meeting of directors on the same date it was noted: "directors noted that due to a disagreement with the Australian Stock Exchange that ratification of the acquisition of IDC would not take place by shareholders as proposed" (Ex. A: 308). That Minute, which is controversial for reasons referred to elsewhere, contained the following resolution: That subject to the formal approval of IDC (verbal approval had been received) the sale completion would be deferred for further ratification on the basis that: (i) The Two Hundred and Ninety Thousand Dollars ($290,000) deposit on the sale would bear interest at 15% from 1 July 1996 until completion. (ii) The deposit would not be refundable if the settlement did not occur. (iii) No interest would be chargeable on the balance due if settlement took place within One Hundred and Twenty (120) days. (iv) Profits for the year to 30 June would remain to the benefit of IDC, however, Signature would be entitled to charge a substantial management fee for services, and administration requirements rendered. (v) The sums would be agreed between management. (Ex. A: 308-309) 277 The plaintiff alleges that this Minute was not prepared in June 1996 nor was it signed in July 1996 as it purports to have been. The plaintiff alleges that the meeting did not take place. I agree with those submissions for reasons stated elsewhere in this judgment. 278 In mid-1996 and up to October 1996, Signature's lease income was not meeting the head lease payments it was required to make to the owners of the properties. Signature's Profit and Loss Statement for the three months to 30 September 1996 recorded that it traded at a net loss of $903,900 for that period and that the head lease payments of $1,262,263 exceeded lease income of $858,323. IDC traded at a loss of $6,028 for the same period. In about late October 1996 Ellis had a conversation with Hall in which he suggested a possible solution to "fix Signature's loss situation". He said: "Signature could charge IDC a fee in return for agreeing to forego IDC's fit-out warranties". Hall said that he did not like that idea and the two men discussed the matter further. It was decided that Signature would charge what was referred to as a "monthly exclusivity fee". Ellis prepared a hand-written worksheet in which he used the rate of $14 per square metre of total floor space of properties held by Signature as a basis for the charge resulting in fees of $941,276 for the period July to October 1996. 279 Ellis gave evidence that in reaching this decision with Hall they did not discuss whether IDC already had an obligation to do the fit-outs for Signature or whether IDC would have the financial capacity from its operations to pay the proposed exclusivity fee. He said he selected the rate of $14 per square metre because it was the figure "which multiplied by the total floor space area, approximated the additional monthly income" that on his estimates was "sufficient to cover the shortfall of revenue in Signature". 280 Ellis gave evidence that shortly after this discussion with Hall he had a conversation with JBL in which he informed him of the "intention" for Signature to charge IDC "monthly exclusivity fees" to overcome Signature's lack of income. He also said to JBL: "IDC can't be part of the Clifford Group because the exclusivity fees and any inter-company fees would be eliminated on consolidation". Ellis claimed that the effect of what JBL said was that he "concurred" with the charging of exclusivity fees and that he made a decision that IDC would not be acquired. 281 Hall denied that he had the conversation as alleged with Ellis in October 1996. He said he did not recall being shown the worksheets. He gave evidence that in about June 1996 he raised with Ellis the performance of IDC and said to him: "One of our difficulties is that IDC are not delivering the product and we are paying for floors we are unable to let". Hall said that Ellis responded: "If Signature cannot generate sufficient revenue because of that, we must find a way to substitute that lost revenue, lost income". Hall asked Ellis to give him some ideas and said that he would talk to PJL, who was managing IDC, about it. Hall said that he had a further discussion with Ellis in the first half of July 1996 when Ellis raised the possibility of Signature charging IDC for delays in fit-outs. Hall said: While I can't speak for Mr Ellis, I believe it was always my intention that this resultant fee was a means of forcing IDC to work harder and faster in order that the works would be completed, but that we would charge a penalty if it did not perform. (tr. 1435) 282 The fees referred to in Ellis' worksheet totalling $941,276 were entered in Signature's General Journal by Ho on 19 December 1996 effective from: 31 July 1996 as to $222,516; 31 August as to $233,576; 30 September 1996 as to $233,576 and 31 October 1996 as to $251,608. Further entries were made in Signature's General Journal on 3 February 1997 for 30 November 1996 and 31 December 1996 both in the amount of $251,608. All of these entries were described as "contribution income" and their effect was to record the amounts as income of Signature for the period July to December 1996 and with the corresponding debt owed to Signature by IDC. These figures were based on $14 per sq. metre of Signature's floor space. 283 In late February 1997 Ellis had a conversation with the auditors, Mr Meldrum and Mr Jepson, in which they advised him that the fees could not be based on total floor space and would have to be based on "something like undeveloped floor space". Jepson's note records that the fee that had been charged "as a form of retainer" for the fit-out work was "inappropriate". It also records that "there could be no commercial reality in IDC paying the same per metre charge for mature properties" and for new properties that would require an extensive fit-out. 284 Ellis informed Hall of his conversation with the auditors and advised him that the fee could only be charged on undeveloped floor space. Hall informed Ellis that he would prepare some supporting documents. In a further conversation in late February/early March 1997 Ellis claimed that Hall informed him that the "new fee is to be $75 per metre on undeveloped floor space". 285 A series of Signature invoices were created claiming a "monthly property development fee (as per agreement dated 11 July 1996) @ $75/sq metre". There is in evidence a letter on IDC letterhead dated 11 July 1996 addressed to Signature and signed by PJL. It is in the following terms: Following our recent discussions regarding this company's relationship with Signature Group Australia Limited (SGAL) we wish to propose an arrangement that secures our position and is also beneficial to the Signature Group. The main benefit for us is to maintain exclusivity as the contractor to SGAL for future works; the benefit to SGAL is a fee buffer that will encourage on time completion of fitouts by this company. Thus we propose: In consideration of SGAL appointing IDC as their exclusive contractor at contract rates determined by SGAL's independent quantity surveyor namely Rider Hunt (QLD) Pty Limited, IDC agree to pay SGAL a monthly fee for exclusivity, equivalent to $75 per square metre contracted but unbuilt space existing at the commencement of each calendar month. Such fee to commence as at the 1st July 1996 and shall continue unless negotiated to the latter of 30th June 1997 or where no unbuilt space exists on contract. Your acceptance of this offer is satisfactorily confirmed by your company's endorsement in the space provided in this letter. (Ex. A: 384) 286 Hall signed a letter dated 15 July 1996 on Signature's letterhead addressed to IDC confirming "our acceptance as verified in the signed copy of that letter". Hall also signed a Minute purporting to record a meeting of directors of Signature (Hall, JBL & PJL) on 15 July 1996 which records a resolution that the directors "ratify the actions of the Managing Director in accepting" the IDC proposal "but also to review the position in the New Year" (Ex. A: 390). 287 JBL signed a Minute purporting to record a meeting of directors of IDC (JBL & PJL) on 11 July 1996 in which there is recorded the following: Alternate Contract Discussed was the discussion held earlier that morning between Peter James Loiterton of Signature Group Australia Limited regarding their potential use of an alternate contract. Interior Design Construction Pty Limited had to recognise the loss of income being experienced by Signature Group Australia Limited, but also its need to maintain exclusivity. It was noted that directorial conflict existed. IT WAS RESOLVED that Signature Group Australia Limited be offered a monthly fee from July 1996 approximately equal to 12.5% of contract value for projects incomplete at calendar month end. And that Peter James Loiterton be given the authority to finalise the details in the best interest of the company. (Ex. A: 322) 288 A Minute purporting to record a meeting of directors of CCL (JBL, Hall & Sapier) on 5 October 1996 was signed by JBL underneath the words "Dated 5 October 1996". That Minute referred to the EGM on 28 June 1996 and the fact that the approval for the IDC acquisition had been withdrawn because of the "ASX objections". The Minute continued: The Chairman advised the meeting that in order to proceed with the acquisition it would be necessary to undertake formal valuations and in turn, to circulate the same to shareholders for their consideration and approval. Having regard to the timing, a separate extraordinary meeting of members may also be required. Due to the significant costs involved in employing independent assessors and experts to prepare reports in order to comply with the relevant Listing Rules and due to the fact that the company was presently well advanced in acquiring JRA Limited, further time, expense and resources being incurred on the IDC acquisition was not justified and would not be to the benefit of the shareholders. IT WAS RESOLVED that the company seek to withdraw from and not proceed with the acquisition of IDC and that the company approach Leisuremark Limited, the vendor of IDC, in order to seek: (i) its acknowledgement of the technical difficulties faced with the acquisition; (ii) its agreement to rescind the contract for the purchase of IDC; (iii) the return of the deposit paid of $290,000; (iv) its agreement that there will be no recourse or liability to Clifford Corporation or its officers as a result of the rescission. The Company Secretary is requested to provide Leisuremark Limited with a copy of this resolution and to seek a corresponding Board of Directors resolution from Leisuremark acknowledging the present technical difficulties faced by both parties in proceeding further and consenting to rescind the contract for the purchase of IDC and agreeing to same on the basis that neither party has legal or any other recourse against the other party and that the deposit paid by Clifford Corporation will be refunded in full. (Ex. A: 683-684) 289 Ellis gave evidence that in August/September 1997 he drafted this Minute as well as the Minute of Leisuremark dated 5 October 1996 in which there is noted a resolution to accept CCL's "withdrawal from purchase negotiations of IDC and to refund the $290,000 paid as deposit by CCL". He gave evidence that these meetings did not occur but that they recorded a "transaction" (tr. 964). Ellis also drafted the correspondence between CCL and Leisuremark dated 5 October 1996 and between Leisuremark and CCL dated 6 October 1996 purporting to record the transaction referred to in the Minutes. Ellis said that he drafted that correspondence in August/September 1997. 290 Ellis gave evidence that in April 1997 he had a conversation with Hall in which Hall said: "There is a basic flaw in the methodology, I am not going to allow it to continue". Ellis said that although Hall explained his reasoning at the time he could not recall what it was. Hall cross-examined Ellis about this conversation but did not suggest to Ellis that his recollection of the part of the conversation that he did recall was wrong. Mr Carnovale cross-examined Hall about the matter as follows: Q. You decided, did you, I think in about April 1997, that there was a flaw in this methodology; is that right? A. I don't know whether I communicated that to anybody, but in my mind their was a flaw. Q. What was the flaw? A. In my mind, the flaw was that if this continued and IDC was unable to achieve the work, this fee continued, so I believe that IDC at some stage, and remembering that I changed hats early that year, I considered that at that stage the continuation of the fee was creating a burden on IDC that couldn't-eventually would cause it to require an input of funds, which I was loath to do. Q. Didn't it occur to you at any time that the flaw with the methodology was that the formula bore no relationship whatever to the profit that IDC was hoping to make by tying itself to doing work for Signature? A. No, that's incorrect. In July of 96 I thought that the relationship was correct. It was then in January of 97 that Peter Loiterton relooked at it-that was second time around-and the third time I guess was in April 97. Q. Can you tell me what relationship there is between hope for future profits by IDC on the one hand, and calculating this exclusivity fee by reference to existing undeveloped space? A. I'm sorry, I'm a little bit confused there. Can I tell you what the connection-can repeat the question? Q. What's the connection between IDC hoping to get profits in the future from working for Signature on the one hand, and being charged and exclusivity fee by reference to existing undeveloped space which is many, many, many times the profit that IDC could hope to make on that particular space? A. Firstly, the "many, many, many times" came out as it continued, but in the initial sense, it never thought that it would reach that level because it wasn't designed to go that way. Q. Why did you continue with it? A. Because, I just said, I didn't relook at it until January of the next year. Q. And when you did, you continued it until April, didn't you? A. Well, I believe we then entered into discussions to see what could be done because, first of all, I think I found out that a wrong figure had been charged and adjusted it to what I considered to be the correct figure. That occurred and then a month later I relooked at the game, I thought this is wrong, this can't continue. Q. But just go back to when you first either thought up this idea or agreed that you would use this idea of charging IDC a fee. You say, don't you, that you decided back in July 96 that it would be $75 a square metre of undeveloped space? A. I believe it's around that time-early July. Q. And you knew at that time, for example, that St Georges Terrace, Perth, was undeveloped? A. I can't tell you where I was at in my mind in respect of each individual property. Q. You surely must have known in July 96 that that property was still undeveloped? A. Because the evidence says it exists, its logical I knew, but I'm trying to say that I can't tell you that I specifically analyse that property. Q. Did you sit down and work out what $75 a square metre the undeveloped space on that property would give you? A. No. As I said earlier, we worked out that $75, I think, was about 12 per cent of what we considered to be the normal fitout incentive. Q. But you knew that the fit out incentive for this particular property was nowhere near $600 a square metre, didn't you? A. I can't answer that. Q. And even if you worked it out on the basis, as you say, of 12 per cent, you must have realised after two or three months, any profit that IDC hoped to make on that job would have disappeared? A. I think I've said earlier to you I didn't look at again until approximately January of the next year. Q. Isn't that because the only purpose you hoped to achieve by this fee was to increase the reported profit of Signature and the Clifford Group and it had no other purpose? A. Well, I certainly got involved in it to ensure that Signature wasn't going to lose profit because of transactions that IDC couldn't complete. (tr. 1706-1707) 291 JBL was cross-examined about the CCL Minute dated 5 October 1996 signed by him. He gave the following evidence: Q: You know, don't you, that these Minutes, which are said to be Minutes of a meeting of Clifford's directors on 5 October 1996 and which are also dated that date on the second page, were in fact only signed by you in about September 1997? A: I'm not aware of that. Q: They were only created in September 1997, were they not? A: Not to my knowledge. Q: I take it that it was the practice within Clifford to show at the bottom of a set of Minutes above the place where the Chairman would sign the expression "dated" and then a date typed which corresponded with the date of the meeting? A: That's my understanding, yes. Let me just add to that. I believe there are occasions when it was hand-dated, but my understanding is that was a common occurrence. Q: But you understand, do you not, that if you see the expression "dated" and a particular date next to it under which you then signed, that you are creating the impression that you have signed it on the date above your signature? A: Oh, no, I don't take it that way at all. That was the date – that was the date on which – which was on the document. I would ordinarily – it would have taken some – I guess, a day or more for the document to be typed and it would be brought to me for signature. Q: The date of the meeting appears in the heading at the top of the first page, you will see. A: Yes, I see that. Q: And this form of Minutes where we find the date of the meeting in the heading at the top of a set of Minutes and we find the same date above your signature at the end of a set of Minutes, this was standard practice, was it within the Clifford Group? A: It would appear to be standard practice. Q: To make dates coincide? A: Yes, it would appear to be generally standard practice. Q: In fact, the date that appears above your signature on this set of Minutes and the other Minutes does not necessarily record the date on which you signed it, does it? A: Correct. That's my understanding, yes. Q: Well can I suggest to you that you signed these in about September 1997 and they were prepared at that time and you were searching for reasons that you could insert in a set of Minutes like this to justify the discontinuance of the purchase of IDC? A: I totally reject that, more so that I certainly did not draft these Minutes. Q: ... Do you understand the proposition is being put to you that you created the Minute to justify the termination of the alleged arrangement between Signature and IDC so that the fees charged from Signature to IDC were not eliminated? A: I understand fully, your Honour, and I reject the proposition. (tr. 1368-1369) 292 By 5 October 1996 the ASX Listing Rule requiring the independent report did not apply because the purchase price of IDC was then less than 5% of the net assets of CCL as at the last audit of its accounts. Total shareholder's equity or net assets of CCL as at 30 June 1996 was $22.77 million and the purchase price of $1.059 million was approximately 4.6% of that figure. 293 The plaintiff claimed that the Minute of 5 October 1996 suggesting there were "technical difficulties faced by both parties" was just a convenient way of justifying termination of the contract to purchase IDC and was in fact a false reason. It claimed that the Minute was created so that IDC would not become part of Clifford and the "fees" charged by Signature to IDC would not be eliminated on consolidation, thus boosting the profits of CCL and Clifford. 294 JBL was cross-examined about this matter and Mr Carnovale suggested to him that the reason given in the Minutes for the termination of the contract to purchase IDC was "totally fictitious". JBL gave the following evidence: Well, it's not fictitious in the sense that if somebody at that time doing the calculations made an error, then its erroneous, but I have never thought anything other than what is contained in those October Minutes. I have always had in my mind that the 5 per cent rule cannot have been met. I don't recall doing the calculations, but that's always been my understanding. (tr. 1367) Q: Do you think, sitting here now, that the reason or a major reason why you didn't go ahead with the IDC purchase is that someone pushed the wrong button on a calculator? A: I don't say that. I'm saying that the reasons stated on the 5 October meeting were in my mind then and even until today, there were in my mind correct. I didn't do the calculation personally and I don't recall checking it but I always understood them to be correct. Q: But the very reason you simply deferred the June resolution rather than terminate the proposed purchase then and there was to await the outcome of the 30 June 1996 accounts, was it not? A: Yes, I'm sure that was the reasoning. Q: Well, having then obtained the audited June 1996 accounts with the net asset figure and shareholders funds there, it was a simple matter, was it not, to work out whether the 5 per cent rule was triggered? A: Yes. Well all I can say to you is that until this moment I've always thought that this was the correct position. Q: Well is that because you sat down with the calculator and worked it out and came to some different figure then what you worked out today? A: No, I don't recall sitting down with a calculator, as you say, but, as I have said, I had no reason then or until this morning, I've had no reason to question the calculation made on that date or the advice given on that date. (tr. 1367-1368) 295 Sapier was also cross-examined about the documents purporting to record meetings of CCL and Leisuremark on 5 October 1996. The Minutes of CCL included Sapier as having been present at a meeting on 5 October 1996 at which the directors of CCL resolved that it would seek to withdraw from and not proceed with the acquisition of IDC (Ex. A: 683). Sapier agreed that on 1 September 1997 his diary entry included the following reference: "Minutes re IDC purchase back on 5.10.96 amended & letter/to/from IDC" (Ex. A: 8865). Sapier acknowledged that Ellis sent him draft Minutes and a draft letter from Leisuremark to CCL dated 5 October 1997 in which Leisuremark advised that its Board of Directors had unanimously agreed, inter alia, to the mutual rescission of the contract for purchase of IDC. Those documents appear to be have been faxed between Ellis and Sapier on 1 September 1997, 5 September 1997 and 29 September 1997 (Ex. A: 3941-3950). Although the draft letter sent to Sapier was dated 5 October 1997 Sapier agreed that he understood the letter was to be dated 5 October 1996 consistently with the date of Minutes (tr. 2105). 296 Sapier's evidence in relation to his assistance to Ellis in creating Minutes eleven months after a purported meeting and creating a letter purporting to evidence advice of a rescission of a contract was, in my view, unsatisfactory. He said that he received the Minutes and draft letter for "review from the point of view of any corrections that might need to be made to their presentation or wording" (tr. 2102). He gave evidence that he did not consider that "it would appear to the world" that Leisuremark had written to CCL on 5 October 1996 (tr. 2105). He said his "true intent" was to "assist" Ellis in "putting together some minutes based on facts and to support that process" (tr. 2106). This evidence seems to totally miss the point that what he was doing was assisting in the creation of a document that a reasonable reader would assume was created approximately twelve months earlier. 297 Sapier also gave evidence that if someone asked him to review the draft Minutes and letter today he certainly would not do so because it would be against his "ethics and morals"(tr. 2106). When asked why he did so in 1997 he said that he "didn't think about it" and that he did not "consider it as an issue" (tr. 2106). This evidence is curious because Sapier gave earlier evidence that he became "quite annoyed" when he observed that he had been listed as being present at an APG meeting when he was not. He claimed in his evidence that on that occasion he asked Ellis to correct the Minute (tr. 2017). To have been sensitive about the APG Minute and not to have been sensitive about backdating a Minute and creating a letter eleven months after a purported event does not sit happily with Sapier's claims of not thinking about it. However in making an assessment of this evidence I must have regard to the fact that these events took place six years ago and memories are obviously affected by the lapse of time. However the significance of these matters to an accountant who claims to have been sensitive about the APG minute seem to me to be such that they could not have escaped his attention at the time that he was "assisting" Ellis. 298 Sapier was at all relevant times a member of the Audit Committee. On 26 August 1997 the Audit Committee noted: There was an interest held in IDC as of June 1996, backed into Leisuremark, which was a related party transaction. A paperwork trail is to be finalized minuting this transaction and providing letters of acknowledgement. The refunding of the $290,000 deposit paid from CCL to Leisuremark is to be documented also. (Ex. A: 3723) 299 It was subsequent to this Audit Committee meeting that Sapier and Ellis settled the so-called "paper trial". Sapier claimed that there had previously been some discussion about the IDC purchase not proceeding and was asked about the entry in the 1996 accounts which referred to the deposit being held in "escrow" (Ex. A: 8416). He gave evidence that the entry in the Note to the CCL accounts for the year ended 30 June 1996 which were signed on 29 September 1996 gave him the impression that the transaction was not going to happen (tr. 2056). However he acknowledged that when he was asked to review an additional draft Minute in relation to a director's resolution regarding IDC forwarded to him by Ellis in August 1997 the Minute referred to the sale being "deferred" (Ex. A: 3807)(tr. 2073). 300 On 10 October 1997 JBL and Hall signed the Director's Report for the financial accounts of Signature for the year ended 30 June 1997. An exclusion from the claim that the directors had not received benefits was: (g) Development fees to Interior Design Constructions Pty Limited, raised for the granting of exclusive contractual rights to refurbish the company's leasehold properties. (Ex. A: 6126) 301 The letters purporting to evidence the agreement to charge the fees dated 11 July 1996 and 15 July 1996 and all the invoices for the "development fees" for the months July 1996 through to April 1997 were the subject of evidence from Graham Donald Henley, a computer forensic analyst. Although Mr Henley was cross-examined, I am satisfied that his analysis proves that all of these documents were created in March 1997 and that the letters purporting to evidence the agreement were created by Hall at that time. 302 JBL agreed that he must have read the Director's Report before he signed it and that he must have been happy with what he was prepared to sign (tr. 1370). JBL said he understood the fees were a "disincentive to IDC in the sense they were a penalty for not providing, not bringing product online on the basis of budgets" (tr. 1370). He said it was in an effort to ensure the public company was not suffering and that "we were always conscious" of this "too-close relationship" (tr. 1371). JBL said that his understanding "at all times" was that it was a penalty (tr. 1374). When asked why he did not describe the fees in the Director's Report as a "penalty" rather than as "development fees" his evidence was: I can't answer that, your Honour. It certainly isn't the way that – sorry, (g) reads differently than my understanding and I can't answer why. I can't respond why. I can only say, your Honour, that I believe that the statement in (g) is not totally correct. (tr. 1374) 303 There is no mention in the Director's Report of a "penalty" nor is there any use of the term "penalty" in the Minutes signed by JBL as a director of IDC purporting to evidence a meeting on 11 July 1996. That Minute refers to IDC's need to "maintain exclusivity". There are in evidence two File Notes dated 11 July 1996 in Hall's handwriting. The first File Note reads as follows: File Note: 11-7-96 Spoke to PJL about the delays in fit-outs causing Signature a delay in income. We may have to seek alternative contractor or compensation for loss of rev. I suggested a monthly % decrease in contract, but PJL wanted to maintain contract and proposed a monthly fee similarly based. He is going to discuss with JBL. (Ex. A: 320) 304 The second File Note was in the following terms: File Note: 11 July 1996 Re: This morning's meeting, IDC have come up with a formula based on average contract price which have margin. ? AV contract $590/m² Fee proposed – monthly of 12.5% payable This fee equals $73-75. I proposed we rounded that up to $75/m². Them to respond (Ex A: 321) 305 The forensic document examination of the two file notes dated 11 July 1996 was rather inconclusive. It was a "possibility" that the second file note dated 11/7/96 (Ex. A: 321) was written before the first file note dated 11 July 1996 (Ex. A: 320). However a file note of 3 February 1997 (Ex. A: 1512) relating to IDC matters written by Hall had indentations from the first 11 July 1996 file note upon it. Indentations from a handwritten draft of the Minutes purporting to record a meeting of IDC directors on 11 July 1996 (Ex. A: 322) were also found on Hall's handwritten file note of 3 February 1997 (Ex. A: 1512). 306 Hall gave evidence that in February 1997 he had a discussion with Ellis in which he said to him: "Somewhere in the files are my file notes of the arrangement". Hall said: To me there was no doubt that an arrangement existed to charge Signature an exclusivity fee and that arrangement existed from July 1996. I also believe that that arrangement was designed to be in the best interests of Signature and to cause IDC to work a lot harder. I believe that the scenario presented based around Mr Ellis' affidavit is one that is not a true representation of the events that occurred during that period. (tr. 1438) 307 The arrangement was not to charge Signature an "exclusivity fee" as Hall put it in this evidence but to charge IDC such a fee. Hall also gave evidence that he made the file notes three weeks after a conversation with PJL in the first half of July 1996. The fee referred to in the second file note (Ex. A: 321) is the fee "$73-75". A fee of $14 per square metre was charged up to February 1997. At that time Mr Jepson advised Ellis that the transaction was not a commercial one and that any fee charged should not be charged on "mature" properties and only on undeveloped floor space (Ex. A: 1664). It is highly unlikely if there was a conversation on 11 July 1996 which the second file note purports to record in which a fee of $75 was agreed or "rounded up", that Signature would proceed to charge a fee of $14 for the first six months of the financial year. I am satisfied that these file notes were not made in July 1996 but were made at a later time to reflect the developments that occurred in October 1996 and in February 1997 after the discussion between Ellis and Mr Jepson. 