New South Wales Court of Appeal CITATION: Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors [2008] NSWCA 206 HEARING DATE(S): 4 August 2008 - 29 August, 5 September 2008 JUDGMENT DATE: 3 December 2008 JUDGMENT OF: Giles JA at 1; Hodgson JA at 52; Ipp JA at 84 (a) The appeal against Mr Daya succeeds. (b) The orders made by the trial judge in respect of the claims against Mr Daya by ICI, AOITL, ASC, AOITP and ESS are set aside. (c) Mr Daya is ordered to pay damages to ICI of $1,581,172.80. (d) Mr Daya is ordered to pay damages to AOITL of $6,177,561. (e) Mr Daya is ordered to pay damages to ASC of $6,500,000. DECISION: (f) Mr Daya is ordered to pay damages to AOITP of $7,540,000. (g) Mr Daya is ordered to pay damages to ESS of $15,964,927.05. (h) The appeals are otherwise dismissed. (i) Leave is granted to the appellants to amend the notice of appeal so as to enable them to rely on the representations in paragraphs 104(a) and (e) of 6FAS. (J) The parties have liberty to apply for any other orders that need to be made in accordance with these reasons. (k) The parties are directed to arrange a date with the registrar for a directions hearing relating to the further disposition of the remaining matters to be resolved in the appeal (including, but not necessarily limited to, costs, interest on the damages awarded, any orders made by McDougall J that should be set aside in accordance with these reasons, and any further orders that need to be made). Thereafter a date will be allocated for the hearing of outstanding matters. CATCHWORDS: CORPORATIONS - capital raising - convertible note issue - whether misleading or deceptive conduct by lead manager, underwriter and broker before issue of the prospectus - whether draft prospectus misleading or deceptive - whether misleading or deceptive conduct in relation to securities after issue of prospectus and before issue of securities - CAUSATION - where company board relied on representations by due diligence committee and resolved to issue securities - whether but for contraventions the note issue would not have proceeded and the appellants would therefore not have sustained loss - whether appellants can recover in circumstances where they were not misled - DAMAGES - whether appellants entitled to recover damages for issue purchases as well as on market purchases - whether appellants have proved their loss - whether appellants were locked in to their investments - whether rule in Potts v Miller applies - PRACTICE AND PROCEDURE - pleadings - surprise rule - materiality - requirement to expressly plead materiality - dishonesty - requirement to expressly plead dishonesty - PRACTICE AND PROCEDURE - trial - failure by trial judge to deal with argument - where trial judge and parties agreed that case would be decided on the pleadings - argument previously pleaded but abandoned in later pleading - whether argument raised in pleadings - PRACTICE AND PROCEDURE - appeals - argument not made at trial - whether fair to allow argument to be raised on appeal Acts Interpretation Act 1901 (Cth) Civil Procedure Act 2005 LEGISLATION CITED: Corporations Law (Cth) Partnership Act 1982 Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005 CATEGORY: Principal judgment Aaron's Reefs Ltd v Twiss [1896] AC 273 Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282; (2006) 67 NSWLR 341 Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170 Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26; (2005) 221 CLR 568 Banque Commerciale SA (In Liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 Beale v GIO of NSW (1997) 48 NSWLR 430 Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 Brambles Australia Ltd v Tatale Pty Ltd [2006] NSWSC 204 Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340 Burston v Melbourne & Metropolitan Tramways Board [1948] HCA 36; (1948) 78 CLR 143 Butcher v Lachlan Elder Realty Ltd [2004] HCA 60; (2004) 218 CLR 592 Cackett v Keswick [1902] 2 Ch 456 Campomar Sociedad Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 Coal and Allied v AIRC [2000] HCA 47; (2001) 203 CLR 194 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 Costa v The Public Trustee of NSW [2008] NSWCA 223 Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658 Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58; (2004) 62 IPR 184; (2004) ATPR 46-248 Dow Hager Lawrance v Lord Norreys (1890) 15 App Cas 210 Edgington v Fitzmaurice [1885] 29 Ch D 459 Ellis v Leeder [1951] HCA 44; (1951) 82 CLR 645 Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) [1987] FCA 230; (1987) 16 FCR 410 Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003)134 FCR 522 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235 Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; (1916) 22 CLR 490 Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 Hampic Pty Ltd v Adams [1999] NSWCA 455; (2000) ATPR 41-737 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546 Heydon v NRMA Ltd [2000] NSWCA 374; (2000) 51 NSWLR 1 Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 House v The King [1936] HCA 40; (1936) 55 CLR 499 CASES CITED: HTW Valuers v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109 In Re Will of Gilbert (dec'd) (1946) 46 SR (NSW) 318 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413 Ketteman v Hansel Properties Pty Ltd [1987] AC 189 Kirby v Sanderson [2001] NSWCA 44; (2001) 54 NSWLR 135 Krakowski v Eurolynx Properties Ltd [1995] HCA 68; (1995) 183 CLR 563 Kuru v State of NSW [2008] HCA 26 Leotta v Public Transport Commission (NSW) (1976) 9 ALJR 666 March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388 Netaf Pty Ltd v Bikane Pty Ltd [1990] FCA 35; (1990) 26 FCR 305 Nocton v Ashburton [1914] AC 932 Nolan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116 North Sydney Council v Ligon 302 Pty Ltd (1995) 87 LGERA 435 Oldfield Knott Architects Pty Ltd v Ortiz Investments Ltd [2000] WASCA 255 Orix Australia Corporation Limited v Moody Kiddell and Partners Pty Limited [2006] NSWCA 257 Paringa Mining and Exploration Company Plc v North Flinders Mines Ltd [1988] HCA 53; (1988) 165 CLR 452 Poignand v NZI Securities Australia Limited [1992] FCA 369; (1992) 37 FCR 363 Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 Saffron v Societe Miniere Cafrika [1958] HCA 50; (1958) 100 CLR 231 Smith New Court Securities Ltd v Citibank NA [1997] AC 254 State of Queensland v JL Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146 Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84 Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 Taco Co of Australia Ltd v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 The Marriner v Bishop of Bath and Wells [1893] P 145 Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627; Visible Results Properties Inc v Sushi Train (Australia) Pty Ltd [2005] FCA 1159 Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 Whisprun Pty Ltd v Dixon (2003) HCA 48; (2003) 77 ALJR 1598 White v Overland [2001] FCA 1333 Yorke v Lucas [1985] HCA 65 (1985) 158 CLR 661 TEXTS CITED: Bernard Cairns, Australian Civil Procedure, 7th ed (2007) The Hon Justice R S French, A Lawyer's Guide to Misleading or Deceptive Conduct (1989) 63 Australian Law Journal 250 Ingot Capital Investments Pty Ltd (ACN 006 538 147) (First Appellant) Eclectic Stocks Limited Company No 3241668 (Second Appellant) Utilico Pty Limited (ACN 003 573 475) (Third Appellant) Eclectic Investment Trust PLC No 02133976 (Fourth Appellant) Eastern States Securities Ltd (Fifth Appellant) Ingot Capital Management Pty Ltd (ACN 066 017 712) (Sixth Appellant) Macquarie Equity Capital Markets Ltd (ACN 001 374 572) (First Respondent) Macquarie Equities Ltd (ACN 002 574 923) (Second Respondent) Macquarie Bank Ltd (ACN 008 583 542) (Third Respondent) PARTIES: Udayan Daniel Ghose (Fourth Respondent) Jonathan Paul Beach (Fifth Respondent) Azmin Firoz Daya (Sixth Respondent) Craig H Deery (Seventh Respondent) Michael J Morrissey (Eighth Respondent) William Peck (Ninth Respondent) Paul Laurence Williams (Tenth Respondent) Peter Aroney (Eleventh Respondent) Patrick Murray and the persons listed in Schedule "B" to the Notice of Appeal (Twelfth Respondent) Andrew Mutton and the persons listed in Schedule "A" to the Notice of Appeal (Thirteenth Respondent) John Trowbridge Consulting Pty Limited (Cross-Respondent) FILE NUMBER(S): CA 40249/07 D F Jackson QC; T G R Parker SC; W G Muddle SC; K H Barrett; J A Arnott (First - Sixth Appellants) B C Oslington QC; A S Bell SC; J Williams (First - Third Respondents) P Wood; P Silver (Fourth Respondent) D J Fagan SC; A P Cheshire (Fifth, Seventh and Eighth Respondent) P S Braham (Sixth Respondent) COUNSEL: L Gor (Ninth Respondent) A J Bannon SC; M J Cohen (Tenth Respondent) P S Braham (Eleventh Respondent) T F Bathurst QC; S M Nixon (Twelfth Respondent) J T Gleeson SC; R A Dick; J A Watson (Thirteenth Respondent) P H Greenwood SC (Cross Respondent) Deacons (First - Sixth Appellants) Mallesons Stephen Jaques (First, Second,Third Respondent) Chang Pistilli & Simmons (Fourth Respondent) Colin Biggers & Paisley (Fifth, Seventh, Eighth Respondent) SOLICITORS: Dibbs Abbott Stillman (Tenth Respondent) Deutsch Partners Lawyers Pty Ltd (EleventhRespondent) Blake Dawson (Twelfth Respondent) Freehills (Thirteenth Respondent) Minter Ellison (Cross-Respondent) LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): SC 50169/01 LOWER COURT JUDICIAL OFFICER: McDougall J LOWER COURT DATE OF DECISION: 30 March 2007 LOWER COURT MEDIUM NEUTRAL CITATION: Ingot Capital Investments & Ors v Macquarie Equity Capital Markets & Ors [No 6] [2007] NSWSC 124 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40249/07 SC 50169/01 GILES JA HODGSON JA IPP JA 3 DECEMBER 2008 Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors Headnote FACTS New Cap Reinsurance Holdings Limited (NCRH) effected a convertible note issue on 12 January 1999. The six appellants invested approximately A$40M in the note issue, in rights to the notes and in acquiring NCRH shares. The thirteen respondents were involved in different ways in bringing about the note issue. Within months after issuing the notes, NCRH was placed in liquidation and the notes, in effect, were valueless. The appellants contended that, in consequence, each suffered substantial damages for which the respondents were liable. The appellants maintained nine causes of action on appeal against various sets and sub-sets of the respondents. Case 1 alleged misleading and deceptive conduct against Macquarie Bank Limited and two of its subsidiaries (acting as lead manager, underwriter and broker for the note issue), said to have occurred before the prospectus was issued, in a series of representations made to Mr Duncan Saville who, on the strength of them, entered into sub-underwriting contracts on behalf of certain of the appellants that gave rise to loss. Case 2 alleged various contraventions of ss 995 and 996 of the Corporations Law against respondents who were directors or officers of NCRH and members of the Due Diligence Committee (DDC) appointed by NCRH to perform various functions in connection with the note issue. Case 2 consisted of several categories and subcategories based on various permutations of four arguments relating to representations in the prospectus. The four arguments were described on appeal as the "smoothing cover argument", the "Trowbridge/NTA argument", the "trading prospects argument" and the "note issue purposes argument". Case 3 alleged contraventions of s 995 which occurred during the period from the issue of the prospectus to the issue of the notes. The appellants argued that during this period, circumstances changed so as to falsify statements made in the prospectus and that the members of the DDC, as well as director Mr Daya had contravened s 995 by failing to disclose these changed circumstances to the board. Case 3.1 was brought against the members of the DDC. Case 3.2 was brought against Mr Daya alone. The trial judge, McDougall J, held that the appellants had failed to establish liability on the part of any respondent save for Mr Daya on the basis of case 3.2. His Honour held, further, that the appellants had failed to prove their loss. Thus, he dismissed all their claims, including that against Mr Daya. A key aspect of several of the appellants' cases was the contention that, but for the alleged contraventions, the note issue would not have proceeded and the appellants would not have invested and therefore sustained any loss. Based on this contention, the appellants argued that they were entitled to succeed even though they were not misled. This causation argument was referred to at trial and in argument on appeal as the "indirect causation" argument. HELD Per Ipp JA (Giles JA and Hodgson JA agreeing) dismissing case 1: (i) As regards the representations alleged in paragraphs 46 and 55 of the Sixth Further Amended Summons (6FAS) to establish liability under case 1, those representations were either not made (paras 46(a), (c) and 55(f)), did not mislead the appellants (paras 46(a), (b) and (d)), were not falsified (paras 46(f), 55(e), (h) and (n)) or had not been argued as false at trial (para 46(d)). (ii) Macquarie is not liable for the representations alleged in paragraph 55 because it acted as a mere conduit. Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 applied Butcher v Lachlan Elder Realty Pty Limited [2004] HCA 60; (2004) 218 CLR 592 applied Orix Australia Corporation Limited v Moody Kiddell and Partners Pty Limited [2006] NSWCA 257 applied Per Ipp JA (Giles JA and Hodgson JA agreeing) dismissing the smoothing cover argument: (i) Materiality is an essential ingredient of civil liability for contravention of s 996. It is therefore an essential element of the pleadings for a contravention of that section. (ii) The dictates of procedural fairness as embodied in the surprise rule require the pleading of the materiality of the misleading or deceptive conduct that is contended to have contravened s 995 or s 996. General principles of pleadings discussed Uniform Civil Procedure Rules 2005 r 14.14 Fraser v NRMA Holdings Limited (1995) 55 FCR 452 applied Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282; (2006) 67 NSWLR 341 distinguished Kirby v Sanderson [2001] NSWCA 44; (2001) 54 NSWLR 135 applied (iii) The appellants were required to plead expressly any part of their case that relied upon lack of integrity on the part of NCRH and those involved in the note issue. Belmont Finance Corporation Ltd v Williams Furniture Limited [1979] Ch 250 applied Oldfield Knott Architects Pty Limited v Ortiz Investments Limited [2000] WASCA 255 applied (iv) The elements of materiality and lack of integrity upon which the smoothing cover argument was based were not pleaded. (v) Nothing in the pleadings, nor in the way the case was conducted led to error on the trial judge's part in not dealing with the smoothing cover argument. The smoothing cover argument was not a live issue at trial and it would be unfair to allow the argument to be raised on appeal. Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 referred to Coal and Allied v AIRC [2000] HCA 47; (2001) 203 CLR 194 referred to Leotta v Public Transport Commission (1976) 50 ALJR 666 referred to Beale v GIO of NSW (1997) 48 NSWLR 430 referred to In Re Will of Gilbert (dec'd) (1946) 46 SR (NSW) 318 applied Adam P Brown Male Fashions Pty Limited v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170 referred to Saffron v Societe Miniere Cafrika [1958] HCA 50; (1958) 100 CLR 231 applied Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 applied Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 applied Per Hodgson JA further dismissing the smoothing cover argument: In a simple case, where the misleading conduct merely suggested something positively advantageous about a transaction, which was not true, it will generally be sufficient just to allege the conduct and what it suggested, and to allege that this was false. Where, however what was truly misleading was rather the suppression or non-disclosure of something disadvantageous, or of something that would otherwise have induced the claimant to have acted otherwise, then in it will generally be necessary, if this is not obvious, to allege what it was that was suppressed or not disclosed. In addition, if it is not obvious what is important or material about what was conveyed or not disclosed, it may be necessary also to make this clear in the pleadings. This is particularly so if what is alleged is non-disclosure of dishonesty, or if some non-disclosure is alleged to be material on the ground that it involved dishonesty. Per Ipp JA (Giles JA and Hodgson JA agreeing) dismissing the Trowbridge/NTA, trading prospects, and note issue purposes arguments: The Trowbridge/NTA, trading prospects, and note issue purposes arguments fail on the facts. Per Ipp JA (Giles JA and Hodgson JA agreeing) dismissing Cases 2.1, 2.2, and 2.3(a)-(d): (i) Case 2.1 fails because the smoothing cover and Trowbridge/NTA arguments fail. (ii) Case 2.2 fails because the smoothing cover and Trowbridge/NTA arguments fail. (iii) Case 2.3(a) fails because the Trowbridge/NTA, trading prospects and note issue purposes arguments fail. (iv) Case 2.3(b) fails because the smoothing cover and Trowbridge/NTA arguments fail. (v) Case 2.3(c) fails because the Trowbridge/NTA, trading prospects and note issue purposes arguments fail. (vi) Case 2.3(d) fails because the smoothing cover, Trowbridge/NTA, trading prospects and issue purposes arguments fail. Per Giles JA further dismissing cases 2.1, 2.2 and 2.3(a)-(d): (i) The distinction drawn in Digi-Tech (Australia) Pty Ltd v Brand is between cases where conduct on the part of the plaintiff forms a link in the causation chain and where it does not. Where it does, there must be reliance on the misleading conduct. Where it does not, there may be recovery if the act of the innocent party induced by the misleading conduct by its very nature, causes the plaintiff's loss. Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184 discussed Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 referred to (ii) The purpose of ss 995 and 1005 is achieved by proscription of engaging in misleading conduct and provision of compensation. Section 1005 should be applied in a way that promotes provision of correct information to investors and protects them in making investment decisions. But this does not warrant compensating investors regardless of the effect on their decision-making of the misleading conduct. (iii) It does not follow from the proscriptive terms of s 996 that causation is satisfied by no more than the fact that the defendant authorised or caused the issue of a prospectus in which there was a material misstatement or omission. The issue of a prospectus containing a material misstatement or omission opens the door to recovery of compensation in a "but for" sense, but as Digi-Tech (Australia) Pty Ltd v Brand shows that may not be sufficient. Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184 discussed (iv) Compensation is to be recovered under s 1005 not simply because a misleading prospectus was issued, but because the investor was misled by its issue. Subject to cases where the investor is not passive but undertook decision-making to which what appeared in the prospectus was material, there must be reliance on the material misstatement or omission in a like manner to Digi-Tech (Australia) Pty Ltd v Brand. Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184 discussed Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 distinguished Per Ipp JA further dismissing cases 2.1, 2.2 and 2.3(a)-(d): (i) Proof that the loss was caused by conduct that contravened s 996 must include proof of one of the two following sets of circumstances: firstly, had s 996 not been contravened, the corporation concerned would not have issued the offending prospectus but would have issued a different prospectus in non-contravening form and the different prospectus would have caused the plaintiff not to invest in the securities that gave rise to its loss; and, secondly (and alternatively), the corporation concerned would not have issued a prospectus at all and, hence, would not have issued the securities that gave rise to its loss. (ii) Mere proof of a material false statement or omission does not constitute proof that a different prospectus, on which the plaintiff would not have relied to its detriment, would have been issued, or no prospectus would have been issued. Wardley Australia Limited v Western Australia [1992] HCA 55; (1992) 175 CLR 514 referred to (iii) Where an element of a plaintiff's case under s 996 is that either a different prospectus would have been issued which would have caused the plaintiff not to purchase the securities, or no prospectus (and no relevant securities) would have been issued, the plaintiff's summons or statement of claim should allege these facts. Not to plead them would be contrary to the surprise rule. Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184 referred to (iv) In a case based on misleading conduct directed against identified individuals, if the person alleged to have been misled is not induced by the conduct in question to act or refrain from acting, there is no "erroneous assumption" in the sense required to establish misleading or deceptive conduct. This is fatal to a cause of action based on misleading conduct. Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 referred to Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 referred to Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340 referred to (v) Persons who claim damages on the ground of misleading or deceptive conduct in contravention of s 995, and who allege that they incurred those damages by acquiring something in consequence of such conduct, must prove that they were misled by that conduct. Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184 applied Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522 referred to Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 distinguished (vi) Cases 2.1 and 2.2 fail because the smoothing cover and Trowbridge/NTA arguments fail. Those arguments fail for the further reason that the appellants did not prove that, but for the misleading conduct alleged, NCRH would have issued a different prospectus (which would have resulted in the appellants not making any NCRH-related investments), or NCRH would not have issued any prospectus (which would have had the same consequence). (vii) Cases 2.3(a)-(d) fail for the further reason that the board was not misled. (viii) Cases 2.3(a)-(d) fail for the further reason that the appellants did not prove that their damages were suffered "by" misleading conduct as required by s1005 of the Corporations Law. Per Ipp JA (Giles JA and Hodgson JA agreeing) dismissing case 3.1: (i) Case 3.1 fails because the appellants did not prove that their damages were suffered "by" misleading conduct as required by s1005 of the Corporations Law. (ii) Case 3.1 fails for the further reason that the board was not misled. (iii) Case 3.1 fails for the further reason that all the representations (save for that upon which the "further issues argument" was based) alleged to arise out of the DDC Supplementary Report were not falsified. As regards the further issues argument, that argument was not pleaded at trial and the appellants should not be allowed to raise it on appeal. Per Ipp JA (Giles JA and Hodgson JA agreeing) upholding case 3.2: (i) The case based upon Mr Daya's independent liability fails because that argument was not pleaded at trial and the appellants should not be allowed to raise it on appeal; (ii) The trial judge erred in finding that Mr Daya engaged in misleading conduct as regards the information he received in December 1998 but did not disclose to the board; (iii) As regards the case based upon Mr Daya's accessorial liability relating to the information he received in January 1999: a. This case was pleaded at trial; b. The trial judge rightly found that NCRH (by Mr Daya remaining silent about the January information) engaged in misleading conduct; c. By that misleading conduct the appellants were misled and suffered damage, and; d. The challenges as to whether the 2nd and 5th appellants were the proper plaintiffs fails on the facts, as do the challenges based on the proposition that certain of the appellants had not proved that they had paid for their notes, and; (iv) As regards the appellants' damages: a. The rule in Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 does not apply; b. The appellants were locked in to their investments, and; c. The appellants' damages should be assessed as the difference between what they paid for their investments and the value of the investments following the failure of NCRH. Because the investments ultimately proved to be worthless, the appellants' damages are the entirety of the amounts invested, less the proceeds of any investments sold. Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 distinguished Smith New Court Securities Ltd v Citibank NA [1997] AC 254 applied Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 referred to HTW Valuers v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 referred to Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 referred to Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413 referred to ORDERS (a) The appeal against Mr Daya succeeds. (b) The orders made by the trial judge in respect of the claims against Mr Daya by ICI, AOITL, ASC, AOITP and ESS are set aside. (c) Mr Daya is ordered to pay damages to ICI of $1,581,172.80. (d) Mr Daya is ordered to pay damages to AOITL of $6,177,561. (e) Mr Daya is ordered to pay damages to ASC of $6,500,000. (f) Mr Daya is ordered to pay damages to AOITP of $7,540,000. (g) Mr Daya is ordered to pay damages to ESS of $15,964,927.05. (h) The appeals are otherwise dismissed. (i) Leave is granted to the appellants to amend the notice of appeal so as to enable them to rely on the representations in paragraphs 104 (a) and (e) of 6FAS. (j) The parties have liberty to apply for any other orders that need to be made in accordance with these reasons. (k) The parties are directed to arrange a date with the registrar for a directions hearing relating to the further disposition of the remaining matters to be resolved in the appeal (including, but not necessarily limited to, costs, interest on the damages awarded, any orders made by McDougall J that should be set aside in accordance with these reasons, and any further orders that need to be made). Thereafter a date will be allocated for the hearing of outstanding matters. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40249/07 SC 50169/01 GILES JA HODGSON JA IPP JA 3 DECEMBER 2008 Ingot Capital Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd & Ors Judgment 1 GILES JA: I agree with the orders proposed by Ipp JA and, subject to the following, with his Honour's reasons. Case 2.3 and "indirect causation" 2 Case 2.3 was based on contravention of s 995 of the Corporations Law. The appellants claimed that the DDC respondents had engaged in misleading conduct in providing to NCRH's board on 18 November 1998 their report to the effect that the members of the DDC were not aware of any material misstatement or omission in the prospectus. 3 Mr Saville did not see the DDC report, and was not misled by it. The appellants did not rely on any direct effect on his decision-making. On the reasoning in Case 2.3, the board was misled and the appellants suffered loss or damage by the contravention of s 995 because the board would otherwise not have issued the prospectus and the note issue would not have taken place. 4 This brought consideration of Digi-Tech (Australia) Pty Ltd v Brand [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 212. McDougall J had held that it precluded the appellants from maintaining a case so structured. 5 In Digi-Tech (Australia) Pty Ltd v Brand Digi-Tech had provided revenue and profit projections to Deloitte; on the basis of the projections Deloitte had arrived at a valuation of products which were purchased as part of a tax-driven scheme; and a Mr Urwin (not from Digitech or Deloitte) had marketed the scheme to investors. In a claim against Digi-Tech the investors alleged that the projections were incorrect and their provision to Deloitte was misleading conduct, and sought to recover compensation for their entry into the scheme. 6 The case at trial was one of direct reliance on the incorrect projections. The trial judge found that the investors' reliance had not been established. It was held on appeal that this finding had been come to on an incorrect premise as to the effect of the representation of the projections, and that the issue should be remitted for retrial. 7 The Court (Sheller, Ipp and McColl JJA) went to deal with an alternative case first propounded on appeal, namely - 148 The appellants submitted that it was not necessary for a party seeking to recover damages to show direct reliance upon misleading conduct by the representor. They submitted that the misleading conduct might cause other persons to act in a way that leads to loss suffered by a plaintiff. They submitted that this approach gives effect to the words in s 82 of the Trade Practices Act 1974 (Cth), namely, 'suffers loss or damage by conduct of'. They relied on Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 at 529-530, Wardley Australia Limited v Western Australia (1992) 175 CLR 514 at 525, Marks v GIO Australia Holdings Limited (1998) 196 CLR 494, Hampic Pty Ltd v Adams [1999] NSWCA 455 and Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84. 149 The appellants put their case in this way. They said that if Digi-Tech had not produced misleading and deceptive forecasts concerning the revenue and gross margin of the products, Deloitte would not have produced a valuation to support the price of $72.5m. In the absence of that valuation, or any valuation supporting that price, the investment scheme would not have gone ahead and Mr Urwin would not have proposed the scheme to any of the investors. It was submitted that Digi-Tech's misleading conduct, thereby, caused Mr Urwin to act in a way that led to loss or damage to the appellants. They described this argument as the 'indirect causation theory'. 8 Their Honours spoke of the cases on which the investors relied, as to Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 citing a passage from the judgment of Mason CJ and Dawson, Gaudron and McHugh JJ at 525 which included that "by" in s 82 of the Trade Practices Act 1974 (Cth) - … clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & M H) Pty Ltd , except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. 9 Their Honours then said - 155 Stockland, like Janssen-Cilag, was not a case where the plaintiff claimed damage caused by entering into a transaction induced by misleading conduct. In both cases the misleading conduct had caused others to act to the direct prejudice of the plaintiff. That is to say, the chain of causation was as follows: firstly, misleading conduct by the defendant; secondly, an innocent party is induced by the misleading conduct to act in some way; thirdly, the innocent party's act, by its very nature, causes the plaintiff loss. On this basis, no act of the plaintiff contributes to the loss. The chain of causation is complete without there needing to be any act or omission on the part of the plaintiff. 156 The Janssen-Cilag and Stockland category of claim is materially different to that which occurs when plaintiffs suffer loss because they, themselves, are induced by misleading representations to perform some act or omission by which they are prejudiced. The difference lies in the fact that in the first category of case no conduct on the part of the plaintiff forms a link in the causation chain. In the second category, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. Without such inducement and a consequential act or omission on the part of the plaintiff there is indeed no linking chain between the misleading conduct and the plaintiff's loss. 157 This analysis demonstrates the fallacy of applying the so-called indirect theory of causation to this case. 158 On the assumption that Digi-Tech's forecasts as to the revenue and gross margin of the products were misleading and deceptive, that misleading and deceptive conduct resulted in Deloitte producing, in essence, a misleading and deceptive valuation to support the price of $72.5m. That valuation enabled the investment scheme to be put together and proposed by Urwin to the appellants. But to complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link, there is no proof that the misleading conduct caused the loss. 159 We accept Mr Sheahan's submission that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As Mr Sheahan pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation. 10 The appellants did not directly submit that Digi-Tech (Australia) Pty Ltd v Brand was wrongly decided in this respect. They submitted (i) that what was said in the passages I have set out was obiter because the Court held also that the "indirect causation theory" was not available to the investors because it had not been pleaded; (ii) that the present case was different because it was not one in which "the plaintiffs suffer loss because they themselves are induced by misleading representations to perform an act or omission by which they are prejudiced" (at [156]) but one in which "misleading conduct had caused others to act to the direct prejudice of the plaintiff" (at [155]); and (iii) that "in connection with a dealing in securities" in s 995 of the Corporations Law and the purpose of protecting investors in Parts 7.11 and 7.12 gave a wider scope to causation than "in trade or commerce" in s 52 of the Trade Practices Act and enabled recovery by investors who did not act directly in reliance on misleading conduct. They said that because s 1005 enables recovery for contravention of s 1024 of the Corporations Law (which requires the issue of a supplementary prospectus if there are material developments after the issue of the prospectus), there was recognition for the purposes of s 1005 of a kind of indirect causation, in that such a contravention will ordinarily not have been relied on by an investor who is unaware of the occasion for a supplementary prospectus. 11 I do not regard the Court's supplementary observation that the "indirect causation theory" was unavailable on pleading grounds as detracting from the considered statements in the passages I have set out. Nor in my opinion is there material difference between the Trade Practices Act and the Corporations Law in their legislative contexts, s 52 and s 995 both being directed to what may broadly be called consumer protection. The partly different phrasing of the norms of conduct in s 52 of the Trade Practices Act and s 995 of the Corporations Law are not to the point. The present question does not concern the norms of conduct but the provisions for recovery of loss or damage upon contravention, and there is relevantly identity between s 82 of the Trade Practices Act and s 1005 of the Corporations Law. Both are in terms of loss or damage suffered by contravening conduct, and the approach to causation should be the same. Section 1024 does not bring recognition of a kind of indirect causation. Satisfaction of the causation involved in "by" in s 1005 will call for regard to whether or not the investment would have been made if a supplementary prospectus had issued. 12 The appellants' reliance on the reference in [156] of Digi-Tech (Australia) Pty Ltd v Brand to the category of claim "when plaintiffs suffer loss because they themselves are induced by misleading representations to perform an act or omission by which they are prejudiced" was in my view misplaced. Their Honours were contrasting the kinds of claim, and were not restricting what followed to where there was direct inducement of the plaintiff; they were identifying the kind of claim in which inducement of the plaintiff played a part. The distinction drawn in Digi-Tech (Australia) Pty Ltd v Brand is between cases where conduct on the part of the plaintiff "forms a link in the causation chain" (at [156]) and where it does not. Where it does, there must be reliance on the misleading conduct in the manner next explained. Where it does not, there may be recovery if the act of the innocent party induced by the misleading conduct "by its very nature, causes the plaintiff's loss" (at [155]), but that is where the plaintiff passively suffers loss from another's act (as in Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 at 529-530, where consumers were led by the misleading conduct to buy less of the plaintiff's product). 13 In saying that in a case of "misrepresentation inducing a transaction" reliance on the misrepresentation was required for proof of causation (at [159]), from the facts before them and their Honour's discussion they meant a case where the plaintiff was not a passive sufferer from another's act, but was someone who made a decision to enter into the transaction to which the representation was material. Their Honours did not mean direct inducement, but that the decision and the materiality to it of the representation was a link in the causal chain. 14 Since Wardley Australia Ltd v Western Australia there has been some withdrawal from the common law practical or common sense concept of causation, and emphasis on the purpose to which the question of causation is directed, see for example Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26, (2005) 221 CLR 568 at [96]-[97] per Gummow, Hayne and Heydon JJ. 15 In Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627 Gummow and Hayne JJ said at [45] - It is now clear that there are cases in which the answer to a question of causation will differ according to the purpose for which the question is asked. As was recently emphasised in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd, it is doubtful whether there is any "common sense" notion of causation which can provide a useful, still less universal, legal norm. There are, therefore, cases in which the answer to a question of causation will require examination of the purpose of a particular cause of action, or the nature and scope of the defendant's obligation in the particular circumstances. 16 In the same case, referring particularly to Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 and I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109, Gleeson CJ said at [30] - In recent cases, this Court has pointed out that, in deciding whether loss or damage is 'by' misleading or deceptive conduct, and assessing the amount of the loss that is to be so characterised, it is in the purpose of the statute, as related to the circumstances of a particular case, that the answer to the question of causation is to be found. 17 There can be postulated, even where the representation was material to the plaintiff's decision to enter into the transaction, that loss or damage is suffered by misleading conduct because the plaintiff would not otherwise have had the opportunity to enter into the transaction. The plaintiff would not have had occasion to make a decision. There is "but for" causation; is it sufficient? 18 In Henville v Walker, after noting that "by" in s 82 of the Trade Practices Act invokes the common law concept of causation but is not to be applied rigidly without regard to the terms of objects of that Act, and that causation in law is concerned with determining legal responsibility for a past act or omission, McHugh J said - 100 In some situations, the legal framework may require a finding that, despite a causal connection in a physical sense between the breach and damage, no causal connection exists for legal purposes. In other situations, the legal framework may require a finding that a causal connection exists even though no more appears than that the damage followed after breach of a legal norm. 101 In the first class of case, some act of the defendant may have set in train, or some omission of the defendant may have failed to set in train, a series of physical events that resulted in or could have avoided damage to another person or property. In this situation, the damage occurred because, given the act or omission, the laws of nature dictated the result. The physical connection between the defendant's act or omission and the damage suffered, and the materiality of the connection is usually apparent, although often enough it will require expert evidence to demonstrate the connection. In this situation, questions of causation usually present no difficulty, although questions of remoteness of damage may do so. Exceptionally, however, the policy or rationale of the legal norm that has been breached will require the court to disregard the physical connection and to make a finding of no causal connection. … 103 In the second class of case, the damage will not have occurred because of the laws of nature but because a person has acted to his or her detriment by reason of or following some conduct of the defendant. The conduct may be an act, an omission, a statement or a suggestion. But it will not be regarded as causally connected with the detriment if it provides no more than the reason why the person acted to his or her detriment. If the defendant intended the person suffering a detriment to act in the general way that he or she did, the common law will invariably hold that a causal connection existed between the conduct and the detriment. But if the conduct merely provides the reason why the person acted, it will not be sufficient to establish a causal connection unless the purpose of the legal norm that the defendant has breached is to prevent persons suffering detriment in circumstances of the kind that occurred. If a broker negligently advises a client to retain shares because they are a good investment, the broker will be liable for the loss sustained in retaining those shares. But if, having received that advice, the client decides to buy more shares, the broker will not be liable for the further losses unless the terms of the original retainer imposed a duty on the broker to advise in respect of further purchases. 19 His Honour's discussion provides guidance here. Where there is a decision by the plaintiff whether or not to enter into a transaction, any resulting loss or damage is not dictated by the laws of nature. That is not the first class of case, but the second. If the plaintiff would not have had the opportunity to enter into the transaction, that "but for" element does not go beyond a reason why the plaintiff entered into it. Conduct which merely provides the opportunity for the plaintiff to enter into the transaction will not suffice, unless the purpose of ss 995 and 1005 is to provide recompense for loss or damage suffered only because there was the opportunity to enter into the transaction and without regard to materiality of the representation to the plaintiff's decision to enter into the transaction. 20 The purpose of ss 995 and 1005 is achieved by proscription of engaging in misleading conduct and provision of compensation. In Henville v Walker Gleeson CJ referred at [18] to the purpose of the broadly equivalent provisions of the Trade Practices Act as "establish[ing] a standard of behaviour in business by proscribing misleading and deceptive conduct, whether or not the misleading or deception is deliberate, and by providing a remedy in damages", and McHugh J said at [96] that a court "should strive to apply s 82 in a way that promotes competition and fair trading and protects consumers". 21 Section 1005 should be applied in a way that promotes provision of correct information to investors and protects them in making investment decisions. But this does not warrant compensating investors regardless of the effect on their decision-making of the misleading conduct. Once provided with correct information, the investors must make their investment decisions. Perhaps in some circumstances a plaintiff enters into a transaction simply because the opportunity to do so is available, when it would not have been available had there not been the misleading conduct, and that plaintiff can be regarded as in like position to the passive sufferer from another's act. That will not be so as a matter of course, and was not so in the present case. 22 As was pointed out in Digi-Tech (Australia) Pty Ltd v Brand at [159], ss 995 and 1005 should not be given a scope whereby an investor entering into a transaction could recover even if it knew the truth of the underlying misrepresentation, or was indifferent to its truth, and proceed nonetheless. In my respectful opinion Digi-Tech (Australia) Pty Ltd v Brand was correctly decided on its facts, and its reasoning holds good. The present case is not one of a plaintiff in like position to the passive sufferer from another's act. The appellants presented a case of decision-making by Mr Saville and materiality of representations to his decision-making; the materiality case was largely not accepted by McDougall J. Mr Saville was certainly not an unthinking investor, and did not decide upon investment simply because the opportunity was available. Case 3.1 and "indirect causation" 23 Case 3.1 was also based on contravention of s 995 of the Corporations Law. The appellants claimed that the DDC respondents had engaged in misleading conduct in providing to Messrs Peck and Daya as the board sub-committee on 12 January 1999 their report to the effect that nothing had come to their attention causing them to believe that there was a material misstatement or omission in the prospectus or any significant change affecting any matter in it. 24 Again, Mr Saville did not see the DDC supplementary report, and was not misled by it. The reasoning in Case 3.1 was again that the board (Messrs Peck and Daya) was misled, and that the appellants suffered loss or damage by the contravention of s 995 because the board would otherwise not have issued the notes. 25 Ipp JA considers that Case 3.1 fails because of the approach adopted in Digi-Tech (Australia) Pty Ltd v Brand. I respectfully question whether that is so. I can give my reasons briefly, in the light of what I have said thus far. 26 By 12 January 1999 Mr Saville had made his investment decisions. The appellants had entered into transactions. They had applied for notes, and their applications awaited issue of the notes. Assuming that disclosure in the DDC supplementary report of the material changes on which the appellants relied would have caused the board not to issue the notes, the appellants could be said to be passive sufferers from the misleading conduct of the DDC respondents. There would be no question of a decision by the appellants to which the DDC's representation to the board was material. Case 3.1 would not be one of "misrepresentation inducing a transaction", and the necessary causation could be found. 27 The assumption must be taken further. As Ipp JA has explained, the board was not unfettered. NCRH had obligations towards the applicants for notes. Postponement of the issue date might have meant that NCRH would have met its demise prior to issue of the notes and for that reason the applicants' money would have been returned. But if the board had offered to cancel the note issue and return the applicants' money in the manner in which Ipp JA refers, the appellants may have had to make a further decision in the light of their knowledge of the changes. Would that bring Case 3.1 within the reasoning in Digi-Tech (Australia) Pty Ltd v Brand, as one of misrepresentation inducing the transaction of deciding to accept the offer to cancel the note issue? And if it did, why should the chain of causation not be completed by the finding (made in relation to Case 3.2) that the strong likelihood is that the appellants would have accepted the offer? 28 It is unnecessary to take this further, and I do not do so. Case 3.2 and "indirect causation 29 Had Mr Daya's liability been an independent liability rather than an accessory liability, what I have said in relation to Case 3.1 could arise. However, for his accessory liability the contravention lies in NCRH's misleading conduct in failing to disclose the January information to the appellants. Whether the appellants thereby suffered loss or damage does not raise a similar question of "indirect causation". Cases 2.1 and 2.2 and s 996 of the Corporations Law 30 Cases 2.1 and 2.2 were based on contravention by NCRH of s 996 of the Corporations Law and knowing involvement of a number of the respondents in that contravention. The appellants claimed that NCRH issued the prospectus with material misstatements or omissions in the respects the subject of the smoothing cover and trading prospects arguments. McDougall J made findings generally adverse to Mr Saville's reliance on the prospectus in these respects. The appellants sought to overcome this by challenging his Honour's findings in relation to the making of the para 46 representations and submitting that error in those findings infected his Honour's view of Mr Saville's credibility. But they also contended that it was sufficient that there was contravention of s 996 by the issue of the prospectus followed by their acquisition of notes, without reliance by Mr Saville on any material misstatement or omission in the prospectus. 31 Ipp JA assumes without deciding that the appellants' contention in this respect is correct, but considers that it does not avail them because they did not plead or prove that NCRH otherwise would not have issued a prospectus at all or would have issued a different prospectus, with the result that they would not have acquired their notes. I would go further. In my opinion, the contention should not be accepted. 32 Section 996 proscribes certain conduct. Section 1005 prescribes civil liability for contravention of s 996. The legislative purpose in s 996 is to set a standard of corporate behaviour, emphatically done because breach attracts criminal liability, in the interests of investors through provision of correct information for their investment decisions. Section 1005 encourages adherence to the standard and advances the interests of investors by providing for compensation. But the compensation is conditioned by the causation involved in "by" in s 1005. 33 The appellants' submission, which at least some of the respondents said had not been put at the trial, was in substance (and also with reference to s 1007 of the Corporations Law, see below) that the contravention of s 996 lay in the issue of a prospectus containing a material misstatement or omission, and that the issue of the prospectus as the requisite contravention itself attracted civil liability regardless of reliance or the investor being misled. 34 The submission did not adequately recognise the requirements of "by" in s 1005. It does not follow from the proscriptive terms of s 996 that the causation is satisfied by no more than the fact that the defendant authorised or caused the issue of a prospectus in which there was a material misstatement or omission. The issue of a prospectus containing a material misstatement or omission opens the door to recovery of compensation in a "but for" sense, but as Digi-Tech (Australia) Pty Ltd v Brand shows that may not be sufficient. 35 There is overlap between s 995 and s 996. The issue of a prospectus containing a material misstatement or omission will be both a contravention of s 996 and engaging in misleading conduct in contravention of s 995. Section 996 creates an offence, but is in less general terms than s 995 and permits defences of reasonableness or inadvertence. The duality is understandable, but when both are picked up in s 1005 it is not to be expected that "by" should have a different meaning or application according to which of the provisions is contravened. 36 The appellants' submission is unpersuasive unless the requisite causation would also be satisfied in the case of contravention of s 995 by the issue of a flawed prospectus. The appellants held back from that submission with respect to Digi-Tech (Australia) Pty Ltd v Brand, save that at one point they faintly suggested in argument that there was similar "connection" between s 1005 and each of s 995 and s 996, it seems meaning that the connection for s 996 would suffice for s 995. However, the similarities between ss 52 and 82 of the Trade Practices Act and ss 995 and 1005 of the Corporations Law are such that the established jurisprudence in relation to the former guides the construction and application of the latter (see for example Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 463-4; Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [285]), and reason must be found for a different causation where the contravention is of s 996. 37 The proscription of the issue of a prospectus containing material misstatements or omissions is so that investors will not be misled, and the prescription of civil liability is so that investors who have been misled can recover the loss or damage suffered "by" the contravention. The proscription and attendant criminal liability is not for its own sake, but so that investors will not be misled; as earlier mentioned, by encouraging provision of correct information to investors. The vice is not issuing misleading prospectuses, but misleading investors by issuing misleading prospectuses. When it comes to s 1005, then, compensation is to be recovered not simply because a misleading prospectus was issued, but because the investor was misled by its issue. Subject to cases of the Janssen-Cilag Pty Limited v Pfizer Pty Limited kind, where the investor was not passive but undertook decision-making to which what appeared in the prospectus was material, there must be reliance on the material misstatement or omission in like manner to Digi-Tech (Australia) Pty Ltd v Brand. 38 There is no reason here for causation in accordance with the appellants' contention where the contravention is of s 996. Acceptance of the contention would mean that an investor in Mr Saville's position could recover for loss or damage suffered following the issue of a prospectus in contravention of s 996, even though the investor knew that the truth of the material misstatement or omission or was indifferent to the correctness of the statement or the omitted matter. It would be enough that the investor knew that a prospectus had issued; perhaps not even that. Such departure from the established jurisprudence relevant to s 995 in my view does not accompany s 996. 39 Section 1007 of the Corporations Law adds to the legislative context, and arguably does provide reason for the causation in question. It provides a defence in an action under s 1005 if it is proved that the investor knew that the statement in the prospectus was false or misleading or was aware of the omitted matter. Since it applies only to an action under s 1005 brought against a person who authorised or caused the issue of the prospectus or a person who by s 1006(2) is by statute involved in that issue, it is confined to where there has been contravention of s 996. It could suggest that where the contravention is of s 996, the "by" in s 1005 is satisfied by the issue of the prospectus followed by investment, because it places on the defendant the burden of proving that the investor was not misled. 40 Against that, s 1007 leaves untouched the situation where the investor is indifferent to the false or misleading statement or the omitted matter. It would be odd if this dealing with one matter, albeit an important one, relevant to suffering loss or damage "by" contravention of s 996 were intended to bring a new causation where the contravention was of that provision; and if so, why not also where the same conduct (the issue of a prospectus containing a material misstatement or omission) is also a contravention of s 995? In my opinion, the better view is that s 1007 stands alongside the causation of "by" in s 1005, and is to be seen as a statutory recognition that causation will be negated, in practice the burden being on the defendant, if it is shown that the investor knew the true position. 41 In Gardiner v Agricultural and Rural Finance Pty Ltd at [442] Handley AJA said, referring to s 996 as well as s 995, that a plaintiff relying on a contravention "must establish that he relied on the misleading or deceptive conduct, or the false or misleading statement, or that he would have acted differently if the material omission had been disclosed". It does not appear that the present question was raised, but in my opinion his Honour stated the correct approach to an action under s 1005 to recover loss or damage suffered by contravention of s 996. Cases 2.3 and 3.1 and misleading the board 42 As Ipp JA has explained, the appellants accepted that the board relied on the truth of the representations made in the DDC report or supplementary report only to the extent that the DDC had "certified" that the prospectus or the issue of the notes could proceed. 43 When an allegedly false representation has been made to identified individuals, whether there was misleading conduct (the complete phrase in s 995(2) is "conduct that is misleading or deceptive or is likely to mislead or deceive") involves asking whether the representation would be misleading to those individuals. Ipp JA has referred to Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340 at 349. Reference may also be made to Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [38], where Gleeson CJ and Hayne and Heydon JJ point out, in relation to an estate agent passing on information obtained from the vendor, that "it is necessary to consider the character of the particular conduct of the particular agent in relation to the particular purchasers, bearing in mind what matters of fact each knew about the other as a result of the nature of their dealings and the conversations between them, or which each may be taken to have known". The point is wider than where information was passed on. At its widest, if the representor reasonably believed that the individuals knew the truth and the individuals did know the truth, it would be difficult to find that making the representation was misleading or deceptive or likely to mislead or deceive. This goes to contravention, and is prior to and distinct from whether the individuals were in fact misled as part of the inquiry into loss or damage suffered "by" the contravention. 44 As part of the last-mentioned inquiry, there may be misleading conduct but the individuals were not in fact misled. So in Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 at 236 one of the principles stated by Wilson J was that the inference that the representee was induced to enter into a contract by a false representation may be rebutted by showing that the representee "either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation". This is a commonly litigated issue. 45 Saying that the board was not misled can obscure the separate questions of contravention and causation of loss or damage. Those questions are better addressed upon the basis that the board did not rely on the correctness of what was said in the DDC report and supplementary report but relied on the fact that the DDC had "certified" that the prospectus or the issue of the notes could proceed. 46 In Case 2.3, the fact that the board did not rely on the correctness of what was said the DDC report leaves open a finding of misleading conduct. That fact of itself does not have the consequence that there was no misleading conduct in providing to the board a false or deficient report. It is true that Mr Peck was both a member of the DDC and a member of the board, but that does not mean that the board as a body is taken to have known all that Mr Peck knew, or that the other members of the DDC reasonably believed that the members of the board other than Mr Peck knew all that Mr Peck knew. Misleading conduct is a matter of fact, not of legal attribution of a board member's knowledge to the corporation. Had one or more of the smoothing cover, Trowbridge/NTA, trading prospects or note issue purposes arguments succeeded, in my opinion there would have been misleading conduct on the part of the members of the DDC. 47 The question then would have been whether the fact that the board did not rely on the correctness of what was said in the DDC report, but on the fact of "certification", meant that any loss or damage was not suffered "by" the contravention of s 995. I do not see a gulf between reliance on the correctness of what was said in the DDC report and reliance to the extent that the DDC had "certified " that the prospectus could proceed. The fact that the DDC gave the go-ahead necessarily conveyed to the board that, having carried out appropriate investigations and given due consideration, the DDC saw no material misstatement or omission in the prospectus. If on one of the arguments abovementioned that was not so, then the board was misled, and (subject to Digi-Tech (Australia) Pty Ltd v Brand considerations) it could be found that loss or damage was suffered "by" the contravention. 