308 The evidence of Ellis is in part supported by the computer analysis of the relevant documents. There were common directors of IDC and Signature at the time the "development fees" or "penalties" were decided upon. I am satisfied that it was not until late 1996 that this fee was thought up and subsequently changed in 1997. I am also satisfied that there were no meetings or "transactions" in July 1996 whereby there was agreement between Signature and IDC. The correspondence and the Minutes are sheer fantasy. Nothing of the sort occurred on the dates that the Minutes or the correspondence purports to evidence. This was an effort to boost Signature's profits and that could not be done by proceeding with the acquisition of IDC. I am satisfied that JBL accepted Ellis' advice that IDC could not become part of the Group, otherwise the fees charged between Signature and IDC would be eliminated on consolidation. 309 I do not accept JBL's evidence that he signed the Minute on 5 October 1996 purporting to evidence a meeting of CCL directors on that date. I accept Ellis' evidence that these were prepared in late 1997. There was no meeting of CCL directors on 5 October 1996 at which a decision was made not to acquire IDC. This "paper trail" created to give the impression of proper and professional corporate governance has been unravelled. Of course Ellis' conduct facilitated this improper procedure, however I am satisfied that both JBL and Hall knew that this was not the appropriate or proper way in which to govern or operate a public company. The auditors were never made aware that there had been no agreement struck between Signature and IDC in July 1996. They were never told that documents were created and backdated to give the impression that there had been an agreement reached between the two companies in July 1996. These documents were simply a sham. 310 I am satisfied that JBL and Hall did not intend that the fees charged would have any connection with the exclusive use of IDC as Signature's fit-out contractor. The evidence establishes that their sole intention was to create documents and cause entries in accounting records to increase the reported, but not real, profits of Signature and consolidated profits of Clifford. These fees totalled $2,801,100 to April 1997. There was a netting off of a cross-debt against these fees and as a result the Signature's 1996/1997 accounts and Clifford's 1996/1997 consolidated accounts showed IDC as a debtor in the sum of $1,667,181 at 30 June 1997. That gave the appearance that IDC paid to Signature part of the fees on 30 June 1997. It is submitted that Signature received that amount with the knowledge of its impropriety and thus held it is constructive trustee for IDC and was not entitled to retain the benefit of it. 311 The amount received by Signature never formed part of its real profits and Clifford's December 1996 half-year consolidated accounts and its 1996/1997 consolidated accounts overstated its consolidated after-tax profit by the full amount of the fees included, namely $1,541,000 for the half-year and $2,801,100 for the full year. These accounts did not give a true and fair view of Clifford's consolidated profit as required by section 295A. 312 Additionally Signature and IDC were "director-related entities" within the meaning of that term in accounting standard AASB 1017 (Ex. A 16252-308) and there should have been a disclosure in the consolidated accounts in compliance with paragraph 4.17, as required by s 298. There was a Note to the accounts that referred to the receipt by Signature of "development fees" from IDC for "the granting of exclusive contractual rights to refurbish leasehold properties" with reference to the directors who had relevant financial interests in purported compliance with s 298 and par 4.17 (Ex. A: 5137). However each of JBL and Hall have given evidence that the fees were not appropriately described in the Note and that the fees were more in the nature of a "penalty" (tr. 1435 & 1712) or an incentive to make IDC work "harder and faster" (tr.1701). 313 There has been no satisfactory explanation given by JBL or Hall as to why they did not take all reasonable steps to ensure that the accounts complied with s 298 and with par 4.17 of the accounting standard. Why approve accounts that described the fees as "development fees" for the exclusivity of contract when, if their evidence is to be accepted, the description is quite wrong. Of course this is a belief some years after the event but it demonstrates that they did not, at the relevant time, take all reasonable steps to ensure compliance with s 298. However to make declarations of these contraventions seems to me to be a little incongruous when I am satsified that these two defendants behaved dishonestly in breach of s 232(2) in respect of these fees because they knew there was no agreement struck in June 1996 between Signature and IDC for the charging of the fees and that there was no meeting on 5 October 1996. Hall created the file notes and letters in early 1997 and the Minutes were created in October 1997. They each caused the inclusion of the Note in false terms rather than in compliance with section 298. 314 I am satisfied that JBL and Hall knew there was no agreement between IDC and Signature in calendar year 1996 and that all relevant documents purporting to evidence such an agreement were created in 1997. I am also satisfied that they knew that the profits reported were not real profits. Hall's conduct in refusing to allow the fees to be charged beyond April 1997 is rather telling. The reason he gave Ellis for the cessation of the fees was that there was a "basic flaw in the methodology". If that was so then all the fees were infected with that flaw. However Hall did not balk at approving the Accounts that contained the purported profit from these fees that had to be stopped because of the basic flaw. I have no doubt that Hall's evidence that he struck the agreement in July 1996 was false. 315 I am satisfied that JBL and Hall each contravened ss 232(2) and 318(1) in respect of the Signature Exclusivity fees and declarations to that effect will be made. 316 In September 1997 Sapier assisted in creating minutes and letters which were signed and dated 5 October 1996, purporting to record a decision to discontinue the acquisition of IDC. It is submitted that he did so knowing that the meetings recorded in the minutes did not take place and knowing that the purpose of the exercise in which he was engaged was to persuade the auditors that Clifford had not acquired ownership or control of IDC, thus removing an obstacle as perceived by the auditors, to the inclusion of the Exclusivity fees in Clifford's consolidated income. 317 Signature's 1996/97 accounts described the Exclusivity fees as "development fees" charged to IDC "for the granting of exclusive contractual rights" to refurbish Signature's leasehold properties. Sapier claimed he did not have a detailed understanding of the transaction between Signature and IDC and relied upon others. He said he was satisfied with whatever he was told and did not make any examination himself. Although he accepted in his evidence he would have seen the management accounts referring to the fees he said he did not register concern over them. 318 The plaintiff submitted that Sapier should have familiarised himself with the accounts of Signature and should have understood the nature of the transaction between Signature and IDC. It was also submitted that what he saw in the accounts and what he knew of the existence of IDC's contract with Signature ought to have caused him to examine the fees more closely. It was submitted that in this instance he was not entitled to rely on the staff of Signature or IDC or the auditors and was obliged to make his own inquiries. It was submitted that his failure to do so amounted to contraventions of s. 232(4) and 318(1). 319 Sapier became a director of Signature from 1 November 1996, having been secretary or joint secretary since November 1994. He became director of IDC on 3 March 1997. He was a director of CCL from 22 February 1995. It is reasonable therefore to conclude that he knew that IDC had carried out fit-out work on Signature's leasehold properties. Monthly management accounts for Clifford from October 1996 to May 1997 included these fees with other income of Signature under the general description "Contribution Income" or "Construction Income". The evidence establishes that it was the practice to provide each director with a copy of the management accounts that were usually prepared within four to six weeks of the end of each month. 320 The management accounts for March 1997 included a report prepared by Mr Ho. It disclosed that the total debt owed by IDC to Signature at 31 March 1997 of $2,564,452 included a "Property development fee" totalling $2,486,250 for the months July 1996 to March 1997. That report also disclosed that a fee was charged to IDC for the month in the amount of $314, 850. When Sapier received and reviewed his copy of the accounts he placed crosses against some of these amounts. He said he received these accounts in June or July 1997. 321 The management accounts for April 1997 included a report prepared by Mr Drake. It disclosed that "no property is currently making a true operating profit (i.e. solely through income generated from tenants), with any surpluses shown to date being largely generated through pre-paid rental contributions and 'Exclusivity fees' from IDC". The report referred to the fees from IDC in the amount of $2,801,100 comprising 36% of total income. The management accounts for May 1997 included a report again referring to the lack of true operating profit with the reference to any surpluses being generated through pre-paid rental contributions and the exclusivity fees, which were noted to have ceased from May onwards. 322 Sapier attended an audit committee meeting on 7 August 1997 at which Hall, Ellis, and Mr Drake were present with other Clifford personnel. Sapier's notes of the meeting include an entry reading "IDC 2.800.000". Sapier gave evidence that such entry and another similar entry on a document he had with him at the meeting meant that he was informed during the meeting that Signature had recorded fees of $2.8 million that it had charged IDC. Sapier also attended an audit committee meeting on 26 August 1997 at which Hall, Ellis, Mr Meldrum and Mr Jepson were present. Sapier's notes of that meeting include entries: "IDC-minute, letter of acknowledgement, sale agreement didn't go ahead … Econ control-confirm CCL has no economic control of IDC-implications for consolidation are that there is an elimination of income & expenses leaving an income hole". 323 Sapier attended another audit committee meeting on 3 September 1997 at which Ellis and the employed accountants Mr Drake and Mr Browne were present. Mr Jepson also attended the meeting. The minutes of the meeting include: "IDC economic control issue: I. Sapier-this issue is applicable; if taken on consolidation point. The implication for the Group is significant. Agreed. Therefore, we were to discuss what we can do to establish that economic control of IDC by CCL does not exist". 324 Some of Sapier's evidence in respect of these fees was most unsatisfactory. For instance, he claimed that he did not have any idea of the scale of the monthly charge and that he left it to Hall, Ellis and the "other accountants". However he agreed that if he had known that an amount as high as $300,000 had been charged for a month he would have wanted to examine it "rather closely" (tr. 2059). When he was shown the management accounts referring to the "property development" fee of $314,850 on which his handwriting appeared the following evidence was given: Q. So you knew, then, when you got this set of management accounts the size of the fee that had been charged, at least for March 1997? A. If I had seen it, that would have been a fair statement. … Q. It is suggested that you couldn't have missed it; what do you say to that? A. Your Honour, I probably would have read it but not registered a concern over it. Q. Didn't you say to me a few minutes ago but if you had known that the fee was around $300,000 a month you would have made some further inquiries about it? A. I did say that. I haven't marked it in the report with a cross next to it. Q. Did you make any further inquiries about it? A. I don't recall. Q. Look, I take it you didn't care too much, did you, about what kind of charges were being put through between Signature and IDC? A. My outlook normally is as long as they are commercially justified and properly backed up and the auditors get to look at them and scrutinise them, then-I didn't see a need to go behind every transaction. Q. How did you satisfy yourself that that fee was a commercial fee? A. I think that I have laid down some fairly clear guidelines with Mr Ellis in relation to fees, and I relied on him and the other accountants to follow those guidelines. Q. So you say that you satisfied yourself it was a commercial fee because you delegated that task to Mr Ellis and others? A. Yes, the auditors also didn't raise anything that I'm aware of, or that I can recall. (tr. 2060) 325 The plaintiff submitted that from the time Sapier became a director of Signature on 1 November 1996 he ought to have familiarised himself with the accounts of the company. It was also submitted that he ought to have made inquiries as to the sources from which Signature was deriving large amounts of "contribution income" and understood the nature and size of the company's assets which, according to the accounts, included a large debt owed by IDC. It was also submitted that from the time he became a director of IDC he should have acquainted himself with the company's affairs which, at that time, were confined to doing fit-out work for Signature and understood the nature and extent of IDC's expenses and liabilities. It is submitted that had he done these things, he would have discovered the detail of the exclusivity fees that would, or should, then have put him on further inquiry. 326 The plaintiff submitted that Sapier knew, from and including at least May 1997 the probable date when he received the March 1997 management accounts, that the exclusivity fees were being charged. It is submitted that he must have known that they were highly unusual because he was aware that IDC did work for Signature and therefore, in the normal course of business, IDC would be charging Signature, rather than vice versa. He knew that the two companies were related and that should have caused him to examine the fees more closely. It was submitted that as a director of two related companies on opposite sides of the transaction involving fees of such magnitude, he had an obligation to examine for himself whether there was any real commercial purpose and substance to the fee. It was submitted also that in these particular circumstances, mere reliance on others was not appropriate or justified. 327 Mr Brender submitted that when Sapier settled the Minutes of the meeting, he did so to fulfil a "purely secretarial function ". However it was submitted that "he did somewhat carelessly overlook the fact that he was shown as present at a meeting which he did not attend". It was submitted that, "through no fault of Sapier" inaccurate or false Minutes had been frequently created and in this instance Sapier had been affected by this conduct. I cannot accept the submission. Sapier could have done something about the way in which Minutes were kept. On more than one occasion, including this one, he was aware that he was recorded as being present at a meeting that simply did not happen as recorded. To settle a Minute and not note that you are recorded as having been present when certain business was transacted is not something that I would describe as being overlooked "somewhat carelessly". I have already referred earlier to Sapier's claims about the Minutes and have rejected those claims. This is but another example of him seeking to distance himself from the process. This attempt is rejected. 328 I am afraid some of the submissions put by Sapier, through his counsel, were rather naïve, to use a fairly neutral epithet in all the circumstances. It was submitted that Sapier had no knowledge of IDC's financial position, "other than to believe that as it was controlled by Loiterton and Hall who were men of substance, and as he had been given reassurance it would be profitable, it would not default" (Subs. 2/12/2003 – p.18). If that is all that directors (executive or non-executive) of companies were required to do to ascertain the financial position of the company of which they were a director, the world of corporate governance would have reached the stage of high farce. This submission put by Sapier seems to me to establish that he obviously did not carry out his duties with proper care and diligence. When combined with the matters to which reference has already been made I am satisfied that Sapier failed to exercise appropriate care and diligence in the exercise of his duties as a director in relation to these fees. 329 The plaintiff does not seek declarations of dishonesty in respect of Sapier's conduct. The declarations of contravention sought relate to sections 232 (4) and 318(1). It was submitted that the fact that the "matters" were raised at the audit committee gave Sapier some reasonable comfort that the "matter" was under scrutiny and that the appropriate treatment in the annual accounts would occur. It was also submitted that as a non-executive director he could do little else than attend meetings, raise matters in discussion and ensure that he was satisfied about what he was told and that the auditors and employed accountants knew about the relevant issues. It was also submitted that it was reasonable for him to expect that had fees been at the material level of $300,000 per month, someone would have disclosed that to him clearly. 330 I am satisfied that Sapier should have registered a concern when he was reading the management accounts which contained the fee. I am satisfied that he should have exercised care and dilgence as a director (with his skills as an accountant) to pursue further inquiry about the size of these fees, their source, and their basis. I agree with the plaintiff's submissions that there was ample evidence from which Sapier should have registered a concern, including the minute that he settled placing him at a meeting that did not occur. Had he made further inquiries it is probable, with his skills, that he would have been able to ascertain that these fees had no proper commercial basis. 331 Sapier approved the accounts without exercising proper care and diligence and he failed to take all reasonable steps to ensure compliance with the Act. I am satisfied that the declarations of contravention of s 232(4) and s 318(1) should be made against Sapier. 332 The plaintiff submitted that PJL was not involved in any of the corporate or accounting areas. He was a divisional operating manager who was directly involved only in operational management such as selling space, administering tenants and developing offices. He was not part of head office management. 333 He signed the letter dated 11 July 1996 from IDC to Signature that I have found was created by Hall, or at his request, in late February or early March 1997. The plaintiff submitted that if PJL had taken proper care he would not have signed that letter. It is submitted that by virtue of his directorships of both Signature and IDC he knew the companies were related and he ought to have known that the fees were highly unusual. It is submitted that he ought to have made further inquiries which, it is submitted, would have led him to discover that there was no commercial purpose or substance to the fees and that their only purpose was to artificially inflate reported profits of Signature and therefore Clifford. 334 The plaintiff does not make any claim for a declaration of dishonesty against PJL and limited the relief sought to declarations in respect of a contravention of section 232(4). PJL's submission recognises that he should have taken more care than he did in the exercise of his duties as a director. I have no doubt that the letter he signed purporting to have been signed in July 1996 was not signed until March 1997. His conduct enabled these fees to be made to look as though they were agreed to when they were not. I am satisfied that as a director of Signature and as a director of IDC, PJL failed to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties in relation to the exclusivity fees. Origin fee 335 Origin Telecommunications Ltd was a company owned by JBL's brother, PL, who had an office in the same premises as Clifford, at 66 Hunter Street, Sydney. 336 In about June 1997 JBL said to Ellis: "We are going to get $770,000 by giving exclusive rights to Origin to provide Signature with telecommunications services". On 26 June 1997 Hall, as Chairman of Signature, wrote to the General Manager of Origin, to the attention of Mr George Loiterton, a son of PL. The letter included the following: This letter is to confirm that Signature Group Australia Ltd ("Signature") grants Origin exclusive rights to provide telecommunications services on any telephone lines currently operated by Signature and its subsidiaries. Signature also agrees that it will use its best endeavours to obtain for and on behalf of Origin the telecommunication rights for any of its tenants and/or any related entity. The period for which signature grants the exclusive right to the provision of telecommunications services is five years. Signature will use its best endeavours for a period of five years to obtain for and on behalf of Origin, agreement with Signature tenants and related entities the provision of telecommunications services. (Ex. A: 2962) 337 The letter then went on to refer to the discounts of 30% that would apply to STD and ISD calls from CCL, Signature and APG and a 25% discount on STD and ISD calls for any tenant of Signature. The letter also listed each of the telephone numbers to which the agreement applied and advised that the fee of $770,000 to be paid by Origin to Signature was for: (a) the provision of Signature's telephone lines direct; (b) Signature's best endeavours to obtain agreements with tenants; and (c) obtaining telephone lines from related entities. 338 Ellis prepared draft letters to the tenants of Signature advising that Signature had held discussions with Origin for the provision of telecommunications services through all of its offices and business centres. The letter requested the tenant to return a counterpart letter to the National Marketing Manager of Signature, Luke Guns, should the tenant wish to receive the 25% discount. Ellis did not recall being aware of any responses from any tenants. 339 Towards the end of June 1997 JBL had a conversation with Drake in which JBL said: We need to book the $770,000 coming from Origin Telecommunications as income to Signature. It is a fee for the rights to provide telephone services to Signature and Signature sub-tenants. We will be receiving the funds soon. 340 On 30 June 1997 the following took place: (a) JBL, using funds in the joint account "JB and WM Loiterton", purchased a bank cheque for $400,000 payable to Origin; (b) JBL, a signatory to Notretoil's bank account, caused Notretoil to purchase a bank cheque for $370,000 payable to Origin; (c) Origin deposited the two bank cheques into its bank account; and (d) Origin paid $770,000 to Signature describing the payment on the cheque butts as "a contract for phone lines". 341 In late June or early July 1997 Drake had a conversation with either Ellis or JBL when one or other of them said to him: "In return for the exclusivity rights, Clifford is investing a million dollars in Origin. Book this amount to the cashflow report". This transaction was not reflected in Origin's register of members, its share allotment journal or its share transfer journal. 342 JBL called PL to give evidence in his case. There was no statement or affidavit from PL and his evidence was elicited orally. The first notice given to the Court that PL was to be called in JBL's case was on 21 May 2003. However JBL had informed the plaintiff on 16 May 2003 that he intended to call PL as a witness. PL gave evidence on 23 May 2003. 343 PL is a solicitor and holds a current practising certificate, however he gave evidence that he disposed of his legal practice in 1994 and has only recently recommenced taking instructions in a minor manner. He gave evidence that in 1997 Origin was a service provider of telephones with approximately 6,000 customers and 3,000 telephone lines. PL's sons, Ben and George Loiterton, were directors of Origin. 344 PL gave evidence that in the period March to June 1997 he had a number of discussions with JBL in respect of Origin. He said that JBL's daughter, Jenni Hoysted, who was the manager of Signature's suite of offices, went to see him on several occasions after she had been approached by a number of service providers including AAPT, Optus and Macquarie Corporate. PL looked at the offers made to Signature by these companies and in a conversation with JBL said: "Why don't you use Origin, we will give the same prices?" (tr. 1592). 345 PL said that "as a consequence" he and JBL had several meetings and determined an appropriate approach. During these meetings there was discussion of an investment in Origin "limited to an investment within the family". PL gave the following evidence-in-chief: A: ... I offered Clifford - when I use the word Clifford, I mean and its subsidiaries – a discount on STD and IDD lines of 30 per cent which was about the going rate in the marketplace. You said that you wanted to take advantage of that discount in a one-off transaction, upfront for the benefit of Signature. We determined your traffic lines, the discount that would occur over the period of five years and quantified that discount. Q: What did the figure come to? A: The figure came to $770,000. Q: And that became the basis upon which discussions continued? A: And the basis of the $1m investment. (tr. 1593) 346 PL gave evidence that without the $1 million investment Origin would have been unable to agree to a forward payment in relation to its future discounts (tr. 1593). The first payment made to Origin of $230,000 was made on 2 June 1997 and the balance of $770,000 was paid on 30 June 1997. PL said the investment was made "through" JBL's family companies (tr. 1593). 347 PL's further evidence-in-chief was that "at some subsequent date" the transaction was "activated" and "part" of the telephone lines of Clifford and other parties were transferred to Origin (tr. 1593). His evidence-in-chief in relation to a further investment in Origin was as follows: Q: Do you recall the basis upon which I approached you for further investment? A: You said that you had been giving consideration to an investment from Clifford and I told you categorically that wasn't on. Q: Do you recall the amount of the investment that I was proposing to you? A: You were talking about one million further dollars. Q: Do you recall your comments at that time in respect of keeping the matter in the family? A: No. I said you must be confused, I've only ever given consideration to the first investment of a million dollars. Q: And the result was that you refused to allow any further investment? A: Correct. (tr. 1594) 348 During his cross-examination PL agreed that on 27 February 2002 he had voluntarily been interviewed by the plaintiff (the ASIC interview) (tr. 1598). A copy of the record of the ASIC interview was shown to PL during his cross-examination and its contents were used to test PL's evidence, not only on the topic of the Origin contract and fee but also in relation to the allegations the plaintiff makes relating to share trading. 349 PL agreed that Origin's gross income up to June 1996 was $85,000. He also gave evidence that the gross revenue in June 1997 was $1.1 million. He agreed that the "enormous jump" in the revenue was in part attributable to an increase in the number of employed salesmen and the agreement to pay them $30 per customer telephone line that they procured. 350 PL agreed that the only time Origin had ever offered a customer an "upfront, lump sum payment" was when it offered such payment to Signature. He said that Origin would certainly not pay to a prospective customer an amount equivalent to twice the customer's annual billings to acquire the customer's business. However he agreed that he told the plaintiff in the ASIC interview that not only did Origin have a "standard practice" of paying a prospective corporate client twice the amount of its annual telephone bills to secure its business, but also that it was the "industry norm" to pay the prospective client an amount equal to 24 months of the customer's last monthly bill (tr. 1626-1627). In cross-examination he said that there was no such industry practice (tr. 1627). When asked why he would have told the plaintiff that there was an industry norm, he said: "I must have believed it at the time but let me say, not having read the transcript in the meantime, it's a surprise to me that that's what is contained in it" (tr. 1627). 351 PL was asked about the formula by which the fee of $770,000 was struck. He said that he believed it was quantification of a 30% discount over five years. He agreed that it had nothing to do with a formula of doubling the customer's annual phone bills and working out a reasonable price. He also agreed that the reason he told the plaintiff that the fee was struck on that basis was to justify the large sum of money that Origin paid to Signature (tr. 1628). His evidence on this topic included the following: Q: You thought during this interview that ASIC wanted to discover some kind of justification for that fee, did you not? A: I assumed so, yes. Q: You assumed, did you not, that they were sceptical of the bona fides of it? A: I didn't know that. Q: You accept that you told ASIC, you gave ASIC a false reason for why the fee was struck at $770,000? A: As far as my clear memory is today, the answer is yes. Q: Yes, it was a false reason? A: Yes. Q: Can you think of any reason why you would have given ASIC that false reason? A: I am certain I would have believed it at the time. I cannot, other than that, assist you. (tr. 1628) 352 PL said that he was spending 60% of his time on Origin business and that he was well aware of how Origin obtained its customers. He was asked why he needed to invent a false reason for how the fee was calculated and said: "I don't know. It may have been one of the calculations or equations we used. I don't have a recollection of it today" (tr. 1628). 