48 For Case 3.1, however, in my view the particular facts brought failure at the prior point of contravention, as well as in relation to causation of loss or damage. 49 The appellants relied on misrepresentation in provision of the DDC supplementary report in that it failed to advise of material changes falsifying the prospectus. The material changes were the four matters more fully described by Ipp JA concerning the stop loss proposal, new losses, a special prudential margin and the provision of a further Trowbridge report. 50 Assuming that the DDC supplementary report should have made those matters known as material changes, the misrepresentation was made to Messrs Peck and Daya as the delegates of the board to whom the report was directed. They were the persons who acted upon it to the extent to which it was acted upon. Messrs Peck and Daya must have known of all four matters, and the members of the DDC must have known that they knew of them. The difficulty lies in making the assumption, but once it is made I do not think the members of the DDC engaged in misleading conduct by failing to make known to Messrs Peck and Daya matters of common knowledge between them. Nor in those circumstances could the fact of "certification" convey absence of the material changes. General 51 In what I have said under these five headings I have to an extent respectfully differed from Ipp JA. The differences do not, however, bring a different outcome in the appeal. 52 HODGSON JA: I agree with the orders proposed by Ipp JA and, subject to what I say below, I agree with his reasons. 53 I would prefer to reserve my position in relation to the following matters: (1) Whether the Board could have been misled by the Due Diligence Committee (DDC) reports. (2) "Indirect causation" and Digi-Tech (Australia) Limited v Brand [2004] NSWCA 58. 54 As well as giving reasons in relation to those matters, I will also briefly state my views on one of the main matters at issue in these appeals. Pleading 55 A crucial question in relation to some aspects of what Ipp JA has called the appellants' "smoothing cover argument" is whether they are available, having regard to the way the case was pleaded and run below. 56 Although the case was brought in the Commercial List, the statement of the claim included in the Summons was treated as a pleaded statement of claim. No one contended it should be treated any differently, and in my opinion this is the appropriate approach. I will refer to the document as the statement of claim. 57 The primary judge made it clear throughout the hearing that he would decide the case on the basis of the pleadings, and the appellants' counsel agreed that this was the appropriate course. 58 The statement of claim was extremely long (214 pages) and extremely complex, with 299 paragraphs and extensive cross-references. It had been amended five times. There were 14 defendants or groups of defendants, with different cases alleged against various groups of them. On appeal, there were ten separately represented defendants or groups of defendants, some of whom had similar cases alleged against them, and some of whom had quite different cases alleged against them. 59 In certain respects, the opening before the primary judge by the appellants' counsel went outside the pleadings, and no objection was taken. There was evidence and cross-examination that was relevant to this wider case, although it was also relevant to other issues, such as those raised by defences to the effect that defendants had acted honestly and reasonably. The appellants' final submissions also supported this wider case; and while some defendants responded that this was outside the pleadings, all defendants responded to the substance of this case. 60 The primary judge in his judgment stated that he would decide the case on the pleadings, and he did not consider this wider case. In circumstances where this had been stated and agreed to during the hearing, I agree with Ipp JA that the primary judge's approach should not be set aside on appeal. Pleading Misleading Conduct 61 Very broadly, the case against all defendants was one based on misleading conduct, and there was some debate on appeal as to how such a case should be pleaded, and as to the width of the case available on the basis of the way it was pleaded in this case. 62 In a simple case, where misleading conduct merely suggested something positively advantageous about a transaction, which was not true, it will generally be sufficient just to allege the conduct and what it suggested, and to allege that this was false. 63 However, where what was truly misleading was rather the suppression or non-disclosure of something disadvantageous, or of something that would otherwise have induced the claimant to have acted otherwise, then in my opinion it will generally be necessary, if this is not obvious, to allege what it was that was suppressed or not disclosed. In addition, if it is not obvious what is important or material about what was conveyed or not disclosed, it may be necessary also to make this clear in the pleadings. This is particularly so if what is alleged is non-disclosure of dishonesty, or if some non-disclosure is alleged to be material on the ground that it involved dishonesty. 64 In my opinion, this is what would generally be necessary if pleadings are to fulfil their function of disclosing the case sought to be made out and avoiding surprise. 65 Thus, in cases like Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282, (2006) 67 NSWLR 341, where what was important about the misleading conduct was not so much the assertion that there were no plans as the non-disclosure of the fact that there were in fact plans, ideally the pleading should allege that non-disclosure, unless it is obvious. In Abigroup itself, however, it was obvious what it was that had not been disclosed, and also obvious why it was material. 66 One important area of alleged misleading conduct in this case concerned the inclusion in the prospectus of a summary of NCRH's balance sheet as at 30 June 1998, showing a figure of US$13.839 million for retrocession. As noted by Ipp JA, evidence in the case suggested that this could have been misleading in various respects, which he formulated as follows: (1) The retrocession figure of US$13.839 million was false, in that it should have been US$5.7 million less. (2) NCRH's accounts as at 30 June 1998 in that respect did not give a true and fair view of the financial position of the company. (3) There was material non-disclosure in the following respects: (a) The figure was reached by wrongly including only one part of a two-part transaction, so as to show the asset of US$13.839 million, whereas if both parts had been included, as they should have been if the transaction was included at all, the asset would have been US$5.7 million less. (b) The transaction was in any event after the closing date of the accounts, and should not have been included at all. (c) The financial position of the company was such that the company was in breach of a covenant with its financier Dresdner. (d) The effect of the wrongful treatment of the transaction was to show the company as not being in breach of that covenant. (e) The transaction had been entered into, and the accounts prepared in that way, with the purpose of showing the company as complying with the covenant. (f) The persons responsible for the transaction and/or the accounts knew that it was wrong to prepare the accounts in this way. (g) They nevertheless did so dishonestly in order to present a false view of the company's position. (h) They did so in order to deceive Dresdner. (i) Those in control of the company who were responsible for the prospectus knew of the above non-disclosures and nevertheless concealed them in order to mislead the public. (j) Those in control of the company who were responsible for the prospectus showed lack of integrity in failing to disclose one or more of the above. 67 The evidence in the case might possibly have supported a finding that the prospectus in this case was misleading in all of these respects, if they had been in issue. And had a finding been made that the prospectus was misleading in failing to disclose the matters in pars (3)(c) to (j), it could well have been concluded that these non-disclosures were material, and either that no prospectus disclosing these things would have been issued or that no one (including the appellants) would have invested if these things had been disclosed. However, as shown by Ipp JA, only (1), (2) and (3)(a) were raised by the pleadings against the directors and Williams and Aroney; and while (3)(c) and (d) might possibly be considered as having been raised against Phillips Fox, (3)(e) to (j) were clearly not raised against anyone. 68 The case was opened before the primary judge so as to suggest all of these things (possibly excepting (3)(i) and (j)), and the same suggestion was made in closing submissions. On appeal, the appellants have sought to rely on (3)(e) and (f). They pointed to par 112 of the statement of claim, which alleges that the directors and Williams and Aroney knew of the falsity of the accounts (in respects 1, 2 and 3(a)). However, the pleading did not allege that the prospectus was misleading in that this knowledge by the directors and Williams and Aroney was not disclosed in the prospectus, and did not allege that any such non-disclosure was material. Particulars of materiality of misleading conduct were sought, and nothing was given in reply that widened allegations in the pleadings. The allegation of this knowledge in the directors and Williams and Aroney was made only in support of an allegation of their knowing concern in NCRH's misleading conduct, in terms of s 79 of the Corporations Law. 69 In my opinion, reliance on any of (3)(e) to (j) is not available on appeal against any defendant. This may seem an unreasonably narrow approach, but in the circumstances set out above, it is in my opinion correct. (3)(e) to (j) involve dishonesty, and should have been directly alleged if they were to be relied on. The appellants were represented at the trial by astute and experienced counsel, and there is no reason to think there was any mistake or misapprehension about the way the case was pleaded. There could be tactical reasons for not alleging dishonesty, for example to improve the chances that insurance would be available to defendants; and no evidence was led excluding this as an explanation. 70 It is notable that the only expert accounting evidence in the case was that led by the appellants against PricewaterhouseCoopers (PWC) and evidence led by PWC in response to it. The expert evidence led by PWC supported the view that it was legitimate to include, in the accounts as at 30 June 1998, a transaction entered into after that date, and this evidence was not accepted by the primary judge. If the matters in (3)(e) to (j) had been alleged against the directors and Williams and Aroney, and also against Phillips Fox, there may well have been expert accounting evidence called on their behalf, and there may also have been investigation of whether or not the deception of Dresdner was either intended or achieved. It might be considered unlikely that this evidence would have made any difference to the primary judge's decision on the accounting issue, but additional evidence of this kind could possibly have been significant in relation to any alleged dishonesty by the directors and others. 71 The primary judge made findings adverse to some defendants along the lines of (3)(e) to (j), which findings were relevant to credibility and would have been relevant to defences, if it had been necessary to decide them. However, for the reasons I have given, these findings are not available to support causes of action relying on (3)(e) to (j). DDC Reports 72 Case 2.3 alleged misleading conduct by members of the DDC in representing to the Board of NCRH that there was no material statement in the draft prospectus that was false or misleading and that there was no material omission. Ipp JA has held that this was not made out because the smoothing cover, Trowbridge/NTA, trading prospects and issue purposes arguments all failed. With this I agree. However, Ipp JA also held that this case failed because the Board was not misled, in that the Board did not rely on the truth of anything stated in the DDC Report. On this, I would prefer to express no concluded view. 73 Although it was not shown that the DDC Report changed the Board's belief as to whether there was any material statement in the draft prospectus that was false or misleading or there was any material omission from it, the DDC Report conveyed, in the circumstances, that the DDC had carefully investigated the matter and had honestly and reasonably held the opinion conveyed; and if it had been proved that in any respect the DDC had not carefully investigated the matter and honestly and reasonably held the opinion conveyed, then I think that misleading conduct and reliance by the Board could possibly have been proved. 74 That is, while Ipp JA takes the view that it was just certification by the DDC that was regarded by the Board as necessary for the prospectus to go ahead, I think the better view is that the Board's beliefs could have been affected to the extent that members were relying on the DDC to have carried out proper investigations and reached reasonable conclusions based on those investigations, and that the Board could have been misled if the DDC had not done this. 75 It could be argued that this approach was not spelt out in the pleadings; but this way of considering representations of opinion by persons given the task of applying diligence and expertise to some question is very familiar: see Heydon v NRMA Limited [2000] NSWCA 374; (2000) 51 NSWLR 1 at [429]-[432] per McPherson AJA. 76 Having regard to my view that case 2.3 fails for other reasons, it is not necessary to reach a concluded opinion as to whether this approach to case 2.3 was open on the pleadings or otherwise made out. 77 Similar considerations apply to case 3.1. Indirect Causation 78 A further basis on which Ipp JA found against the appellants on case 2.3 was on the basis of the approach exemplified by Digi-Tech, especially par [159] of the judgment in that case. 79 In Digi-Tech, the claim was made that the plaintiffs had invested in a scheme in response to a proposal put together on the basis of an accountant's valuation of two telecommunications products, which valuation in turn was based on misleading and deceptive forecasts by Digi-Tech concerning the revenue and growth margin of the products. The Court of Appeal held that the plaintiffs could not obtain damages for Digi-Tech's misleading conduct without proving that they had themselves relied on and been misled by Digi-Tech's misleading conduct; and also held that, in any event, no other basis for the plaintiff's claim had been pleaded. 80 I am inclined to think that investors may be able to claim damages on the basis of misleading conduct where: (1) Because of misleading conduct that misleads people involved in putting together an investment opportunity, an investment opportunity is made available to investors which would not have been made available at all but for the misleading conduct; (2) Investors invest in it; and (3) The investors lose money because the investments are, by reason of matters concealed by the misleading conduct, worth less than the investors paid for them. 81 I accept that, if the investors actually know the truth concealed by the misleading conduct, it would be difficult if not impossible to characterise their loss as being loss or damage suffered "by" the misleading conduct, within the meaning of provisions such as s 1005 of the Corporations Law or s 82 of the Trade Practices Act. However, I do not think the investors would need to prove that they themselves relied on and were misled by the misleading conduct, except possibly to the extent of showing they did not know the truth concealed by the misleading conduct. As to where the onus of proof would lie in relation to that matter, I note that, in relation to claims based on s 996 of the Corporations Law, s 1007 appears to place the onus on a defendant to prove that the plaintiff did know. 82 To require investors to prove also that they actually relied on the misleading conduct, or even that if they had known the truth they would not have invested, seems to me possibly superfluous. But for the misleading conduct, there would have been nothing to invest in; and in my opinion it is plainly foreseeable by the persons responsible for the misleading conduct that, if the misleading conduct results in the offering of investments that are worth less than their price by reason of the matters concealed by the misleading conduct, people not knowing the truth may invest in them and suffer loss by reason of the matters concealed by the misleading conduct. On that basis, it does seem to me arguable that loss of that kind would be loss suffered "by" the misleading conduct, at least so long as the investors did not know the truth. 83 It is not necessary for me to express a final view on this question, or on whether my suggested approach is consistent with Digi-Tech; and I will refrain from doing so. 84 IPP JA: I THE APPEAL AND THE STATUTORY PROVISIONS 1. The causes of action argued on appeal 85 The disputes that give rise to this appeal concern a converting note issue effected on 12 January 1999 by New Cap Reinsurance Holdings Limited (NCRH), a company now in liquidation. By the note issue, NCRH raised capital of approximately US$50m. The appellants invested approximately A$40M in the note issue, in rights to the notes and in acquiring NCRH shares. The respondents were involved in different ways in bringing about the note issue. Within months after issuing the notes, NCRH was placed in liquidation and the notes, in effect, were valueless. The appellants contend that, in consequence, each has suffered substantial damages for which the respondents are liable. 86 The appellants brought proceedings against the respondents claiming the amounts they had invested less monies recovered through sales of some of the securities they had acquired. The respondents, in turn, filed cross-claims. There were 38 cross-claims. 87 The trial judge, McDougall J, held that the appellants had failed to establish liability on the part of any respondent save the sixth respondent, Mr Daya. His Honour held, further, that the appellants had failed to prove their loss. Thus, he dismissed all their claims (including that against Mr Daya). The appellants appeal against his Honour's orders. The respondents contingently cross-appeal in order to maintain their cross-claims. 88 In the course of case managing the appeal, this Court ordered that the appeal by the appellants should be heard first. The cross-appellants are to decide, after judgment is delivered on this part of the appeal, whether they wish to prosecute their appeals. A pending application for leave to appeal against the costs orders made by McDougall J also remains to be resolved. 89 At trial, the appellants relied on several causes of action. Many of these play no part in this appeal. In effect, the appellants now maintain only nine causes of action. I refer to these as Case 1, Cases 2.1, 2.2, 2.3(a), (b), (c) and (d), and Cases 3.1 and 3.2. The nine cases are divided into three categories (Cases 1, 2 and 3) as the relevant events occurred over three discrete periods, namely, October and November 1998 (before the note issue prospectus was issued), 18 November 1998 (when the prospectus was issued), and thereafter until 12 January 1999 (when the notes were issued). Each sub-category of case involves different respondents or sets of respondents. 90 The nine cases are based on alleged contraventions of certain sections within Parts 7.11 and 7.12 of the Corporations Law. The sections on which the appellants rely are ss 995, 996, 1005 and 1006 (in the form they were in at the relevant time). Those sections are as set out under the next heading. 2. The principal statutory provisions 91 Section 995 provided: 995 Misleading or deceptive conduct (2) A person shall not, in or in connection with: (a) any dealing in securities; or (b) without limiting the generality of paragraph (a): (i) the allotment or issue of securities; (ii) any prospectus issued, or notice published, in relation to securities; (iii) the making of takeover offers or a takeover announcement, or the making of an evaluation of, or of a recommendation in relation to, takeover offers or offers constituted by a takeover announcement; or (iv) the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in subparagraph (i), (ii) or (iii); engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (3) A person who contravenes this section is not guilty of an offence. (4) Nothing in the following provisions of this Part or in the provisions of Part 7.12 shall be taken as limiting by implication the generality of subsection (2). 92 Section 996 provided: 996 Misstatement in, or omission from, lodged prospectus (1) A person must not authorise or cause the issue of a prospectus in relation to securities of a corporation if: (a) the prospectus has been, or is required to be, lodged under Part 7.12; and (b) either: (i) a material statement in the prospectus is false or misleading; or (ii) there is a material omission from the prospectus. (2) It is a defence to a prosecution for a contravention of subsection (1) if it is proved: (b) that the defendant, after making such inquiries (if any) as were reasonable, had reasonable grounds to believe, and did until the time of the issue of the prospectus believe, that the statement was true and not misleading or the omission was not material; or (c) where there was an omission from the prospectus--that the omission was inadvertent. (3) A person does not contravene this section merely because the person gave a consent required by this Chapter to the inclusion in the prospectus of a statement purporting to be made by the person as an expert. 93 Section 1005 relevantly provided: 1005 Civil liability for contravention of this Part or Part 7.12 (1) Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in contravention of a provision of this Part or Part 7.12 may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention. (2) … (3) This Division does not affect any liability that a person has under any other law. (4) … 94 Section 1006 relevantly provided: 1006 Civil liability for false or misleading statement in, or omission from, prospectus (1) This section applies for the purposes of an action under section 1005 in respect of conduct being the issue of a prospectus in relation to securities of a corporation: (a) in which there is a material statement that is false or misleading; or (b) from which there is a material omission. (2) The reference in subsection 1005(1) to any person involved in the contravention includes a reference to all or any of the following persons: (a) the corporation; (b) a person who was a director of the corporation at the time of the issue of the prospectus; (c) a person who authorised or caused himself or herself to be named, and is named, in the prospectus as a director or as having agreed to become a director either immediately or after an interval of time; (d) a promoter of the corporation; (e) if the prospectus includes a statement that purports to be, or to be based on, a statement made by an expert and the expert gave consent under section 1032 to the issue of the prospectus--that expert; (f) a person named, with the consent of the person, in the prospectus as a stockbroker, sharebroker or underwriter of the corporation or for or in relation to the issue or proposed issue of securities; (g) a person named, with the consent of the person, in the prospectus as an auditor, banker or solicitor of the corporation or for or in relation to the issue or proposed issue of securities; (h) a person named, with the consent of the person, in the prospectus as having performed or performing any function in a professional, advisory or other capacity not mentioned in paragraph (e), (f) or (g) for the corporation or for or in relation to the issue or proposed issue of securities; (3) … 95 Section 995 applies to conduct, in connection with dealings in securities, which was misleading or deceptive or was likely to mislead or deceive. Section 996, on the other hand, concerns the issue of a prospectus (in relation to securities) containing a material statement that was false or misleading or a material omission. 96 The respondents, apart from disputing many of the elements of the appellants' causes of action, raised several affirmative defences under other sections of Parts 7.11 and 7.12 of the Corporations Law. II THE PARTIES, THE NOTES AND THE WINDING UP 3. The parties 97 NCRH was incorporated in August 1996 in Bermuda. On 13 December 1996 it was listed on the Australian Stock Exchange (the ASX). NCRH's operating subsidiary in Australia was New Cap Reinsurance Corporation Limited (NCRA) and its operating subsidiary in Bermuda was New Cap Reinsurance Corporation (Bermuda) Limited (NCRB). From its incorporation, NCRH carried on reinsurance business 98 The appellants were a number of companies associated with Mr Duncan Saville. A principal aspect of their businesses was investing in securities listed on the ASX. The appellants contended at trial that their decisions to make the relevant investments in NCRH securities were made on their behalf by Mr Saville or in reliance on him. 99 Mr Saville controlled the first appellant (ICI) (14 Red 3230 [12]) and the sixth appellant (ICM) (1 Blue 14 paragraph 37). ICM was an investment manager of the fourth appellant (AOITP) (14 Red 3231 [17]). The second appellant (AOITL) was a wholly owned subsidiary of AOITP (14 Red 3231 [14]. Through ICM, Mr Saville influenced AOITL and AOITP. ICM also provided investment advice to the third appellant (ASC). ASC, according to the appellants, made investments after discussions between its four directors. Mr Saville was a director of ASC. Mr Saville and Mr Goddard were the two directors of the fifth appellant (ESS). The appellants' case was that ICM made investment decisions on behalf of ESS. According to Mr Saville, ESS's investments were usually made after discussions between him and Mr Goddard. 100 Mr Jackson QC, together with Mr Parker SC, Mr Muddle SC, Ms Barrett and Mr Arnott, appeared for the appellants. 101 The first three respondents were referred to in the proceedings as "the Macquarie parties" or "Macquarie". In September 1998, NCRH retained the first respondent, Macquarie Equity Capital Markets Limited (MECM), as a corporate adviser for the proposed note issue. MECM became the lead manager and underwriter. The second respondent, Macquarie Equities Limited (MEL), was the broker to the note issue. MECM and MEL were subsidiaries of the third respondent, Macquarie Bank Limited (MBL). According to the appellants, MBL "directed and controlled each of MECM and MEL in the conduct of the business, activities and affairs of each". (Red 14, 3232 [22]). 102 Mr Oslington QC, together with Dr Bell SC and Mr Williams, appeared for the Macquarie parties. 103 The fourth respondent, Mr Ghose, was the chairman and chief executive officer of NCRH. He had close contacts with an American financial institution, Dresdner Kleinwort Benson (Dresdner), which was a substantial loan creditor of NCRH. Mr Wood, together with Mr Silver, appeared for Mr Ghose. 104 The fifth respondent, Mr Beach, the seventh respondent, Mr Deery, and the eighth respondent, Mr Morrissey, were non-executive directors of NCRH, resident in North America. They attended board meetings from time to time in Sydney and a relevant board meeting in Toronto, Canada. Mr Fagan SC, together with Mr Cheshire, appeared for these respondents. 105 The sixth respondent, Mr Daya, was the managing director and chief executive officer of NCRA and a member of the board of NCRH. He was not represented at the trial but on appeal was represented by Mr Braham. 106 The ninth respondent, Mr Peck, was a member of the board of NCRH. He was also a partner of Phillips Fox, a firm of solicitors. Mr Peck was also a member and the chairman of the Due Diligence Committee (the DDC) that was appointed by NCRH to perform various functions in connection with the issuing of the notes. Mr Gor represented Mr Peck. 107 The tenth respondent, Mr Williams, was the deputy-managing director of NCRA. He was not a director of NCRH, but was a member of the DDC. Mr Bannon SC, together with Mr Cohen, represented Mr Williams. 108 The eleventh respondent, Mr Aroney, was the chief financial officer of NCRA. He was not a director of NCRH. He was, however, a member of the DDC over the relevant period. Mr Braham (as well as representing Mr Daya) represented Mr Aroney. 109 The twelfth respondent is PricewaterhouseCoopers (PWC), a firm of accountants. PWC did accounting work for NCRH. Mr Murray of PWC was the PWC audit partner for NCRA. To the extent that the audit of NCRH required work to be done in relation to NCRA, Mr Murray was responsible for that work. Mr Murray was also a member of the DDC. Mr Bathurst QC, together with Mr Nixon, appeared for PWC. 110 Phillips Fox (constituted by its partners during the relevant period) is the thirteenth respondent. Phillips Fox was retained to advise in connection with the issuing of the notes. The partner responsible for this advice was Mr Andrew Mutton. Mr Mutton became a member of the DDC. Phillips Fox does not dispute that it is liable for any act or omission of Mr Mutton performed while acting for it in connection with the issues that arise in this appeal. The appellants contend that Mr Peck accepted appointment to the board of NCRH in the course of Phillips Fox's business or with its authority and that the firm is liable under s 10 of the Partnership Act 1982 for any default or omission on his part in the performance of his duties as a director of NCRH. Mr J T Gleeson SC, together with Mr Dick and Mr Watson, appeared for Phillips Fox. 111 During the material period, John Trowbridge Consulting Pty Limited (Trowbridge) was retained as consulting actuaries by NCRH. Trowbridge was a party to the initial proceedings but the claim against it was settled. Accordingly, it is not a party to the appeal. Nevertheless, it is a party to cross-claims and cross-appeals. Mr Greenwood SC appeared for Trowbridge and made submissions. 