353 PL agreed that negotiations for the "deal" with Signature were unique. He informed the plaintiff that he had negotiated the fee with Ms Hoysted and that JBL merely agreed to the figure. He could not explain why he had told the plaintiff in the ASIC interview that it was negotiated with Ms Hoysted when his evidence at this trial was that it was negotiated with JBL. He agreed that his son, George Loiterton, played no part in the negotiations in relation to the fee and could not explain why the letter from Signature would have been addressed to him (tr. 1630). 354 PL claimed that JBL said: "We would like to work a deal with you whereby we take the deemed telephone bills and discount 30% and, rather than paying it to us monthly, we'd like you to pay us a one-off deal upfront" (tr. 1633). PL also gave evidence that the deal he made with JBL was "totally an oral one", and that although he informed ASIC that he had received the letter of 26 June 1997 from Signature on about that date, he believed he did not receive it. He said the "deal was to be reduced to writing but that did not occur" (tr. 1634). 355 PL knew in June 1997 that JBL and Hall were keen to try and sell off the Signature business. He gave the following evidence: Q: Bearing in mind that you were dealing with a listed public company, Mr Loiterton, and bearing in mind that you were Barrie's brother, did it occur to you, as a matter of prudence and propriety, that there should be something in writing between the two companies evidencing the agreement? A: Yes. Q: You see, your concern was that the amount itself was uncommercial, wasn't it? A: No, but I had nothing to gauge it on. It was a negotiated figure. (tr. 1635) 356 PL claimed he thought Origin would make "a good little profit" out of the deal because Clifford was acquiring other companies and doing all sorts of things. He said that the fee was calculated by ascertaining Clifford's billing, taking 30% of that figure and multiplying it by 60 (tr. 1636). He said that JBL brought the figure of $770,000 to him and his evidence was: Q: Was that figure connected in some way with the fact that that figure plus $230,000 which Barrie paid you on about 2 June 1997 comes to $1m? A: Yes. Q: What's the connection? A: They're connected. Without the $1m investment, Origin wouldn't have the $770,000 to pay for the lines. So it was totally part of each other. Q: But if Barrie was going to have a $1m investment, why did he only pay you $230,000 on 2 June? A: I can't recall it, but the $770,000 was determined at the – by 2 June. Q: What took so long for the $770,000 to be paid to Signature? A: To be paid to Origin? Q: To be paid to Signature? A: That was paid on 30 June by Origin to Signature. Q: Did you strike an agreement with Barrie on the fee that was to be paid as early as 2 June? A: Yes. Q: Then what took so long for Origin to pay the fee to Signature? A: Well, we had to receive it from Barrie, for a start. Q: So in your discussions with Barrie, did he make it a condition of the payment to Origin by him of $770,000 that that money should be used exclusively to pay it to Signature? A: Yes. (tr. 1638) 357 He agreed that the deal he struck with JBL in June 1997 was that JBL would arrange for $770,000 to be paid to Origin and that Origin would then pay that money to Signature and the Clifford Group would switch its business to Origin (tr. 1643). On about 2 June 1997 JBL and his wife paid a cheque for $230,000 to PL. PL gave evidence that he paid that directly into Origin's account. He said that the $230,000 was "always a share investment" and went so far as to say that he and JBL argued about the percentage of shares that would be issued (tr. 1645). 358 PL accepted that he informed the plaintiff in the ASIC interview that he had no doubt that Blenheim Holdings Ltd was a 20% shareholder in Origin (tr. 1647). However he also gave the following evidence: Q: Were the shares ever issued to anyone? A: In the end, no. Q: So no shares in Origin were ever issued to any entity associated with Barrie Loiterton? A: Not issued, no. There were plenty of draft documents, but they were never issued. … Q: Did you tell ASIC in the February 2002 interview that the issue of shares in Origin to Blenheim happened? A: I did. Q: Why did you say that if it never happened? A: I believed it at that time. Q: What's happened between then and now that has changed your belief? A: I have found out that, firstly, a return of allotment of shares was not filed with ASIC and that in consequence I had to accept that shares, whilst promised to be issued, were never issued. Q: You realize that the share issue happens first and then the notice to ASIC occurs, doesn't it? A: Yes. Q: Why didn't it happen if in fact you say that you received $1m from Mr Loiterton for a share issue? A: In the course of the following four months, for the circumstances of Origin, it was not completed. Q: Why wasn't it completed, for example, in July 1997? A: I think in retrospect it should have been, but it was not. Q: Why not? A: I am unable to say. Q: Well, why wasn't it completed in August or September 1997? A: For the same reasons. It should have taken place in the formal and physical sense of the documents, and apart from draft documentation, it was not finalized. Q: But why not? A: I think I will accept responsibility for the tardiness in finalization. (tr. 1647-1648) 359 The receipt of $1 million made up of the two payments of $230,000 and $770,000 were described in Origin's accounts as "loans from third parties" (tr. 1649). PL gave evidence that he regarded this description as "quite proper" until it "translated into shares". It was suggested to PL that the reason this description was given to the $1 million and the reason no shares were issued was because it was never intended to issue any shares. PL denied this suggestion. 360 PL was shown a Report as to Affairs of Origin (the Origin Report) signed by him on 14 November 1997 certifying that the particulars within it were true to the best of his knowledge and belief (Ex. R). He gave evidence that he prepared the Origin Report, or caused it to be prepared, and was responsible for its contents (tr. 1651). He accepted that there was no reference in it to the $1 million payment and gave evidence that there should have been "reference to the fact of unallocated shares" (tr. 1653). He said he accepted "responsibility for obviously overlooking it" and claimed "had I been thoughtful enough I would have included it" (tr. 1653). PL also accepted that the Origin Report did not contain any reference to any asset of Origin said to constitute the contract with Signature for the five-year deal. He said that his failure to include the payment of $770,000 to Origin and the $770,000 contract he alleged he entered into with Signature through JBL in the Origin Report was "an oversight" (tr. 1654). 361 The plaintiff relied upon the evidence of Peter George, a telecommunications consultant. Mr George analysed the draft statutory accounts of Origin for the period ending 30 June 1996 and an unaudited trial balance of that company as at 31 December 1996. He also had regard to the letter of 26 June 1997 and its attachments. Other documents reviewed included the correspondence between Origin and AAPT, ASP, Smart Communications Pty Ltd and James Edward Stephens. Mr George looked also at the prospectus of Macquarie Corporate Telecommunications Pty Ltd which was used to provide benchmark information on gross profit margins and a cost structure for a company operating in the same market sector as Origin, offering the same range of services and having no network infrastructure of its own to reduce carriage costs. Having regard to the cost to Origin and the terms of the letter of 26 June 1997, Mr George concluded that such agreement was not within the bounds of reasonable commercial practice at that time. 362 The plaintiff alleges that the letter of 26 June 1997 was not sent to Origin. It is alleged that Signature did not receive any document from Origin confirming the details in the letter and that Signature's letter was not the product of any negotiations of a commercial nature between Origin and Signature. It is alleged that the payment by Origin of $770,000 to Signature for the purported rights referred to in the letter of 26 June 1997 was not within the bounds of reasonable commercial practice. 363 On 20 October 1997 a secured creditor of Origin appointed receivers and managers to that company and on 21 October 1997 it ceased trading. On 21 November 1997 Origin went into liquidation by order of the Federal Court of Australia. 364 At the conclusion of PL's cross-examination, JBL sought time to consider his position before re-examining PL and indicated that he had not seen the record of the ASIC interview. On 26 May 2003 JBL requested that PL's evidence be struck, or that the plaintiff be prohibited from relying upon those parts of it that relied upon the ASIC interview, because JBL was not given access to the record of the ASIC interview before he called PL to give evidence. 365 JBL advised the Court on 15 September 2003 that he did not wish to re-examine his brother, however he did give evidence in support of an application that his brother's evidence in cross examination should be struck from the record or an order made preventing the plaintiff from relying upon it. The basis of that claim is that because he was representing himself he did not specifically ask the plaintiff to provide him with records of interviews with persons who had provided information voluntarily. His evidence was that he asked the plaintiff for copies of s19 examination transcripts (tr.2161). He therefore did not obtain a copy of PL's record of interview that was provided voluntarily outside the s19 process. 366 JBL's cross-examination in respect of this application included evidence that it was possible, indeed probable, that he had spoken to his brother following his own s19 examinations. His evidence is that he did not know about his brother's interview until it was cross-examined upon when his brother was giving evidence. 367 The evidence of Peter Noel Riordan, a solicitor employed with the plaintiff, sworn 2 June 2003, is that the plaintiff did not receive a formal or informal request from JBL, or anyone on his behalf, for a copy of PL's transcript or for a class of documents of which the transcript formed part. In the case management of this matter there was no order for formal or informal discovery in the proceedings and no agreement had been made between the plaintiff and JBL for the provision of documents by way of informal discovery or by way of procedure analogous to informal discovery. 368 It is apparent that the plaintiff provided a copy of the transcript of PL's interview to the solicitors for Sapier on 6 March 2003 in answer to their specific request for the document. It is also apparent from the evidence that the plaintiff at all times held a genuine belief that JBL was aware that PL had given a voluntarily recorded interview to the plaintiff on matters relevant to the present proceedings. 369 The plaintiff submitted that whatever the intrinsic nature of civil penalty proceedings, the legislative intention is that they should be characterised as civil, not criminal proceedings. Consistently with the characterisation of the proceedings as civil proceedings, s1332 provides that the standard of proof is to be the civil standard of proof on the balance of probabilities. S1317ED provides that subject to the rules of Court, in hearing and determining an application for a civil penalty the Court is to apply the rules of evidence and procedure that it applies in hearing and determining civil matters. 370 The plaintiff accepts that the proceedings attract an obligation of "prosecutorial fairness" although the content of that obligation in civil penalty proceedings is submitted to be uncertain. In the present proceedings JBL was aware at all times that his brother, PL, played a role in some of the transactions or purported transactions the subject of the proceedings. He did not make a claim in his evidence in support of this application that if he had been aware of the contents of the interview PL gave to the plaintiff he would not have called him to give evidence in his case. His submissions in support of the application were as follows: If I had had the benefit of the transcript of Mr Loiterton, I do not know what different action I might have taken, if any, but I should have had the opportunity. I submit there was no excuse for this transcript to have not been supplied. (MFI 12) 371 The discretion of a prosecutor to call or not to call witnesses is an important part of the criminal justice system: The Queen v Apostilides (1984) 154 CLR 563. The discretion of counsel or solicitor appearing for a government regulator seeking declarations of contraventions of civil penalty provisions of the Act is in my view an important aspect of the justice system administering civil penalty prosecutions. 372 Whether a statement made by a person to a regulator in the course of an investigation, who is not called by the regulator in the case for declarations of contraventions of the Act, should be made available to a defendant will depend upon a number of factors. Those factors will include whether there has been an order for discovery either generally or by categories; whether there has been an agreement between the parties that informal general discovery or discovery by categories should take place; or whether the statement (or interview) is appropriately the subject of a claim for privilege. It seems to me that it would be prudent for defendants in civil penalty proceedings to seek orders for discovery, if only to ensure that all relevant documents may be viewed by them and/or their legal representatives from their perspective. That was not done in this case. 373 Whether it is "unfair" that a statement or an interview of such a person has not been provided to a defendant will depend upon the circumstances of the particular case. In this case JBL was unrepresented but it is clear that enormous efforts were made to supply to him access to all of the documents and copies of all documents that the plaintiff intended tendering in evidence. The forensic decision to call PL was apparently made late in the day and without a request for transcripts of any interviews he had with the plaintiff. It is obvious this has been a very large case with a very lengthy investigation with many thousands of documents only some of which are in evidence. The whole process has taken approximately four years to conclude after an investigation that apparently took at least two years. 374 I am certainly not satisfied that the plaintiff breached its obligation to JBL in not providing PL's ASIC interview transcript. These are civil proceedings and the circumstances of this case, notwithstanding JBL representing himself, lead me to the conclusion that it was not "unfair" that PL's interview had not been provided to JBL prior to the time that he called PL to give evidence. It was reasonable to assume that JBL was aware of his brother's interview with the plaintiff and that any evidence that PL would give would be consistent with what he told the plaintiff in the ASIC interview. I do not intend to accede to JBL's application to strike PL's evidence from the transcript and I do not intend to make an order that the plaintiff is not permitted to rely upon the cross-examination of PL in respect of the ASIC interview transcript. 375 The plaintiff claims that the purported agreement between Signature and Origin recorded in the letter of 26 June 1997 was not made or alternatively was a sham. It also claims alternatively that if the purported agreement was not a sham, it was a transaction between related parties which ought to have been, but was not, disclosed in Clifford's 1996/1997 consolidated accounts or in Signature's 1996/1997 accounts as an uncommercial transaction between non-arm's length parties. 376 There is no disclosure in Clifford's 1996/97 consolidated accounts of information about the Origin fee. The accounts disclose, in the related-party notes, that "a brother of John Barrie Loiterton rents office space from Signature Group Australia Limited on normal commercial terms and conditions". JBL gave evidence firstly that he did not think the Origin fee was a related party transaction but later said that he knew that the transaction was with the company controlled by his brother and had to be disclosed. However he said he did not notice the non-disclosure when approving the accounts (tr. 1406-1408). Hall gave evidence that although he was aware that JBL's brother controlled Origin, he did not give any thought to the related-party nature of the transaction (tr. 1670). 377 The plaintiff submitted that the Origin fee received by Signature was not received as consideration for the grant of the exclusive rights to provide the services referred to in the letter. It was submitted that Origin, acting through PL, knowingly facilitated a scheme, devised by JBL and designed to increase Signature's reported profit and therefore Clifford's reported consolidated profit, by creating the appearance that Signature had entered into a bona fide arm's length commercial transaction and had earned income of $770,000 from the transaction. 378 It was submitted that Origin was merely a conduit for the payment of the Origin fee by JBL to Signature and that it was never the intention of JBL or PL that Origin should have any obligation to JBL or his family interests in respect of the $770,000 that JBL paid the company on 30 June 1997. It was submitted the JBL never intended that he should acquire an equity interest in Origin. It was submitted that JBL intended that Clifford should pay $1,000,000 to Origin for an issue of shares and that Origin should use the money to repay JBL so that he would not be out of pocket. 379 The plaintiff submitted that by the time the accounts were signed on 10 October 1997 the fee correctly represented a "profit" to Signature and Clifford, however it is submitted that the fee was in the nature of a gift from JBL or from Origin with funds provided by JBL for that specific purpose. The amount came from a CCL director or his brother's company and this was not disclosed in the accounts. It is submitted that the failure to disclose these matters did not give a true and fair view of the consolidated profit. Signature and Origin were director-related entities and the consolidated accounts should have complied with the disclosure requirements such that the nature of the terms and conditions of the fee should have been disclosed. 380 The plaintiff submitted alternatively that if the Origin fee was received as consideration for the grant of the exclusive rights, the fee was the product of a non-arm's length dealing and was manifestly excessive by commercial standards. There was a failure to disclose either of these matters in the accounts. 381 It is submitted that, as a director of CCL, JBL contravened s 232(2) or alternatively s. 232(4) and s 318(1). It is submitted that, as a director of Signature, JBL contravened s. 232(2). 382 It is submitted that Hall was aware that the Origin fee was the product of discussions or negotiations between JBL and his brother, whom Hall knew controlled Origin. Hall regarded the transaction as one that JBL negotiated for Signature and did not have the knowledge to assess for himself the appropriateness of the fee. He gave no thought to the fact that there was a family relationship involved in the transaction and did not examine the transaction carefully. 383 The plaintiff submitted that Hall should have been aware of the need to examine the transaction carefully and should have made inquiries about the calculation of the fee and its commercial justification, before agreeing to assist in the implementation of the purported transaction. It is also submitted he should have been aware of the related-party disclosure rules or at least sought advice as to the application of those rules. For his failure to do so the plaintiff submitted that, as a director of CCL, Hall contravened s.232(4) and s. 318(1) and, as a director of Signature he contravened s 232(4). 384 This transaction has to be looked at in the context of everything else that was going on in June 1997. As I have said elsewhere, it is not appropriate to look at this transaction in isolation when considering whether declarations of contravention should be made against the defendants. The pressure that was being applied by JBL in respect of the Revesby property (referred to later in this judgment) combined with the requirement that the Signature exclusivity fee be charged evidences an environment in which the directors must have been aware that the predicted profits might be in jeopardy unless those transactions and the Origin fee transaction occurred. 385 For JBL and Hall to give the evidence they did in respect of their lack of recognition of the related party nature of this transaction speaks volumes of the way in which these two men approached the affairs of CCL and Clifford. There is something a little surreal about the way in which they directed these companies or to put it more accurately, failed to direct these companies. When JBL wanted a particular level of profits, resort was had, not to performance of the usual business of the company in an effort to generate real profits but to transactions with family members that at the very least look very uncommercial and are also riddled with curious and inconsistent documents and explanations about their nature. 386 JBL's payment of $770,000 to Origin was the only way Origin would have been able to pay Signature that amount. The failed attempt to have CCL make an "investment" in Origin to the tune of $1 million was an unsophisticated attempt to have the $770,000 paid back to JBL. The recitation of these facts make it clear that this was a transaction, not measured in a commercial manner between corporate entities, but part of the rather "loose" arrangements that had developed between JBL and his brother PL, to which reference is made later in this judgment. This was not a real arrangement at all. It was an arrangement whereby the purported profits of Signature were boosted by JBL injecting funds into Signature via Origin on no commercial basis at all. JBL knew that this was not in the best interests of Signature and ultimately CCL and acted in disregard of that knowledge. I am satisfied that JBL contravened s 232(2) both as a director of CCL and Signature and was the cause of Clifford's failure to comply with s 295A. 387 From his own admissions, I have absolutely no doubt that Hall failed to exercise the appropriate level of care and diligence as a director in relation to this transaction and thus declarations of contravention of sections 232(4) and 318(1) will be made. The Revesby Profit 388 A term of the agreement for the purchase by CCL of the shares in JRA was that JRA/APG would cause one of its subsidiaries to transfer the Revesby property to Austchas for the purchase price of $799,998. At the time of the agreement CCL held a property valuation report from Colliers Jardine that expressed the opinion that the current open market value of the freehold interest in the Revesby property was $3.2 million (Ex. A: 7872). At the time of the settlement of the share sale agreement on 14 October 1996 Austchas received a transfer of the Revesby property that it mortgaged to secure CCL's borrowings in relation to the overall transaction. Austchas leased the Revesby property to CCL for five years with a further five year option. 389 On 21 November 1996 JBL by "Internal Memorandum from the Office of CEO" advised "all directors" that: The Revesby property has reached its use by date. The factory has extensive areas of asbestos including a totally asbestos roof. Any alteration or addition will be extremely expensive. We will shortly face a major upgrade cost and planning and repairs which were not unexpected. The property stands in our books at $3.4m. It is my view that as vacant possession, it is more likely to be valued at $2.8m but it might be possible to yield $3.0m or thereabouts. The Hino operation in the front of the building, given the change to Renault, will be removed from the site in any event. If this site is retained, then we will need to upgrade the new spare parts section at the front to incorporate the pre-delivery unit for STA. The capital cost is expected to be between $300,000 and $400,000 plus at least $800,000 in factory upgrade. (Ex. A: 8451) 390 On 7 February 1997 JBL, as Chairman of CCL, wrote to the company secretary of APG (at the time Ellis and Sapier jointly) advising that the Board of CCL had "taken the view" that in CCL's "ordinary course of business, it will not be involved in the management of real property within its subsidiary companies". The letter instructed APG to commence the disposal of all properties held within APG and to enter into leaseback arrangements on a commercial basis. The letter concluded: As a blanket policy, and consistent with Clifford's primary business objectives of entering into large transactions, the sale of this property and any other properties within APG is not to be considered outside Clifford's core objective or its strategic move towards an overall business plan. (Ex. A: 8959 – 60) 391 Ellis gave evidence that in about February/March 1997 JBL informed him that he wanted the Revesby, Adelaide and Kingston properties sold before 30 June "because we need the profits and the cash". JBL cross-examined Ellis in respect of this evidence and suggested to him that the words he claimed JBL had used were not "strictly correct" (tr. 523). JBL suggested to Ellis that he had not used the words "because we need the profits and the cash". Ellis said that he did not agree (tr. 523). 392 JBL also suggested to Ellis in cross-examination that he had been asked the same question at his s 19 examination and had answered it differently (tr. 523). Ellis said he did not recall the question or the answer during the s 19 examination. Although there are in evidence extracts of transcripts of some of the s 19 examinations (Ex. D1-20), the transcript of that particular examination is not in evidence. In any event it is not in issue that JBL wanted every effort to be made to dispose of the properties and achieve the target for which CCL had planned (Ex. D1-9: par 141). In April 1997 Ellis had discussed with Biber the "possibility of putting a trust deed in between JRA and Austchas in order to ensure that the Revesby property purchased by Austchas was held in trust for JRA". Ellis advised JBL by memo dated 15 April 1997 of a number of problems that prevented such a transaction, including that Biber "simply would not allow us to do it". He also advised: Our initial thought is that the only proper method to ensure the Revesby property is brought into Austral Pacific Group Ltd (APG) is to effect a proper transfer of the property from Cargall to APG. This being the case, stamp duty would be incurred and is estimated at $121,000 based on the valuation at $3.2 million. Prior to proceeding along this route, I will see if there is any alternative, as I have commenced discussions with Ian Sapier. I will also obtain a valuation based on vacant possession and will ensure that the valuation is as low as possible. I will advise you further as events unfold. (Ex. A: 9186) 393 Also on 15 April 1997 JBL, as Chairman of CCL, wrote to the company secretary of APG referring to the letter of 7 February 1997 and instructed APG to commence disposal of the Revesby property and to enter into a leaseback arrangement for a period of twelve months "during which time more suitable premises should be found". The letter also advised that CCL required APG to make "immediate arrangements" to offer the property to interested parties (Ex. A: 9184). On 17 April 1997 Ellis, as company secretary of APG, wrote to JBL at CCL advising that APG undertook "to action the sale" as part of CCL's business plan with "due haste" (Ex. A: 9188). 394 On 21 April 1997 Ellis wrote to Sapier advising him that he would like to talk him in relation to the sale of the Revesby property and the letter of advice that Sapier was sending which had then become rather urgent (Ex. A: 9195). 395 It appears that in April 1997 an offer for the Revesby property was made by Mr Colin Crossley of Crossley Coaches, a major bus company (tr. 198, 1139). On 23 April 1997 JBL sent a memorandum to Mr LE Stewart, a director of APG at the time, suggesting what JBL described as the "most tax effective approach" in respect of the sale to Crossley. JBL suggested that the property be sold to Crossley for $800,000, "the price in our books" that would "have the effect of substantially reducing his stamp duty". The memorandum continued: 2. As we would require a price of $3.2m, the difference of $2.4m is proposed to be a fee payable on settlement by Crossley to Clifford which would be the subject of a separate simple agreement. It would be deemed to be a consulting fee, payable at the rate of $800,000 per year for "assistance in the future development of the property" or similar and the $2.4m would represent a prepayment of the annual fees of $800,000 for 3 years. By this means, we achieve our $3.2m and Crossley receives an annual deduction of $800,000 against his taxable income and we apply the fees against our tax losses and don't make a taxable capital gain. It should have absolutely no effect on Crossley except to give him a tax benefit over 3 years of approximately $900,000 (which he should not object to). The only additional exercise is that we want him to pay on delivery for the purchase of the spray booths which will be left there at a further price of $70,000. 3. Delivery will be given as to the side annexe on a date to be agreed, but at the moment 6 months would sound the right approach, with the balance in 15 months maximum. We would prefer 12 months. 4. In the meantime, from settlement we will pay an annual rent of $400,000 and after he takes delivery of the annexe, the rent will drop to $250,000 per annum – all adjustable on a monthly basis. Rent would be payable quarterly in arrears. See if you can close on this basis as we have a considerable profit advantage in this move, moving profits from capital gains to trading profits. (Ex. A: 9217) 396 On the same day Ellis made a file note in relation to the proposal to sell to Crossley in which he referred to the $2.4 million as "fees for consulting and business-related purposes" and that it was a "one-off payment, non-specific in time". The file note recorded that Ellis and Sapier were to examine the transaction and ensure its viability "in relation to income tax profit maximization and acceptability by the auditors" (Ex. A: 9222). 397 The sale to Mr Crossley did not proceed but JBL was cross-examined about his memo to Mr Stewart dated 24 April 1997. He accepted that CCL never intended to provide consulting services to Mr Crossley or his company in return for his money and agreed that "on the face" of the memo it suggested that Crossley should enter into a "pretend" transaction (tr. 1255). However JBL denied the suggestion that the idea contained in the memo was one of many that he had for "creating artificial transactions in the records of the Clifford Group" (tr. 1257 & 1260). 398 JBL went overseas on 18 May 1997 until 2 June 1997. He gave evidence that before he departed he "left instructions to dispose of the properties" but that on his return he discerned that little had been achieved. He said he then issued a series of instructions designed to promote a successful sale of the Revesby property. On about 2 June 1997 the value of the Revesby property in the consolidated balance sheet for the Clifford Group for the period ending 30 December 1996 was written back to $970,200, made up of a rounded figure for the purchase price of $799,998, together with stamp duty of $170,200 (Ex. A: 2875-7 & 9425). 399 On 10 June 1997 one of the property agents, Knight Frank, advised that there was very little keen interest in the property but they hoped that recent mailing of brochures would produce some active enquiry (Ex. A: 9438). On about 12 June JBL enquired of Ellis why the Revesby property had not sold and said "it must be sold by 30 June, get on to Ian Hall, get him to sell it". Ellis informed JBL that he would do something about it. Ellis then had a discussion with Hall and sent him a memo dated 12 June 1997 with a copy to JBL in the following terms: Further to our discussion this morning, could you please expedite the disposal of the Austchas Revesby property, using any method, in order for a sale to be completed by 30 June 1997 (critical date). As discussed, we could have Austral Pacific Group enter into a five-year lease in order to achieve a sale and leaseback of the property. As you are aware, it is critical that as at 30 June 1997 we are the stage of having a "non-cancellable" contract issued. (Ex. A: 9439) 400 In his cross-examination Hall said he thought the term "using any method" should have been "using all contacts" (tr. 1737). JBL cross-examined Ellis as to why he had used the term "critical date" in this memo. Ellis said: "you wanted the sale completed by the end of June, so therefore 30 June was a critical date, so that it would come into the books or the sale would be completed by 30 June 1997" (tr. 504). Ellis said that he recollected clearly that was the reason he used the term. JBL suggested to Ellis that in his s 19 examination he had said that he had used the term: "because everybody knows that 30 June is the date that ends the financial year" and that he was trying to use it as a "lever to try and put the fire under somebody and get something done" because it appeared the attempts to sell the property had "stalled" (tr. 504). 401 Ellis said that he did not know why he had used the term "non-cancellable" in the memo. However he said that JBL was applying "pressure" on him to sell the property (tr. 505–506). In his affidavit, Ellis claimed that he used the term "non-cancellable" because a party "committed to purchasing" the Revesby property had to be found. He said that he was also aware that if the Revesby property was not sold by 30 June 1997 "at a substantial profit", CCL would not have achieved its forecast profit for the year. In further cross-examination JBL asked Ellis: "did someone strike a sale price?". Ellis said that JBL had struck the price. JBL then suggested to Ellis that he had been asked exactly the same question at his s 19 examination and had answered: "no, we went on the valuation" (tr. 506). 402 On 16 June 1997 JBL asked Ellis to send the details of the property to Mr Malcolm Edwards of Essington Investments Pty Ltd and consent was sought from the mortgagees for a sale of the Revesby property. On 26 June 1997 Ellis had a conversation with Hall in which Hall asked him to advise Mr Biber to commence preparing the contract for the sale of the Revesby property and that he would have the details for him the following day. It may have been the same day or around that day that Hall also advised Ellis: "we've found somebody to buy Revesby but we might have to help them". 403 Sapier gave evidence that it was some time in June 1997 that Hall asked him if he knew anybody who would be interested in acquiring the Revesby property because it would be a good opportunity; it had good market rental; all outgoings were covered; and it would be self-funding. Sapier informed Hall that he could not think of anyone at that time but would let him know if he did. 404 In April 1996 Sapier had arranged the incorporation of a shelf company, Peregrine Corp Pty Ltd (Peregrine), for a client of his accountancy practice, which had ceased to trade on 30 June 1996. In mid-1997 the client instructed Sapier to "wind up" Peregrine. Sapier had another client, Michael Majdalani (Majdalani), whom he thought may be interested in and capable of obtaining finance for the acquisition of the Revesby property. 405 Sapier said that he contacted Majdalani and informed him that he had a "business opportunity" for him to "acquire a property located at Revesby". He said that he informed him that the property had "rental sufficient to cover any funding costs and outgoings" and asked him whether he was interested. Sapier said that he informed Hall that he had someone "who could be interested" in the property. He informed him of Majdalani's identity and a little of his background and that he was looking for a new opportunity but did not have any money. Hall informed Sapier that he was "sure we could spot him for a couple of thousand". 406 Majdalani's evidence was that Sapier said to him: I have a business opportunity that you might be interested in. It is with a company by the name of Peregrine. Peregrine was a company that started as a consulting company but has never traded and never been used much. Peregrine is trying to purchase a property, a factory located at Revesby. The factory fixes buses. It should take about three months for the purchase to be completed. You would be the director for this period until the purchase is completed. But you would only be a nominee director. It might lead to a position for you with the company in the future, either overseeing the site or working in an office at the site. There is an initial fee of $2,000 for ongoing costs with the property. Are you interested? 407 In cross-examination Majdalani agreed with Sapier's counsel, Mr Brender, that the first time he heard the word "nominee" was when he went to the plaintiff's offices and before he swore his affidavit. He said he now knows what it means (tr. 810). He also said that he was "to be given a position with Peregrine after the property was purchased" but "not to actually own the property" (tr. 814). In cross-examination he gave the following evidence: Q: I want to suggest to you he didn't mention anything about being a nominee director at that time? A: I mean, what would you like me to say? I can't remember. … Q: What I am suggesting is that he didn't mention anything about being a nominee director at that time? A: I don't remember. (tr. 815) 408 Majdalani also agreed in cross-examination that the only mention of the "three month period" by Sapier was "the time before I was to be given a position at the property" (tr. 815). 409 During the period 27 June to 30 June 1997 Sapier prepared consents to appointment as secretary, director and public officer of Peregrine for Majdalani's signature effective from 27 June 1997. In the 1996 annual return for Peregrine the question: "does the officer hold shares in the company?" was answered: "yes". Majdalani was listed as the beneficial owner of 100 ordinary fully paid shares. Majdalani's signature appears on these documents and also appears with the common seal of Peregrine on the contract for the sale of land between Austchas and Peregrine for the Revesby property for the price of $3,938,500 with a deposit of $200,000. The contract is dated 30 June 1997 as is the Development Agreement between Austchas, APG and Peregrine also signed by Majdalani. 410 One of the documents prepared by Sapier was a share transfer form recording the transfer of shares from Sapier's client who formerly owned Peregrine to Majdalani. There is also a share transfer form recording the transfer of shares from Majdalani to Hall, although not signed by Hall. Sapier gave evidence that he prepared this latter form as a result of Hall saying to him: "Majdalani doesn't have anything so we're obviously going to have to help him along. I want to take a signed transfer so that I've got some form of security". Hall denied this conversation (tr. 1441). 411 Ellis gave evidence that it was about 30 June 1997 that he became aware that the name of the company buying the Revesby property was Peregrine and that Majdalani was associated with the company. Ellis said that the series of minutes relating to the purchase of the property between Austchas and Peregrine were minutes that recorded a transaction. These minutes recording him as having been in attendance were not minutes of actual meetings (Ex. A: 10023–10059; 10140–10176; 10069–10138). 412 Majdalani did not discuss the payment of the deposit or the purchase price or any costs associated with the purchase price of the Revesby property with Sapier. The $200,000 deposit was not paid by Majdalani. It was paid by bank cheque dated 30 June 1997 (Ex. A: 9708–9709). On the reverse side of the bank cheque there appears the signatures of JBL and Hall. This was banked into JRA/APG's account on 2 July 1997 as Austchas did not have a bank account. Ellis gave evidence that during the first two weeks of July 1997 Hall informed him: "we've helped them to pay the deposit". 413 On 14 July 1997 Ellis signed a Leisuremark cheque requisition for a cheque payable to Store of Knowledge for $200,000. At the same time he signed a Leisuremark cheque relating to that requisition. His evidence was that he was aware from a conversation that he had with Hall that the $200,000 cheque was to repay the Store of Knowledge for the $200,000 deposit it had paid for the acquisition by Peregrine of the Revesby property. 414 Majdalani said that at the time of signing the Contract and the Development Agreement he did not consider that he was, or would become, responsible personally for the payment of any of Peregrine's costs. Sapier did not inform Majdalani at the time that he signed the Contract where the money for the purchase was coming from nor did Majdalani ask Sapier about that matter. Majdalani did not see the Peregrine company seal and did not place the seal on any of the documents that he signed. 415 There is in evidence a letter on CCL letterhead dated 18 July 1997 signed by Hall. It is a letter to the directors of Peregrine in the following terms: We refer to the contract entered into between our subsidiary, Austchas Pty Ltd, for the sale of the above mentioned property to Peregrine Corp Ltd and note that under the contract, the conditions of Further Special Condition (8) are to be satisfied by the end of 21 July 1997, and that completion is to occur on or before 11 August 1997. As Austchas has yet to finalise requirements under the contract, namely searches and enquiries with the relevant statutory authorities, we hereby extend the timing related to Further Special Condition (8) and settlement by 30 days. (Ex. A: 10414) 416 When Hall was asked in cross-examination what searches and enquiries Austchas had to finalize with the relevant authorities he was not able to give a real explanation (tr. 1753-1754). Majdalani did not see this letter prior to the time it was shown to him in 1999 by officers of the plaintiff. Ellis gave evidence that towards the end of July 1997 Hall had said to him: "there is a discrepancy between the square metre areas and what is shown in the contract and therefore we will give them an extra 30 days". On about 20 August 1997 Majdalani received a call from Sapier who asked him to go into his office to sign a document. Majdalani subsequently attended and signed a letter dated 20 August 1997 on Peregrine letterhead. The letter was to the directors of Austchas advising that during investigations it had come to attention that there may be a discrepancy between the stated and the actual floor area of the Revesby property and that the tenant required capital expenditure in excess of that agreed. The letter continued: Notwithstanding imminent confirmation and resolution of this matter, we wish to arrange a further extension in the settlement of the sale. We further confirm that Peregrine Corp is committed to conclusion of settlement as early as possible. (Ex. A: 10492) This letter was created on a Clifford computer allocated to Hall's personal assistant. 417 On 8 August 1997 John Rubina of Mortgage Link Securities Pty Ltd wrote to Ellis at CCL referring to their discussion earlier that day and enclosed a "conditional offer" addressed to Peregrine of $2.8 million to "assist with the purchase" of the Revesby property. The letter stated that the advance was to be structured by way of first mortgage limited to a maximum of 70% of the valuation of the property to be determined by a valuer approved by Mortgage Link (Ex. D2-1). When giving evidence Ellis did not have a recollection of receiving this letter. 418 On 28 August 1997 Majdalani received a cheque for $1,000 from Sapier as a "fee" for his involvement in Peregrine. In affidavit evidence, Majdalani stated that he received a total of $2,000 from Sapier but could not recall whether the balance of $1,000 was in the form of cash or a cheque. In his oral evidence Majdalani said that the other $1,000 was in cash that he collected from Sapier's office in an envelope. He could not recall if the envelope was left at reception or if it was given to him by Sapier (tr. 816). 419 There are in evidence copies of three letters: (i) a letter dated 15 October 1997 from Clifford to Peregrine; (ii) a letter dated 22 October 1997 from Peregrine to Clifford; and (iii) a letter dated 3 November 1997 from Clifford to Peregrine (Ex. A: 15943-15946). None of the letters is on letterhead, nor is there any signature or identification of who was to sign the letters. The letters contained a proposal, accepted in the third letter, for the sale by CCL of all the shares in Austchas to Peregrine subject to a mortgage over them to secure payment of the sale price over five years. The letters noted that completion was to be not later than 31 May 1998 and that Austchas was to have the obligation to pay stamp duty and legal costs "on a party/party basis". The mortgage of the shares was to remain unregistered and CCL was to remain "in possession of the shares and blank signed transfers" as security. 420 Hall gave evidence that by about October 1997 he was concerned that no one would be able to find finance for Peregrine to complete the purchase of the Revesby property (tr. 1796). Although he suggested that Ellis may have had a hand in drafting one of the letters and although his evidence was equivocal at times as to how the letters were drafted and by whom, he admitted that it was "probably" the case that he drafted the letters without speaking to anyone else (tr. 1798). When it was suggested that they were "all made up", he answered, "we didn't go anywhere with this" (tr. 1799). However he admitted that "we" were thinking about going ahead with the proposal (tr. 1799). 421 Hall gave evidence that any implication that he was controlling Peregrine was "abhorrent" (tr. 1445). He claimed that Sapier was the communication channel with Peregrine and that the only influence he was able to exert was to "prepare drafts of responses" in the terms that he considered to be "acceptable" responses. However he also claimed that he always expected such drafts to be treated as "prompts" (tr. 1445). 422 The plaintiff submitted that there was no real bargaining in relation to the proposals set out in the draft letters prepared in October 1997 but, if signed and exchanged, they would have given the appearance that there was. It was submitted that Hall intended to create that appearance and that if he controlled Peregrine his actions would be consistent with a desire to hide that fact. 423 In early October 1997 Majdalani received an enquiry from his solicitor who was acting for him in his Family Court proceedings. That enquiry concerned Majdalani's involvement with Peregrine. He referred his solicitor, Mr SD Morey of Slattery Jurd and Co, to Sapier. On 9 October 1997 Sapier wrote to Mr Morey in the following terms: As requested, we confirm that Mr Michael Majdalani consented to act as an officer of Peregrine Pty Ltd in a nominee capacity only. For this service he received a token fee for his services. We confirm that Mr Michael Majdalani has no actual or beneficial interest in the company or any of the property in the company. We confirm that Mr Michael Majadalani has no position whatsoever in respect of the company other than acting in a nominee capacity as indicated above. (Ex. A: 10948) 424 Sapier gave affidavit evidence in relation to this letter. He stated that he wanted to convey the "position" that Majdalani had not received any benefit, equity or value from the Revesby transaction. He said he did not want to be responsible for the suspicion that Majdalani had secret assets or was not making full disclosure of his financial position. The affidavit continued: 53. I recognise that in my wording of that letter I went further than that and made inaccurate statements, for example that he was "an officer of Peregrine Pty Ltd in a nominee capacity only" and that he had "no actual or beneficial interest in the company" and that he "had no positive position whatsoever in respect of the company other than acting in a nominee capacity as indicated above". 54. I recognise that writing that letter was wrong and I should not have done it. I was very concerned about the pressure that I had been placed under, and that Majdalani had been under, as a result of the Revesby transaction having dragged on for some five (5) months since it was entered on 30 June. At that stage I did not know whether or not it would ever settle. Hall, Ellis and Loiterton were saying words to the effect: "the Revesby transaction problem will be fixed. It will settle". I was hoping that it would settle. I was in the dark as to what was going on. I did not know whether the transaction was likely to complete or not. I was not told about the progress of any application for finance to permit completion of the transaction. I regretted getting Mr Majdalani into a situation where he was being accused of not disclosing his financial position and I wanted to help him. I was feeling increasingly uncomfortable about having played any role in the Revesby transaction. I did not know what to do. 425 On 12 January 1998 Sapier wrote to Hall at IDC seeking "further instructions" in relation to the completion of the annual return for Peregrine. His letter stated that the matter "should be considered in the light of your instructions with its future use and the requirement for its longevity" (Ex. A: 11593). Sapier gave evidence that he wrote this letter because "Leisuremark was funding the administration of Peregrine and the annual return was due on 31 January 1998". 426 On 24 March 1998 Sapier wrote to Hall at Leisuremark enclosing a letter received from the plaintiff in relation to the non-lodgement of Peregrine's 1997 annual return. That letter included the following: As you will recall, the strategy for the intended use of Peregrine was as follows: · Using a nominee entity to retain the property at Revesby; · To on sell the property within a very short period of time; · To avoid the lodgement of documents reflecting any interest of yourself or Barrie; · To use a nominee as the director/secretary/shareholder; You will also recall that the officers and shareholding of the company was changed from the original proprietors [to] Mr Michael Majdalani with a blank share transfer form in favour of yourself to ensure that control of the company remained with you. Due to the time that has passed since the strategy was implemented there is now a requirement to lodge documents with the Australian Securities Commission for the calendar year 1997. Mr Michael Majdalani has received a letter from the Australian Securities Commission in the form of a warning/follow-up in relation to the 1997 annual return. In the event that the annual return is lodged, the document will reflect that Mr Michael Majdalani is the sole director/secretary and shareholder (non-beneficial) of the shares in the company. On the above basis we have prepared a 1997 annual return (form 316) which has been signed by Mr Michael Majdalani. Would you please issue me with your instructions as to whether the document is to be lodged? In the event that the document is not lodged, there are implications for Mr Michael Majdalani in the form of penalty notices and possible prosecution for non-lodgement. I would be reluctant to suggest that Mr Michael Majdalani be placed in this situation. In the event that the document is to be lodged, would you kindly confirm so in writing and arrange for a cheque to be issued in favour of the Australian Securities Commission for an amount of $430.00 to cover filing fees upon lodgement. You might also be kind enough to indicate to me your proposed future use of Mr Michael Majdalani as the sole director/secretary of the company. This is a specific inquiry from Mr Michael Majdalani to me. (Ex. A: 11652) 427 Sapier's affidavit evidence was that by the time he wrote the letter of 24 March 1998 he had come to believe the facts set out within it as to the strategy which he did not appreciate in June 1997. He said that by March 1998 he "realised" that Majdalani was a non-beneficial owner of shares and prepared the 1997 annual return on that basis. That return stated that Majdalani did not hold the shares in Peregrine beneficially (Ex. A: 11641–42). Sapier claimed that in the period following October 1997 he became increasingly concerned about the Revesby transaction and his role in it. He said he did not know how to deal with the problem and eventually decided to write the letter of 24 March 1998. 428 Hall claimed that when he received the letter he became "violently upset" (tr. 1810). He immediately telephoned Sapier and said: "what are you doing and what does all this mean. Ian, this gentleman's got hold of a bloody valuable property that's going to earn him a lot of money, why won't he proceed". Sapier said: "well I'll have to talk to him". Hall said to tell Majdalani that: "we are doing our level best to assist him and it's our intention to have this property settle". Hall then told Sapier to "either withdraw this letter to me totally or I'll have to write to you to confirm this conversation and my view". Sapier said, "I'll withdraw the letter". Hall claimed he was so annoyed about the letter that he either destroyed it or threw it away. Although he did not receive another letter withdrawing the letter of 24 March he regarded it as having been withdrawn. 429 Sapier said that he knew that Hall had arranged to pay the $430 requested in his letter of 24 March. However that amount was paid by bank cheque under cover of a letter with no signature, stated author or letterhead (Ex. A: 11707). On 31 March 1998 Sapier prepared a Memorandum of Account directed to Hall at Leisuremark for professional services rendered for the period up to 31 October 1997. That account included four items as follows: · Attendance on 25 June, 1997 to arranging for the assumption and control of Peregrine Corp Pty Limited (0.4 hour); · Attendance on 27 June, 1997 to preparation of documentation regarding the assumption and control of Peregrine Corp. Pty Limited. Attendance to change of company directors, secretary and shareholders. Lodgement of outstanding documentation. Preparation of share transfers. Preparation of secretarial documentation, consents and resignations. Meeting with new principal of Peregrine Corp Pty Limited and negotiations regarding remuneration (3.5 hours); · Meeting on 30 June, 1997 with parties to execute documents in connection with the assumption of control of Peregrine Corp. Pty Limited (0.75 hour); · Attendance on 20 August, 1997 to correspondence with Ian Hall regarding Peregrine Corp. Pty Limited's annual return (form 316) outstanding 1996 lodgement fee (0.5 hour). (Ex. A: 11696) 430 Sometime after 31 March 1998 Hall requested Sapier to "re-do" his account of 31 March 1998 to "adjust all your references to the Peregrine attendances and consolidate them as one entry under administration". Sapier issued another account dated 31 March 1998 which included: · Attendance on 25 June, 27 June, 30 June and 20 August 1997 to administration matters (5.15 hour) (Ex. A: 11782-83) 431 Sapier said in his affidavit that it did not occur to him that the removal of these references to Peregrine was in any way improper and he was not seeking to hide anything by complying with Hall's request. In May 1998 Sapier drafted the following letter addressed to JBL and Hall at Leisuremark: Re: Peregrine Corp Pty Limited Sometime ago you issued me instructions to incorporate a shelf company. As normal because the request was an everyday event I had and have no difficulty with that request. As normal I was not advised of the purpose. I still accept your explanation for the use of that company. As you are aware, Mr Michael Majdalani who I introduced to you, is a client of mine. He wants to know how much longer he will be required to remain. Unfortunately, he has been going through a messy divorce and the company could create a problem for him. Through the process of dealing with the auditors, I have received explanation from you that settlement of the property was being slightly delayed but only for a short period of time due to technical, financing and development works being carried out. This explanation has also been confirmed by Craig Ellis who has written on several occasions to the auditors and told them that the settlement was imminent. I have also been requested to confirm same and on each occasion I have sought recourse and confirmation from yourself. Time is now marching on. I am a director of Clifford and I need to know what is going on and I want to know why the matter has not settled and I want to know if I am going to have a problem with Michael Majdalani over this matter. I do not want to be used and I do not want my client used other than to offer him a new opportunity. I am also supporting the Clifford position as a director on this matter and I want to know if there is anything that I should be made aware of. I will not be a party to a transaction that will not complete. Is this the case? I am also sick of begging to be told what is going on. When will you (Barrie) be conducting those regular meetings that were promised. I have called for meetings but for some reason they get cancelled or moved to an informal chat. If this transaction will not complete – get real and reverse it and deal with the proper processing and disclosure. Is Phillip Biber able to supply me with some documentation for myself and also to supply to Michael Majdalani. Please advise. (Ex. A: 11787) 432 Sapier decided not to send this letter because on 22 May 1998 he had a conversation with Hall in which he claimed he said words to the effect of what was set out within the letter. Sapier said that Hall responded: "well, we'll have to do something about all of that". 433 On 11 June 1998 Sapier and Ellis had a meeting with Grant Thornton who had been appointed as Clifford's new auditors after Roberts Nissen's retainer ceased on 29 April 1998. Sapier's notes of the meeting include the note "Revesby to settle by end June, 1998". Sapier said that the note recorded what Ellis said at the meeting, rather than being indicative of any knowledge he had about the settlement. Sapier was asked why he did not disclose to the auditors his view that the Revesby transaction was a sham and that JBL and Hall controlled and owned Peregrine. He gave evidence that he did not make that disclosure because he was comforted by Ellis' statement that settlement was imminent and he did not want it found out that he had assisted in the Revesby transaction (tr. 1986). 434 On 24 June 1998 Sapier and Joseph Edward Crogan, who was by then a director of CCL, had a conversation about a number of matters including the sale of Revesby. Sapier informed Mr Crogan that he was "worried" about the Revesby sale and asked: "Do you know about that?". Crogan informed Sapier that he knew only that the sale was supposed to settle with a cash surplus for CCL. Sapier then informed Mr Crogan that the sale had taken place in late June 1997 through a company he had set up in his office. Sapier informed Mr Crogan that Peregrine was "owned by someone off the street, a client of mine". Mr Crogan expressed surprise and said: "This is pretty serious. Does the shareholder exist or is he fronting for Barrie Loiterton and Ian Hall? It sounds like a contrived transaction". Sapier said that the company was owned by a client, "off the street". Mr Crogan asked Sapier what he meant by that, and said he expected the auditors would investigate and at least demand a "write-back" if settlement did not occur before the end of June. Sapier said: "I don't know how it will settle, but both Barrie Loiterton and Ian Hall know about the issues involved and they have assured me Peregrine will settle". Mr Crogan and Sapier agreed to meet the next day to prepare a memorandum about their concerns relating to various issues (Ex. J). 435 Sapier's version of the conversation with Mr Crogan is slightly different. He said that he informed Mr Crogan that he found the buyer after Hall had approached him to see if he knew of anyone interested in buying the property and that JBL and Hall "are helping him with the deposit and financing enquiries etc to enable completion". He informed Mr Crogan that he "had assisted by sourcing a company for the client to use but I have had no further involvement and I am worried that the matter has not completed". Mr Crogan then said that, if the matter did not settle, it "could be fairly serious" (tr. 1064). 436 On 13 July 1998 Hall wrote to Sapier on Leisuremark letterhead in which he advised that: "we believe all difficulties encountered in this sale are now able to be overcome and it can proceed to completion". Hall requested for the sake of "form" that Sapier have Peregrine confirm the arrangements. Those arrangements included that the sale exchanged on 30 June 1997 "is remaining at the sale price of $3,938,500"; that the contract be varied; that the Development Agreement be rescinded with Austchas undertaking to complete the works prior to completion; that Austchas would arrange an assignment of its first mortgage of $2.7 million to Peregrine prior to completion; that the balance of the purchase price, after deposit of $200,000 and mortgage of $2.7 million, being $1,038,500 was to be regarded as rental paid for the first 52 months after completion of the lease by Clifford; and some minor consequential amendments. A letter on Peregrine letterhead was signed by Majdalani confirming that all the difficulties encountered were now able to be overcome and confirming the arrangements as requested (Ex. A: 11924). 