4. The notes 112 Each ordinary shareholder in NCRH was offered the right to apply for seven notes for every ten ordinary shares held. Such rights could be sold. The notes were issued at a price of A$1.30, payable on subscription by 31 December 1998. 113 The holders of the notes were entitled to convert them on 30 November 2001 (unless converted earlier in accordance with the issue terms) to ordinary shares at a 10% discount to the then prevailing ordinary share price. The conversion price was subject to a maximum ordinary share price of A$1.45. This meant that any increase in NCRH's ordinary share price above A$1.45, in effect, would be profit to a holder of the note. The minimum conversion price was US$0.40 per ordinary share (the par value of ordinary shares) at the date of conversion. 114 The prospectus emphasised two particular benefits designed to make investment in the notes attractive. Firstly, a holder would have the benefit of "participation in any increase in the Company's Ordinary Share Price above A$1.45". Secondly, there would be "protection against a fall in the Ordinary Share Price down to the Australian dollar equivalent of US$0.40 through the issue of additional ordinary shares at conversion". (Blue 2413). 115 The notes entitled the holders to a fixed interest payment of 7.5% per annum on the issue price, subject to a possible increase to reflect movement in market interest rates between the date of the prospectus and the allotment date of the notes. 116 Holders of the notes could elect to convert all the notes into ordinary shares on a one for one basis at any time until 30 November 2001. On that date the notes automatically converted into ordinary shares (in accordance with the terms of the issue) unless the company exercised its redemption option. 117 A holder was entitled to accelerate conversion on the occurrence of certain defined events. These events included the making of an unconditional takeover bid for the company or a winding up of the company. 118 On redemption, the amount payable to the holder was equal to the market value of the ordinary shares that the holder would have received upon conversion (that is, the issue price of A$1.30 plus 11.1% of the issue price plus any unpaid accrued interest). 119 The notes were to rank ahead of share capital on liquidation but were unsecured obligations. The holders of the notes ranked equally with other unsecured creditors. 5. The winding up 120 NCRH was capitalised by a US$150M private placement and a subsequent US$12M public offering. As at 30 June 1998, accumulated losses and a share buy-back reduced shareholders' equity (according to NCRH's accounts) to US$127.5M. At that time the company had borrowings of US$23.75M. 121 That capitalisation was small by reinsurance company standards and had been diminished by the losses it had sustained. Accordingly, in the second half of 1998, NCRH decided to raise approximately US$50M further capital by the note issue. 122 At first, NCRH's underwriting team operated under the supervision of an experienced underwriter, Mr de Chelard. It gradually became clear that business he had written was giving rise to unexpectedly large claims. His authority was first curtailed and, later, terminated. The prospectus relating to the note issue made the point that NCRH's underwriting department was under new management. 123 On 17 November 1998, AOITL and ICM entered into sub-underwriting agreements relating to the note issue. 124 On 18 November 1998 NCRH issued a prospectus in respect of the note issue. 125 During the period 13 November 1998 to 22 December 1998, a number of the appellants, by transactions on the ASX, purchased several parcels of rights to the notes, shares in NCRH and notes on a deferred settlement basis. 126 On 23 December 1998 NCRH announced to the ASX: [T]he second half of 1998 has featured an unusually high incidence of major claim events – 2 major airline crashes, 2 highly destructive hurricanes (including the most damaging hurricane recorded in the Caribbean) and 2 major satellite losses . The announcement indicated that these catastrophes would have a financial impact on NCRH. 127 The note issue closed on 31 December 1998. 128 From 23 December 1998 to 8 January 1999, a number of the appellants, through transactions on the ASX, acquired various parcels of rights in the notes, shares in NCRH and notes on a deferred settlement basis. 129 On 12 January 1999 NCRH issued the notes. Notes were allotted to various appellants. 130 On 24 February 1999, NCRH made the following announcement (referred to at trial as the "tombstone announcement") to the ASX: The Company has previously indicated that it was negatively impacted by as much as US$41.5M by catastrophe claims and reserve strengthening in the second half of 1998. This is in addition to the US$14.8M loss reported in the first half of 1998. It is now clear that [NCRH] has experienced greater claims than were anticipated or known at the time of its last announcement and that the resulting financial impact for the year will be materially greater. As a result, [NCRH] currently anticipates that it will incur an operating loss for the full year 1998 in the region of US$90M, resulting in a reduction in total capital to approximately US$100M. After adjusting for the converting shares this equates to a net asset value of approximately A$1.00 per ordinary share. 131 Mr Saville had been informed of the pending announcement a day or two before it was made. Nevertheless, from 25 February 1999 to 12 March 1999, he caused a number of the appellants, through transactions on the ASX, to purchase notes and acquire shares in NCRH. 132 Immediately after the tombstone announcement, the listed price of the notes fell from $A1.40 to $A0.90. On 28 February 1999, NCRH suspended its underwriting activities. On 15 March 1999, trading in NCRH shares was suspended. (1 Orange 104). 133 On 21 April 1999 an administrator was appointed to NCRH. On 22 April 1999, the Supreme Court of Bermuda appointed a provisional liquidator to NCRB. On 19 May 1999, the Supreme Court of New South Wales appointed a provisional liquidator to NCRH and its subsidiaries. On 21 July 1999 NCRB was wound up. On 9 November 1999 NCRH was wound up. 134 On 5 December 2005 the liquidator of NCRH in Australia considered that the likely dividend to creditors of NCRH would be less than one cent in the dollar. (1 Orange 105) 135 The appellants do not contend that the contraventions on which they rely brought about the demise of the NCRH group. In fact, the principal cause of the collapse was the receipt, as from December 1998, of an extraordinary and unexpected large amount of "attritional" claims (that is, claims arising out of the ordinary course of NCRH's business) and, to a lesser degree, unexpectedly large claims arising out of catastrophes. Much of these risks involved business underwritten under the management of Mr de Chelard. 136 The board of NCRH, other than Mr Daya, only became aware of the large increases in claims after 12 January 1999, that is, subsequent to the note issue. Mr Daya knew earlier of substantial increases in claims but did not disclose these to the board. III THE NINE CASES ARGUED ON APPEAL 6. Case 1 137 Case 1 concerns Macquarie alone. It is based on alleged misleading and deceptive conduct on the part of Macquarie in contravention of s 995. The Case 1 misleading conduct is alleged to have occurred before 18 November 1999, that is, before the prospectus was issued. 138 The appellants alleged in Case 1 that Macquarie's misleading conduct induced Mr Saville and, through him, AOITP and ICM, to enter into the sub-underwriting agreements, thereby causing these two companies and other of the appellants to suffer loss. The element of causation in Case 1 is, therefore, of a familiar kind, akin to that which plaintiffs ordinarily seek to establish in actions based on contraventions of s 52 of the Trade Practices Act 1974 (Cth) (the TPA). 139 At trial, Macquarie's misleading and deceptive conduct was alleged to be constituted by oral and written representations made prior to the issue of the prospectus on 18 November 1998. 140 The appellants allege that the written representations were made in two documents. The first is a document described as "the Institutional Roadshow Document" (the IRD). The second is the draft prospectus (which, for all relevant purposes was identical to the 18 November 1998 prospectus). Mr Jackson accepted that the oral representations were no different to those alleged to have been made in those two documents. 7. Cases 2.1, 2.2 and 2.3 141 Case 2 concerns contraventions of s 995 and s 996 arising out of the prospectus alone. 142 Case 2 is divided into three categories (Cases 2.1, 2.2 and 2.3). Case 2.3 is divided into four sub-categories (Cases 2.3(a), (b), (c), and (d)). The different categories and sub-categories are based on various permutations of four forms of contravening conduct involving: (1) The treatment in the prospectus, in particular in the NCRH balance sheet as at 30 June 1998 incorporated in the prospectus (the prospectus balance sheet), of so-called "smoothing cover" (or retrocession cover) and the prudential margin for claims. The appellants contend that these two items were falsely stated. I shall refer to this argument as the "smoothing cover argument". (2) A statement in the prospectus that Trowbridge had independently verified the adequacy of NCRH's claims provisioning, a matter relevant to its net tangible assets (NTA). I shall refer to this argument as the "Trowbridge/NTA" argument. (3) Representations in the prospectus concerning the trading prospects of NCRH. I shall refer to this argument as the "trading prospects argument". (4) Representations in the prospectus concerning the purposes of the note issue. I shall refer to this argument as the "note issue purposes argument". 143 Case 2.1 concerns the directors of NCRH alone (Messrs Ghose, Beach, Deery, Morrissey, Peck and Daya) and rests on s 996 (and not s 995). The alleged false and misleading material statements and material omissions in regard to case 2.1 involve only the smoothing cover and Trowbridge/NTA arguments. 144 By s 1005(1), a person who suffered loss by conduct of another person in contravention of Part 7.11 or Part 7.12 could recover that loss from that other person or any other person involved in the contravention. Section 1006 applied (for the purposes of an action under s 1005) in respect of conduct that constituted a contravention of s 996 (s 1006(1)). It is not necessary to decide whether s 1006 applied to contraventions of other sections of the Corporations Law, as well. Section 1006(2) provided that the reference in s 1006(1) to "any person involved" in the contravention (relevantly, of s 996) "include[d]" a reference to any person who was a director of the corporation at the time of the issue of the prospectus. 145 In Case 2.1, the appellants alleged that, in the respects alleged by the smoothing cover and trading prospects arguments, NCRH contravened s 996. The appellants contended that the directors, by virtue of s 1006(2), are to be regarded as involved in those contraventions and liable for them. 146 The element of causation in Case 2.1 (and Case 2.2) rests on the proposition that, had the contraventions of s 996 not occurred, the note issue would not have taken place and the appellants would not have invested in the notes, rights and shares. The appellants contend that a cause of action based on s 996 did not require proof that any person was misled or deceived. They submitted that, upon proof of a contravention of s 996 (that is, proof of a material statement in a prospectus that was false or misleading, or a material omission from a prospectus) and proof of loss suffered in consequence of such a contravention, they are entitled to recover that loss from persons involved in that contravention. 147 Case 2.2 concerns Mr Peck, Mr Williams and Mr Aroney and was based on the same contraventions (of s 996) as Case 2.1. Messrs Williams and Aroney were not directors of NCRH, and hence the appellants are unable to rely on s 1006(2) against them. Instead, as regards these two persons, the appellants rely on s 79 of the Corporations Law. For some reason, Mr Peck is also sued under s 79 in Case 2.2 even though he was a director of NCRH and was a defendant in Case 2.1. 148 Section 79 provided: 79 Involvement in contravention. Subject to section 1006, a person is involved in a contravention if, and only if, the person: … (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to, the contravention; or … 149 The appellants asserted that Messrs Peck, Williams and Aroney were liable to them because they were "knowingly concerned in" contraventions of s 996 by NCRH based on the smoothing cover and trading prospects arguments. 150 Case 2.3 is based only on a contravention of s 995. Four sets of respondents are involved in case 2.3 and the case against each set is a sub-category of case 2.3. Different allegations are made against the respondents in each sub-category. 151 Macquarie is the respondent in Case 2.3(a). The respondents in Case 2.3(b) are Messrs Peck, Williams and Aroney. In Case 2.3(c) the respondent is PWC (through the conduct of its employee, Mr Murray). The respondent in Case 2.3(d) is Phillips Fox (through Mr Mutton and Mr Peck). 152 All the Case 2.3 respondents (the DDC respondents) are sued by reason of conduct in which they (or persons said to represent them) were involved as members of the DDC. Messrs Peck, Williams and Aroney were members of the DDC, as were Dr Mackenzie (for whose conduct Macquarie is said to be liable), Mr Murray (for whose conduct PWC is said to be liable), and Messrs Mutton and Peck (for whose conduct Phillips Fox is said to be liable). 153 In Case 2.3(a) the misleading conduct alleged is based on the Trowbridge/NTA, trading prospects and issue purposes arguments. Case 2.3(b) is based on the smoothing cover and Trowbridge/NTA arguments; Case 2.3(c) on the Trowbridge/NTA, trading prospects and issue purposes arguments and Case 2.3(d) on the smoothing cover, Trowbridge/NTA, trading prospects and issue purposes arguments. 154 The element of causation in Case 2.3 is similar to that in Cases 2.1 and 2.2. It rests on the proposition that, had the contraventions not occurred, the note issue would not have taken place. In that event, the appellants would not have acquired any of the notes and shares in NCRH and would not have suffered any loss. There was a suggestion of an alternative argument based on the proposition that the prospectus would have been issued in different terms such that the appellants would not have acquired the notes or any shares in NCRH but this was not pressed with any conviction. It was not sought at the trial to propound through evidence, or otherwise than by a passing reference in submissions, the terms in which the prospectus would have issued or, more significantly, the effect on Mr Saville's investment decisions of any alternative prospectus. This was not a formality; there were many ways in which the prospectus might have issued in different terms. McDougall J was critical of Mr Saville's evidence of the matters influencing his decision-making, and the alternative argument needed to be established but was not. No basis was shown for disturbing his Honour's finding as to inducement at [473] of his reasons, which effectively ruled out inducement, except possibly in relation to the smoothing cover argument. 8. Cases 3.1 and 3.2 155 Both Case 3.1 and Case 3.2 are based on alleged contraventions of s 995 committed during the period from the date of the issue of the prospectus (18 November 1998) to the date of the issue of the notes (12 January 1999). Messrs Peck, Williams, Aroney, and Macquarie (through Dr Mackenzie), PWC (through Mr Murray) and Phillips Fox (through Mr Mutton and Mr Peck) (the DDC respondents) are the respondents in Case 3.1. Mr Daya is the respondent in Case 3.2. 156 The appellants' argument in regard to Case 3.1 is as follows. During the period from the issuing of the prospectus and the issuing of the notes, circumstances changed so as to falsify the prospectus. The DDC respondents contravened s 995 by failing to disclose the changed circumstances to the board (the board for that purpose being Messrs Peck and Daya as its delegates authorised to approve the issuing of the notes) and thereby misleading the board. Had those changed circumstances been disclosed, the board would not have proceeded with the note issue at all. Had the notes not been issued, the appellants would not have made any investments in NCRH and would not have suffered any loss. 157 The appellants' argument in regard to Case 3.2 against Mr Daya is also based on the proposition that, during the period from the issuing of the prospectus to the issuing of the notes, circumstances changed so as to falsify the prospectus. 158 As in Case 3.1, the appellants contend in Case 3.2, firstly, that Mr Daya, acting independently, misled the DDC and the board (as then constituted by Messrs Peck and Daya as its delegates) by failing to disclose the changed circumstances. They likewise argue that, had disclosure been made, the notes would not have been issued, the appellants would not have made any investments in NCRH and would not have suffered any loss. 159 As an alternative argument in Case 3.2, the appellants contend that NCRH, with knowledge of the changed circumstances through Mr Daya, misled the appellants (in this argument, not the DDC or the board) by failing to disclose those changed circumstances to them. Once more, they contend that, had disclosure been made, the notes would not have been issued and the appellants would not have made any investments in NCRH and would not have suffered any loss. They contend that, by that misleading conduct, NCRH contravened s 995 and Mr Daya is liable to them as an accessory under s 79 of the Corporations Law, he being knowingly concerned in that contravention by NCRH. IV DAMAGES GENERALLY 9. The judge's reasons for holding that no loss was proved 160 The issue of damages is the only one that applies to all claims and it is convenient to deal with it at this stage. 161 McDougall J held (at [1140]): The plaintiffs have not sought to value NCRH as at 12 January 1999, on the basis that there should be taken into account what became known thereafter as to the true extent of its claims liabilities under policies written prior to 31 December 1998. Nor have they shown that its worthless state in December 2005 was causally unrelated to events that occurred after 12 January 1999 and were not causally linked to the contraventions that I have found. Nor, more generally, have they sought to show that the market value of the notes after the tombstone announcement of 24 February 1999 was misinformed, or otherwise not a reliable indicator that, contrary to the plaintiffs' case, the notes had some value. 162 His Honour proceeded (at [1141]): In those circumstances, I conclude, the plaintiffs have failed to prove the amount of the loss that they sustained 'by' the contraventions that I have found. 163 His Honour's reasoning was based on the rule in Potts v Miller [1940] HCA 43; (1940) 64 CLR 282. That case involved the acquisition of shares following fraudulent misrepresentation. The High Court (Starke, Dixon and Williams JJ) held that, in such a case, the measure of damages was the difference between the amount paid for the shares and the real value of the shares at the time they were received. The Court held that the value of the shares in question, at a time subsequent to their receipt, was not relevant. Starke J put the rule (at 289) as follows: The measure of damage in cases in which a person is induced by fraud to take up shares is the difference between the amount he subscribed or paid for the shares and the real value — not the market value — of the shares on allotment. And Dixon J stated (at 297): ... it appears to be treated as an inflexible rule that wherever the purchase or allotment of shares is the consequence of the deceit, the defendant shall receive credit for the fair or real value of the shares estimated as at the time of allotment or purchase. 164 I have noted that, in the present case, there was a major rise in attritional claims in December 1998 (the real extent of which was discovered only in January 1999) and, to a lesser degree, from 1 January 1999 to 12 January 1999. There were also serious catastrophe claims in these periods. Additionally, after 12 January 1999, NCRH continued to receive claims in both categories. 165 The true value of the appellants' investments in NCRH at 12 January 1999 depended on the underlying financial situation of the company at that date (particularly its net asset position). As McDougall J observed, there was no evidence that established these matters as at 12 January 1999. McDougall J appears to have regarded the liabilities incurred after 12 January 1999 as a supervening cause of loss. As the evidence was not capable of establishing the net asset position of NCRH at 12 January 1999, his Honour held that the appellants had not proved their loss. For this reason, his Honour did not assess the different amounts for which each respondent might conceivably be liable and to which each appellant might conceivably be entitled. 166 In argument on appeal, Macquarie submitted, firstly, that the appellants had put their case at trial on a Potts v Miller basis and, secondly, that in any event the Potts v Miller basis was in the present case the correct one. As to the first submission, I am satisfied that, albeit not with clarity, the appellants argued for an assessment of damages on a wider basis than Potts v Miller. In my view, it is open for the appellants to maintain on appeal a case of assessment of damages not tied to the precise principles laid down in Potts v Miller, in particular, they are entitled to argue for an assessment on a basis other than the value of NCRH as at 4 January 1999. 10. Assessment of damages under s 1005 167 Section 1005 is substantially similar to s 82(1) of the TPA. Section 82(1) relevantly provides: …, a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. 168 In assessing loss under s 1005, the principles established in relation to claims under ss 52 and 82(1) of the TPA are of assistance: Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235 at [313] per Basten JA. The relevant point of similarity between s 1005 and s 82(1) is that each requires that a claimant suffer loss or damage "by conduct" of another person in contravention of the statutory provisions applicable. 169 The assessment of damages under s 82 has been addressed by the High Court on several recent occasions. See, for example: Marks v GIO Australia [1998] HCA 69; (1998) 196 CLR 494; Henville v Walker [2001] HCA 52; (2001) 206 CLR 459; Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388; HTW Valuers v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640, and Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627. 170 In Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) [2006] NSWCA 282; (2006) 67 NSWLR 341, Beazley JA reviewed these authorities and others in identifying the core principles relating to the application of s 82. I would extract the following propositions from her Honour's review; in my view they are equally applicable to a claim for damages under section 1005. 171 Firstly, the task of assessing damages under s 82 is broad and flexible: HTW Valuers at 667 [65]; Henville v Walker at 489 [96]; Marks v GIO Australia at 515 [56] and 528-529 [101]; Abigroup (No 3) at 361 [99] and 363 [108]-[109]. In Henville v Walker McHugh J observed at 502 [131] that "general principles for assessing damages may have to give way altogether in particular cases to solutions best adapted to give the injured claimant an amount which will most fairly compensate for the wrong suffered". His Honour cited Johnson v Prez [1988] HCA 64; (1988) 166 CLR 351 at 355-356 per Mason CJ. In HTW Valuers the Court said at 667 [665]: [T]he deduction of the true value at the acquisition date from the price paid is no more than a guide to the assessment of damages under s 82. Section 82 does not in terms refer to that method, and the width of s 82 permits other approaches to the assessment of damages so long as they work no injustice. 172 Secondly, concepts of causation and damages are closely linked under the TPA. The point was made by Gummow J in Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) [1987] FCA 230; (1987) 16 FCR 410 at 418-419: Wrapped up within s 82 are ... concepts the common law would describe by the terms 'causation' and 'remoteness' and 'measure of damages' ... [I]t would be an error to translate automatically to the particular statute what appeared the closest analogue from the common law 'rules' as to causation. It is rather a question of statutory construction ... Thus, in construing s 82 it is appropriate to bear in mind such matters as the scope and purpose of Pts IV and V ... the wide range of subject matters dealt with in Pts IV and V but all linked to s 82 ... the absence of any direct provision to apportion responsibility for loss or damage ... and the apparent telescoping of what to the common law would be issues of causation, remoteness and measure of damages. (footnotes omitted) 173 Thirdly, damages under s 82 are not limited by analogy to the award of damages under contract, tort, deceit or equitable remedies. There may, however, be appropriate cases where such an analogy is useful. As McHugh J stated in Henville v Walker at 501-502 [130] (citations omitted): This Court has addressed the question of assessment of damages under s 82 on several occasions. The Court has concluded that in most cases the measure of damages in tort is the appropriate guide in determining an award of damages under s 82. However, in assessing damages under s 82, courts are not bound to choose between the measure of damages in deceit or other torts or contract. In Marks v GIO Australia Holdings Ltd (1998) 196 CLR (194) the Court said that the central issue under s 82 is to establish a causal connection between the loss claimed and the contravening conduct. Once such a connection is found to exist, nothing in s 82 suggests that the recoverable amount should be limited by drawing an analogy with contract, tort or equitable remedies although they will usually be of great assistance. As Gummow J said in Marks (at 529) '[a]nalogy, like the rules of procedure, is a servant not a master'. 174 Fourthly, questions of causation and the assessment of damages are to be answered having regard to the scope and purposes of the statute: Henville v Walker at 470 [18], 482-483 [66]-[69], 489-490 [96] and 509 [164]; Travel Compensation Fund v Tambree at 639 [30], 643-644 [49], 645 [54] and 653 [79]. As Gaudron J explained in Henville (at 482-483 [68]-[69]), limitations should not be imposed upon relief beyond the terms of the TPA: Just as the relief available under s 82(1) is not to be confined by analogy either with the actions in tort or in contract, it should not be confined by imposing an unduly strict burden of proof on the claimant. As already indicated, s 82 provides for the recovery of loss or damage that a person suffers by contravening conduct. To require a claimant to prove which component of his or her loss or damage is referable to the contravening conduct would be to impose limitations on relief which the terms of that subsection do not require. At the very least, to require that a claimant under s 82(1) of the Act prove which component of his loss or damage is referable to contravening conduct would be to confine recoverable loss to that directly resulting from that conduct, and, thus, to impose a gloss on the words of the sub-section. At the other extreme, it would be to deny any remedy at all in those cases where loss results from two or more acts or events but the claimant is unable to identify the precise component or components of the loss referable to contravening conduct. That consequence is inconsistent with the concept of causation upon which s 82(1) is predicated, namely, that the contravening conduct should only have materially contributed to the loss or damage suffered. 175 In determining the meaning of s 1005, this court may have regard to the Explanatory Memorandum (see s 15AB(2)(e) of the Acts Interpretation Act 1901 (Cth)). According to the Explanatory Memorandum at paras 2988 and 2989, s 1005 "finds a parallel in TPA s 82" and is a "general damages clause … (which) operates to provide a remedy in addition to any other remedy available at law". In Abigroup (No 3) Beazley JA observed at 354 [57] that the purpose of s 82 was "inter alia, … to provide relief for persons who suffered loss by contravening conduct". The purpose of s 1005 is the same. 176 While a court is not obliged to follow the common law in assessing damages under section 1005 for contraventions of s 995 and s996, the assessment of damages remains an exercise confined by and subject to law. It is necessary, therefore, when considering whether to assess damages otherwise than in accordance with the rule in Potts v Miller, to identify the circumstances that require such a course. 