437 These matters were all referred to in a draft letter prepared by Biber for Ellis to send to Rubina. In a memo dealing with the draft letter dated 14 July 1998 from Biber to Hall and Ellis, Biber stated: Ian tells me that Peregrine does not have a solicitor and invites me to act for the purchaser. It is not permitted by my profession's ethical rules to act for both parties in these circumstances. If Peregrine elects to act for itself then that is a matter for it. I look forward to hearing from Peregrine so that I may draft the appropriate documents and submit them for consideration. There is probably little point in preparing the draft of any document until such time as there is some positive response from the mortgagee's representatives. I also confirm your instructions that the Development Agreement of 30 June 1997 is likely to be mutually rescinded. Having regard to the nature of documents that will need to be prepared by National Mutual's solicitors, bearing in mind the impact of the new arrangement on the existing facilities, I think it is unrealistic to expect this matter to settle within 3–4 weeks. I do not know what your expectations are. If it needs to be addressed much more urgently then you could make this known to John Rubina. (Ex. A: 11926–927) 438 On 22 July 1998 property agents Niemeyer Commercial were provided with an exclusive agency agreement from Austchas in respect of the Revesby property for the sale of the property by private treaty at a price of $4 million. On 14 August 1998 Hall sent a memorandum to JBL which included the following: With respect to the Revesby sale I do expect that Bob Breen, on his return to the office on Tuesday 18th August 1998, will be able to close off with the purchaser a contract at $3.75 million, under the terms and conditions that we have previously discussed but are contained in a memorandum to Bob Breen attached. Please note the best arrangement that we can consider to occur is a simultaneous and mutual recision (sic) of the original contract by both Peregrine and Austchas, with Peregrine forfeiting the $200,000 deposit they have paid. I don't believe they will argue with this, as their inability to perform is quite obvious. I reiterate that I do not think there should be any more correspondence that exists against a simple rescission and acceptance so. From where I sit right now on this particular contract, I am told that the purchaser just has to clear matters with his bank, but I do not have final and ultimate confirmation of the two outstanding points being: No bank guarantee & Reviews only 2 years to market. (Ex. A: 11991) 439 On 26 August 1998 Niemeyer Commercial wrote to Biber advising that they had arranged the sale of the Revesby property to a Mr A and Mrs M JE Clifford as trustee for the Barry Property Trust. There is no suggestion that the purchaser was not a bona fide third party purchaser. On 31 August 1998 Biber wrote to Hall, Ellis and Breen, enclosing the letter and advising them that it had come as a bit of a surprise to him and he was unaware that the property was even on the market. His memorandum continued: Firstly, what is to be done in relation to the Contract for Sale between Austchas and Peregrine Corp Pty Limited dated 30 June 1997. I gather that the transaction is not proceeding, but the Contract needs to be determined in an appropriate way. Is it the case that the Purchaser has failed to complete and accordingly the Vendor (Austchas) will terminate the Contract and forfeit the Purchaser's $200,000 deposit or is the position that both Vendor and Purchaser wish to walk away from the transaction with a mutual rescission of the Contract with the Vendor returning the $200,000 deposit. Obviously this should be attended to before any other Contract for sale is executed. (Ex. A: 12020) 440 Over the next two weeks Biber corresponded with the new purchaser's solicitors in relation to the contract for the sale of the Revesby property. On 14 September 1998 Biber wrote a letter addressed to the directors of Peregrine giving them formal notice that the contract was terminated by the vendor and that the Development Agreement was terminated by Austchas, APG and CCL. The letter advised that the deposit of $200,000 was to be forfeited to the vendor which reserved its right to claim damages and expenses on the loss of any re-sale. 441 That letter was sent to Majdalani who telephoned Sapier on receipt of the letter to ask him what it was about. Sapier advised Majdalani that it sounded like the purchase had fallen through and was not going ahead. Majdalani instructed Sapier that he wished to have his name removed from the company and did not wish to be involved in it any further. Sapier then contacted Hall who advised him that they had another buyer. Sapier requested Hall's permission to de-register Peregrine as there was no further use for the company and Hall agreed to the de-registration. JBL 442 The plaintiff alleges that, as a director of CCL, JBL contravened s. 232 (4) because he failed to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties in approving the Clifford 1996/1997 consolidated accounts which: (a) he ought to have known were not true and fair; or (b) he ought to have known failed to comply with the disclosure requirement that the Revesby transaction was a related party transaction. 443 The plaintiff also alleges that, as a director of CCL, JBL contravened s. 318(1) because there was default in compliance with ss. 295A & 298 and he failed to take all reasonable steps to comply with or secure compliance with those sections. 444 Finally, the plaintiff alleges that, as a director of Austchas, JBL contravened s. 234 (4) by failing to exercise the appropriate degree of care and diligence in the exercise of his powers and the discharge of his duties. 445 The plaintiff alleges that JBL knew that there was difficulty selling the Revesby property. Indeed when Crossley was in negotiations, JBL was willing to sweeten the deal for Crossley in an attempt to secure a sale prior to 30 June 1997. That sweetener included "deemed" consultancy fees of $800,000 per year for three years aimed at giving Crossley an annual deduction of that amount against his taxable income. When Crossley did not proceed and JBL went overseas he left instructions to "dispose" of the property. His instructions on return from his overseas trip on 12 June 1997, were that the property "must be sold by 30 June". I accept that he gave those instructions in the context of wanting profits and cash. 446 On his version of events, JBL was informed by Hall that a buyer had been found who was a client of Sapier. JBL knew that this proposed buyer could not even afford the deposit and he agreed with Hall that a transaction should occur to enable the deposit to be loaned to the proposed purchaser. This transaction was the loan by Store of Knowledge of $200,000 to Leisuremark effected by the purchase of the bank cheque by Store of Knowledge payable to Austchas, with a payment of the same amount by Leisuremark back to Store of Knowledge in July 1998. 447 JBL admitted that it was "extraordinary" that he and Hall should be funding this transaction. However although he was "concerned", he understood from Hall that the proposed purchaser's lack of funds was short term. He claimed that he relied on the fact that the purchaser was Sapier's client and that Hall had told him that the purchaser had a capacity to raise the funding. JBL did not make any independent investigation and assumed Ellis would have done so because he had issued the instructions for sale. He said that his main concern was that Leisuremark might lose $200,000 because he "could not see how we could adequately secure it". 448 His evidence was that he knew of no reason why CCL could not have waited for a more "conventional buyer" in the new financial year (tr. 1306-1307). This seems to me to be inconsistent with JBL's conduct in 1997. He applied pressure to Ellis and Hall to sell the property by 30 June 1997 because he wanted to generate cash and profits in that financial year. The "sale" enabled JBL and Hall as directors of Austchas to cause a dividend to be paid to CCL. 449 JBL claimed that at the time he approved the accounts, although he was disturbed and concerned that the sale had not settled, he did not have any particular suspicions that settlement would not occur. Prior to approving the accounts he had become aware that Ellis was looking for finance for the purchaser. His evidence was that he certainly thought that this was unusual, but that he wanted the transaction settled and believed that any assistance of that kind was "time well spent". This is a rather benevolent approach for a man who claims that he was entitled to charge pre-acquisition fees in the amounts that he did for the apparent provision of services by members of his companies to other companies. 450 I am not satisfied the JBL could be so naïve as to think that this was an independent unrelated third party transaction. JBL has been in business quite some time and the way in which he went about funding the deposit with Hall persuades me that he should have made further enquires as to the nature of the transaction. His own evidence that he regarded the funding of the deposit as "extraordinary" and that he was concerned, are further reasons why he should have taken care and diligently investigated the true nature of the transaction. At the time he approved the accounts any director with knowledge of the circumstances would have been put on notice of the need to make further independent inquiry as to what was happening with the purchase. The letters that were written extending the time for settlement combined with the attempts by Ellis to obtain finance would have put any director on notice that at the very least this transaction should have been disclosed as a related party transaction. 451 The plaintiff submitted that when JBL signed the contracts on 30 June 1997 he knew: (a) that he had applied pressure on both Ellis and Hall to sell the property by 30 June 1997; (b) all efforts by national real estate agents had failed to produce a single offer by close of tenders on 24 June 1997; (c) that after the date for close of tenders when he was informed that Hall had found the buyer, he knew that Peregrine did not have the funds to pay the deposit and was apparently unable to borrow the money from conventional sources; (d) no discussion occurred as to the terms of any loan of $200,000 that might be imposed notwithstanding a lack of ability to adequately secure its repayment; (e) that it was an extraordinary thing for directors of a listed public company to provide, in effect, their own money to allow a purchaser to pay the deposit on the purchase of the property from the public company's subsidiary. 452 The plaintiff submitted that when JBL approved Clifford's 1996/97 consolidated accounts that included the profit on the sale of the Revesby property he knew all the matters referred to in the preceding paragraph and he knew that completion had not occurred by the due date notwithstanding Ellis taking the unusual step of looking for finance for Peregrine. The plaintiff submitted that JBL should not have agreed to approve the accounts and should have sought written evidence of Peregrine's bona fides, financial position and resources and written evidence of its ability to complete the contracts. It is submitted that he failed to take proper care as a director of CCL and Austchas. 453 It seems to me that on the evidence there is a real suspicion that JBL well knew this transaction was not a real transaction or alternatively that he knew it was one that was to be funded and controlled by himself and Hall through their corporate vehicles. If one takes into account the circumstances of all the other transactions upon which the plaintiff relies in this case it seems to me that it is probable that JBL did not care how the profit on Revesby was achieved, so long as it was achieved. He wanted the property sold by 30 June 1997 because "cash and profits" were "needed". However the plaintiff has withdrawn the allegation that JBL breached s. 232 (2), the dishonesty provision, as it could not point to evidence that would satisfy the Briginshaw standard. 454 The evidence establishes that at the time JBL approved the accounts in 1997 he failed to act with the appropriate degree of care and diligence of a director of both CCL and Austchas. He did not take reasonable steps that he should have in respect of this transaction to ensure compliance with s 295A and 292 so that the accounts gave a true and fair view of the relevant company's financial position. It is all very well to claim that everything was either ticked off or approved by the auditor, however the acquiescence in the round robin of cheques to pay the deposit and the willingness to allow the secretary of a public company to spend time in searching for funds for the purchaser, clearly demonstrates that at the very least JBL knew that the transaction was one that was quite different from the way in which it was disclosed in the accounts and he should have taken steps to ensure that it was described accurately, or alternatively should have alerted him to make further enquiry as to the true nature of the transaction. 455 I am satisfied that JBL's conduct, as a director of CCL and Austchas, in respect of the Revesby transaction was in contravention of ss. 232 (4) and 318 (1). Accordingly declarations of contraventions of those sections will be made. Hall 456 The plaintiff alleges that, as a director of CCL and Austchas, Hall contravened ss. 232(2) or alternatively 232 (4), and s. 318 (1). 457 It was submitted that Majdalani was subject to the direction of Sapier who was subject to the direction of Hall. From 27 June 1997 either Majdalani or Hall was the sole shareholder of Peregrine. It was submitted that Majdalani held his shareholding interest at all times subject to the direction of Sapier and thus the direction of Hall. It is submitted that Hall controlled and beneficially owned Peregrine at all relevant times from 27 June 1997. This, it was said, reflected the common intention of Hall and Sapier from June 1997 and was part of a plan they made at the time involving a pretended sale of the Revesby property to Peregrine and involving a pretence that Peregrine was not associated with Hall or Clifford. It was submitted that it was their plan that the beneficial ownership of the Revesby property was to be retained within Clifford for a short period of time, probably about three months, within which a real buyer would be found. Completion of the Peregrine contracts was not an essential step in their plan. 458 It was submitted that Hall and Sapier may have considered the possibility that Hall might find finance to enable Peregrine to take a transfer of the property and hold legal title to it for a short period of time, but neither Hall nor Sapier had any grounds for believing that finance would be found for the balance of the purchase price and the stamp duty. It was submitted that their prime objective was to secure Majdalani's signature on the contracts to give the appearance that an arm's length purchaser, in the form of Peregrine, had contracted to purchase the property and had risked the $200,000 deposit from its own funds or through its own resources. 459 Hall took possession of the contracts. No conventional exchange took place. It was submitted that this was because Hall directed and controlled Peregrine and was a director of Austchas and CCL. The submission has force. There was no reasonable prospect that Peregrine would complete the contracts at any time prior to the date when Clifford's 1996/97 consolidated accounts were signed on 10 October 1997. It was submitted that the accounts overstated the consolidated profit by the amount of the profit attributed to the sale of the Revesby property, namely $1,899,072, and the Austchas 1996/1997 accounts similarly overstated its profit. 460 The plaintiff submitted alternatively that if Peregrine through the controlling mind of Hall, intended to complete the contracts, and if it was reasonably likely when the consolidated accounts were signed that Peregrine would do so, the transaction giving rise to the reported profit was a related-party transaction because Hall was a director of CCL and also in control of Peregrine. Peregrine was therefore a director-related entity within the meaning of that expression in accounting standard AASB 1017 Related Party Disclosures. Such disclosure should have included the fact that Hall controlled Peregrine, that Leisuremark had financed the deposit on terms which involved no payment of interest with no document evidencing the loan, and that Peregrine had no assets or resources of any kind other than the contractual rights to purchase the property. 461 It is submitted that Hall and Sapier acted dishonestly in the affairs of Austchas and in the affairs of CCL by approving the accounts that included the profit on the sale of Revesby because they failed to disclose the related-party nature of the transaction. It was submitted that Hall and Sapier knew well at all relevant times that what they were doing was not bona fide in the interests of Austchas and/or CCL. It was submitted their conduct was deliberate conduct in disregard of that knowledge. 462 Hall submitted that the evidence does not establish that he regarded the transaction between Austchas and Peregrine as a sham. He submitted that no vendor can have 100% certainty that contracts will complete but in this instance the fact that Clifford was prepared to assist in arranging finance together with the lease back arrangement, gave him confidence that the contract would or could settle. Hall posed the question in his submissions – if this was a sham, how was Leisuremark going to recoup the loan? He also suggested that the answer to such question was obviously the contract needed to proceed for that to occur. I do not find this submission helpful. If the contract was a sham then Leisuremark could recoup the money it paid, because there was no obligation upon it to pay it. 463 It is Hall's conduct surrounding this transaction that supports the plaintiff's submission that he knew this transaction was never intended to complete in the usual way or certainly not until a bona fide purchaser was found. Hall's conduct in directing Sapier and Peregrine what to do, in paying Majdalani $2,000 in such a surreptitious manner, in paying Peregrine's fees, in funding or arranging the funding of the $200,000 deposit, in screening his identity from gaze as the funder, in obtaining the Share Transfer from Majdalani to Hall dated 1 July 1997 and the Share Certificates signed by Majdalani stating that Hall was the registered owner of the shares in Peregrine and the writing of letters for Peregrine so that settlement could be delayed satisfy me comfortably that Hall well knew this transaction was not intended to complete and well knew that Peregrine and Majdalani were under his control and direction. To approve accounts containing a profit from such transaction was in my view well-known to Hall not to be in the best interests of Clifford and in disregard of that knowledge Hall still approved the accounts and in my view did so dishonestly. 464 I am satisfied that declarations of contravention of s 232(2) should be made against Hall in relation to his conduct as a director of CCL and Austchas. Having regard to the findings I have made I am also satisfied that, as a director of CCL, Hall was the cause of Clifford's default in compliance with s 295A in respect of the Group's 1996/1997 consolidated accounts and that declarations of contravention of s 318(1) should be made against Hall in respect of the Revesby profit. Sapier 465 The plaintiff alleges that, as a director of CCL Sapier contravened s. 232(2) or alternatively s. 232 (4) and s 318(1). It further alleges that, as a director of Austchas, Sapier contravened s 232(2) or alternatively s 232(4). 466 Sapier admitted that his conduct in dealing with the Revesby property transaction was in part wrong. However he claims that when the contract was signed in June 1997 he did not believe that Peregrine was a nominee company (tr. 1930) nor did he believe that Majdalani was not going to be the owner of the property. He sought to maintain that position in his cross-examination. The documentary evidence is inconsistent with Sapier's claim. The plaintiff relies upon the Share Transfer from Majdalani to Hall dated 1 July 1997 and the Share Certificate signed by Majdalani stating that Hall was the registered owner of the shares in Peregrine (Ex. A: 10349 & 10326). Although Sapier claims these documents were produced at the behest of Hall for "security" because Majdalani did not have any money, the plaintiff submitted that these documents were to ensure that Hall maintained control of Peregrine. 467 The letter from Majdalani's solicitor, Mr Morey, refers to a conversation that he had with Sapier on 2 October 1997. Mr Morey purports to confirm the contents of that conversation in which the irresistible inference is that Sapier informed Mr Morey that Majdalani became "an office holder in the Company on some form of flat-fee arrangement to assist another client" and that he had "no beneficial or other interest in the Company" (Ex. A: 10947). Within two days of receiving that letter Sapier responded confirming that Majdalani consented to act as an officer of Peregrine in a "nominee capacity only" and that for his services he received a "token fee". He further confirmed that Majdalani had "no actual or beneficial interest" or any property in the company. Finally he confirmed that Majadalani had no position with the company other than acting in the "nominee capacity" (Ex. A: 10948). 468 Sapier's evidence in relation to these letters was that what he had informed Mr Morey was false. The plaintiff submitted that what he had informed Mr Morey was true and true to his knowledge as at June 1997. Sapier admitted that he would have understood that the letter he wrote to Mr Morey would have been used by the solicitors for the respective parties in reaching a property settlement and may have been viewed by the Family Court. Sapier admitted that his bill to Majdalani included a charge for an attendance on 9 October 1997 to correspondence to Mr Morey "confirming your capacity as a nomine only with Peregrine Corp Pty Ltd" (Ex. A: 11106). When asked why he would charge Majdalani for a letter containing falsehoods he said that he charged all his clients for everything he did (tr. 1964). 469 On 12 January 1998 Sapier asked Hall to consider the question of the completion of the annual return for Peregrine in the light of Hall's intentions with its future use and the requirement for its longevity (Ex. A: 11593). When asked why it was that he had asked Hall this question as opposed to Majdalani, Sapier said that he regarded Hall as the banker or supporter of Peregrine at that time (tr. 1967). It was on 24 March 1998 that Sapier wrote to Hall suggesting that he, Hall, would "recall" the strategy for the intended use of Peregrine. That use included using it as a nominee entity to retain the Revesby property and to on-sell the property within a very short period of time. It also included avoiding the lodgement of documents reflecting any interest of Hall or JBL in Peregrine and using a nominee as a director/secretary/shareholder. Sapier's evidence in respect of this letter is most unsatisfactory. At one stage he suggested that this letter was "testing the waters" (tr. 1971). He also claimed that by this time he had become concerned about the transaction and whether it would settle and indeed admitted that by this time he had come to the view that it was a "sham" (tr. 1977). 470 Sapier knew that Majdalani had no money, had no job and was going through what was described by him as a "messy divorce". He knew that his client could not possibly come up with any money, even for the filing fees with ASIC. Sapier admitted that towards the end of the financial year 1997/1998 he was nervous and "scared"(tr. 1989). He also admitted that he did have an intention to protect himself from being found out (tr. 1983). His affidavit evidence claiming that he did not see anything wrong or improper with removing the reference to Peregrine in his accounts was also very unsatisfactory. In cross-examination he accepted that he understood that Hall wanted him to hide the fact that Leisuremark was involved with Peregrine. 471 On 27 June 1997 Sapier recorded in his diary "LML – nominee company Peregrine Corp set up and changes to Majdalani". There is then reference to various other forms, share transfers and documents relevant to Peregrine. It is noted that this work took 3.5 hours (Ex. A: 8833). Sapier's evidence in relation to the use of the word "nominee" in this diary entry does not assist his claim that he did not believe as at June 1997 what he believed in late 1997 or early 1998, that is, that Peregrine was only to be used as a nominee. The reference to the diary to "LML" is a reference to Leisuremark Ltd, the client he was going to charge as and from the first day of his involvement in the matter. 472 Mr Brender submitted that Sapier's conduct did not breach the test of honesty and that his conduct was not for a collateral purpose or against the interest of the company. It was conceded that Sapier had breached s232(4) in relation to his conduct and participation in the Revesby transaction. However it was submitted there was no breach of s232(2) because Sapier simply did not know the full circumstances of the transaction. 473 Mr Brender submitted that the elements of the civil penalty provision in s232(2) are: consciousness that what is being done is not in the interests of the company, but rather for the achievement of some collateral purpose; and deliberate disregard of that consciousness or knowledge. He submitted that Sapier had not attempted to achieve any collateral purpose and thus did not fall within the ambit of the section. He submitted that a collateral purpose in this instance should be understood to be something that either concealed a negative aspect of the company accounts or which benefited a third party rather than the company. 474 By the time Sapier approved the accounts in October 1997 he knew that the transaction was very likely not to settle. He knew that Majdalani could not raise any finance and that Hall and JBL and/or their relevant company interests had raised the deposit and had also "spotted" Majdalani $2000 for his trouble. I am satisfied that he believed that Peregrine was really controlled by Hall and that his client, Majdalani, was a mere pawn in the game of boosting Clifford's profits. I am satisfied that the letter Sapier wrote to Majdalani's solicitors in relation to his Family Court proceedings contained a statement that Sapier honestly believed at that time-that Majdalani had no actual or beneficial interest in the company or any of the property in the company (Ex. A: 10948). He knew there was no related party disclosure in the accounts and that such transaction was being put forward in the accounts as a non-related transaction and a real transaction. I do not accept Sapier's evidence that this only dawned on him sometime in 1998. The letter that he wrote to Hall in May 1998, but did not send, has all the hallmarks of a person seeking to sheet home blame to others and to avoid a finding of his own culpability in this pretence. 475 I find it irresistible to conclude from the evidence that Sapier knew that to include the profit from the sale of the Revesby property in the accounts in these circumstances was not in the best interests of the company and he knew that it was for the purpose of boosting the profits of Clifford at that time. I am satisfied that he acted in disregard of the consciousness and did so dishonestly in breach of section 232(2). The evidence establishes that it is appropriate to make declarations against Sapier of contraventions of ss 232(2) and 318(1) of the Act. Share and Option Trading Background 476 CCL shares were quoted on the ASX after the issue of the 1995 Prospectus. Fourteen million options to purchase CCL shares (CCL options) were also issued to the vendor's nominee, Leisuremark, under the 1995 Prospectus but were not quoted on the ASX until about September 1997. 477 During the period 1996 to 1998 JBL regularly instructed Ellis to either place specific buy and sell orders or confirm orders that JBL had placed with stockbrokers in respect of CCL shares and/or CCL options. These orders were placed or confirmed by Ellis on JBL's instructions on behalf of Leisuremark, Notretoil and Blenheim Holdings Limited (Blenheim). Blenheim was incorporated on 6 August 1997 (then known as Chandin Limited with a change of name to Blenheim on 4 September 1997). The shareholders included Notretoil and the Store of Knowledge and the directors were JBL, Hall and PJL (Ex. A: 10443). 478 In August 1997 both Leisuremark and Notretoil held a large number of shares in CCL. In September 1997 Leisuremark held 2 million CCL option. Blenheim held 2.9 million CCL options and the remainder were held among CCL staff and their family members in parcels of about 2,000. 479 On 11 August 1997, at CCL's Extraordinary General Meeting, JBL announced that Clifford's consolidated 1996/1997 after-tax profit was expected to exceed $13.4 million, that a final dividend of 2.25 cents per share was expected to be recommended by the directors, in addition to the interim dividend of 1.25 cents per share already paid, and that a further bonus dividend was being contemplated. On the same day the same announcement was made to the ASX. 480 On 11 September 1997 Clifford announced to the ASX that its 1996/1997 consolidated "final results" included consolidated after-tax profit of $14.256 million, that directors would recommend a final dividend of 2.25 cents per share and would consider recommending a further bonus dividend of 1 cent per share. 481 On 10 October 1997 Clifford issued its 1996/1997 financial accounts and consolidated accounts. CCL's 1996/1997 after-tax profit was shown as $4.120 million and Clifford's 1996/1997 consolidated after-tax profit was shown as $11.511 million. The allegations of contraventions 482 In its case against JBL for declarations of contravention of s 232(5) and/or s 1002G the plaintiff claims that: 483.1 Between 22 August 1997 and 17 September 1997 JBL, in contravention of s 1002G and s 232(5), caused Notretoil to sell through stockbroker EPIC Securities, 1.5 million CCL shares for a net price of $924,409 (the Notretoil shares sale). 