177 In my opinion, particularly bearing in mind the scope and purpose of s 1005, the rule in Potts v Miller will not ordinarily apply in cases where a plaintiff becomes "locked in" to property acquired as a result of contravening conduct. In circumstances where it is not practically possible or it is unreasonable for plaintiffs to dispose of assets acquired on the strength of contravening conduct on the part of others, that conduct may be regarded as causing the entire loss even if, after the acquisition of the assets in question, other causes contribute to the loss. 178 The rationale for such an approach (which is applicable at common law, as well) was given in Smith New Court Securities Ltd v Citibank NA [1997] AC 254 (at 266) by Lord Browne-Wilkinson (emphasis added): In many cases, even in deceit, it will be appropriate to value the asset acquired as at the transaction date if that truly reflects the value of what the plaintiff has obtained. Thus, if the asset acquired is a readily marketable asset and there is no special feature (such as a continuing misrepresentation or the purchaser being locked into a business that he has acquired) the transaction date rule may well produce a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him, freed from any continuing adverse impact of the defendant's wrongful act. The transaction date rule has one manifest advantage, namely that it avoids any question of causation. One of the difficulties of either valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is that difficult questions of causation are bound to arise. In the period between the transaction date and the date of valuation or resale other factors will have influenced the value or resale price of the asset. It was the desire to avoid these difficulties of causation which led to the adoption of the transaction date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresentation there are likely to be many cases where the general rule has to be departed from in order to give adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to influence the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired. 179 Gibbs CJ in Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 (at 221-222) made a similar point. His Honour said: This rule, is, with all respect, not quite as inflexible as Potts v Miller might suggest. There may be cases in which the purchaser continues to trade, either because he has no real alternative or because he has not become aware of the nature of the fraud, and in those circumstances incurs losses which are not represented by the difference between the price and value of the business. There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. 180 So also in HTW Valuers the court would have been prepared to assess loss by regard to the value of the shopping centre at the date of trial because it "increasingly came to be perceived to be of declining utility and value and so was not a readily marketable asset". There may be questions of degree, but ultimately it must be determined whether departure from the rule in Potts v Miller will provide a proper assessment of the loss suffered "by conduct" in contravention of s 995 or s 996. 181 In written submissions (1 Orange 274 to 275), Macquarie argued that Smith New Court did not apply because: It was not alleged that any representation made by Macquarie continued to operate after 12 January 1999. Mr Saville was not "locked in" to his investment. He could have sold his notes on-market on reading the "tombstone announcement" in late February 1999. He didn't. He acquired more notes and even acquired shares, motivated by his own view of their worth at the time. 182 It may be observed that, even if this be accepted, there would be a loss represented by the difference between the amount paid for the notes acquired to that time and their value in a sale on market on reading the 'tombstone announcement'; a loss of 40 cents per note. 183 Dr Bell, who argued this part of the case for Macquarie, submitted that it was necessary to distinguish between causation of loss and what the loss is, and that it was erroneous to identify the loss on a "but for" causation basis. He referred in particular to Netaf Pty Ltd v Bikane Pty Ltd [1990] FCA 35; (1990) 26 FCR 305, in which Sheppard and Pincus JJ said at 308 that, where a purchase has been induced by misleading conduct, it is not enough in order to recover losses subsequent to the purchase to prove that, but for the misleading conduct – or as a partial consequence of it, the agreement to purchase would not have been made, and that "[i]t is not the law that in every such case the party held to have been engaged in misleading conduct … becomes the insurer of the other's success and prima facie liable to indemnify him against the consequences of the purchase." Dr Bell submitted that, even if it was reasonable for a plaintiff to hold on to an asset, that did not mean that the defendant was liable for a loss in the value of the asset in the plaintiff's hands on the basis only that the defendant's breach was the explanation for how the plaintiff came to hold the asset. So, Dr Bell submitted, in accordance with Potts v Miller it was necessary to ascertain the true value of the notes as at 12 January 1999, and that had not been proved. 184 I do not accept the argument advanced on Macquarie's behalf. I reiterate that on 28 February 1999 NCRH suspended its underwriting activities; on 15 March 1999 trading in NCRH shares was suspended; on 21 April 1999 an administrator was appointed to NCRH, and appointments of liquidators followed. Realistically, the only window available to the appellants for disposing of their investments was between 12 January 1999 and 15 March 1999. Dr Bell accepted that Macquarie did not say that it was unreasonable for [the appellants] to have held on to [the investments] (AT 645). After the tombstone announcement on 24 February 1999 the notes retained some value, although less than what had been paid for them, and the future of NCRH was not known to be so clouded that disposal was mandated; indeed, immediate disposal of the large holdings was not likely to have been feasible. After 15 March 1999, there was no practical way in which the appellants could realise their investments. There was nothing, in practical terms, that they could do other than retain their notes and wait for a dividend to be paid by the liquidator of NCRH. I would add that the fact that the appellants acquired more notes and shares after 12 January 1999 is irrelevant to whether, practically speaking, they were locked-in as from that date. 185 As regards the investments made after the tombstone announcement, the respondents do not suggest that those investments were made unreasonably. Once those investments were made, the appellants, practically, could do nothing to dispose of them. 186 So far as Macquarie submitted that the causation required by "by conduct" was negated, or had not been established, because the notes may have lost value as a result of events occurring after 12 January 1999, I do not accept the submission. 187 If it be assumed that contraventions of ss 995 and 996 caused the appellants to make their investments in the notes, rights and shares, it cannot be gainsaid that whatever loss the appellants suffered by making those investments was caused, at least on a "but for" basis, by that contravening conduct. Factual, or historical, causation was established. In other words, it was established that the assumed contravening conduct materially contributed to the loss claimed. Of course, it does not necessarily follow that the respondents would be liable for that loss. The loss must be loss suffered "by conduct" within the meaning of s 1005(1). 188 McHugh J expressed the applicable principles in Henville v Walker (at 493) as follows: If the defendant's breach has "materially contributed" to the loss or damage suffered, it will be regarded as a cause of the loss or damage, despite other factors or conditions having played an even more significant role in producing the loss or damage. As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage. In exceptional cases, where an abnormal event intervenes between the breach and damage, it may be right as a matter of common sense to hold that the breach was not a cause of damage. But such cases are exceptional. (footnotes omitted) 189 The liabilities for claims incurred after 12 January 1999 did not result from abnormal events. While attritional claims received from December 1998 onwards were far more numerous than what had happened previously, and gave rise to unexpected liabilities, those liabilities were incurred in the ordinary course of NCRH's business – they were claims of the kind that had always been received and were part of NCRH's business to receive. 190 This situation has some similarity to Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413. That case involved a negligent valuation of property. The appellant argued that loss suffered from a fall in the market subsequent to the negligent valuation should be excluded from the damages awarded. This argument was rejected. Kirby and Callinan JJ said (at 459 [123]), in a passage with which Gummow J agreed: Nothing said in Potts v Miller is determinative of this case. Indeed, as Dixon J's reasons in that case show, different situations may arise in practice in cases of deceit (of which Potts was one). There can be no rigid rules to govern all cases. If an example is required of the flexibility with which these questions need to be approached, Gould v Vaggelas [1985] HCA 85; (1985) 157 CLR 215 provides it. There the Court allowed as damages trading losses incurred some time after the giving of a false inducement. It did so on the basis that it was reasonable, in the particular circumstances, for the purchasers to continue to carry on business as they did. (footnotes omitted) 191 In my opinion, the appellants' damages should be assessed as the difference between what they paid for their investments and the value of the investments following the failure of NCRH. Because the investments ultimately proved to be worthless, the appellants' damages are the entirety of the amounts invested, less the proceeds of any investments sold. V CASE 1 11. The sub-underwriting contracts 192 Case 1 is based on the proposition that Macquarie made representations to Mr Saville who, on the strength of them, entered into transactions on behalf of certain of the appellants that gave rise to loss. The transactions in question are two sub-underwriting contracts entered into on 17 November 1998 between Macquarie, on the one hand, and AOITL and ICM, respectively, on the other. By these contracts, AOITL agreed to take one million notes at A$1.30 each and to sub-underwrite (i.e. as sub-underwriter to MECM) eight million notes, and ICM agreed to be sub-underwriter to MECM in respect of 7.5 million notes. 193 In consequence of the sub-underwriting contracts AOITL and ICM were required to arrange for 16.5 million notes to be taken up. Nine million of these notes were taken up by ICI at a cost of A$1.30 and 7.5 million were taken up by AOITL at the same cost. 12. One meeting or two? 194 At trial, the appellants relied on representations pleaded in a number of paragraphs of their summons. The summons was at least the sixth version of the summons as originally filed. The parties referred to it as "6FAS" and I shall use the same nomenclature. By the time that argument on appeal had concluded, the appellants had indicated that they relied only on the representations alleged in paragraphs 46(a), (b), (c), (d) and (f), and paragraphs 55(e), (f), (h) and (n) of 6FAS. I shall deal firstly with the paragraph 46 representations. 195 The paragraph 46 representations on which the appellants rely are as follows: [46] In or about October 1998, Macquarie, pursuant to the approach referred to in paragraph 45 above, made the following representations to Saville: (a) that as a result of a new management team and a revised underwriting strategy, the New Cap Group was likely to be profitable in 1999; (b) that the New Cap Group had Net Tangible Assets ("NTA") at 30 June 1998 of AUSD2.61 per share; (c) that [NCRH] had a substantial investment portfolio which was held mainly in United States treasuries and bonds, which investment portfolio was, or would be after the issue of converting notes, substantially unencumbered; (d) that the New Cap Group had a substantial claims reserve to meet its then current outstanding claims liability, including any liability which had been incurred but not reported, which had been independently assessed, and which included a prudential margin; … (f) that NCRH's purposes in issuing the Converting Notes included removing restrictive debt and replacing it with equity, and improving the New Cap Group's security ratings; and … Particulars (a) The representations were expressly made and were, in part, made in writing and, in part, made orally; (b) To the extent that they were oral, they were made by Jonathan Coultas, or alternatively, Tony Jackson; (c) To the extent that they were written, they were made in [the following] documents: (i) [The IRD]" (ii) "Key Ratios"; …. 196 6FAS alleged that the paragraph 46 representations were made "in or about October 1998". Mr Saville testified that the representations were made during two or three meetings (one or more of which was in November 1998) that he had with Macquarie officers including Messrs Coultas and Jackson. 197 His Honour found, however, that only one such meeting occurred, namely, on 16 November 1998. His Honour found that a representation as alleged in paragraph 46(f) was made at that meeting but was not satisfied that any of the other paragraph 46 representations were made. The appellants challenge these findings. 198 These findings, according to the appellants, are important in two respects. Firstly, the findings tainted the judge's overall factual findings relating to Mr Saville. Secondly, the findings led his Honour into error when determining whether Macquarie made representations to Mr Saville as set out in the IRD. 199 In submitting that there was more than one meeting, the appellants relied on the testimony of Mr Moran, a senior employee of Macquarie. Mr Moran testified that on or about 12 November 1998 a Macquarie executive involved in marketing the NCRH issue asked him to send certain documents, including the draft prospectus and the IRD, to Mr Saville's home in Vaucluse. In response, Mr Moran prepared a letter to Mr Saville and on 12 November 1998 a courier delivered the letter, a draft sub-underwriting letter, the draft prospectus, and the IRD to Mr Saville. Mr Moran said that he would not have included a copy of the IRD if, to his knowledge, Macquarie representatives had already visited Mr Saville in relation to the note issue. 200 In cross-examination, Mr Moran changed his evidence to a degree. He testified that "his best recollection" was that "on or about 12 November" he was asked by Mr Coultas to send a sub-underwriting letter and the draft prospectus to Mr Saville. This, he said, was after Mr Coultas and another Macquarie representative had met with Mr Saville at the latter's home. This evidence suggests that there was a meeting between Mr Saville and the Macquarie representatives on or before 12 November 1998, as well as on 16 November 1998. McDougall J accepted Mr Moran as a witness of truth, but did not refer to this aspect of his testimony. 201 The appellants, in their final address at trial, did not rely on Mr Moran's evidence. They contended that the representations were made during a presentation on 3 or 4 November at Mr Saville's home. They did not invite the judge to take account of Mr Moran's evidence (which was inconsistent with the case they were advancing). 202 Mr Oslington submitted that Mr Moran's evidence given in cross-examination should simply be regarded as erroneous. It appears to have been accepted as such by the appellants (and, by inference, his Honour) at trial. This argument, in the circumstances I have set out, is persuasive and I accept it. 203 The appellants also relied on the evidence of Mr Jackson, who (on behalf of Macquarie) attended a meeting with Mr Saville. Mr Jackson testified that during that meeting "it was more than likely" that he or Mr Coultas informed Mr Saville of the key benefits of the note issue. Mr Jackson also testified that at that meeting Mr Saville said, "I have sufficient interest to meet management to do some work on this", and the appellant submitted that this suggested a meeting earlier than 16 November because on 17 November Mr Saville signed and returned the underwriting commitments. The appellants submitted that this evidence supported Mr Saville's testimony that oral representations were made to him at that meeting. Mr Jackson, however, denied that he had made the alleged oral representations at the meeting on 16 November and the judge believed him. Mr Saville's interest may well have led to a commitment on his part without a further meeting with management. His own evidence was that he was interested in taking a substantial underwriting position at the end of what he said was a first, earlier meeting. I am not persuaded that his Honour erred in the finding he made in regard to this issue. 204 Mr Saville gave vacillating evidence as to when the meetings occurred. Mr Oslington submitted that Mr Saville's testimony on this issue kept on changing as new evidence came up tending to suggest that his previous versions were incorrect. Mr Oslington also submitted that Mr Saville appeared anxious to place the meeting in October 1998, that is, before he received documents from Macquarie containing express disclaimers and explanations by them in regard to their role in drafting the prospectus and making any representations in it. These arguments, and the documents on which they are based, are convincing. 205 Macquarie's database as at 3 November 1998 showed that a Macquarie representative had not visited Mr Saville, a Macquarie representative had not been assigned for the purposes of communicating with Mr Saville, and Mr Saville had not been provided with a draft prospectus. Indeed, the draft prospectus only became available on 29 October. Mr Saville's name appears first to have been raised by Macquarie as a potential investor on 4 November. Macquarie's records indicated that there had been no presentation to Mr Saville by that date. 206 Mr Coultas left Sydney on 5 November 1998. He returned late on 11 November. On 12 November, Mr Moran sent Mr Saville a copy of the draft prospectus, a draft sub-underwriting agreement and the IRD. Macquarie's records show that on 16 November Messrs Coultas and Jackson travelled by taxi to Mr Saville's home in Vaucluse and both these persons testified that the only meeting they had with Mr Saville was on that date. This evidence establishes that the meeting must have been held in November, later than the pleaded date and the date for which Mr Saville, in his evidence, contended. 207 The incomplete copy of the IRD retained by Mr Saville (referred to at trial as "the slides") contains information (the issue size of A$80M) that indicates that the IRD could only have been created on or after 12 November 1998 (as the issue size only became A$80M on that date). This supports the inference that the meeting between Mr Saville and Macquarie occurred on or after that date. 208 I am not persuaded that McDougall J erred in finding that there was only one meeting and that it occurred on 16 November 1998. 13. The IRD 209 McDougall J held that none of the representations alleged in paragraphs 46(a) to (e) and (g) were made orally. These findings rested squarely on his Honour's view of Mr Saville's credibility and have not been shown to be wrong. In any event, as I have noted, in argument on appeal the appellants accepted that the oral representations allegedly made were no different to the written representations. 210 The question remains, however, whether (apart from the oral representation pleaded in paragraph 46(f)), the appellants are entitled to rely on the written document pleaded (the IRD) as the source of the other relevant paragraph 46 representations. 211 As his Honour found that no meeting occurred in October 1988 between Macquarie and Mr Saville, he considered that there was no need to deal with the IRD and the paragraph 46 representations that the appellants contended were made therein. Accordingly, his Honour made no finding as to whether or not Mr Saville received and read the IRD. 212 On appeal, the appellants argued that his Honour erred in failing to deal with their paragraph 46 representations case based on the IRD. They submitted that the IRD was sent to Mr Saville under cover of Macquarie's letter of 12 November 1998, and that Mr Saville read it and relied on the representations contained therein. The appellants contended that, despite the fact that paragraph 46 alleged that the representations had been made in October 1998, they were entitled to rely on the evidence that the representations were made on 12 November 1998 in the IRD. 213 The Macquarie parties submitted that it was not open on appeal for the appellants to make out a case based on representations not made either in October 1998 (as pleaded in paragraph 46) or on 4 November 1998 (as the appellant contended at trial). The appellants submitted that they would be prejudiced were such an argument to be allowed on appeal. They argued that, had such an argument been made at trial, they would have cross-examined Mr Saville to show that he did not rely on the IRD and that he knew that they were acting merely as a conduit and were making no representations in the IRD. 214 6FAS expressly pleaded that the paragraph 46 representations were made in the IRD. Macquarie's defence to paragraph 46 asserted that the IRD was provided by Macquarie to Mr Saville on 12 November 1998. Mr Oslington acknowledged (T 358) that Macquarie "never disputed" that the IRD was attached to the letter of 12 November. He accepted that part of the appellants' case included that Mr Saville was provided with the slides (T 370). Mr Saville disclosed the slides in his discovery and he must have had them in his possession. Macquarie's own case is that he received them from Macquarie. The only possible source of the slides was Macquarie. 215 Mr Oslington drew attention to the fact that, in a chronology filed by the appellants at the commencement of the trial, they asserted that the IRD had not been attached to the letter of 12 November 1998. Nevertheless, the matters to which I have referred in the previous three paragraphs demonstrate that, at the trial, it was generally accepted that the IRD was attached to the letter of 12 November and sent to Mr Saville. Accordingly, I would hold that Macquarie sent the IRD to Mr Saville on that date. 216 The next question is whether Mr Saville read the IRD. 217 In a statement dated 23 July 2003, tendered by the appellants at the trial, Mr Saville attached the slides that, according to him, he had received (the slides that were not produced were those containing the disclaimers). Paragraph 88 of that statement reads: During the course of the October Presentation I recall Coultas and/or Jackson leading me through all of the slides … and expanding upon each of the points made in each of those slides. 218 During the course of cross-examination of Mr Saville, the cross-examiner accepted that Mr Saville had been taken through the slides and knew their contents. It was expressly put to Mr Saville that he saw a particular slide prior to seeing the draft prospectus and he replied that he had seen the slides before the draft prospectus. 219 The way in which McDougall J treated the issue of whether Mr Saville received and read the disclaimers is not without significance. The disclaimers were contained in attachments to the sub-underwriting letter, enclosed under cover of the letter of 12 November. The appellants contended that the document containing the disclaimers was not enclosed under cover of that letter. His Honour found, however, that the disclaimers were indeed sent to Mr Saville by that letter, and he read them. It would be strange, then, if Mr Saville did not also read the IRD, which was also enclosed in that letter. 220 The material facts pleaded are that Macquarie sent the IRD to Mr Saville, the IRD contained the representations, Mr Saville read the IRD, and relied on the representations. The date on which the paragraph 46 representation was made is not a material fact. 221 Macquarie, in their defence, expressly asserted that any representations as pleaded in paragraph 46 were qualified by the IRD. Mr Saville was extensively cross-examined on reliance, generally, as well as on the effects of the disclaimers (which Mr Saville read before the appellants entered into the sub-underwriting contracts). 222 In all the circumstances, I consider that the question whether Mr Saville received and read the IRD and the disclaimers was a live issue at the trial. 223 The evidence and the probabilities strongly support a finding that Mr Saville read the IRD before the sub-underwriting agreements were entered into. I would so hold. 224 I accept that the way in which the appellants conducted their case at trial diverted the attention of all involved from the question whether the appellants could succeed on the representations made in the IRD alone (irrespective of any representations made at a particular meeting). Notwithstanding this, I consider that the issues of reliance and the part Macquarie played, if any, in making the representations contained in the IRD were adequately canvassed at the trial. In my opinion considerations of fairness and justice permit the appellants to raise the paragraph 46 representations case on appeal. 14 The paragraph 46 representations Paragraph 46(a) 225 The representation alleged in paragraph 46(a) was that Macquarie represented to Mr Saville that "as a result of a new management team and a revised underwriting strategy, [NCRH is] likely to be profitable in 1999". 226 The IRD contained no statement or expression of opinion about the likelihood of the profitability of NCRH. The appellants contended that the representation arises by inference from other material in the IRD. I discuss this material below. 227 The appellants relied on statements in the IRD that the notes would provide "a secure yield" and that NCRH was "a company in transition". They also relied on the fact that the IRD set out detailed changes in management personnel. These matters, however, did not imply that NCRH was likely to be profitable in 1999 and do not support the appellants' argument. 228 The IRD referred to aspects of NCRH's "culture", the "risk" with which it was concerned, and to "claims examination" and "reduced key man reliance". Under the heading "Risk", the IRD contained the phrases "model risk profile" and "active risk management". Under the heading "Systems", the IRD referred to "new systems and procedures". The appellants contended that these references in some way supported the inference that the representation pleaded in paragraph 46(a) was made. This argument is untenable. 229 The appellants relied on a reference in the IRD to "opportunities for New Cap Re in 1/99 renewal season" and a statement in the IRD that the issue would "position New Cap Re to take advantage of 1/99 renewal season". They relied on the following phrases in the IRD: "Forthcoming renewal season", "transition complete", "98 underwriting year", "capital raising is the critical next step" and "converting notes and attractive security". These phrases do not give rise to a representation, by inference, that NCRH was likely to be profitable in 1999. 230 I would add that the representation pleaded is that the likely profitability would be "as a result of a new management team and a revised underwriting strategy". The IRD, however, did not connect the security of the yield with the new management team. 231 I accept that it would be wrong to look at the particular phrases and statements on which the appellants rely separately and in isolation. The document has to be looked at as a whole. That exercise does not result in the inference contended for by the appellants being drawn. 232 The appellants, in their written reply submissions, drew attention to a statement in a different document, namely, the "key ratios" document (which is a document referred to in the particulars to paragraph 46, being documents in which the representations pleaded were made). This document projected a profit after tax of A$10.9M. I would not uphold the argument based on this document. The only reference to it in oral argument was a statement by Mr Jackson that "it doesn't affect the matter really" (T302.13). The appellants' submissions were silent as to whether Mr Saville read the "key ratios" document or relied on it. It was referred to only as an aside. In a case of this complexity and density, involving a huge body of material, it is not for this Court to search out possible evidentiary support in written submissions made, as it were, casually. 233 I therefore conclude that the representation pleaded in paragraph 46(a) is not made in the IRD. 234 In any event, I am not persuaded that Mr Saville was misled by that representation. 235 McDougall J found (at [451]): Mr Saville also accepted that he was aware that there was a real risk that the company might make losses for 1999, as opposed to 1998 (T1556.3 – 6). 236 His Honour found that, on his own evidence, Mr Saville was aware that the possibility of further losses (over and above A$40M) was a "real risk" ([453,3454] Red 15). Mr Saville conceded that he recognised that NCRH faced a "trying" time going into the future (T 1399). He agreed that there were valid reasons why there could be a real risk that NCRH could not make profits in the 1999 year (Black 3/1546.43-47). When asked in cross-examination about the risk that NCRH might not make profits in 1999, Mr Saville replied, "I had no reason to believe they would or wouldn't" (Black 3/1547.2-4) 237 His Honour's findings are amply borne out by the evidence and error on his part has not been shown. Paragraph 46(b) 238 This paragraph asserted that Macquarie represented to Mr Saville "that the New Cap Group had net tangible assets ("NTA") at 30 June 1998 of AUSD2.61 per share". Such a representation was made in the IRD (Blue 4/1743). 239 The appellants contended that this representation is falsified "because of the figure for retrocessions" in the balance sheet. 240 The draft prospectus stated that as at 30 October 1998 the current NTA was "between approximately A$2.06 and A$2.20". In Mr Saville's statement of 23 July 2003 he stated that he read the draft prospectus "to ensure that its contents were broadly consistent with the material that had already been provided to me". He observed that that NTA was lower than "the A$2.61 NTA" referred to in the "November dealer's notes based on the accounts of 30 June 1998". He said that the draft prospectus confirmed the information provided to him by Messrs Coultas and Jackson. 241 Mr Saville received the IRD on the same date that he received the draft prospectus. On that date he learned from the draft prospectus that the NTA was between A$2.06 and A$2.20. It was not suggested that the latter figure was false. It follows that Mr Saville could not have placed any reliance on the statement in the IRD that the NTA was A$2.61. Accordingly, in context, that representation in the IRD was not misleading and, in any event, had no causative effect. Paragraph 46(c) 242 This paragraph asserted that "[NCRH] had a substantial investment portfolio which was held mainly in United States treasuries and bonds, which investment was, or would be after the issue of converting notes, substantially unencumbered". A critical element in this representation is the proposition that NCRH's investment portfolio was "substantially unencumbered". The IRD did not state expressly that the assets of the Group or the investment portfolio were unencumbered. 243 The appellants relied on random phrases in the IRD that were said to give rise to the inference that the investment portfolio was substantially unencumbered. Phrases on which reliance was placed are "excess capital", "performance of equity investments" and "spreads on cat bonds". The appellants referred, in addition, to words in the IRD indicating that existing loans would be replaced with the converting notes and that the investment portfolio would be invested in bonds. The appellants also contended that the representation was made because the investment portfolio was of no significance to an investor if it was encumbered, apparently on the reasoning that reference to the portfolio carried with it the implication that the portfolio was unencumbered. 244 In my opinion, the argument advanced is far-fetched. The representation alleged is not made in the IRD. Paragraph 46(d) 245 This paragraph asserted that "[NCRH] had a substantial claims reserve to meet its then current outstanding claims liability, including any liability which had been incurred but not reported, which had been independently assessed, and which included a prudential margin". 246 At trial, the appellants did not seek to falsify paragraph 46(d) as at 18 November 1998. Their case had been that the representation became false thereafter, but no such case was maintained on appeal. Instead, the appellants submitted on appeal that independent assessment and inclusion of a prudential margin were falsified because of prior disagreement between NCRH's internal actuary and its management, resolved by a report provided by Trowbridge to the board which it was said "implied" that there should be a review of the prudential margin. 247 The appellants recognised that they had not previously articulated this case. Mr Oslington submitted that, had they done so, Macquarie might have adduced evidence showing that it held on reasonable grounds the opinion that the representations in paragraph 46(d) were correct, and that Macquarie would be prejudiced were the appellants to be allowed to raise paragraph 46(d) as a live issue on appeal in its new guise. I would accept these submissions. 248 Mr Saville did not testify that he relied on an independent assessment of the claims provisions by Trowbridge when he decided to cause the appellants to invest in NCRH. He listed in paragraph 120 of his statement of 23 July 2003 the representations and misleading conduct that influenced him in so doing. An independent assessment of the claims provisions by Trowbridge is not one of the factors listed in paragraph 120. 249 Mr Saville testified that when he made the investment decisions in question he realised from the Trowbridge report that Trowbridge's opinion as stated in paragraph 4.3 of the prospectus (namely, that Trowbridge had confirmed the adequacy of the claims provisions) was not based on any prudential margin (3 Black 1172-3). He also testified that he realised that Trowbridge had "made it very clear" that "their central estimate does not include a prudential margin". He said, "I would have taken that into account" (3 Black 1172). He said that he knew that if the prudential margin proposed by NCRH were added to Trowbridge's net central estimate, it would reduce the NTA by between 7 and 15.5 cents per share (3 Black 1173). 250 Mr Saville agreed that he had read and understood the statement in the prospectus that "there can be no assurance that claims will not exceed the Company's claims reserves and have a material adverse effect on the Company's financial; condition or results" ((4 Black 1720). 251 Accordingly, the appellants did not establish that they relied on the representation pleaded in paragraph 46(d) or that it induced them to act to their prejudice. The case based on paragraph 46(d) was not established. Paragraph 46(f) 252 This paragraph asserted that "NCRH's purposes in issuing the Converting Notes included removing restricted debt and replacing it with equity, and improving the New Cap Group's security ratings" 253 The appellants' case was not that these were not "purposes", but that there were other material purposes (see the note issue purposes argument later described). 254 The representation in paragraph 46(f) is not falsified as it contains the word "included". The representation, itself, implies that its purposes are more than the removal of restrictive debt, the replacement of debt with equity and the improvement of the Group's security ratings. Conclusion in regard to the paragraph 46 representations 255 I would not uphold the appellants' arguments in relation to the paragraph 46 representations. 15. The paragraph 55 representations 256 The appellants alleged that the paragraph 55 representations were made in the draft prospectus; there is no allegation that they were made orally. The appellants press only claims based on paragraphs 55(e), (f), (h) and (n) of 6FAS (the appellants' reply submissions tab 30 paragraph 2). These paragraphs are in the following terms: [55] In providing the Draft Prospectus to Saville, Macquarie and NCRH each made the following representations to Saville in connection with the issue of Converting Notes, which representations were also made by NCRH when it published the Prospectus on 18 November 1998: … (e) as a result of a new management team and a revised underwriting strategy, the prospects for the New Cap Group in 1999 were positive. Particulars Page 3, and section 4.4 of the Draft Prospectus and the Prospectus. (f) NCRH was not aware of any material claims, other than those identified in section 4.3 of the Draft Prospectus and the Prospectus, and the Trowbridge Report at page 43 of the Draft Prospectus, which would impact significantly on the New Cap Group's financial position for the second half of 1998; Particulars Section 4.3 of the Draft Prospectus and the Prospectus. … (h) an independent actuarial review by Trowbridge had confirmed the adequacy of the New Cap Group's claims provisioning; Particulars Page 3 of the Draft Prospectus and the Prospectus … (n) the purposes of the issue of the Converting Notes were to: (i) recapitalise NCRH to widen the business available to the New Cap Group; (ii) replace existing debt with more efficient capital; (iii) meet the existing capital requirements of the industry; and (iv) position the New Cap Group for an enhanced claims paying rating. Particulars Page 1 of the Draft Prospectus and the Prospectus. Section 4.5 of the Draft Prospectus and the Prospectus. 257 The appellants did not contend that the representations contained in the paragraphs in question were representations of fact. They submitted that the representations were of opinions that Macquarie represented that it held and represented were based on reasonable grounds. The appellants accepted that they needed to establish that those opinions were not held on reasonable grounds. (See paragraphs 8 to 13 of the appellants' note in tab 33 of their "Reply Submissions".) 258 In substance, paragraphs 55(e), (h) and (n) raise, respectively, the same representations as the trading prospects, Trowbridge/NTA and note issue purposes arguments. 259 It is to be noted that paragraph 55(e) asserted that, "as a result of a new management team and a revised underwriting strategy, the prospects for the New Cap Group in 1999 were positive", whereas the trading prospects argument is based on a representation in the same terms save that the word "good" is substituted for the word "positive". I do not regard this difference as material. There is another difference between the representation pleaded in paragraph 55(e) and that on which the trading prospects argument is based. Paragraph 55(e) refers to the period "in 1999" whereas the trading prospects argument is concerned with the period "for the second half of 1998". A representation as to the prospects in 1999 is not found in the prospectus. In any event I do not regard the difference between 1999 and the second half of 1998 as factually material. The conclusion to which I would come in regard to both periods is the same. 260 The trading prospects, Trowbridge/NTA and note issue purposes arguments are dealt with below. For the reasons I give when dealing with those arguments, I conclude that those arguments fail. The arguments based on paragraphs 55(e), (h) and (n) fail for the same reasons. 261 The appellants referred generally to NCRH's knowledge of Mr de Chelard's poor track record in writing business, but not to evidence that - as at 18 November 1998 - Macquarie (through Dr McKenzie, or any other person) knew or should have known of any "material claims" as referred to in paragraph 55(f). Although Mr Daya knew in December 1998 of increases in claims, it is not now in dispute that he did not reveal this knowledge to any relevant person until after the note issue had taken place. It follows that the paragraph 55(f) representation, if made, was not falsified as an opinion of Macquarie. 262 Accordingly, I would not uphold the appellants' arguments in relation to the paragraph 55 representations. 16. Macquarie a mere conduit 263 One of the grounds on which McDougall J rejected the appellants' case based on the paragraph 55 representations was that he was not satisfied that those representations "were made by Macquarie to Mr Saville in the manner alleged and particularised in that paragraph" ([344]). In effect, his Honour held that Macquarie acted only as a conduit in regard to the paragraph 55 representations. 264 Part of his Honour's reasoning in concluding that Macquarie made no representations by sending the draft prospectus, and was a mere conduit, was based on certain disclaimers contained in the draft sub-underwriting contracts and the draft prospectus. These documents were enclosed under cover of Macquarie's letter of 12 November 1999 and Mr Saville read them. 265 The draft sub-underwriting contracts contained the following clauses: 5. Except for any liability which cannot be excluded by law, Macquarie does not accept any responsibility or liability for the contents of the Prospectus (including any draft or supplementary prospectus) or in relation to the offer of the Converting Notes. You acknowledge and agree that none of its directors, officers, employees or advisers makes any warranty or representation as to the accuracy of the information given to you and Macquarie, its directors, officers, employees and advisers exclude and disclaim all liability, except as may not be excluded by law, for any expense, losses, damages or costs that may be incurred by you as a result of that information being inaccurate or incomplete in any way for any reason. … 8. Macquarie, its servants or agents makes no recommendation as to whether you should participate in the sub-underwriting of the Capital Raising nor do they make any representations or warranties to you concerning the Capital Raising. You should make your own decision to participate based on your own enquires [sic] and the information contained in the draft Prospectus and the proposed amendments to the draft Prospectus contained in Attachment 7 of this letter. 266 The draft prospectus contained the following clauses: Notwithstanding that it may be referred to elsewhere in this Prospectus, Macquarie Equity Capital Markets Limited was only involved in the preparation of the following part of this Prospectus: that part of the Prospectus where it is named as Lead Manager and Underwriter in the Corporate Directory. Macquarie Equity Capital Markets Limited has given, and at the time of lodgement of this Prospectus has not withdrawn, its consent to the issue of this Prospectus with that part included in the form and context in which it is included. Macquarie Equity Capital Markets Limited did not authorise or cause the issue of any other part of this Prospectus. … Macquarie Equities Limited has given, and at the time of lodgement of this Prospectus has not withdrawn, its consent to the issue of this Prospectus with those parts included in the form and context in which they are included. Macquarie Equities Limited did not authorise or cause the issue of any part of this Prospectus. 267 In paragraph 120 of Mr Saville's statement of 23 July 2003, he set out 21 matters that he said were "contrary to the information" which he had reviewed on or before 17 November 1998. He stated in paragraph 120 that, had he been informed on or before 17 November 1998 of the truth of each of the 21 matters, he would have declined to participate and would not have signed the acceptances of the sub-underwriting contracts on behalf of ICM and AOITL or made recommendations and instructions to the appellants in respect of the purchase of shares, rights and notes in NCRH from 17 November 1998 onwards. 268 Mr Saville agreed in cross-examination that, when he read the draft prospectus, he recognised that Macquarie had only accepted responsibility for a limited part of the information contained in that document. 269 In a crucial exchange, the following was said: Q. Do you agree that as at 17 November 1998 you would have realised that each of the matters in the sub-paragraphs to paragraph 120 of your statement was a matter outside of the area of responsibility accepted by Macquarie in the draft prospectus? A. In the draft prospectus, yes. (Black 3/1272) 270 Later, (Black 3/1274) Mr Saville accepted that, had he put any query to Macquarie concerning any of the matters listed in paragraph 120, his expectation was that Macquarie "would have sought further information from those responsible for the particular matter then accurately and reliably reported back to [him]". As McDougall J observed (at [314]): These matters do not go merely to reliance. They go also to the question whether, in all the circumstances, Macquarie should be regarded as having made any representation to Mr Saville when on 12 November 1998 it sent him the draft prospectus and the draft underwriting agreement. 271 It was substantially in reliance on Mr Saville's own evidence that his Honour concluded (at [339]): All the circumstances to which I have referred support the conclusion that the Macquarie parties did not make any relevant representation to Mr Saville by MECM's letter of 12 November 1998 and its attachments, including the draft prospectus. Further, it might be asked, how could one rationally say that they (or MECM) did, in circumstances where Mr Saville did not regard them as doing so? 272 The principles to be applied in determining whether a party has done no more than communicate a representation of another, without adopting or endorsing that representation, and, hence, has not engaged in misleading or deceptive conduct, have now been settled. 273 Mason ACJ, Wilson, Deane and Dawson JJ in Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 666, after saying that a corporation could contravene s 52 of the TPA, even though it acted honestly and reasonably, observed: That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive. 274 In Butcher v Lachlan Elder Realty Pty Limited [2004] HCA 60; (2004) 218 CLR 592 Gleeson CJ, Hayne and Heydon JJ referred to the above-quoted observations and said (at [39] – [40], 605): In applying those principles, it is important that the agent's conduct be viewed as a whole. It is not right to characterise the problem as one of analysing the effect of its 'conduct' and divorced from 'disclaimers' about that 'conduct' and divorced from other circumstances which might qualify its character. Everything relevant the agent did … must be taken into account. … For the following reasons, the agent did not engage in conduct towards the purchasers which was misleading. Whatever representation the vendor made to the purchasers by authorising the agent to issue the brochure, it was not made by the agent to the purchasers. The agent did no more than communicate what the vendor was representing, without adopting or endorsing it. That conclusion flows from the nature of the parties, the character of the transaction contemplated, and the contents of the brochure itself. 275 The majority (at [36] and [37], 604) pointed out that, in analysing whether conduct was misleading, a particular approach was to be adopted where the objects of the conduct are "identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld". Identified individuals of this kind are to be considered quite apart from any class into which they fall. The conduct of the defendant in relation to that plaintiff alone must be analysed. 276 This approach was followed in Orix Australia Corporation Limited v Moody Kiddell and Partners Pty Limited [2006] NSWCA 257. In that case the appellant claimed that it had suffered loss as a result of the misleading conduct of the respondent. Only one witness testified on behalf of the appellant, namely, its senior key accounts executive. The knowledge and understanding of this witness were the knowledge and understanding of the appellant. At [59], with the concurrence of Spigelman CJ and Basten JA, I said: In a case where the alleged victim of misleading conduct is a single entity, and the knowledge and understanding of the entity is that of a particular individual, the actual knowledge and understanding of the individual is of fundamental importance. If the individual recipient of information believes a disclaimer to mean that the agent is not the source of the information said to be misleading, and that the agent is merely passing on information supplied by others, that must be decisive. It is then not necessary to construe the disclaimer. 277 McDougall J correctly applied these principles in concluding that Macquarie had made no relevant representation by the draft prospectus to Mr Saville. His Honour took into account all of the relevant circumstances, not only Mr Saville's statement (which on one view, alone, is conclusive) that as at 17 November 1998 he realised that each of the matters in the 21 sub-paragraphs to paragraph 120 of his statement was outside Macquarie's area of responsibility in the draft prospectus. I shall mention the more important matters to which his Honour had regard. 278 His Honour accepted that, when Macquarie sent the draft prospectus to Mr Saville together with the draft underwriting agreements, it did so for its own benefit. There can be do doubt that this is so. Macquarie was seeking to find a sub-underwriter to cover its own underwriting obligations in regard to the note issue. Macquarie's charges for the work done by it in connection with the note issue were some three million dollars. It was to Macquarie's advantage to persuade Mr Saville to cause the companies over which he had influence to take up sub-underwriting obligations. The draft prospectus was accompanied by the IRD which was a marketing tool of Macquarie. 279 While these are relevant matters, they are by no means conclusive. The position of Macquarie has some similarity with the position of the agents in Butcher and Orix, who both stood to gain from the transactions they were promoting; nevertheless, each was found to have acted as a mere conduit in passing on information designed to persuade the recipients to enter into the transactions concerned. That Macquarie provided the draft prospectus as part of seeking to find a sub-underwriter to its own advantage did not necessarily mean that it endorsed the draft prospectus – its own opinions were to be separately found in the IRD. The appellants submitted that McDougall J had left out of account that the IRD accompanied the draft prospectus and the draft underwriting agreements, but that was part of Macquarie acting for its own benefit which, as I have said, was relevant but not conclusive. His Honour took into account the fact that "Macquarie (or, at least MECM) had been involved in the drafting" of the draft prospectus and the sub-underwriting agreements. His Honour said (at [342]): But the great bulk of the information in the documents did not come from Macquarie; most of it came from NCRH, and parts of it came from Trowbridge, PWC or Phillips Fox. The appellants stress this aspect of Macquarie's involvement. 280 Dr McKenzie was Macquarie's representative on the DDC. Clause 3.1 of the DDC Conduct Memorandum recorded: The Committee is to approve the scope of the due diligence, receive regular progress reports and, where necessary, redirect the due diligence efforts with a view to ensuring that by the end of the due diligence period a complete and thorough understanding has been obtained of all the relevant facts prior to finalisation of the prospectus. The Memorandum recorded further, "[e]ach member of the Committee will participate in the due diligence inquiries and deliberations" and (at cl 6.1) "[t]he prospectus will be prepared simultaneously with the steps set out above and will be amended to reflect the findings of the Committee and further investigations." 281 The appellants submitted that Dr McKenzie, on behalf of Macquarie, must have played a significant part in the preparation of the prospectus. Various minutes of the DDC indicate that MECM prepared an outline of the prospectus, which was tabled and discussed. Dr McKenzie made various suggestions and contributions regarding the drafting of the prospectus and suggested various amendments to it. He also made amendments to Trowbridge's independent expert report. 282 The appellants referred to the statement in the prospectus that, notwithstanding that MECM might be referred to elsewhere in the prospectus, it was only involved in the preparation of that part where it is named as lead manager and underwriter in the corporate directory. The appellants submitted that this statement was false. The appellants also submitted that the statement in section 3 of the prospectus that MEL was only involved in the preparation of that part of the prospectus that concerned "brokerage rates offered by Macquarie Equities Limited" was also false. 283 The appellants submitted that these false statements tended to induce a belief on Mr Saville's part that Macquarie had no responsibility for the statements in the prospectus. Therefore, it was said, Mr Saville's belief should be discounted. 284 The proposition so advanced was not put to McDougall J. In any event, I do not think that, in the circumstances of this case, it should be accepted. 285 The critical parts of the disclaimers (for the purposes of this part of the argument) were not who drafted the prospectus; rather, they were the statements to the following effect: (a) Macquarie did not accept any responsibility or liability for the contents of the prospectus. (b) None of the Macquarie directors, officers, employees or advisers made any warranty or representation as to the accuracy of the information in the prospectus. (c) Macquarie excluded and disclaimed all liability, except as may not be excluded by law, for losses incurred as the result of that information being inaccurate or incomplete. (d) Macquarie made no recommendation as to whether readers of the draft prospectus should participate in the sub-underwriting. (e) Macquarie made no representations or warranties concerning the capital raising. (f) Readers of the draft prospectus should make their own decisions whether or not to participate based on their own inquiries and information contained in the draft prospectus and other information provided. 286 An analysis of the relevant cross-examination of Mr Saville leads to the conclusion that the matters listed in the previous paragraph caused him to believe that Macquarie was not making any representation in the draft prospectus. The issue as to who drafted the prospectus does not appear to have influenced Mr Saville at all. 287 In my view, the fact that Macquarie may have contributed significantly to the drafting of substantial parts of the prospectus (contrary to the statements to different effect made in the draft prospectus) is not material. There is considerable evidence to the effect that the information in the prospectus, which Mr Saville regarded as influencing his decision to cause the appellants to invest in the sub-underwriting contracts (and, by various ways and means, in NCRH), was not information that Macquarie provided. 288 Importantly, Mr Saville understood that Macquarie was not the source of the representations, or the information that formed the basis for them; Mr Saville believed, rather, that Macquarie was merely passing on the information (derived from others) conveyed by the representations. 289 McDougall J correctly observed (at [331]) that the approach he adopted did not give effect to the disclaimers as contractual bars to an action for misleading or deceptive conduct. He said: "It does no more than take those matters into account in considering whether the Macquarie parties made any representations at all". 290 In my opinion, his Honour was correct in holding that Macquarie was a mere conduit in regard to the paragraph 55 representations. 291 It follows that I would dismiss the appeal in regard to Case 1. VI THE SMOOTHING COVER ARGUMENT 17. NCRH obtains smoothing cover 292 I have mentioned that the various categories of Case 2 are based on different permutations of four arguments that there was contravening conduct under s 995 and s 996. I repeat that these arguments are the smoothing cover, Trowbridge/NTA, trading prospects and note issue purposes arguments. Before discussing the different categories of Case 2, I shall deal with each one of these arguments as they form an essential part of the appeal in regard to Case 2 as a whole. I commence with the smoothing cover argument. 293 The way in which the smoothing cover transaction was dealt with in the prospectus balance sheet played a major part in the appellants' Case 2 argument. The respondents resisted the smoothing cover argument principally on the grounds that, according to their submissions, the argument is outside the pleadings, not in accord with the way in which the case was run at trial, and should not be allowed on appeal. These submissions can only be understood against the context of the history of the transaction itself. 294 The smoothing cover transaction is closely related to a long-standing loan made to NCRH by Dresdner. The Dresdner loan facility forms a key part of the smoothing cover argument. 295 When, on 13 December 1996, NCRH was listed on the ASX, it had a credit facility with Dresdner with a limit of US$50M. By the end of December 1996, NCRH had drawn down some US$47M of this sum. Importantly, under the Dresdner loan facility, NCRA undertook to maintain the net worth of its assets at US$140M (the net worth covenant). 296 From January 1997 onwards there had been a continuing history of default on the part of NCRA in regard to the Dresdner facility. An executive of Dresdner, Mr Valencourt, wrote an email on 4 March 1998 to colleagues at Dresdner stating that NCRA "have been waiver/amendment city from day one" (Red 37560). One of the major problems was NCRH's lack of compliance with the net worth covenant. In the first part of 1998 these problems led to discussions taking place between NCRH and Dresdner concerning a restructure of the lending facilities. 297 On 24 June 1998 Dresdner agreed to a temporary waiver of defaults for a period of 60 days to allow time for the negotiation and execution of an agreement amending the Dresdner loan facility. Dresdner agreed that, until 30 June 1999, the net worth covenant should be reduced (from US$140M) to US$124M. In late June 1998 NCRH asked Dresdner if could be reduced to US$115M. This produced a reaction described by an NCRH officer as an "explosion". 298 In August 1998 the temporary 60-day waiver lapsed without agreement and the existing covenants were reinstated. NCRH was then in breach of the net worth covenant but Dresdner did not call up the loan. Instead, it entered into further negotiations with NCRH. 299 Eventually, on 17 November 1998, NCRH and Dresdner entered into a "Waiver and Amendment Agreement" (the waiver agreement). The waiver agreement was conditional on Macquarie agreeing to underwrite the note issue that was then pending. By the waiver agreement, Dresdner waived, until January 29, 1999, any default that had previously occurred (including past breaches of its net worth covenant) on condition that it was repaid US$13.75M forthwith and, by 29 January 1999, the balance of its loan from the proceeds of the note issue. The waiver agreement reduced the net worth covenant to a limit of US$100M. In addition, it provided for a "buffer" that required NCRH to hold US$20M in cash over and above its cash assets that were secured by letters of credit. 300 Eighty percent of NCRH's cash and investments constituted collateral security for a letters of credit facility. NCRH was required to obtain letters of credit in order to conduct a particular kind of reinsurance business. That business was conditional on NCRH giving a letter of credit to the reinsured entity. Chase Manhattan Bank provided the letters of credit in question. 