483.2 On 18 September 1997 JBL, in contravention of s 232(5), caused Blenheim to sell through EPIC Securities, 1 million CCL options for a net price of $299,548 (the Blenheim options sale). 483.3 Between 4 September 1997 and 22 September 1997 JBL, in contravention of s 232(5), caused Leisuremark to sell through stockbroker Paul Morgan Securities, 655,500 CCL options for a net price of $ 216,092 (the Leisuremark options sale). 483.4 In September 1997 JBL, in breach of s 1002G and s 232(5), caused, induced or encouraged Leemac to sell 1.75 million CCL shares for a net price of $1,028,087 and, in breach of s 232(5), caused Leemac to sell 1.75 million CCL options for a net price of $354,070 – a total of $1,382,157. Alternatively in September 1997 JBL caused Leisuremark and Blenheim to sell those shares and options to Leemac to enable Leemac to sell them on the open market, knowing that Leemac intended to sell them (the Leemac shares and options sale). 483 The plaintiff also seeks declarations of contravention of s 1002G and s 232(5) against Hall. It is alleged that between 4 November 1997 and 20 November 1997 Hall caused Leisuremark to sell through stockbroker Potter Warburg 538,400 CCL shares for a net price of $269,225 (the Hall/Leisuremark shares sale). 484 It is alleged that both JBL and Hall possessed information, acquired by them by virtue of their positions as directors of CCL, that, if generally available, would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell CCL shares or CCL options. It is alleged that JBL and Hall knew, or ought reasonably to have known, that the information they possessed was not generally available and that it might have a material effect on the price or value of CCL shares or CCL options. 485 The material information alleged is that CCL's 1996/97 profits and Clifford's December 1996 half-year consolidated profits and 1996/97 consolidated profits, as forecast to the market or as published, materially overstated or misrepresented the true profits or consolidated profits. It is alleged that these profits included, to JBL and Hall's knowledge, the Clifford pre-acquisition fee of $1.45 million, the Ansair pre-acquisition fee of $800,000, the Signature pre-acquisition fee of $252,300, the Signature Exclusivity fees of $2.8 million, the Origin fee of $770,000 and the Revesby profit of $1.899 million. 486 Although there is no direct evidence as to whether those amounts were included in the forecast consolidated after-tax profit figures of $13.4 million and $14.256 million announced respectively on 11 August and 11 September 1997, the plaintiff submitted that the strong probability is that they were included. It submitted that the pre-acquisition fees had been included in the earlier December 1996 half-year consolidated accounts. The Signature Exclusivity fees, in relation to the six months ended December 1996, had been included in the earlier consolidated half-year accounts. The whole of the exclusivity fees for the ten months to April 1997 had been included in the earlier management accounts for the period to April 1997 and May 1997. The Origin fee was entered in Signature's 1996/97 accounting records on 1 July 1997. CCL's accounting records include an entry on 6 August 1997 to record the receipt on 30 June 1997 of a dividend from Austchas which, according to Austchas' signed accounts, was paid out of the Revesby profit. In those circumstances the plaintiff submitted that it is strongly probable that those amounts were included in the figures as announced. I agree. I am satisfied that the figures as announced included these amounts. The Notretoil Share Sale 487 Between 22 August 1997 and 17 September 1997 Notretoil sold through a stockbroker, Epic Securities, 1.5 million CCL shares for a total net price of $924,409. The instructions to the broker to sell the shares were given: (a) as to 600,000 shares, directly to the broker by JBL on 22 August 1997; (b) as to 400,000 shares, by Ellis, at JBL's direction, to the broker on 3 September 1997; and (c) as to 500,000 shares, by Karen Mackey, JBL's personal assistant, at JBL's direction to the broker on 16 September 1997. The sale proceeds were deposited into Notretoil's bank account. 488 In final submissions JBL did not "concede" that he sold or caused the sale of the Notretoil shares. His submissions record that he denies receiving any direct or indirect benefit from the Notretoil share sale because he held no shares in Notretoil at any time. He submitted that Notrtoil was "always the trustee (since 1975) of the family trust in which I was not the settler, and held no beneficial interest". This aspect of the matter becomes academic by reason of what I have concluded in respect of this claim, referred to below. 489 It is a little fanciful to contemplate that his personal assistant would be off on a folly of her own trading in the shares. Of course that was not suggested directly to Ms Mackey, but I am satisfied that JBL's submissions that he did not cause the sale would mean that Ms Mackey, at least in respect of 500,000 shares, caused the sale on her own volition. Equally it would mean that Ellis was on a folly of his own and that he caused the 400,000 shares to be sold. I do not accept that either Ellis or Ms Mackey acted in this way. In any event, JBL did "concede", to use his expression, in his evidence that he caused the trading of the Notretoil shares (tr. 1242). I am satisfied that the Notretoil shares sale was caused by JBL. 490 For the purposes of s 232(5), the plaintiff must establish that JBL possessed information that he acquired by virtue of his position as a director of CCL. The information relied upon is that the forecast profit figures were, to JBL's knowledge, figures that included amounts that were not true profits and thus such figures overstated the profits of CCL and the Group. I have found that JBL knew that the pre-acquisition fees, the Signature exclusivity fees and the Origin fee were amounts that were not true profits. I am satisfied that he acquired this knowledge by virtue of his position as a director of CCL. 491 To prove a contravention of s 232(5) the plaintiff must also establish that JBL made "improper use" of the information. In this regard the plaintiff's case is that JBL's "improper use" of the information was in selling the shares at a time when the market was not aware of information that the figures that had been announced contained false profits. The impropriety of the use was to sell without informing the market of the true position. The purpose of the sale at this time was to gain an advantage for Notretoil, such advantage being the sale of its CCL shares and options at a price that was unaffected by the information of the false profits being generally available to the market. The circumstances surrounding this transaction with JBL's knowledge that the figures contained false profits lead irresistibly to the conclusion that the transaction involved an improper use of the information. 492 However even if I were willing to consider the making of declarations in the unsatisfactory circumstances that blurred the basis for proof of these allegations, referred to at the commencement of this judgment, I am not satisfied that the plaintiff put to JBL in cross examination the matters necessary to establish that the sale occurred "to gain" the relevant advantage. I accept that the advantage does not have to have been achieved but at the least it should have been put to JBL that the sale was made at that time because if it had occurred when the market knew of the information Notretoil would not have achieved an "advantage" – that is the sale at a higher price than otherwise would have been the case. It is fairly logical that such a position would follow but in civil penalty proceedings, it was necessary to give JBL the opportunity to deal with the allegation directly in his evidence, rather than having him deal with the matter in submissions. 493 I refuse the plaintiff's application for a declaration of s 232(5) in respect of this transaction. 494 For the purposes of s 1002G the plaintiff must establish that JBL possessed information that was not generally available to the market. I am satisfied that JBL possessed information that the figures announced to the market contained figures that were not true profits and that such information was not generally available to the market. Section 1002G(1) requires the plaintiff to prove that if such information were generally available, "a reasonable person" would expect it to have a "material effect" on the price or value of the shares. Further the plaintiff is required to prove that JBL knew, or ought reasonably to have known that the information was not generally available and that if it were, it "might" have a material effect on the price or value of those shares. If that is proved s 1002G(2) prohibited JBL from selling the Notretoil shares. The plaintiff does not have to prove that JBL gained an advantage in this process to prove a contravention of this section. 495 JBL knew that CCL and the Group were in a different financial position from that which had been announced because of the false profit figures. The next question is if the information were generally available, whether a reasonable person would expect it to have a "material effect" on the price or value of the shares. This is an objective test assuming the reasonable person to have some knowledge of the workings of the share market and an expectation that the profits reported or forecast by publicly listed companies would report or announce true rather than false profits. A reasonable person "would be taken to expect information to have a material effect" on the price or value of the shares if the information "would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not" to purchase or sell the shares (s. 1002C). 496 JBL did not suggest that the plaintiff was required to call evidence of what influences persons who commonly invest in securities to buy and or sell shares. Hall did make such a submission and it is convenient to deal with that submission here. Hall submitted that the plaintiff's case must fail in this regard because there is no evidence of the general or specific influences on persons who commonly invest in securities to buy or sell shares. 497 In R v Rivkin [2004] NSWCCA 7 the Court of Criminal Appeal approved the trial judge's summing up to the jury, extracted at par [227], in which the trial judge said: The test that I have posed- that is the test provided by s 1002C- is an objective test. That means that it focuses, in a hypothetical way, on whether the information, if it became generally available, would influence or be likely to influence not the accused but, persons who commonly invest in securities in deciding whether to buy or sell shares. Nor does it provide that the persons who commonly invest in securities received the Information in the same way or in the same circumstances that the Crown alleges that the accused did. It takes the information on its face and asks the hypothetical question whether, if that information had become generally available a at the relevant day, would it influence or be likely to influence the hypothetical group of persons in deciding whether to buy Qantas shares. … Rather, you must assume that the Information became known to persons who commonly invest in securities in a neutral way. The information is for the purposes of this element of the offence, assumed to be generally available, and hence readily observable matter. Nevertheless, you would be entitled to find, although it is entirely a matter for you whether you do so find, that the hypothetical group of investors would be entitled to draw certain inferences from the information and take the further information derived by way of inference or conclusion or deduction into account in assessing bot the contents of the information and its likely degree of reliability. 498 In R v Rivkin the Crown had called evidence on the issues of "materiality" which included the expert opinion of a witness that the information would be likely to influence persons in deciding whether to buy or sell Qantas shares. The Crown also relied upon evidence concerning the price war and the effect it was having on the profitability and share price of Qantas; the fact that, as a matter of commonsense, the prospect of the Impulse business merging with Qantas would be positive news for Qantas investors and the evidence of a witness to similar effect; and the increase in the price of Qantas shares which had coincided with a relevant report in the Australian Financial Review as well as the increase in the price of Qantas shares which had followed a formal announcement on 1 May 2001 (see par [90]). The trial judge dealt with the expert opinion in his summing up in the following way; If I may return for a moment to the opinions expressed by the experts in relation to this issue. You should take care in examining the factors that they took into account in reaching their opinions. By that I mean that you should discount those opinions to the extent that they may have taken into account matters I have directed that you should not take into account in relation to this element of the offence. Similarly to the extent to which those experts or any of them may not have taken into account matters which I have indicated you may legitimately take into account, you should similarly discount their opinions to that extent in relation to this element. In the end however, the issue on this fourth element is, as I have said repeatedly, essentially a matter for your commonsense and for your judgment. 499 One of the grounds of appeal in R v Rivkin was that the evidence led in the trial was incapable of proving that the information was capable of, or would have been likely to influence persons who commonly invest in securities in deciding whether to subscribe for, sell or purchase shares in Qantas. The appellant relied upon a concession made by the expert in cross-examination that if the information had been generally available he would not have acted either way in relation to Qantas shares, because he would not have been able to make an assessment of the reliability of the information received. 500 The Court of Criminal Appeal found that the submission had no merit for several reasons. The Court found: 170 … First, the jury were not bound to accept the evidence of any expert, since the responsibility to find the facts rested with them. 171 Secondly, (the expert witness') evidence was not the only evidence that dealt with this issue. The other evidence was capable of making out the Crown case, and it was open to the jury to accept the other witnesses in preference to (the expert witness). In these circumstances, in accordance with well-established authority, this argument could not have been made good on a directed verdict application, particularly when taken in conjunction with the other circumstances that were relied upon for proof of the materiality of the information, such as the existence and effect of the price war, and the share price movements. 501 Hall submitted that it a "strange case that calls no expert witness to assist with the effect on the market". I am of the view that it will depend upon the case as to whether such "expert" evidence is led. In this case, as in R v Rivkin there is evidence of the fluctuation in the price of CCL shares (Ex. H) that coincide with the announcements to the market that provides a basis for concluding that persons who commonly invest in securities would be likely to be influenced by such announcements. 502 It seems to me that the test in respect of this matter is based on the premise that a reasonable person assumes that persons who commonly invest in securities rely upon announced or reported profits being true profits and not false and that if there is information that is generally available that profits as announced as true profits contain some false profits then such information "would, or would be likely to" influence those persons. 503 The plaintiff must also establish that JBL knew or ought reasonably to have known that the information was not generally available and that if it were generally available it "might" have a material effect on the price of the shares. There is no doubt that JBL knew that the information was not generally available. JBL had reasonable experience in trading in securities. He would have known or ought reasonably to have known that if reported or announced profits contained false profits the persons considering selling or purchasing shares in such a company might be influenced by such information. I am comfortably satisfied that in his position he ought to have known that if the information had been generally available it might have influenced persons who commonly invest in securities whether or not to subscribe for, buy or sell CCL shares. 504 Having regard to the conclusions I have reached in respect of combining these two claims I am satisfied that it is inappropriate to make a declaration of contravention. The Blenheim option sale 505 On 18 September 1997 Blenheim sold through Epic Securities 1 million Clifford options for $299,548. The instructions to the broker were given by Ellis at JBL's direction, on 18 September 1997. 506 The plaintiff claims that JBL contravened section 232(5) by the "improper use" of the information. There was no claim under s 1002G because the plaintiff indicated in its written submissions that it accepted that the section did not apply because options were not "securities" for the purpose of the section. Once again, the plaintiff's case must be that JBL's "improper use" was the use of the information to sell the options at a price knowing that it would be at a better price than if the information was available to the market. 507 The same deficiency that exists in respect of the cross examination of JBL in the Notretoil share sale exists in respect of this transaction. Even if I were willing to consider the making of a declaration of contravention but for the blurring of the matters of proof to which reference has been made, this matter would persuade me not to make such a declaration. The plaintiff's case in this regard fails. The Leisuremark options sale 508 Between 4 September 1997 and 22 September 1997 Leisuremark sold through a stockbroker, Paul Morgan Securities, 655,500 CCL options for a total net price of $216,092. The instructions to the broker to sell the options were given: (a) as to 500,000 options, by Ellis, at JBL's direction, to the broker on 4 September 1997; and (b) as to 155,500 options by JBL directly to the broker or by Ellis or Ms Mackey, at JBL's direction, to the broker between 4 September 1997 and 22 September 1997. The sale proceeds were deposited into Leisuremark's bank account. 509 The plaintiff claims that JBL contravened section 232(5) by the "improper use" of the information. There is no claim under s 1002G because the plaintiff accepted that the section did not apply because options were not "securities" for the purpose of the section. Once again, the plaintiff's case must be that JBL's "improper use" was the use of the information to sell the options at a price knowing that it would be at a better price than if the information was available to the market. 510 As I have said, I am of the view that it is inappropriate to consider the making of declarations in respect of these matters but in any event the same evidentiary deficiency exists in this matter that is present in the earlier transactions. The plaintiff's case in this regard fails. The Leemac shares and options sale 511 On 24 September 1997, on PL's instructions to the stockbroker, D & D Tolhurst, Leemac sold, or agreed to sell, 1.75 million CCL shares for a net price of $1,028,087 and 1.75 million CCL options for a net price of $354,070, totalling $1,382,157. On 1 October 1997 Leemac banked the proceeds of the sales of $1,382 million and the following day drew a cheque in favour of Notretoil in the amount of $600,000. 512 Immediately prior to the sales, or agreements to sell, Leemac was not the registered holder of the shares and options but was in possession of two unregistered, stamped (with adhesive duty stamps) transfers, each dated 8 July 1996. The first was a transfer of 1.75 million CCL shares from Leisuremark to Leemac, showing the consideration as $385,000, signed by JBL and Ellis for the vendor, Leisuremark, and by PL for the purchaser, Leemac (the Leisuremark/Leemac transfer). The consideration of $385,000 was the market value of the shares at 8 July 1996 (Ex. H). 513 The second transfer was of 1.75 million CCL options from Blenheim to Leemac, showing the consideration $1 and signed by JBL and Ellis for the vendor, Blenheim, and by PL for the purchaser, Leemac (the Blenheim/Leemac transfer). 514 In about September 1997, while Hall was on leave, JBL went into Ellis' office and asked him to sign the Leisuremark/Leemac transfer and the Blenheim/Leemac transfer. JBL said to Ellis: Can I get you to countersign these transfers? I have arranged a loan for Phil (Loiterton). That is why these shares and options are going to Leemac. They are to help fund a property at Kirribilli for Phil. 515 At the time that the transfers were given to Ellis the details were completed and JBL had signed them. Both transfers had also been dated "7/96". Ellis could not recall whether or not PL's signature was on them at the time the transfers were given to him. He also could not recall whether the company seals for Leisuremark and Blenheim had already been affixed or whether JBL instructed him to affix the seals. Ellis said he did not question the date of "7/96" at the time that he signed them. There were no stamp duty stamps affixed to the transfers at the time Ellis signed them. 516 JBL dealt with the trading of these shares in September 1997 in his statement (Ex. D 1–9) as follows: Alleged Share Trading September 1997 - Tolhurst 201. In late August, Phillip told me he was buying a unit at Kirribilli and asked whether I could assist with the financing. In discussion we determined an approach and I told him that I would provide him with some shares and options and he could use them as security or sell them as he saw fit. 202. In early September 1997, I requested Ellis to contact Phillip and draw up transfers to Phillip for the shares and options. I presume Ellis spoke to Phillip as I was not otherwise aware that the transfers were to go to Leemac. 203. A day or two later, Ellis presented two transfer Forms for signature. I cannot recall whether Ellis had countersigned at that time or not. The Transfers were for 1,750,000 shares from Leisuremark and 1,750,000 options from Blenheim in favour of Leemac. 204. I do not recall whether the company seals were affixed however I did not have access to the seals and had never affixed the seals to any document. Ellis had access to the seals. 205. I left for an overseas business trip on 19 September 1997 to Adelaide and then Malaysia. I returned on Thursday 25 September but returned to the office only for one day on Monday 29 September 1997. 206. On Tuesday 30 September, I departed for the USA, UK and Germany for meetings, returning on 10 October and returning to the Sydney office on Monday 13 October 1997. 207. I did not instruct the sale of either the shares or options. 517 JBL was cross-examined on this topic and gave the following evidence: Q: When you say in paragraph 201, that you told your brother Phillip that you would "provide him" with some shares and options, did you mean by that that you would lend them to him or would sell them to him, or what exactly? A: I don't think I made it clear, but I would have expected it to be accounted through other inter-family loan accounts. Q: You weren't intending to say that you were selling the shares and options to him, were you? A: I was, in effect, giving them to him. Q: You were letting him take away some documents that he could sell the shares and take the money as a loan from Leisuremark and Blenheim to him; is that right? A: No, I was giving him some shares. Q: Well, were you giving them to him for no consideration or.. A: I didn't have to. My relationship with my brother was such that for more than 30 years we had transferred assets and money between us and accounted for them. On other occasions we transferred assets and didn't account for them particularly. It was a very loose arrangement in every respect. Q: So in this situation, was it the case that you just decided to give him the share scrip and work out later on how you would account for the transaction? A: Yes, I guess that is a fair summation. Q: And you certainly never intended to have part ownership of those shares and options at that point, did you? A: Yes, I did. In giving them to him I was giving them to him. It was finite. Q: You knew he had to sell them, didn't you, if he wanted some money for a house? A: That was then his concern. I – he could have borrowed against them. (tr. 1243) Q: In paragraph 202 you say that in early September '97 you asked Ellis to draw up some transfers to your brother for these shares and options; do you see that? A: Yes, I believe that was the situation, yes. Q: What's the reason then that in cross-examination of Mr Ellis you put to him that those transfers were signed in July '96? A: I don't recall. But I think I was exploring as to why there was a notation of 7- I think it 7/96 on the transfers. … (Shown transcript at page 833) Q: You were trying to suggest to Mr Ellis there, weren't you, that when he got the share transfers they had been dated July '96 and had been signed at that time, weren't you? A: Yes. I was satisfied that was the situation at that time. Q: And you were suggesting in that question that there was some arrangement with your brother back in July '96 pursuant to which the transfer was signed, weren't you? A: That's what I was suggesting. Q: There was no such arrangement, was there? A: Not that I am aware of at that time. Q: So why did you make that suggestion? A: I was exploring. Q: What is the point of putting fictitious suggestions to Mr Ellis like that? A: I was dissatisfied with my recollection that it was September and I was testing Mr Ellis in respect of that in case my recollection was incorrect. September of '97 I mean. Q: Do you say when you put that question your recollection was that it had all happened in September 1997? A: No, I am saying I was confused as to when it happened. I had put that to Mr Ellis simply because my original recollection was that it must have happened at that time. I am satisfied that the recollection that I had placed at 202 is correct. Q: And what happened between the cross-examination and your statement that allowed you to make the statement in paragraph 202? A: I re-read as much of the documentation as I could and had a discussion with my brother. Q: Could it also be the fact that after you asked that question to which I directed your attention, you learned that Blenheim was incorporated only in August '97? A: That surprised me. But I learnt that in the Court or that I recall that as a consequence of the evidence in Court. Q: Why are they dated July '96? A: I have no idea. Q: When you signed them, did you question why they bore that date? A: I do not know. I have no idea where the date 7/96 came from. Q: No, but did you question why it bore that date when you signed them? A: Excuse me? Q: When you signed the transfers, did you question anyone as to why they bore the date July '96? A: I don't recall. I don't think I recall that they did. I certainly do not recall now they did until I was reminded in Court. Q: Well, why in September '97 would you be signing transfers dated July '96? A: I said I do not know that that was the date of the signature. I do not know why that date was put on there. I certainly did not put it there. (tr. 1245-1246) 518 Mr Carnovale then showed the transfers to JBL and drew his attention to the portion dealing with consideration. That part of the document included the words "(0.22c/share ASX 3/7)" (Ex. A: 8145). JBL agreed that the shares would have been selling at approximately 22 cents on 3 July 1996 and that they were selling at approximately 60 cents in September 1997 when he signed the transfers (tr. 1247). He then gave the following further evidence: Q: And, again, what was the reason for inserting the price that was the market price back in July '96? A: I don't recall. It doesn't ring any bells at all. Q: Well, were you trying to deceive anybody by signing a transfer dated July '96 and signing it in September '97? A: I certainly was not trying to deceive anybody. There would be no point me trying to deceive anybody on it. Q: That's the effect of what you did, isn't it? A: I don't think so. I really have some difficulty looking at this Transfer Form to know why this wasn't signed in '96. I know what I have said in my statement, your Honour, but looking at this transfer, there is a very, a very good chance, that this was in fact signed in '96 and not in '97. It might have been activated in '97 but it seems to me, looking at the transfer now, and looking at it closely that the top half of the transfer and the option section, knowing that Blenheim wasn't formed at that time, it seems to me that this could well have been originally – the top half could have been originally signed in '96. Q: Why would you be transferring shares or options between companies that didn't exist? A: I'm having difficulty, your Honour. I believe the "Blenheim Holdings Ltd" words have been added later. That is not my handwriting. Certainly the "Leemac" has been added later. That's not my writing. The date at the bottom of the signatures is not my writing. The dating right at the bottom on each of those is not my writing. (tr. 1247) 519 After further evidence in relation to whether his recollection was then clear, he was asked: Q: In any case, it's clear, isn't it, that these transfers were not signed until September '97? A: I can't say that because its – I can't see any reason in my mind why I wouldn't have signed them at that time, but I am unable to give a clear recollection. It would be silly of me to go further. However with the exception of the date, there is no doubt that Mr Ellis then took over the, to use the word, the "carriage" of carrying out this transaction. That's all I can say. … Q: It was certainly only in September '97 that you gave those transfers to Phillip, isn't it? A: I am now having some doubts, but I believe so. And I say that because of the wording of Blenheim Holdings Limited in 8146. (tr. 1248) 520 It was suggested to JBL that it was because he wanted Leemac to report the profit on the sales of the shares and options in its own accounts rather than in the accounts of Leisuremark or Blenheim. JBL denied that suggestion. He agreed that his brother, PL, wanted the money to help him buy his unit in about August 1997 and he also agreed with the proposition that he could not have given the transfers to PL any earlier than about August or September 1997 (tr. 1249). JBL denied telling his brother to sell the 1.75 million shares and options. His evidence on this aspect of the share transaction was as follows: Q: Your arrangement with your brother was that he would organize the sale of the shares and options and take the proceeds or part of the proceeds as a loan from your entities to him? A: Not true necessarily. The fact of the matter is that I reiterate that I gave him the 1.75 million shares and the 1.75 million options for him to do as he required to do or as he wished to do, and in some subsequent time we would have balanced the books as it were, nothing more, nothing less. Q: And do you know whether he kept the entirety of the sale proceeds for himself as a loan? A: You keep saying, "as a loan". Q: Yes. A: Leaving out those words, no, I do not recollect. Money passed between us on a reasonably regular basis. Q: Well, the transfers that you gave to him in September '97 appear on their face, don't they, to suggest that the shares and options were sold to Leemac by Leisuremark and Blenheim respectively? A: Yes; for him to have on-sold them or to have borrowed money against them they would have to be in Leemac's name and so they were transferred to him. Q: Sold to him, were they? A: Transferred to him. Q: What about the consideration that appears in the documents? Did Leisuremark and Blenheim receive it? A: Leisuremark's accounts and Blenheim's accounts would have been adjusted in due course by Mr Hall accounting for what was properly or what would be charged against, if you will, against the accounts of Notretoil. Q: And so you say that your intention in giving the transfers to Phillip in September 1997 was to cause a sale of the shares and options to Leemac. A: In order to give them to him, the process was to transfer them to Leemac. Q: But a transfer consideration in your understanding is simply a sale, isn't it? A: Well, if you wish to call it a sale, then the sale was to Leemac. Q: And you caused the sale to Leemac? A: I deny that. I caused the sale to Leemac. Q: You caused Leemac to onsell them? A: No, that was the end of the transaction as far as I was concerned. I did not thereafter have anything whatsoever to do with the shares. Q: You cannot explain why you caused the sale to Leemac at prices that were applicable in July 1996? A: I can't give you any further information than I already have. Q: What's the reason? A: I have no idea, your Honour. I really have no – nothing else I can add to it. ... Q: Were you trying to make it appear that Leisuremark and Blenheim had disposed of the share options back in 1996 when in truth they had not. A: No, I was not trying to do that at all, certainly to my recollection. (tr. 1250-1251) Q: I suggest to you that there was no sale to Leemac, that in fact you simply asked him to sell the shares and take his loan out of the proceeds. A: That is not true. Q: Alternatively, I suggest to you that you caused the sale of the shares and options to Leemac in September 1997. A: That is not true sorry – to Leemac? I caused the Leemac - I caused the sale to Leemac. I am sorry – I withdraw that. I caused the sale to Leemac. Q: In September 1997? A: I believe in hindsight and looking at all the evidence, it is obvious to me and I can't explain the transfers, that the sale occurred in September of 1997, which is what I say in my statement. (tr. 1252) 521 In his examination-in-chief PL gave the following evidence: Q: Do you recall some time in August or September of 1997 requesting me to provide you with some assistance relative to an acquisition of a unit? A: Yes. Q: Do you recall the result of those discussions? A: You agreed to provide me with the use of 1.75m shares of Clifford which were owned by or related to yourself and 1.75m options in Clifford similarly held. Q: Did I instruct you in any way to sell those shares? A: No. Q: Did you sell the shares in due course? A: Yes. (tr. 1594) 522 In cross-examination PL gave evidence about the share Transfer Forms and in particular about the date, "8/7/96", that he inserted on them. PL's evidence in relation to the date upon which he wrote that date was as follows: Q: Is it true that you placed your signature and the date that I mentioned on these two documents in about August, September 1997? A: No. Q: When did you do that? A: I believe I executed that transfer at any earlier time. Q: When? A: I cannot be precise but there were previous transactions between us and – many transactions between us – but I didn't execute this at or about that time. Q: What time? A: '97 – September '97. Q: Can you tell by looking at the document when you executed the two documents – I should say, when you executed them? A: No, I cannot. (tr. 1596) 523 PL said that he had a "strong suspicion" that the duty stamps on the transfers came from his office (tr. 1597). He thought he "probably" had involvement in trying to register the transfers and said that he "was concerned about the date and if the date were not appropriate I would not use them and, indeed, I did not" (tr. 1597). He gave the following evidence: Q: What concerned you about the date? A: What concerned me is that it wasn't accurate. If it wasn't proper, I wasn't prepared to do it. That's how the share scrip and transfer came down to me from my brother's office like that, and I did duly at some stage, sign it. We had a transaction back the previous year when I attempted to buy a property. This transfer may have come into existence at that time but I was not prepared to use it in September '97. (tr. 1598) Q: Well isn't it the case that you and your brother signed these share transfers in about September 1997 for the purpose of giving you a piece of paper that you could take to the broker and instruct him to sell? A: I've indicated to you that it is my view that the transfers were signed at an earlier date but were delivered to me in order to be used for this transaction. Q: Do you mean by that, signed by you at an earlier date? A: Yes. Q: Are you able to tell me the date? A: I'm not able, your Honour. I know that there were many transactions. Other shares were sold, other things done. I am unable to do so. Q: Am I to understand then that the date on the transfer that you wrote was not accurate? A: No, I believe it was accurate at the time I signed. (tr. 1601) Q: Just so I can clarify something you told me a little earlier, you said that when you signed the document you believed it was accurate at the time you signed it. Do you remember saying that, Mr Loiterton? A: Yes. Q: Just so I am clear on what you have told me, are you claiming that you signed the share transfer on 8 July 1996? A: Or close to – or thereabouts, yes. Q: If you were to learn today that Blenheim Holdings Ltd was incorporated on 6 August 1997, would you then agree that you did not sign these transfers until August or September 1997? A: I'm aware of the incorporation of Blenheim. I indeed caused it to be incorporated, thus I am aware and have always been aware of the date. No is the answer to the question. (tr. 1603) Q: Did these share transfers have anything to do with any money that had been owed to you by your brother or by Leisuremark or by Blenheim? A: Not specifically as that sum of money. Q: Well, did it have anything at all to do with any money that you were owed by the companies or persons I have mentioned? A: Yes. Q: Did your brother owe you $385,000 at the time you signed these transfers? A: I am unable to say what was owed to him or by him at that time. (tr. 1605) Q: Is there any connection at all between any money that Barrie might have owed you and these two transfers? A: The consideration sum would have been struck for a reason. I presume it was relating to a debt. Q: But owed by whom to whom? A: By him to me. I don't have a specific recollection, other than being reminded of the transaction. (tr. 1606) 524 PL agreed that the transactions relating to the CCL shares and options were to assist in obtaining funds for the purchase of a property in August/September 1997. He also agreed that in his ASIC interview he said the words: … [b]ear in mind if it had been currently dated for the purposes of the sale, what we were doing, the stamp duty is about three times as large, so we brought them into existence in order to satisfy the requirements of the brokers. (tr. 1601) 525 PL was cross-examined about this. He gave the following evidence: Q: In that same question and answer you referred to "bringing them into existence in order to satisfy the requirements of the brokers"; do you see that? A: Yes. Q: Which particular broker were you referring to? A: Specifically, Mr Doyle, broker. Any broker would want to see some evidence of ownership. Q: You were referring to Doyle, weren't you at D & D Tolhurst? A: I presume so, yes. Q: And you understood or you believed that D & D Tolhurst – before they would let you sell these shares to get money to fund the property, you have to bring into existence the share transfers? A: Share transfers, yes. Q: Is that right? A: Correct. Q: So these share transfers were not in existence .. A: No. Q: .. before August/September 1997? A: These transfers, I have indicated before, had been previously created, and to bring into existence brings into legal right brings into availability brings into use. Their physical existence probably – certainly the incompleted form had existed at an earlier date. … Q: Surely you wouldn't sign something in blank and put an earlier date on it? A: Your Honour, I know there was a previous transaction. Q: Surely you wouldn't sign something in blank and put a date on it? A: I wouldn't think so, no. (tr. 1608-1609) 526 After further pressing by Mr Carnovale in respect of the date upon which he signed the transfers, PL said: A: I have said signed in blank. I indicated to you, I don't know when I signed, but the document came into existence, it was signed partially or fully completed at an earlier date. I just don't recollect. Q: What about the date under your signature, 8 July 1996, on the two documents? A: Yes. Q: Did you place that date on the documents on 8 July 1996? A: I am unable to say. It is certainly my handwriting. It would have been done at a time prior to September of 1997. It could have been done at that time. I do not recollect. Q: So in September 1997 you may well have placed the date 8 July 1996 on the two documents? A: I cannot say. (tr. 1609-1610) 527 After further clarification of his understanding of these questions, PL said that he did not recall but he believed he placed the date on the transfers "at or around that period of time" (tr. 1611). Mr Carnovale persisted and referred PL to his ASIC interview. The following evidence was given: Q: Were you of the view during the interview that when shown those two transfers, or copies of them, in the interview, you believed then that you had signed them in September 1997 but had placed the July 1996 date on them in order to pay less stamp duty than might otherwise be the case? A: I don't know. I appeared to believe that, by reading the transcript. (tr. 1612) 528 PL gave evidence that the transfers were not "used". He said that he regarded them as "non – existent" when it came to the "actual method of transferring the shares, selling the shares and obtaining the proceeds" and that he did not "implement" the transaction (tr. 1615). PL's evidence in relation to the date on the Blenheim/Leemac share transfer was at times quite unbelievable. He gave the following evidence: Q: So, then, what was your intention with the share transfers? Was it to effect a change in beneficial ownership or merely in legal ownership? A: The original proposal was to transfer legal ownership. In reality, beneficial ownership only vested in Leemac. Q: Did it vest in Leemac before you instructed Doyle to sell them? A: Yes. I think so. I mean, it had to be. … Q: How could beneficial ownership have been transferred to Leemac by Blenheim when it didn't exist? Tell me that. It is impossible, isn't it, Mr Loiterton? A: I agree, your Honour. At the time if it didn't exist it can't be transferred to it. Q: So a transaction dated 8 July 1996 purporting to have Blenheim transfer beneficial ownership of the shares to Leemac could not be effected, could it? A: No. I believe that the Blenheim name was inserted at a later stage. I accept that. Q: Even accepting that it was inserted at a later stage, as you do accept, didn't you also realize when the name had been inserted that the document, the transfer of the options, could not be an effective document on its face once it was disclosed that Blenheim didn't exist at the date of the transfer? A: I don't have a view in relation to that. Perhaps consideration as to whether there are any alternative courses, I don't know. Q: If all you wanted was some kind of document to enable Leemac to go and sell the shares that Barrie offered you to sell, why didn't you just draw up a power of attorney? A: Well that was a consideration. … Q: Why didn't you do it? A: Well hypothetically one might have. Q: But you are being asked why you didn't do it. A: I have no reason. I think the course that I chose was the simplest and best, namely, to cause the shares to be sold and to give a direction to D & D Tolhurst to pay the proceeds to Leemac. (tr. 1617-1618) 529 PL's further evidence included the following: Q: Did you have a concern about giving them to Doyle because they bore a July 1996 date on them? A: I had concern about giving them to Doyle for a number of reasons, including that. Q: What was the nature of your concern in relation to the date on them and the giving of them to Doyle? A: The size of the consideration referred to in the transfers. Q: You were concerned, were you, that he might question you as to whether those transfers were backdated? A: No. That was my own concern. As to what he may be concerned about, I determined that the proper course was not to use the transfers. Q: But in February '02 when you were being interviewed and you were looking at transfers dated July '96, what was it about them that led you to think that you signed them in September '97? A: Sorry, can I have the question again? Sorry, I understand your question. At the time that's what I believed was the position. Q: But you believed that because you took your memory back to what had happened in September 1997, did you not? A: My recollection, yes. Q: Your memory then was that you needed money to complete the purchase of Kirribilli? A: Yes. Q: And that you created or helped to create these transfers and signed them in September 1997 for that express purpose? A: My evidence is that I did not sign those to my best belief and understanding in September '97. Q: Finally on this issue I just want to suggest to you it was indeed in September 1997 that you did the following things: you filled out the name of the transferee, the address of the transferee, and you placed your signature and you placed the date under your signature on each of the two transfers in about September 1997? A: I do not agree with that. Q: I suggest to you that in September 1997 you purchased or arranged for the purchase of the duty stamps which appear on the transfers and that you personally affixed or arranged for someone to affix the stamps on that? A: I do not agree with the date. As to rest, I have said that that may well be so. (tr. 1620-1621) 530 To suggest that the arrangements between the brothers was "very loose" as JBL did in his evidence, is very much an understatement. The evidence of both JBL and PL in respect of these transactions was quite extraordinary and in parts simply unbelievable. JBL said in his evidence that it was not "necessarily" true that the arrangement he had with PL was that PL would sell the shares and options and take part of the proceeds as a loan (tr. 1250). He also said that he "gave" him the shares and options for PL "to do as he required to do or as he wished to do" and they would balance the books subsequently (tr. 1250). He accepted that to give PL the shares the process was to transfer the shares and options to Leemac. 531 The devious steps that these brothers took in respect of this transaction with the share transfers is indicative of a mindset and motive to conceal the true identity of the seller of the shares at this time. That has all the hallmarks of using information for an improper purpose, that is to sell the shares at a better price than the price the shares would be if the information was known generally. 532 The evidence establishes that JBL was willing to be part of the creation of a share transfer that was more probably than not to pretend that shares had been sold to Leemac at a different price in 1996. It also establishes that the way in which JBL concluded financial transactions with PL was apparently intentionally loose. I have no doubt that he intended that PL sell the shares and options and I am also satisfied that JBL's and PL's conduct is extraordinarily suspicious and that their evidence in relation to the transaction simply cannot be believed. 533 JBL knew that CCL and the Group were in a different financial position to that which was announced in that the profits contained the false profits to which I have already referred. I am satisfied that a reasonable person would expect the information to have a material effect on the price or value of the shares. I am comfortably satisfied that JBL ought to have known that if the information had been generally available it might have influenced persons who commonly invest in securities whether or not to subscribe to, sell or purchase CCL shares. 534 This analysis, as damning as it may appear to be to JBL, is however not going to result in any declarations being made against him because of what I regard as the inappropriate way in which this part of the plaintiff's case was prosecuted. The Hall/Leisuremark shares sale 535 Between 4 November 1997 and 20 November 1997 on instructions from Hall to the stockbroker Potter Warberg, Leisuremark sold 538,400 CCL shares for a net price of $269,225. The sale proceeds were deposited into Leisuremark's bank account. 536 Hall returned from leave in September 1997 and had a conversation with Ellis about the shares and options being transferred to Leemac in Hall's absence. Hall said to Ellis: "Every time I go on holidays, Barrie does something like this without telling me. I go off on holidays and I get screwed again". 537 Hall submitted that the plaintiff must prove that he gained an advantage for himself or Leisuremark; that he had knowledge that public statements did not reflect a true and fair view; and it was improper use to sell or procure and sell at that time the CCL shares. It is submitted that nowhere in the plaintiff's submissions is it alleged that Hall gained an advantage for himself. 538 It is submitted that Leisuremark did not have any arrangements with the recipients of the funds and gained no advantage in selling the shares it owned. Therefore it is submitted that the plaintiff's case against Hall fails as to "form and fact and there is no case to answer". Alternatively Hall submitted that the plaintiff has been unable to prove an advantage has been gained by either Hall or Leisuremark. 539 The following submission was also made: The ASIC claim therefore depends upon proving its case with respect to some, if not all, the three pre-acquisition fees, the so-called exclusivity fee, the Origin fee and the Revesby profit. There has been no evidence presented as to the effect on the market as to less than all of the fees. For example, would the market be affected if only the Signature fee of $252,300 applies (which is not admitted). In fact, there has been no evidence presented as to what a reasonable person might expect the material effect to be on the price or value of the securities. See later in respect of Section 1002G submissions, however it is a strange case that calls no expert witness to assist with the affect on the market. The relative position of each of the abovementioned fees, charges or profits is dealt with in the individual cases, however, the Second Defendant submits that ASIC has been unable to prove that the second defendant at that the time of the share trades was aware that there was any problem with the releases or accounts referred to above. Ellis, who was aware at all times of all matters and in reference to the pre-acquisition fees for example, commented that as at 10 October there was no matter of concern with the invoices. Meldrum, the auditor, made comment to D2 that there was nothing to concern him about the accounts. The second defendant submits that ASIC has failed to prove their case in respect of s232(5). As to the alleged contravention of s1002(G) the second defendant submits, as referred to earlier, that the lack of expert evidence on the subject of material effect as to all or part of the information….. makes it difficult, if not impossible, for the Court to reasonably determine the material effect on the price or value of the securities or even if there might have been an effect at all. 540 Hall submitted that even if I am satisfied that he knew of the inclusion of false amounts in the profits of CCL and Clifford, the plaintiff's case must fail by reason of there being no evidence to demonstrate what effect it would have had on the market. In those circumstances Hall submitted that the insider trading allegations should be dismissed. 541 I am satisfied that Hall knew of the inclusion in the profits of Clifford and CCL of the pre-acquisition fees, the Signature exclusivity fees and the Revesby profit and that they materially overstated those profits. I am satisfied that he knew that CCL and Clifford were in a different financial position to that which was announced because of the inclusion of these false profits in the announced figures. 542 I have already dealt with Hall's submissions in relation to the failure to call expert evidence in relation to the influence on persons commonly investing in securities. I need not repeat my findings here other than to say that I do not agree with Hall's prima facie attractive submissions in this regard. I am satisfied that a reasonable person would have expected the information, if generally available, to have had a material effect on the price or value of the shares. I am also satisfied that Hall ought to have known that if the information had been generally available it might have influenced persons who commonly in vest in securities whether or not to subscribe for, sell or purchase CCL shares. 543 By reason of the view that I have taken in respect of the inappropriate way in which this aspect of the plaintiff's case was prosecuted, the plaintiff's case in this regard fails. Dividends 544 The plaintiff's case against JBL, Hall and Sapier on this aspect of the matter relates to four dividends: a dividend from Signature to CCL on 28 February 1997 of $1.5 million (the Signature dividend); a dividend from Austchas to CCL on 30 June 1997 of $1,899,072 ( the Austchas dividend); a dividend from CCL to its shareholders on 30 April 1997 of $1,425,825 (the CCL April 1997 dividend); and a dividend from CCL to its shareholders on 17 December 1997 of $2,905,509 (the CCL December 1997 dividend). The Signature Dividend 545 On 28 February 1997 Signature paid an interim dividend of $1.5million to CCL and CCL made a loan of the same amount to Signature. In Signature's accounting records and its 1996/97 accounts, the Signature dividend was recorded as having been paid out of profits. In CCL's accounting records and the 1996/97 accounts it was recorded as income of CCL. 546 The plaintiff's case is that the Signature dividend was not paid out of profits because at the time of declaration and/or payment the so-called profits included the Signature exclusivity fees and the Signature pre-acquisition fee that were not true profits. It is claimed that Signature had no real retained profits as at 28 February 1997 from which to pay the dividends. The plaintiff also claims that the recognition in CCL's accounts of the dividend as income was also impermissible because it included the Signature exclusivity fees and the Signature pre-acquisition fees that were not true income. 547 The Signature management accounts recorded available profits of $1,682,953 as at 28 February 1997. At that date prior to paying the Signature dividend of $1.5 million a schedule of Distributable Reserves, printed on 1 September 1997 and faxed by CCL to Sapier on that date, recorded that Signature had retained profits at 28 February 1997 of $415,294, after allowing for a payment on that date of the dividend incorrectly recorded as $1.1 million. The plaintiff submitted that if the correct amount of dividend, $1.5 million, is substituted in the schedule, the retained profits at 28 February 1997 would be $400,000 less, that is $15,294, if the schedule is otherwise correct. 548 A later Distributable Reserves schedule printed on 16 September 1998 recorded a figure of $15,924 as the retained profits at 28 February 1997 after payment of the dividend, correctly recorded at $1.5 million. The plaintiff submitted that these schedules recorded that Signature had available profits of $1,515,294 at 28 February 1997 prior to payment of the Signature dividend. However the plaintiff submitted that it is irrelevant whether one uses the first schedule or the second because included in the income that formed part of the retained profits were the Signature exclusivity fees of $2,171,400 for eight months to February 1997 and the Signature pre-acquisition fee of $252,300. It was submitted that those amounts did not in truth form part of the real profits of Signature and that it therefore had no real retained profits at 28 February 1997 from which to pay any part of the Signature dividend. In those circumstances payment of the interim dividend was prohibited by s201: Marra Developments Ltd v BW Rothe Pty Limited [1977] 2 NSWLR 616 at 622E per Hutley JA. 549 The directors of Signature at the time the dividend was paid were JBL, Hall, Sapier and PJL. CCL's directors were JBL, Hall and Sapier. The plaintiff submitted that JBL and Hall knew and Sapier and PJL ought to have known, that the profits of Signature included the Signature exclusivity fees and the Signature pre-acquisition fee. It was further submitted that the knowledge of JBL and Hall collectively or individually was also the knowledge of CCL and that it therefore received the dividend with knowledge of its impropriety and held that amount as constructive trustee for Signature and was not entitled to retain the benefit of the dividend amount. 550 It was submitted therefore that the dividend never formed part of the real profits of CCL and that CCL's 1996/97 accounts overstated its after-tax profit by the amount of the Signature dividend. JBL and Hall caused Signature to pay that dividend. Alleged Contraventions 551 The plaintiff alleges that as directors of CCL, JBL and Hall contravened s232(2) because they approved CCL's 1996/97 accounts that included the Signature dividend which they knew was not income and thus failed to act honestly in the exercise of their powers and the discharge of their duties as directors. It is alleged in the alternative that JBL and Hall contravened s232(4) in approving CCL's 1996/97 accounts that included the Signature dividend because they ought to have known it was not income and they failed to exercise the appropriate degree of care and diligence in the exercise of their powers or the discharge of their duties as directors of CCL. It is also alleged that JBL and Hall contravened s318(1) because of the default in compliance with s292 in respect of CCL's 1996/97 accounts in that they were knowingly the cause of the default or that they failed to take all reasonable steps to comply with or secure compliance with s292. 552 It is also alleged that as directors of Signature JBL and Hall contravened s232(2) because they failed to act honestly in the exercise of their powers and the discharge of their duties by causing or permitting Signature to pay the dividend which they knew was not paid out of profits. Alternatively, it is alleged that JBL and Hall breached s232(4) because they failed to exercise the appropriate degree of care and diligence in the exercise of their powers or the discharge of their duties, by causing or permitting Signature to pay the dividend which they ought to have known was not paid out of profits. 553 The plaintiff has established that JBL and Hall acted dishonestly in respect of the Signature pre-acquisition fee and the Signature Exclusivity fee and I have found that declarations of contraventions of section 232(2) should be made in respect of those matters. What the plaintiff must prove to establish contraventions of s 232(2) in respect of the Signature dividend was knowledge in both JBL and Hall, as directors of Signature, that they knew at the time of the declaration and/or payment of the Signature dividend that Signature had no real retained profits from which to pay any part of the dividends. 554 JBL submitted that he relied upon Ellis, the accountants and the auditors and that no one brought to his attention that there were not enough retained profits from which to pay the dividend. He submitted that he acted properly at all times and that there is no evidence to establish that he acted dishonestly in relation to approving the accounts that included this dividend. 555 This submission relies upon a finding that JBL did not know that the Signature Exclusivity fees were not fees struck and charged pursuant to a real agreement between Signature and IDC in June 1996 and that pre-acquisition fee was not the subject of agreement with JRA. I have found otherwise as referred to earlier in this judgment. The reason that the Signature Exclusivity fees were created was because Signature was not making a profit and it was necessary to boost its profits by these fees. Both JBL and Hall knew at the time that they approved the accounts that this dividend was paid out of profits reliant upon the fees that they knew were not part of Signature's real profits and could not be received by CCL as real income. 556 I am satisfied that the plaintiff has established that each of JBL and Hall contravened s 232(2) in respect of this dividend. I am also satisfied that they contravened s 318(1) by knowingly causing the default of CCL in failing to comply s 292. JBL and Hall caused the false profits to be included in the accounts in the first place. 557 The submissions made against Sapier relate only to his position as a director of CCL. It is alleged that he contravened s232(4) because he failed to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties as a director of CCL by approving CCL's 1996/97 accounts that included the Signature dividend which he ought to have known was not income. It also alleged that he contravened s318(1) because there was default in compliance with s292 in respect of CCL's 1996/97 accounts and that he failed to take all reasonable steps to comply with or secure compliance with s292. 