301 By May 1998, Mr Daya appreciated (and informed Mr Ghose), that substantial losses were emerging. Mr Daya told Mr Ghose that "[t]he picture is not pretty – it is getting uglier" (Red 3245 [79]). McDougall J noted: Mr Daya reported to the board of NCRH on 2 June 1998. He identified the need for 'additional contingent capital support' and the importance of 'solidifying 1998 profits'. For the latter purpose he said, consideration should be given to obtaining a whole of account stop loss protection 'to ring fence' any latent deterioration beyond current provisioning on the 1997 accounting year'. Any such contract 'would act as a stop-loss on 1998 and future years and a smoothing cover for the impact in 1998 of 1997 deterioration'. (Red 3245 [80]) 302 In fact, by March 1998, Mr Daya had already opened negotiations with a reinsurance broker, Guy Carpenter. The broker proposed a structure whereby NCRH would receive A$40M cover for a total premium of A$19M and would pay back the balance by writing cover of US$22.5M for a premium of US$1M. (Red 3246 [83]) 303 This type of structure was commonly known as "smoothing cover". It was designed to create an improved appearance in an insurance company's financial accounts. Smoothing cover typically involves two transactions. In the first transaction (the first leg), the reinsurer providing smoothing cover agrees to provide retrocession cover against losses that have already been incurred or are virtually certain to be incurred. This cover is then reflected in the financial statements of the reinsured for the period in question, enabling the reinsured to show satisfactory results for that period. The first leg, however, is balanced by another transaction (the second leg) in the subsequent financial period. The second leg returns the benefit provided by the reinsurer under the first leg, together with an additional payment that, in substance, is the reinsurer's fee for providing the smoothing cover. 304 The board of NCRH considered Guy Carpenter's proposal but Mr Peck expressed concerns at the proposed accounting for the two legs and other members of the board shared his views. The proposal did not proceed. 305 Guy Carpenter then proposed an alternative and smaller smoothing cover structure. This was negotiated and documented from about 5 August 1998 to September 1998. The structure involved two transactions described as "leg one" and "leg two". 306 On 2 September 1998, a meeting of the board of directors of NCRH took place in Toronto, Canada. A document termed a "Half Yearly Report 1998 and Recommended Action Plan" (the half yearly report) was prepared for that meeting by a "management team" that included Mr Daya, Mr Williams and Mr Aroney. The executive summary of that report stated that NCRH had "sustained a substantial underwriting loss for the six month period to June 30, 1998" and that NCRH's "pre-eminent problem" was "a lack of sufficient capital to be considered as an acceptable reinsurance security". The board was asked to review the attached material "with utmost priority and importance". (4 Blue 1384). 307 In section 4.2 of the half yearly report the statement was made that any breach in the net worth loan covenant would result in an immediate repayment of principal. Section 4.3 stated that NCRH could not continue if the Chase letter of credit facility was cancelled. 308 Section 6.12 stated: Without an injection of additional capital, the Company would have insufficient capital to continue in its current form. The security committees of most major brokers would deem the company unacceptable security and resist using it for new or renewal business. A continuance of operations could risk further loss. Some emerging market clients would continue to do business with the company and premium levels would undoubtedly fall below $100 million in 1999. (4 Blue 1435) 309 Section 6.3 stated: [W]e have evaluated the relative merits of a 'smoothing cover' as requested by the board. We have concluded our investigation of such an arrangement … . 310 A proposal in slip form by General & Cologne Re (GCR) in accord with the "arrangement" in question was attached to the half yearly report and placed before the board at the Toronto meeting. The GCR proposal reflected only leg one. The documentation relating to leg two does not appear to have been placed before the board. NCRH agreed to the smoothing cover so proposed. 311 Under leg one, NCRH paid GCR a premium of US$1M for the retrocession cover. The benefit to NCRH from that cover in the 1998 insuring year was a gross amount of US$7.5M, but this amount was reduced in the books of NCRH by discounting the amount for net present value (as the sum involved would be received at a later time). Essentially, under leg one, NCRH was US$5.675M better off. Leg one was so reflected in the prospectus balance sheet. 312 As Mr Fagan put it, it was open on the evidence to find that the retrocession cover under leg one: was almost certain to be – I think the expression is – hit. It was almost certain, in other words, that there would be a claim upon GCR to give the indemnity of $6.675M. I think the evidence would have supported that. (T.694). 313 At the same time that the contract for leg one was made, NCRH entered into a contract (leg two) that, in effect, reversed leg one in the next insuring year. Leg two was constituted by a separate contractual document. I infer, from the evidence and his Honour's findings, that Mr Aroney and Mr Peck made the arrangements for leg one and leg two. 314 There were, in fact, two balance sheets in the prospectus, namely, an actual balance sheet as at 30 June 1998 and a pro-forma balance sheet as at the same date. The pro-forma balance sheet showed the expected effect of the note issue (namely, that it would be successful and about A$50M would be raised) and the subsequent repayment of the existing borrowings, as if the transactions had occurred on 30 June 1998. 315 The pro-forma balance sheet was prepared in accordance with Australian GAAP (GAAP is an acronym for "Generally Accepted Accounting Principles"). The actual balance sheet was prepared in accordance with US GAAP. Australian GAAP differs materially from US GAAP in that, according to Australian GAAP, claims reserves are discounted to present value, all investments are marked to market and the change in value reflected in the profit and loss account. In addition, US GAAP does not require a prudential margin. 316 The actual balance sheet (and the pro-forma balance sheet) recorded a line item (as part of the total assets) of "retrocession recoveries receivable" of US$13.839M. This item included leg one of the smoothing cover, which in the absence of accounting for leg two would result in NCRH's assets being overstated by the amount of US$5.675M. The same overstatement would be perpetuated in the line item for NCRH's net assets for the year. 317 Once the decision had been made to take up the net benefit of leg one in the accounts, there were two choices that faced NCRH. One was to publish accounts that, as at least Mr Aroney and Mr Peck understood, would be materially misleading under Australian GAAP. The other was to take some step to ensure that the results stated in the accounts were not so materially misleading. For this reason, Messrs Aroney and Peck proposed to board members that the prudential margin in the accounts should be increased by US$5M to offset the benefit of leg one ([709] 3533). This proposition was accepted. 318 Accordingly, NCRH increased the prudential margin (on the liabilities side of the balance sheet) by an extra US$5M, thereby increasing the amount of US$9M (that had originally been decided upon) to US$14M. The net difference between the overstatement of US$5.675M and the US$5M increase in the prudential margin was US$0.675M. It is not in dispute that this difference, purely as a line item for NCRH's assets in the prospectus balance sheet, was not material. 18. The judge's findings concerning the smoothing cover 319 His Honour analysed the allegations in 6FAS to determine how the pleadings confined the issues regarding Macquarie's conduct alleged to have been misleading or deceptive. He then said (at [275]): On this analysis, it is the matters so confined, and the evidence properly led in support of them, that govern both the amplitude and the resolution of [the issue relating to the alleged misleading or deceptive conduct of Macquarie up to 18 November 1998]. (14 Red 3382) 320 His Honour (at [629]) referred to the representations pleaded in paragraph 104 of 6FAS and noted that, according to the appellants: NCRH represented that the Prospectus Balance Sheet fairly and accurately represented the financial position of NCRH as at 30 June 1998 (sub para (a)); that there was no material difference between the financial position of NCRH as at 30 June 1998 and what was indicated in the prospectus balance sheet (sub para (b)); and that the net assets of NCRH as at 30 June 1998 were US$127,479,000 (sub para (c)). 321 His Honour accepted that the item in the prospectus balance sheet of US$13.839M retrocession recoveries receivable constituted a representation that as at 30 June 1998 NCRH had retrocession coverage in an amount of US$13.839M, all of which was valid and recoverable. As Mr Jackson submitted, the figure of US$13.839M was a fabrication, as was the amount of net assets of US$127.479M. As at 30 June 1998, the retrocession recoveries receivable did not amount to US$13.839M. This figure included a figure of US$5.675M that had been derived, well after 30 June 1998, from leg one of the GCR smoothing cover transaction. Similarly, the amount of net assets of US$127.479M was false as it also included the US$5.675M in question. 322 His Honour determined (at [683]) that leg one should not have been brought to account in the prospectus balance sheet (because it was transacted after the balance sheet date), but observed (at [685]): However, there is no basis for concluding that the error committed by bringing leg one to account should have been compounded by the further error of bringing leg two to account. 323 His Honour noted that the prima facie consequence of including the net effect of leg one in the prospectus balance sheet was that NCRH's loss for the six months ending 30 June 1998 was understated, and its gross and net assets were overstated, by US$5.675M (at [687]). 324 His Honour concluded that the overstatement was on any view relevant to the statement of the net loss, and may have been material to the net assets. This, however, his Honour observed, did not answer the question whether the overstatement had an overall materially misleading effect. In this regard the respondents submitted that it was not material because of the increase in the prudential margin of US$5M. They submitted that this increase meant that the net impact of leg one on the reported loss and on net assets was only US$0.7M. His Honour recorded the appellant's argument at trial on this issue as follows (at [690]): The plaintiffs disputed that there was such an off-set. In any event, they said, the whole transaction (including, if it occurred, the creation an off-setting special prudential margin) remained material. It remained material, they submitted, because it was relevant only to the account that the company prepared under Australian [GAAP]. … [T]hey submitted that it was not relevant to accounts prepared for Dresdner, which were required on a quarterly basis and to be prepared under US GAAP. 325 The judge then turned to the respondents' argument that the prima facie overstatement was not material because of the increase in the claims provision by a special prudential margin of US$5M. The respondents submitted to his Honour that the increase in the prudential margin meant that the net impact on the reported loss and on net assets was US$0.7M "and therefore immaterial to either" (see [689]). His Honour referred to various arguments raised by the appellants in answer to this submitted lack of materiality of US$0.7M. He did not, however, mention the smoothing cover argument as it was put on appeal. 326 His Honour accepted that the prudential margin originally proposed was US$9M and that it was increased, shortly before the June 1998 accounts were approved, to US$14M (at [704]). 327 McDougall J found that both Mr Aroney and Mr Peck understood that leg one of the smoothing cover transaction should not be included in the prospectus balance sheet, at least by reason of the fact that leg one was not a "subsequent event that could be reflected in the accounts". His Honour held, further, that Mr Aroney and Mr Peck understood that, if the benefit of leg one were taken up, the accounts would (or at least might) – simply on that account – be materially misleading. His Honour concluded (at [709]): Those circumstances seem to me to favour the view that the increase of US$5 million in the prudential margin was intended to off-set the benefits of leg one 328 McDougall J observed (at [723]): I therefore conclude that the prudential margin originally proposed to be taken up, US$9 million, was increased by US$5 million, and that this was done specifically to off-set the benefit of leg 1 in the financial statements for the half year ended 30 June 1998. I conclude that this was done to enable the directors to approve those financial statements on the basis that the results reported in them were not materially misleading. 329 His Honour proceeded (at [724]): To the extent that the Prospectus Balance Sheet Representations relate to individual line items in the Prospectus Balance Sheet (i e, 6FAS para 104(c), … they are concerned with the line items to which reference is made and not to the components or derivation of those line items. Thus, a representation as to net loss, or net assets, is not falsified, and is not of itself misleading or deceptive, because the method of derivation might be suspect. The same applies – indeed, with greater force – to the more general representation alleged in para (a). If, as I have concluded, the understatement of the net loss and overstatement of net assets following from the introduction of the net effect of leg 1 were effectively cancelled out by an increase in the prudential margin, then there was no remaining material impact on the financial statements. 330 And concluded (at [725]): It follows that I do not think that the Actual and Pro-Forma Consolidated Balance Sheet in the prospectus was falsified because the retrocession recoveries shown as receivable in it included the net benefit of leg one of the GCR transaction. 331 The point to be made is that his Honour, in considering the materiality of the false statements in the prospectus balance sheet, dealt only with the effect on the net assets and losses of NCRH of the retrocession recoveries line item together with the increased prudential margin. He did not otherwise refer in his reasons to the smoothing cover argument as it was put on appeal. 19. The smoothing cover argument 332 The appellants contended that the treatment of the smoothing cover in the prospectus balance sheet was materially misleading in many respects additional to the mere arithmetic effect of the relevant line items in the prospectus balance sheet. Mr Jackson submitted: (a) The prospectus balance sheet was represented as being a true balance sheet, but it deliberately represented a false position. NCRH was not a large company and the false overstatement of assets was itself material. (b) That false representation reflected on the integrity of NCRH; in the insurance market, a lack of integrity arising from untrue statements in a company's public documents will inevitably give rise to material adverse inferences to the company's reputation. (c) The bringing of leg one into account as at 30 June 1998 without leg two meant that the prospectus balance sheet falsely represented that the net worth covenant under the Dresdner loan had been complied with. As NCRH was in breach of that covenant as at that date, this was material. (d) Had the true position been revealed, Dresdner might have terminated the loan facility and called up the debt. This might have affected the Chase letters of credit facility and the ultimate viability of NCRH. (e) The materiality of (c) and (d) could not be met by an assertion that Dresdner had or would have waived the breach of the net worth covenant as NCRH did not tell Dresdner that, as at 30 June 1998, it was in breach. (f) The prospectus should have disclosed that the directors, while knowing of the overstatements, nevertheless intended to rely on them to promote the note issue. (g) Increasing the prudential margin by US$5M did not remedy the materiality of the false representation as to net assets. The inclusion of a US$5M margin was as dubious as the inclusion of US$5.675M in retrocession recoveries. The sole purpose of increasing the prudential margin was to conceal the misleading effect of the overstatement of retrocession recoveries. The increase in the prudential margin made the misleading conduct worse, not better. It was not part of a genuine estimate of liabilities but inserted to counter the effect of the addition to retrocession recoveries that should not have been there in the first place. 333 The appellants argue that McDougall J did not deal with these matters and hence did not deal with a major part of their case. 334 The respondents, as I have mentioned, contend on the other hand, that the appellants did not plead the misleading conduct now relied on and should not be allowed to raise these matters on appeal. 20. The pleading of the smoothing cover argument 335 In attempting to understand the way in which the smoothing cover argument was pleaded, it is necessary to have some understanding of the overall complexity of the pleadings and the background to them. In what follows it should be remembered that, for s996 of the Corporations Law to apply, there must be a material misstatement or omission, and that the misleading conduct alleged for the purposes of s 995 was in falsely representing that there was no material misstatement or omission in the prospectus. 336 The appellants' action was brought in the Commercial List by way of summons. The summons went through many metamorphoses. As mentioned, there were at least six versions of amended summonses (hence 6FAS). 6FAS was some 200 pages long. Lengthy defences, the 38 cross-claims and the large number of parties (22) compounded the overall complexity of the case. The pleadings comprised more than 3200 pages and occupied some nine lever-arch files. This made ascertainment of issues difficult. 337 The style adopted in 6FAS exacerbated these problems. An example is paragraph 132, which pleads that NCRH engaged in misleading or deceptive conduct "by reason of the matters pleaded in paragraphs 103 to 131 above". Paragraphs 103 to 131 comprise some seventeen pages. They contain more than 100 substantive allegations. A characteristic of 6FAS is that it pleads allegations that incorporate a multitude of cross-references to other allegations (which, in turn cross-refer and incorporate yet other allegations). Mr Fagan tellingly observed, "[a]t trial, if you added them all up, there were sixty or eighty causes of action against my clients if you multiplied the representations and the different ways they were said to be falsified in the sections" (T 691). Many of the causes of action are not pleaded as a coherent set of allegations, and various elements are to be found many pages away from other elements. This requires the reader to undertake a demanding tracking operation when trying to work out the entirety of a particular cause of action pleaded. 338 The appellants' submissions that various elements of the smoothing cover argument were pleaded in different parts of 6FAS, and even in the defences and cross-claims, must be measured against the background of the labyrinthine, convoluted, and confusing nature of 6FAS and the pleadings as a whole. 339 In paragraphs 132(b), 152 and 153 of 6FAS, the appellants pleaded causes of action under s 1005 based on the involvement of the directors and Messrs. Williams and Aroney in contraventions by NCRH of s 996. In paragraph 132 of 6FAS the appellants pleaded that, by reason of the matters in paragraphs 103 to 131, NCRH contravened ss 995 and 996. Materiality is not an element of s 995 but material statements in a prospectus that are false or misleading, or material omissions from the prospectus, are elements of s 996. Thus, the allegation that NCRH contravened s 996 is an implicit allegation that the prospectus contained material statements that were false or misleading or material omissions. None of these paragraphs, however, casts any light on the way in which the appellants intended to establish materiality. Neither s 152 nor s 153 contains any allegation relevant to the materiality of the misleading conduct. 340 Paragraphs 104(a) and (e) and paragraph 111(a) are the only paragraphs of 6FAS that pleaded, directly, the smoothing cover as misleading conduct. These paragraphs applied only to the directors and Messrs Williams and Aroney. 341 Paragraph 104 asserted: 104 In … the Prospectus, NCRH made the following representations: (a) the actual and pro forma consolidated balance sheet which was included in the Draft Prospectus and the Prospectus fairly and accurately represented the financial position of NCRH as at 30 June 1998 … (e) as at 30 June 1998 NCRH had retrocession coverage in an amount of US$13.839 million, all of which was valid and collectable. 342 Paragraph 111(a) pleaded that those representations were false in that the prospectus balance sheet failed to disclose leg two and "the retrocession recoveries stated as US$13.839M ought to have been at least US$5.7M lower." 343 In paragraph 112 the appellants pleaded that each of the directors and Messrs Williams and Aroney "knew or ought to have known of the matters referred to in paragraph 111(a)." Paragraph 112 did not, however, allege that such non-disclosure was an element in the materiality of the misleading conduct relied upon. Rather, the knowledge alleged in paragraph 112 was pleaded to support an allegation of knowing concern, within s 79 of the Corporations Law, on the part of the directors and Williams and Aroney in NCRH's misleading conduct. Nothing in 6FAS alleged that the prospectus was misleading because it failed to disclose that knowledge of the directors and Messrs Williams and Aroney. 344 Paragraph 119(e) is in a part of 6FAS relating to representations concerning the purposes of the note issue (and is unconnected with paragraphs 104(a), 104(e) and 111(a)). Paragraph 119(e) pleaded: NCRH was in default of a net worth covenant under its loan agreement with Dresdner, entitling Dresdner to immediate repayment of US$25 Million. 345 Other than in paragraph 119(e), Dresdner is not mentioned in paragraphs 103 to 131. In my view, paragraph 119(e) could not reasonably have alerted the directors and Messrs Williams and Aroney to the fact that the appellants were intending to assert that the allegations in paragraphs 104(a) and (e) and 111(a) were material by reason of some connection with Dresdner and a breach of the net worth covenant. 346 It is true that, by paragraph 119(e), the question whether NCRH was in default of the net worth covenant, entitling Dresdner to immediate repayment of the loan, was an issue at the trial (and an issue concerning the directors and Messrs Williams and Aroney). But, as I have noted, it was an issue only as regards the note issue purposes argument. The respondents might have conducted the trial differently had they known that concealment of a breach of the net worth covenant was being alleged as an element of materiality in the smoothing cover argument. The two arguments are significantly different, as are the defences to them. 347 The appellants submit that the pleading of involvement in contravening conduct (including conduct relating to the smoothing cover argument) is to be found in paragraphs 144 to 151 of 6FAS. Of these paragraphs, however, the only one of marginal relevance to the smoothing cover argument is paragraph 148. This paragraph pleaded that a balance sheet of NCRH, certified by the directors on 4 September 1998, included a reduction in losses of US$5.7M due to the effect of the smoothing cover transaction. Paragraphs 144 to 151 did not explain why that reduction was material other than, implicitly, as a line item in the balance sheet and, therefore, its effect on the net financial assets of the company. 348 The appellants seek to rely on paragraph 39D (which is in a section of 6FAS headed "The Defendants"), Paragraph 39D alleged: On 18 November 1998, each of Peck, Williams, Aroney, McKenzie on behalf of Macquarie, Murray and Payne on behalf of PWC and Mutton on behalf of Phillips Fox represented to the board of NCRH that there was no material statement in the Draft Prospectus … that was false or misleading, there was no material omission from the Draft Prospectus and neither the issue of the Draft Prospectus nor the offer of the converting notes involved conduct that was misleading or deceptive (DDC representation). 349 Paragraph 39D, however, gave no explanation as to the basis on which the misleading conduct, constituted by the incorporation of the smoothing cover in the prospectus balance sheet, was said to be material. 350 The appellants argue that paragraph 178AH(a) allows them to contend that the DDC representation was false because it represented that NCRH was complying with the net worth covenant. This argument can apply only to Phillips Fox as s 178AH appears in a section of 6FAS that is under the heading "Misleading or deceptive conduct by Phillips Fox". The appellants' chain of reasoning is as follows. Paragraph 170AH(a) pleaded that the representations contained in the prospectus were false "as alleged in paragraphs 70 to 75". Paragraph 70 pleaded, in effect, that the representations as to the accuracy of the prospectus balance sheet were false for reasons set out, relevantly, in paragraph 70D. Paragraph 70D incorporated by reference a number of paragraphs including paragraph 74(l). Paragraph 74(l) pleaded: NCRH was unable to comply with the net worth covenant of US$125M without: i) NCRA entering into the [smoothing transaction] with GCRA … and incorporating profit of US$5.7M from that policy into NCRH's consolidated accounts as at 30 June 1998, but not including or disclosing in its 30 June 1998 accounts [leg two]; and ii) … . 351 This is a good example of the entanglements one finds in 6FAS. Mr Gleeson (for Phillips Fox) correctly pointed out that many of the matters referred to in paragraphs 70 to 75 have nothing to do with the prospectus balance sheet. He submitted that, on an ordinary reading of 6FAS, the matters referred to in paragraphs 70 to 75 were alleged to falsify other representations, not those pleaded in paragraphs 104(a), 104(e) and 111(a). I would uphold these submissions. 352 I do not think that on a reasonably careful reading of 6FAS it becomes apparent that paragraph 74(l) is pleaded as part of the appellants' case in regard to the smoothing cover transaction. It would be quite unreasonable to expect a party to undertake the tortuous exercise in tracing and detection that underlies the appellants' argument on this issue. I am not persuaded that paragraph 74(l) can reasonably be read as applying to the smoothing cover argument. It does not apprise any relevant respondent that the allegations made therein are relevant to the allegations made in paragraphs 104(a) and (e) and 111(a). 353 The appellants argue in their written submissions: [T]he court should look at all the plaintiff's pleaded causes of action. Generally speaking a defendant is not prejudiced if a fact proved for the purpose of cause of action A is used in support of cause of action B. See Nocton v Ashburton [1914] AC 932 at 977-8, 965, 957. 354 In Nocton v Ashburton Lord Parmoor (at 977) held that if allegations directly imputing fraud were excluded from the plaintiff's pleadings "sufficient remains on which to found a charge of negligence for breach of duty of the appellant". Lord Parmoor said (at 977-8) that in those circumstances there would be no injustice to the appellant in dealing with the action as one of negligence for breach of duty: The same evidence would have been required whether the action had been founded on negligence or fraud, and the defence would have been conducted in either case on the same lines. 355 The appellants' argument, however, goes much further than anything said in Nocton v Ashburton. The appellants, at times, sought to identify facts alleged in various parts of their own pleadings, in the respondents' defences and in the cross-claims, in order to bolster their submission that the smoothing cover argument had been pleaded. The appellants also submitted that a matter not particularised by a plaintiff but raised by a defendant in its defence is available to the plaintiff by way of additional support of the pleaded cause of action, citing Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99 at 110-11. In that case the example was a defendant against whom it was alleged the brakes of his vehicle were defective, but the defendant explained the accident by asserting that he was so much under the influence of alcohol that he could not use the brakes effectively or by saying that the accident was due to defective steering. That is quite different from the present case. 356 The appellants submitted that pleading affirmative defences involving reliance on others and establishing that the respondents acted honestly "necessarily opened up the transaction's propriety, including its intended effect". That does not make the transaction's propriety part of the appellants' case against the relevant respondents. It remained for the appellants to prove their pleaded case. The respondents may or may not then have sought to establish their affirmative defences, and in establishing them had to address only the appellants' case so far as they considered it had been proved against them. 357 I do not accept that the respondents should have examined the various paragraphs in the dense thickets of 6FAS, and – from that dark journey –realised that certain allegations, when taken together with others pleaded elsewhere (not only in various distant parts of 6FAS but in the defences and in the cross-claims), were capable of pleading a case not otherwise signalled in the document. When regard is had to the fact that the pleadings numbered more than 3,200 pages, the phrase "needle in a haystack" comes to mind. It would be unfair and unjust to hold that the respondents should have undertaken such an exercise. Pleadings are not intended to function in this way. 358 There is another point that needs to be made in this regard. Elements pleaded in defences to a plaintiff's case, in cross-claims, and in defences to cross-claims, when read together with other allegations made in the summons, may make out a potential cause of action the plaintiff has not pleaded. The plaintiff usually, will not be able to rely on such a cause of action. A defendant needs to know which elements the plaintiff contends make up its case. The defendant's conduct of the trial may well differ depending on whether the elements are pleaded against it, or in another party's cross-claim, or in a defence to the claim or cross-claim. If the plaintiff does not make clear that it is relying on a cause of action so made up, the defendant may be prejudiced. If so, the plaintiff will be precluded from relying on that cause of action. 