558 It was submitted that Sapier was entitled to rely upon the executive directors and he would not be expected to assume that they would act dishonestly. There is force in the submission that Sapier should not be taken to assume that the executive directors would act dishonestly. However Sapier was required to act with care and diligence in relation to the approval of the CCL accounts that included this dividend. I have found that Sapier failed to so act in respect of the Signature exclusivity fees and as Mr Brender pointed out in his final submissions, that finding "flows through" to this allegation of contravention (tr. 2208). Sapier did not make appropriate or any enquiries in respect of this dividend and I am satisfied that a declaration of contravention of s 232(4) should be made. I am also satisfied that he failed to take all reasonable steps to ensure that CCL complied with s 292 in respect of this dividend and that a declaration of contravention s 318(1) should be made. The Austchas Dividend 559 On 30 June 1997 Austchas declared and paid to CCL a dividend of $1,899,072. On the same day CCL made a loan of the same amount to Austchas. In Austchas' accounting records and in its 1996/97 accounts the Austchas dividend was recorded as having been paid out of profits. In CCL's accounting records and in its 1996/97 accounts the Austchas dividend was recorded as income of CCL. 560 Austchas' 1996/97 accounts record that it had available profits of $2,967,300 on 30 June 1997 before paying the Austchas dividend. Those profits were attributable entirely to the Revesby profit. The plaintiff submitted that the Revesby profit was not, in truth, a real profit and that Austchas had no real profits available from which to declare or pay any part of the Austchas dividend. 561 At the time the dividend was paid, the directors of Austchas and CCL were JBL, Hall and Sapier. It is submitted that Hall and Sapier knew and JBL ought to have known that the available profits were entirely attributable to the Revesby profit and were not in truth real profits. It is further submitted that the knowledge of Hall and Sapier, collectively or individually, was also the knowledge of CCL and it therefore received the Austchas dividend with knowledge of its impropriety and held it as constructive trustee for Austchas and was not entitled to retain the benefit of that amount. It was submitted that the Austchas dividend never formed part of the real profits of CCL and that the 1996/97 accounts overstated its after-tax profits by the amount of the Austchas dividend. JBL and Hall caused Austchas to declare and pay the dividend. Alleged Contraventions 562 The plaintiff alleges that as a director of CCL, JBL contravened 232(4) and s318(1). It is also alleged that as a director of Austchas, JBL contravened s232(4). I have found that JBL contravened s 232(4) in respect of the inclusion in the account of the profit from the Revesby profit and I am satisfied that he failed, both as a director of CCL and of Austchas, to act with appropriate care and diligence in respect of this dividend knowing that it was reliant upon the Revesby profit. I am also satisfied that he failed to take all reasonable steps to ensure that CCL complied with s 292 in respect of the inclusion of this dividend in contravention of s 318(1). Declarations of contravention of s 232(4) and s 318(1) will be made accordingly. 563 It is alleged that as a director of CCL, Hall contravened s232(2), alternatively s232(4), and s318(1). It is also alleged that as a director of Austchas, Hall contravened s232(2) or alternatively s232(4). 564 I have found that Hall acted dishonestly in approving the accounts that contained purported profits from the Revesby transaction. I am satisfied that Hall knew that this dividend was reliant upon those profits and that they were not real profits but approved the accounts that contained the dividend in disregard of that knowledge. I am satisfied that he contravened s 232(2) in this regard as a director of CCL and of Austchas. I am also satisfied that, in contravention of s 318(1) he was the cause of CCL failing to comply with s 292. Declarations of contravention will be made accordingly. 565 It is alleged that as a director of CCL, Sapier contravened s232(2), alternatively s232(4), and s318(1). I have found that Sapier acted dishonestly in approving the CCL accounts that included the Revesby profits and I am satisfied that he knew that the dividend was reliant upon such purported profits. I am satisfied that he knew the profits as reported were not real profits and that the accounts containing such dividend should not have been approved. I am satisfied that he contravened s 232(2) in respect of this dividend and that he caused CCL's failure to comply with s 292 in contravention of s 318(1). Declarations of contravention will be made accordingly. CCL April 1997 Dividend 566 On 30 April 1997 CCL paid an interim dividend to its shareholders of $1,425,825. This dividend and a dividend paid in November 1996 (the earlier dividend) were subject to CCL's Share Dividend Plan under which a shareholder was issued with shares in satisfaction of his or her dividend entitlement unless there was an election to take the dividend in cash. The share dividend component of the CCL April 1997 dividend was $1,126,785 and the cash dividend component was $299,040. Dividend recipients in respect of this dividend included Leisuremark, Notretoil and the Store of Knowledge. 567 In CCL's accounting records the CCL April 1997 dividend was initially recorded on 14 May 1997 as having been paid out of profits. On 26 May 1997 entries were made, apparently without the directors' authority purporting to treat the share dividend component as having been paid out of the share premium account instead of out of profits. At the same time similar entries were made in respect to the share dividend component. 568 On 2 September 1997 these entries were reversed, once again apparently without the directors' authority, so that the share dividend component of the dividend and the share dividend component of the earlier dividend were again recorded as paid out of profits. In CCL's signed 1996/97 accounts the CCL April 1997 dividend was recorded as paid out of profits. 569 CCL's management accounts at 30 April 1997 recorded available profits of $785,527 as at that date after the payment of the CCL April 1997 dividend. These accounts were prepared at a time when the records treated the share dividend component of the earlier dividend and the April 1997 dividend as having been paid out of share premium reserves. The management accounts therefore only included the cash dividend component of the two dividends and understated the cash dividend component by an amount paid to the Wyllie Group. Additionally, the accounts did not include the receipt of the Signature dividend of $1.5 million. 570 The plaintiff submitted that an appropriate adjustment to the accounts would be to add the Signature dividend and to subtract the reinstated share dividend component and the cash dividend to reach a figure of $876,282 as available profits before the payment of the CCL April 1997 dividend. 571 The plaintiff submitted that the Retained Profits schedule and the Distributable Reserves schedules in evidence demonstrate that CCL had available profits alternatively of $1,708,640 or $1,760,903 or $1,376,284 prior to the payment of the CCL April 1997 dividend. However it is submitted that it does not matter which of the schedules provides the best guide to CCL's purported retained profits because, included in each of them was the CCL pre-acquisition fee of $1.45 million and the Signature dividend of $1.5 million. It is submitted that those amounts totalling $2.95 million did not, in truth, form part of the retained profits of CCL. If one adjusts the accounts to remove what is submitted to be the overstated retained profits, CCL had no real retained profits at the date of the payment of the Clifford April 1997 dividend from which to pay any part of it. It is submitted that payment was therefore prohibited by s201. 572 At the time that this dividend was paid the directors of CCL were JBL, Hall and Sapier. It is submitted that at that time JBL and Hall knew, and Sapier ought to have known, that there were no retained profits from which the dividend could be paid. JBL, Hall and Sapier caused CCL to pay the dividend. Alleged Contraventions 573 It is alleged that as directors of CCL, JBL and Hall contravened s232(2) or alternatively s232(4). It is also alleged that they contravened s232(6) because, by causing or permitting CCL to pay the dividend which they knew was not out of profits and which they knew would be received, in part, by Leisuremark, Notretoil and the Store of Knowledge, they made improper use of their positions as directors of CCL to gain an advantage for those shareholders. 574 It is alleged that as a director of CCL, Sapier contravened s232(4) because he failed to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties as a director by causing or permitting CCL to pay the dividend which he ought to have known was not out of profits. 575 In respect of this dividend and the December 1997 dividend, JBL relied upon the evidence of Ellis in which he said that at the time the dividends were paid he had no doubt in his mind that they were paid properly and according to law (tr.451). It was submitted that at no time were any problems raised with JBL by the accounting staff, Ellis or the auditors. In this regard JBL relied upon the following evidence of Ellis: Q: Mr Ellis, in paying dividends, is it not true that as the senior financial officer of the company it was required of you to ensure that, before such a payment occurred, there were sufficient retained profits in the group to make those payments? A: Yes. Q: And you did that, did you not? Yes. Q: And at all times you satisfied the requirements, did you not, of the level of retained earnings in order to pay the dividends that occurred that you have enunciated? A: I believe we did (tr.777) 576 What this evidence addresses is the amount of retained profits, as though they were real profits. The confusion surrounding the source of this dividend is ultimately irrelevant because of the fact that the profits of CCL at this time included false profits and false profits to the knowledge of JBL and Hall. The plaintiff was required to prove that JBL and Hall could not have taken the view that there were enough profits otherwise out of which to pay this dividend. I am not satisfied that the plaintiff discharged its onus in this respect. However I am satisfied that each of JBL and Hall contravened s 232(4) in approving this dividend because each of them knew that in some respect there were false profits in CCL and further enquiry should have been made in respect of the source of the dividend, before approval. It was their knowledge of the false profits that prevented them from reliance upon others in this regard. 577 I have found that Sapier's conduct in respect of the pre-acquisition fees and the Signature exclusivity fees contravened s 232(4). Sapier's extraordinary attitude to his duties as a director in believing that because JBL and Hall were men of substance the company would be secure is indicative of his lack of real assessment in this instance of whether the dividend should be approved. I am of the view that Sapier was well positioned with his skills as an accountant to ask pertinent questions as to the basis of the fees that made up the so-called profits out of which the dividend was to be paid before approval was given for the dividend. He made no such investigation and I am satisfied that his conduct was in contravention of s 232(4). 578 I am not satisfied that the plaintiff has made out its case for declarations of contraventions of s 232(6). Declarations of contravention of s 232(4) will be made accordingly. The CCL December 1997 Dividend 579 On about 26 November 1997 CCL's directors declared a final dividend to be paid to the shareholders on 17 December 1997, totalling $2,905,509. It is submitted that the dividend became "payable" either on 17 December 1997 or on 26 November 1997. This submission is made because there is no direct evidence of a declaration by the directors and it is to be inferred from, inter alia, the evidence of the announcement to the ASX and the CCL Articles of Association. This dividend was also subject to CCL's Share Dividend Plan and the amount of $2,905,509 was made up of the share dividend component of $1,389,781 and the cash dividend component of $1,515,728. Shareholders that received part of the dividend either in cash or shares included Leisuremark, Notretoil and the Store of Knowledge. 580 CCL's accounting records recorded that the whole of the dividend was paid out of profits. The management accounts and a schedule of Distributable Reserves recorded that CCL's retained profits at the relevant time were either $2,268,409 or $2,287,009. It is submitted that it matters not which figure is used because the retained profits included within them the CCL pre-acquisition fee of $1.45 million, the Signature dividend of $1.5 million and the Austchas dividend of $1,899,072. It is submitted that those amounts totalling $4,849,072 did not, in truth, form part of the real profits of CCL. It is also submitted that the accounts and records therefore overstated the amount of retained profits. In a calculation to adjust the overstatement in the accounts the plaintiff has demonstrated that there were no available profits on either of the dates, 26 November 1997 or 17 December 1997, from which to pay the dividend. 581 It is submitted that at the time the dividend was paid JBL and Hall knew and Sapier ought to have known that there were no real profits from which to pay the dividend. JBL, Hall and Sapier caused CCL to pay the dividend. Alleged Contraventions 582 It is alleged that JBL and Hall as directors of CCL contravened s232(2) or alternatively s232(4) and s232(6). It is alleged that as a director of CCL, Sapier contravened s232(2) or alternatively s232(4). 583 JBL submitted that he was not specifically informed of any problems in respect of the payment of any inter-company dividends or of any interim or final dividends. He submitted that if there had been any problem he was entitled to have expected Ellis to bring such problems to his attention and to the attention of the other directors. JBL also submitted that he relied on Sapier to advise on the appropriate accounting treatments required for dividends and on Ellis and the professional accounting staff and the review of the auditors to ensure that the proper treatments occurred. He admitted that he was aware that dividends were declared between the subsidiary companies from time to time but claimed that he always considered those matters were all justified. He claimed that funds flowed from CCL in its treasury role for its subsidiaries, properly by way of loans, fees and charges and dividends without the direct knowledge of the directors. He claimed that Ellis had full and continuing authority to act accordingly and did so. 584 By the time this dividend was approved each of JBL, Hall and Sapier knew that the profits of CCL contained profits that were not real profits but in differing respects, as reflected in the declarations of contraventions of s 232(2) that I have indicated will be made. It is those differing respects that required the plaintiff to prove that these defendants knew that there were not enough profits otherwise than from the false profits of which they were aware, in different respects, out of which to pay the dividend. I am not satisfied that the plaintiff has discharged its onus in this regard. I am however satisfied that each of the defendants contravened s 232(4) in approving this dividend. Knowing of the existence of some false profits, they each should have made further enquiry that there were real profits, separate from the profits that they knew to be false, out of which to pay the dividend. They did not do so. Declarations of contraventions of s 232(4) will be made accordingly. Conclusion 585 I have found that the plaintiff has made out its cases against the defendants for declarations of contraventions of the Act. The following is a summary form of those findings upon which declarations will be made. It will be necessary to bring in Short Minutes of Order containing those declarations: JOHN BARRIE LOITERTON A. Pre-acquisition fees 1. That as a director of CCL he contravened s.232(2) in failing to act honestly in approving Clifford Group's December 1996 half-year and 1996/1997 full year accounts which he knew did not give a true and fair view of the Group's profit or loss for those accounting periods because they included profit purporting to be from the pre-acquisition fees. 2. That as a director of CCL he contravened s.318(1) and that he was knowingly the cause of the Clifford Group's default in complying with s.295A because, by his conduct, he caused the consolidated accounts to include the purported profits from the three acquisition fees and that the accounts did not give a true and fair view of the Group's profit and loss. 3. As a director of CCL he contravened s.232(2) in failing to act honestly in approving CCL's 1996/1997 full year accounts because he knew they did not give a true and fair view of CCL's profit or loss because they contained profits from the pre-acquisition fee of $1,450,000 purportedly charged to JRA. 4. As a director of CCL he contravened s.318(1) in that he was knowingly the cause of CCL's default in complying with s.292 because by his conduct he caused CCL's 1996/1997 full year accounts to include purported profits from the $1,450,000 pre-acquisition fee purportedly charged to JRA. 5. As a director of Ansair he contravened s.232(2) in that he knew that the $800,000 pre-acquisition fee charged by Ansair was not a fee to which JRA had agreed and was not justified. 6. As a director of Signature he contravened s.232(2) in that he knew that the $252,300 pre-acquisition fee charged by Signature was not a fee to which JRA had agreed and was not justified. 7. As a director of JRA he contravened s.232(2) in that he knew that the three pre-acquisition fees charged to JRA were not fees to which JRA had agreed and were not justified. B. Signature Exclusivity Fee 1. That as a director of CCL he contravened s.232(2) by failing to act honestly in the exercise of his powers and discharge of his duties in approving Clifford's December 1996 half-year and 1996/1997 full year consolidated accounts which he knew were not true and fair because they included the purported profit from the Signature exclusivity fee. 2. That as a director of CCL he contravened s.318(1) in that he was knowingly the cause of Clifford's default in compliance with s295A because the December 1996 half-year and 1996/1997 full year consolidated accounts did not give a true and fair view of the profit and loss of the Group because of the inclusion of the purported profit from the Signature exclusivity fee. C Origin Fee 1. That as a director of CCL he contravened s.232(2) in respect of the Origin fee. 2. That as a director of Signature he contravened s 232(2) in respect of the Origin fee. 3. That as a director of CCL he contravened s.318(1) in that he caused Clifford's failure to comply with s 295A in respect of the 1996/1997 consolidated accounts by the inclusion of the purported profits from the Origin fee. D The Revesby Profit 1. That as a director of CCL he contravened s.232(4) in failing to exercise the appropriate degree of care and diligence in approving Clifford's 1996/1997 consolidated accounts which he ought to have known were not true and fair and failed to comply with the disclosure standard. 2. That as a director of CCL he contravened s.318(1) in that he failed to take all reasonable steps to comply with or secure Clifford's compliance with s.298 when he approved Clifford's 1996/1997 consolidated accounts. 3. As a director of Austchas he contravened s.232(4) in failing to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties as a director of Austchas in failing to make the appropriate enquires in respect of the transaction between Austchas and Peregrine. E. Dividends 1. That as a director of CCL he contravened s 232(2) in approving CCL's 1996/1997 accounts because he knew that the Signature dividend was not income. 2. That as a director of CCL he contravened s 318(1) by being the cause of the default of the company in failing to comply with s 292 in respect of the inclusion of the Signature dividend. 3. That as a director of Signature he contravened s 232(2) by causing Signature to pay the dividend that he knew was not paid out of profits. 4. That as a director of CCL he contravened s 232(4) in respect of the Austchas dividend. 5. That as a director of CCL he contravened s 318(1) in failing to take all reasonable steps to secure compliance with s 292 in respect of the Austchas dividend. 6. That as a director of Austchas he contravened s 232(4) in respect of the Austchas dividend. 7. That as a director of CCL he contravened s 232(4) in respect of the April 1997 dividend. 8. That as a director of CCL he contravened s 232(4) in respect of the December 1997 dividend. IAN HALL A. Pre-acquisition fees 1. That as a director of CCL he contravened s232(2) by failing to act honestly in approving the Clifford Group's 1996/1997 consolidated accounts which he knew did not give a true and fair view of the Group's profit or loss because they included profit purporting to be from $252,300 pre-acquisition fee purportedly charged by Signature. 2. That as a director of Signature he contravened s 232(2) by failing to act honestly in that he knew that the $252,300 pre-acquisition fee purportedly charged by Signature had not been agreed to by JRA. 3. That as a director of CCL he contravened s 232(4) in failing to exercise the appropriate degree of care and diligence in the exercise of his power or the discharge of his duty as a director of CCL in approving Clifford Group's December 1996 half-year and 1996/97 full year consolidated accounts which he ought to have known were not true and fair because they contained profits purportedly from the pre-acquisition fees purportedly charged by Ansair to JRA and by CCL to JRA. 4. That as a director of CCL he contravened s318(1) in that he was knowingly the cause of Clifford's failure to comply with s 295A because, by his conduct, he caused Clifford's December 1996 half year accounts and the 1996/1997 full year accounts to include the purported profit from the pre-acquisition fee charged by Signature in the amount of $252,300. 5. That as a director of CCL he contravened s318(1) in that he failed to take all reasonable steps to comply with or secure Clifford's compliance with s295A because the December 1996 half-year and the 1996/97 full year consolidated accounts contained purported profits from the pre-acquisition fees purportedly charged to JRA by CCL and Ansair. B. Signature Exclusivity Fee 1. That as a director of CCL he contravened s.232(2) by failing to act honestly in the exercise of his powers and discharge of his duties in approving Clifford's December 1996 half-year and 1996/1997 full year consolidated accounts which he knew were not true and fair because they included the purported profit from the Signature exclusivity fee. 2. That as a director of CCL he contravened s.318(1) in that he was knowingly the cause of Clifford's default in compliance with s295A because the December 1996 half-year and 1996/1997 full year consolidated accounts did not give a true and fair view of the profit and loss of the Group because of the inclusion of the purported profit from the Signature exclusivity fee. C Origin Fee 1. That as a director of CCL he contravened s.232(4) in failing to exercise the appropriate degree of care and diligence in approving Clifford's 1996/1997 consolidated accounts which he knew or ought to have known did not comply with the relevant disclosure standard. 2. That as a director of CCL he contravened s.318(1) in that he failed to take all reasonable steps to comply with or secure Clifford's compliance with s.298 because he knew or ought to have known that Clifford's 1996/1997 consolidated accounts did not comply with s.298 in disclosing the nature of the transaction in compliance with the standard AASB1017. D The Revesby Profit 1. That as a director of CCL he contravened s.232(2) in that he failed to act honestly in the exercise of his powers and the discharge of his duties by approving Clifford's 1996/1997 consolidated accounts which he knew did not give a true and fair view of Clifford's profit or loss. 2. That as a director of CCL he contravened s.318(1) in that he was knowingly the cause of Clifford's default in compliance with s.295A in respect of Clifford's 1996/1997 consolidated accounts. 3. That as a director of Austchas he contravened s.232(2) in that he failed to act honestly in the exercise of his powers and the discharge of his duties as a director. D. Dividends 1. That as a director of CCL he contravened s 232(2) in approving CCL's 1996/1997 accounts because he knew that the Signature dividend was not income. 2. That as a director of CCL he contravened s 318(1) by causing the default in compliance with s 292 in respect of the inclusion of the Signature dividend. 3. That as a director of Signature he contravened s 232(2) by causing Signature to pay the dividend that he knew was not paid out of profits. 4. That as a director of CCL he contravened s 232(2) in respect of the Austchas dividend. 5. That as a director of CCL he contravened s 318(1) in causing CCL's failure to comply with s 292 in respect of the Austchas dividend. 6. That as a director of Austchas he contravened s 232(2) in respect of the Austchas dividend. 7. That as a director of CCL he contravened s 232(4) in respect of the April 1997 dividend. 8. That as a director of CCL he contravened s 232(4) in respect of the December 1997 dividend. IAN SAPIER A. Pre-acquisition fees 1. That as a director of CCL he contravened s232(4) in failing to exercise the appropriate degree of care and diligence when he approved the Clifford's December 1996 half–year and 1996/1997 full year consolidated accounts which he ought to have known did not give a true and fair view of the Clifford's Group profit or loss because they contained the purported profit from the pre-acquisition fees. 2. That as a director of CCL he contravened s318(1) in that he failed to take all reasonable steps to comply with or secure the Group's compliance with s295A because the Clifford's December 1996 half-year and 1996/1997 full year consolidated accounts included profits from the acquisition fees when they should not have. 3. That as a director of CCL he contravened s232(4) in failing to exercise the appropriate degree of care and diligence when he approved CCL's 1996/1997 full year accounts which he ought to have known did not give a true and fair view of CCL's profit or loss because they contained profit from the purported pre-acquisition fee of $1,450,000 when they should not have. 4. That as a director of CCL he contravened s318(1) in that he failed to take all reasonable steps to comply with or secure CCL's compliance with s292 because CCL's 1996/1997 full year accounts did not give a true and fair view because they included the $1,450,000 pre-acquisition fee when they should not have. 5. As a director of Signature he contravened s232(4) in failing to exercise the appropriate degree of care and diligence in permitting the charging of a fee of $252,300 when he ought to have known no agreement was in place to allow such a pre-acquisition fee to be charged. B. Signature Exclusivity Fee 1. That as a director of CCL he contravened s232(4) by failing to exercise the appropriate care and diligence in the exercise of his powers or the discharge of his duties in approving Clifford's 1996 half-year and 1996/1997 full year consolidated accounts which he ought to have known were not true and fair because they included the purported profit from the Signature exclusivity fee. 2. That as a director of CCL he contravened s.318(1) in that he failed to take all reasonable steps to comply with or to secure Clifford's compliance with s.295A because the December 1996 half-year and 1996/1997 full year consolidated accounts did not give a true and fair view of the profit and loss of the Group because of the inclusion of the purported profit from the Signature exclusivity fee. C. The Revesby Profit 1. That as a director of CCL he contravened s.232(2) in that he failed to act honestly in the exercise of his powers and the discharge of his duties by approving Clifford's 1996/1997 consolidated accounts which he knew did not give a true and fair view of the Group's financial position. 2. That as a director of CCL he contravened s.318(1) in that he was knowingly the cause of Clifford's default in compliance with s.295A in respect of Clifford's 1996/1997 consolidated accounts. D. Dividends 1. That as a director of CCL he contravened s 232(4) in failing to exercise the appropriate degree of care and diligence in respect of the Signature dividend. 2. That as a director of CCL he contravened s 318(1) in failing to take all reasonable steps to cause CCL to comply with s 292 in respect of the Signature dividend. 3. That as a director of CCL he contravened s 232(2) in respect of the Austchas dividend. 4. That as a director of CCL he contravened s 318(1) in that he was knowingly the cause of CCL's failure to comply with s 292 in respect of the Austchas dividend. 5. That as a director of CCL he contravened s 232(4) in respect of the April 1997 dividend. 6. That as a director of CCL he contravened s 232(4) in respect of the December 1997 dividend. PETER LOITERTON A. Signature Exclusivity Fees 1. That as a director of Signature he contravened s.232(4) by failing to exercise the appropriate degree of care and diligence in the exercise of his powers for the discharge of his duties as a director in failing to enquire further in relation to the contents of the letter from IDC to Signature dated 11 July 1996 which he signed in early 1997. 2. That as a director of IDC he contravened s.232(4) by failing to exercise the appropriate degree of care and diligence in the exercise of his powers or the discharge of his duties in signing the letter dated 11 July 1996 in early 1997 without making any further enquiry in relation to the purported agreement referred to therein. 586 The plaintiff's claims against the defendants will be otherwise dismissed. 587 I list the matter on 16April 2004 at 2pm for the purpose of filing Short Minutes of Order and for directions and/or evidence and submissions on penalty and compensation. ************************* Last Modified: 05/14/2004 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. 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