359 The appellants relied also on Leotta v Public Transport Commission (1976) 50 ALJR 666 and Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658, and submitted that a party is not bound by the legal interpretation of the facts it has pleaded and so facts pleaded for one cause of action are available in support of another cause of action. As later discussed, an essential purpose of pleadings is provision of procedural fairness, and a convoluted and confusing pleading is unlikely, justly, to permit picking up for one pleaded case facts pleaded for another. 360 The smoothing cover was pleaded in paragraph 70(a) of 6FAS. This was in the context of pleading representations "up to and including 17 November 1998 and 18 November 1998". These representations formed part of a cause of action not pressed on appeal. The complaint made in paragraph 70(a) is that the balance sheet in the draft prospectus reflected leg one but did not refer to leg two. 361 Paragraph 148 of 6FAS (which related to the liability of the directors and Messrs Williams and Aroney) pleaded that the prospectus balance sheet reflected leg one. 362 Paragraph 260 of 6FAS (which related to the liability of PWC) pleaded that PWC represented that the prospectus balance sheet truly and fairly disclosed the financial position of NCRH, and that representation, "by reason of the breaches of duty referred to in paragraph 256" was false. Paragraph 256 contained sub-paragraphs (a) to (s). Paragraphs 256(g) and (h) referred to leg one of the smoothing cover, and 256(n), arguably, referred to the omission of leg two. Paragraph 256(n), in effect, referred to the omission of leg two. The complaints made in paragraphs 256(g), (h) and (n) were all directed to the effect of the smoothing cover on the net asset position of NCRH. 363 Paragraph 265 of 6FAS also concerned the liability of PWC alone. This paragraph alleged that certain representations made by PWC were false or misleading. As regards the smoothing cover, paragraph 265 made no allegations relating to the materiality of the false or misleading representations that differed in substance, from those in paragraph 256. 364 In summary, in paragraphs of 6FAS which concerned causes of action not pressed on appeal (but to which reference was made in the course of argument), the appellants pleaded the smoothing cover. In pleading the materiality of the smoothing cover, however, the appellants went no further than pointing to the effect that the smoothing cover had on the net asset position of NCRH. 365 The appellants pleaded the materiality of the smoothing cover argument in paragraph 111. The way in which it did do is highly pertinent. Paragraph 111(a), as I have noted, pleaded the smoothing cover overstatement of US$5.675M. Paragraph 111(b) asserted that NCRH included acquisition costs in an amount of US$13.4M in the net assets of NCRH as at 30 June 1998. This was alleged to be in contravention of the applicable accounting standard. Paragraph 111(c) asserted that NCRH failed to include any substantial prudential margin in respect of outstanding claims, contrary to NCRH's previous accounting policy. Paragraph 111(c) pleaded that, had that policy been followed, NCRH would have added a prudential margin of approximately US$9M to its outstanding claims provision in the balance sheet. 366 Thus, paragraph 111 as a whole pleaded overstatements in the prospectus balance sheet of US$5.675M, US$13.4M and US$9M. That is, in aggregate, some US$28M. Had the appellants succeeded in establishing the allegations in paragraphs 111(b) and (c), as well as paragraph 111(a), they would have proved that the aggregate overstatement was over US$28M. The materiality of an aggregate overstatement to that extent might be regarded as self-evident. But, at trial, the appellants failed to establish paragraphs 111(b) and (c). On appeal, they are in essence, trying to make out a different case based on paragraph 111(a) alone. This requires attempting to find – where possible – pleaded elements of materiality applicable to the smoothing cover argument from parts of 6FAS that on their face were intended to apply to different arguments. 367 In my view the only reasonable inference that the relevant respondents could draw from 6FAS as a whole, and the agreed issues, was that the smoothing cover transaction was material only to the extent that it affected NCRH's assets and liabilities as line items in the prospectus balance sheet. 368 I have not been able to find anything in 6FAS that makes out a case against Mr Peck of knowing concern (that is, in reliance on s 79 of the Corporations Law) in a contravention based on the smoothing cover argument. The appellants, nevertheless, argued on appeal that he was so liable (see, for example, 3 Orange 754 paragraph 27(b)). A smoothing cover argument case is, of course, alleged in 6FAS against Mr Peck by reason of him being a director of NCRH (that is, based on s 1006(2)(b) of the Corporations Law). 21. The further and better particulars 369 Prior to the trial, the respondents sought further and better particulars as to various allegations made in 6FAS. These further and better particulars comprise a number of volumes of "red books". A request relating to paragraph 111(a) of 6FAS was: "Specify the facts". The word "facts" as used in the request was defined in the particulars as "each and every act, fact, matter, circumstance or thing by reason of which the allegation is made (including all relevant dates and places)" (2 Red 371). The answer, in substance, was the following: Included in the pro-forma balance sheet contained within the Draft Prospectus was an asset in the form of a retrocession recovery in the amount of US$5.7 million. This recovery related to [leg one of the smoothing cover transaction]. The recovery of US$5.7 million was only the first leg of a back-to- back arrangement that New Cap had with GCR [General & Cologne Reinsurance Australasia Ltd], the second leg being a Casualty Excess of Loss Reinsurance contract which was issued by [NCRH] in favour of GCR. The effect of the second leg was that any recovery made by [NCRH] under [the first leg] was repayable to GCR. The failure to include the second leg of the GCR stop-loss contract meant that the pro-forma balance sheet was materially incorrect. (3 Red 473) 370 This answer, to the extent that it clarifies anything, supports the inference (apparent from 6FAS) that the appellants were contending that the materiality of the smoothing cover transaction involved its effect on NCRH's net assets as a line item in the prospectus balance sheet, and nothing more. 371 Several other requests, bearing on the materiality of the smoothing cover transaction, were asked in the request for further and better particulars but save for two exceptions, all answers merely reiterated the effect the transaction had as a line item in the prospectus balance sheet. 372 One exception concerned a question asking for particulars of "the facts, matters and circumstances relied upon in respect of the allegation that [each of the Prospectus Representations] was material". The answer was that investors would rely on each Prospectus Representation when making investment decisions and therefore "to the extent that the Representations were false in a material particular, they would necessarily be materially misleading". This did not advance matters – perhaps the reverse. 373 The other exception was the answer to a request to specify the matters on which the appellants relied in alleging that the failure to include leg two was in contravention of the accounting standards applicable. The answer included the following: By failing to disclose any write-off recovery of [GCR] under the Casualty Excess of Loss Reinsurance Policy, NCRH failed to disclose the substance of the [GCRA] transaction. The first leg of the GCRA transaction, without the inclusion of the second leg, appeared in the financial statements as a genuine retrocession contract benefiting NCRH, when in substance it was in fact a 'profit smoothing contract'. 374 This answer indicated that the true nature of the smoothing cover transaction was not reflected in the prospectus balance sheet, but the only complaint made was that leg two was not shown. 375 Further particulars were also given about the misleading conduct alleged in the actual and pro-forma balance sheets in the draft prospectus. These concerned Case 1 but nevertheless gave some indication of how the appellants intended to put their case as to the misleading aspect of the actual and pro-forma balance sheets, generally. These further particulars referred to 56 documents that were said to support the allegation that the representations as to the accuracy of the balance sheets were false. None of these documents relate to the Dresdner transactions. 22. Earlier Versions of 6FAS 376 It is noteworthy that the appellants, in an earlier form of 6FAS, made allegations that in some respects resemble the way in which they sought to put the case on appeal. Later, however, they amended their pleadings so as to omit those allegations. 377 In the fourth further amended summons (4FAS) the appellants alleged (as they did in 6FAS) that in the prospectus NCRH represented that: As at 30 June 1998, NCRH had retrocession coverage in an amount of US$13.839 million, all of which was valid and collectable. 378 Significantly, however, paragraph 73(c) of 4FAS alleged that the prospectus failed to disclose that: [A]s at 30 June 1998, NCRH was in breach of a net worth loan covenant given by NCRH to the Dresdner Bank which rendered NCRH immediately liable to repay to the Dresdner Bank the entire loan balance of approximately US$25 million. (14 Blue 6795) 379 In later versions of the summons, this allegation (that is, paragraph 73(c)) was abandoned and, hence, it did not appear in 6FAS. The appellants thus deliberately removed from 6FAS the allegation that NCRH was in breach of the Dresdner net worth covenant. 380 The deliberate abandonment of the allegations in paragraph 73(c) of 4FAS is a compelling factor against finding that the pleadings, by implication, set up a case based on like allegations. Implying what the pleadings mean involves an exercise in determining what the party, whose pleading is being construed, intended to convey by the words in that pleading. In my view, it would not be correct to imply a pleaded case that has deliberately been abandoned, without at least there being a satisfactory explanation for why that occurred. 381 In Codelfa Construction Pty Limited v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 Mason J at 352-353 accepted that, contrary to the general rule applicable to construing written contracts, evidence of prior oral negotiations could be admissible where that evidence proves that the parties deliberately refused to include in the contract a provision that one party later seeks to have implied. The reasoning behind such a rule is self-evident. It would be unjust to imply terms in a written contract that the parties, before executing that contract, agreed to exclude from the written document. Similar reasoning applies to implying allegations in a pleading where a party seeks to have implied an allegation that the party has earlier made but, by amendment, has omitted. 382 I have held that significant parts of the smoothing cover argument were not pleaded. In my opinion, nothing in the pleadings could give rise to implied allegations of the kind made in the abandoned paragraph 73(c) of 4FAS. 23. The conduct of the trial and the smoothing cover argument 383 In opening, Mr Douglas QC, senior counsel who appeared for the appellants at the trial, referred to the significance of the fact that NCRH "was potentially in breach of its minimum net worth covenant" in terms of the Dresdner loan (1 Black 43). Mr Douglas said that a question that would arise in the trial was: [W]hether, by entering into the smoothing cover, the directors of NCRH intended that the accounts of the company would be released without indicating that it was in breach of its banking covenant to Dresdner, thus triggering an obligation to repay the remaining US$125 million loan. 384 Mr Douglas also submitted in opening that, irrespective of the financial impact of the smoothing cover on the accounts, a failure to disclose the Dresdner breach was material. (1 Black 46) 385 After Mr Douglas had completed his opening, Mr Oslington said: We wish to make it clear that we propose to contest the case on the basis of the pleading against us. We are conscious, during the course of the opening, that it may be thought, or it may be construed, that the plaintiffs' opened case departs, to some extent, from the pleaded case. (2 Black 843) 386 Mr Oslington gave some examples (that he said were not "exhaustive") where the appellants had departed from the pleaded case. One was a suggestion that "the court ought to decide whether or not there was a deliberate non-disclosure with respect to Dresdner." Mr Oslington said that that was a serious allegation and no part of the pleaded case against Macquarie. (2 Black 844) 387 Mr Silver, then appearing alone for Mr Ghose, said that he was also relying upon the pleaded case. Mr Gor, for Mr Peck, reiterated Mr Oslington's comments. Mr Gleeson, for Phillips Fox, said: "[w]e do hold the plaintiffs to the pleading" (2 Black 845). Mr Nixon for PWC also asserted that PWC would "be holding the plaintiffs to their pleading" and reiterated that "various issues have been raised that are not reflected in the pleading and which we would say are not relevant to the determination of this case." (2 Black 848) 388 After the case had progressed for several days, McDougall J noted that the parties "should be in a position to reassess their ideas of the real issues of fact and law" (6 Black 2952). He gave directions requiring each of the parties to state its own view of the "real issues". Mr Oslington said, "We don't understand compliance with these directions to afford the opportunity to the plaintiff to in any way depart from its pleaded case". His Honour agreed (6 Black 2954). His Honour observed: I consider that the efficient further hearing and disposal of these proceedings will be further facilitated if each party states its own view of what it now sees to be the real issues of fact and law arising on the plaintiffs' claim. (6 Black 2956) And proceeded: I do, however, wish to make it clear that the order that I am about to make for statements of the real issue are not intended to permit, and should not be taken by any party as permitting, a departure from, by way of extension of, that party's pleaded case … . (6 Black 2956) His Honour then stated, "I want each party to think very carefully about what are the real issues of fact of law, or both." (6 Black 2957) 389 Mr Douglas responded by stating that he wanted "to say something in relation to what Mr Oslington said" (namely, that compliance with the "real issues" directions should not afford the appellants the opportunity in any way to depart from their pleaded case). Mr Douglas then referred to rulings McDougall J had made "in relation to the pleadings in interlocutory proceedings" and said (6 Black 2957): [W]e respect those rulings and that's why we haven't sought to canvass the rulings … So we are proceeding on the basis that that is your Honour's position, and we don't propose to depart from that unless circumstances change. 390 It is not clear to me to what "interlocutory rulings" reference was being made by Mr Douglas. Nevertheless, in my opinion, it is apparent from what was said in the exchanges set out in the three preceding paragraphs that: (a) Mr Oslington said that the statement of real issues should not allow the appellants to depart from the pleaded issues. (b) McDougall J gave a firm indication that he accepted Mr Oslington's proposition and expressly stated that a departure from a party's pleaded case would not be permitted. (c) Mr Douglas accepted this ruling and did not "propose to depart from that unless circumstances change". 391 The importance that McDougall J attached to these exchanges and the pleadings is manifest from the following (at [285]): In the present case, there can be no suggestion that the Macquarie parties, or for that matter any of the defendants who appeared during the hearing, acquiesced either expressly or by inference in any widening of the pleaded case against them. This was made clear on a number of occasions: including on 14 December 2005 when (shortly before adjourning for the long vacation) I directed the parties to reconsider, with a view to refining, the Statement of Issues as it then stood. Mr Oslington QC, who appeared with Dr Bell of counsel for the Macquarie parties, said at T2954.41 that his clients' position was that compliance with that direction was not intended 'to afford the opportunity to the plaintiff [sic] to in any way depart from its [sic] pleaded case'. Clearly, that proposition was correct: see what I said at [T2956.31]; and see also what Mr Douglas QC (who appeared with Mr Hammerschlag SC and Mr Muddle and Mr Katekar of counsel for the plaintiffs) said at T2957.11. I made it plain that I accepted Mr Oslington's proposition; and Mr Douglas made it plain that he did not dissent from it having regard to earlier rulings that I had given. 392 In his reasons for judgment McDougall J referred to the statement of "real issues" and said that he proposed to structure his reasons by reference to those issues. He observed: However, it will be necessary from time to time to refer to the pleadings: both to resolve disputes as to whether something is properly in issue and to understand what underlies other issues. 393 The issues as formulated numbered 162. Issue 60 was identified during the appeal as the only issue that could relate to the smoothing cover argument. Issue 60 is as follows: Whether the pleaded conduct of NCRH, up to and including 18 November 1998, namely the representations made by NCRH in the … Prospectus as pleaded in paragraphs 104 to 109 of the 6FAS, was misleading or deceptive conduct in all the circumstances of the case. In reality, issue 60 casts no light on the topic of materiality. 394 McDougall J, from time to time during the course of the trial, continued to emphasise that he would deal with the issues in accordance with the pleadings. I shall give two examples of this. 395 When dealing with an objection to evidence by Mr Murray, his Honour said (12 Black 6390): I will allow it subject to relevance, I think. As always, it won't be taken to expand the pleadings because it has gone in over objection. 396 Mr Hammerschlag SC, then also appearing for the appellants, put to Mr Mutton that a "breach of a facility with a bank may constitute a breach of another facility" (this related to the effect that a breach of the Dresdner facility would have on the Chase letters of credit). Mr Gleeson objected on the ground that the issue fell outside the pleadings. His Honour said that the safest course was to allow the question on the basis that: [It] would not be taken to expand the case otherwise pleaded and particularised, if on a proper examination of the material, which will take several days, what you put is correct. His Honour referred to this approach as "the usual basis" (13 Black 6811). 397 I shall identify the more important passages in the evidence where matters relevant to the smoothing cover argument were raised. It should be remembered, however, that apart from whether cross-examination went to credit the defendants had raised the affirmative defences that they had acted honestly and reasonably and should be excused, and there was also a cross-claim in the proceedings in which NCRH alleged breach of duty by its directors in entering into the smoothing cover. These matters could appropriately be raised in evidence otherwise than in support of the smoothing cover argument as maintained on appeal. 398 Mr Peck was cross-examined as to whether the purpose of the smoothing cover was to produce apparent compliance with the Dresdner covenant (9 Black 4702, 4831, 4832) and whether there was dishonesty involved in his signing of the NCRH's accounts (because they reflected the smoothing cover transaction that had not taken place at the reporting date). Whether this occurred because of the need to avoid reporting non-compliance with the net worth covenant was canvassed (9 Black 4706 – 4707). 399 Mr Mutton was cross-examined as to his knowledge of the smoothing cover transaction, whether he understood it to be an inappropriate transaction and whether he knew that it related to the net worth covenant: (13 Black 6795 – 6796, 6801 and 6807). Messrs Williams and Aroney were similarly cross-examined (12 Black 6496 and 10 Black 5236). The same issue was raised with Mr Ghose in cross-examination (7 Black 3669). 400 Messrs Beach, Deery and Morrissey testified that they were not aware that the purpose of the smoothing cover was to create the appearance of compliance with the net worth covenant (23 Black 11823 – 11824, 11797 and 11765). They were cross-examined as to whether they were party to the dishonest purpose of obtaining the smoothing cover in order to create the appearance of compliance with that covenant: (8 Black 4104, 4137, 4140 – 4142 and 9 Black 4400, 4408, 4561). 401 Turning to the closing addresses, paragraph 20 of Macquarie's written submissions in closing referred to 15 issues that, according to Macquarie, were not the subject of any pleaded case against the Macquarie parties. These included: knowledge of the second leg of the GCR contract and the smoothing cover issue; any case based on the final Prospectus, and; a representational case to the effect that [NCRH's] facility with Dresdner Bank was in good standing, and the related submission that Macquarie knew that [NCRH] had a long history of default under the Dresdner facility. 402 In his oral closing address, Mr Oslington said: Your Honour, we accept that in a large and complex case such as the present, which involves a joint trial against 12 separately represented defendants, topics will be opened and addressed in evidence which may have a bearing on the pleaded case against one or more defendants and not against others. We also accept that it is understandable that the plaintiffs, in opening such a case and in leading evidence in such a case, will not be required to precisely identify with reference to each piece of evidence and each submission which part of the pleaded case it relates to and which particular defendant it is directed to. Indeed, if that was required, to the extent to which the trial has been difficult to conduct, it would become impossible. That really highlights the importance of the pleadings in the case, because if the plaintiffs are bound by their pleadings, one can readily discern whether a particular topic addressed in submission or in evidence has a bearing on the case against any particular party. It would be apparent to your Honour that enormous care and diligence and time has been spent in Macquarie preparing to properly meet the numerous and complex allegations against it in the pleading. For Macquarie to be faced with having to address and defend itself against new unpleaded topics, unformulated in the manner any pleading would require those topics to be formulated, disentitled by the absence of a reference to a pleading seeking particulars and disentitled from opposing any such amendment on grounds of prejudice if a formal application had been made so as to afford it proper time to repair, would be grossly unfair, in our submission. All of that is put in the context of the numerous amendments to the pleadings that have already been addressed. To require Macquarie to do that in the face of Macquarie's consistent statements that it is conducting its defence in accordance with the pleaded case, your Honour's apparent acceptance of that being the basis upon which the case is being conducted and senior counsel for the plaintiffs' acceptance of that proposition must result, we respectfully submit, in your Honour shutting out any consideration in the case against Macquarie of the topics listed in paragraph 20 of our written submissions and any other topic which is not pleaded. (15 Black 7979 – 7980) 403 The closing addresses on behalf of Messrs Williams and Aroney responded substantively to the submissions that the appellants had made in closing concerning the smoothing cover transaction and its relationship with the Dresdner covenant (18 Black 9143, 23 Black 11819 – 11839; see also 11793, 11799 and 11801 and 11765). As Mr Fagan said in his submissions on appeal, "[w]e joined issue on the fact and the evidence with [the appellants] about this contention" and, "[w]e really had to because we were mounting affirmative defences" (T776). Nevertheless, the written submissions made on behalf of Mr Williams in closing, made a point of the "gap between [the appellants'] pleaded case and the case run at trial" (25 Black 12865_3 and 12865_4) and contended that he had only to meet the pleaded case (25 Black 12865_25). The closing submissions of Mr Aroney relied on the fact that the Dresdner loan and the smoothing cover argument were not identified by the parties as an issue and asserted that these matters do not "arise as an issue on the pleadings" (24 Black 12043). 404 In closing submissions filed on behalf of Mr Ghose, it was noted that a topic of relevance relating to Dresdner was whether the purpose of the GCR contract was part of a ruse to meet the net worth covenant, and whether Mr Ghose knew of or participated in such a ruse. Mr Ghose had been cross-examined on this issue. The closing submissions stated: [t]his topic does not form part of any direct case pleaded against Mr Ghose. According to the submissions, this aspect was addressed: to the extent that it forms part of the factual matrix . 405 Phillips Fox, in their closing written submissions, asserted: The plaintiffs do not allege a case of misleading conduct by omission in relation to the failure to refer to GCR and the Prospectus. The only pleaded case in relation to GCR in the summons is that it is identified as one of the matters that falsifies the Balance Sheet Representations, which representations the plaintiffs allegedly relied on. In so far as [the appellants are] seeking to raise any question of moral hazard arising from GCR, this should be rejected by the court as outside the pleading. 406 The appellants' closing written submissions asserted: The central propositions put against the Directors, Williams and Aroney are as follows: (a) The smoothing cover transaction was entered into in order to reduce the losses disclosed in the 30 June 1998 accounts, and to enable the company to represent to Dresdner that it complied with the US$125 Million net worth covenant. And: (d) The Prospectus invited investors to think that the converting note issue was a way of re-financing the company more efficiently. Instead, the converting note holders were being asked to lend money to the company when no bank was prepared to. The Dresdner default was kept out of the Prospectus because any mention of it would have scared off investors - and the reinsurance market. 407 The appellants' written and oral submissions contained arguments as to the dishonesty involved in the smoothing cover transaction on the part of every respondent. 408 As Mr Jackson pointed out, a considerable amount of evidence was adduced at trial relevant to the smoothing cover argument. That evidence, however, was also relevant to affirmative defences raised by the directors, to certain cross-claims and to the credibility of witnesses. 409 I reiterate that, at trial, the labyrinthine pleadings, the number of parties, the different causes of action, the affirmative defences, and the vast number of cross-claims made the identification of the relevance of discrete pieces of evidence extremely difficult. But two things are crystal clear. Firstly, McDougall J made it absolutely plain that he would decide the case by reference to the pleadings alone; pleadings were to be the ultimate arbiter of relevance. Secondly, none of the parties demurred and, indeed, they accepted that the case should be conducted on this basis. 410 I would add that, on appeal, the appellants accepted that they were bound by the case which was pleaded at first instance, and that the case "was expressly conducted by the parties on the basis of the pleadings". (see Orange 3/749) 411 To summarise, the case was conducted as follows: (a) Despite the omission of the smoothing cover argument from the pleadings, the appellants, in opening, stated that it was one of the arguments on which they based their case. (b) The respondents, in their opening addresses, without mentioning the smoothing cover argument, pointed out that they intended to contest the case on the basis of the pleading against them and they would hold the appellants to the pleadings. (c) McDougall J, after the parties had opened and on several occasions thereafter, stated that he would address only the pleaded issues. The appellants accepted this. (d) Evidence was adduced, both in chief and in cross-examination, capable of supporting the smoothing cover argument. Occasionally objections were taken but more often not. When objections were taken, McDougall J's approach, generally, was that he would allow the evidence but he would only deal with the pleaded issues. (e) In closing, the appellants advanced a full smoothing cover argument. The respondents, generally, noted that the argument was outside the pleadings but addressed it on its merits. (f) McDougall J, in his reasons, omitted any reference to the smoothing cover argument, other than in relation to line items in the accounts. 24. Pleadings: General Principles 412 Considerable time was taken during the appeal on whether the appellants should be allowed to raise the smoothing cover argument. This is not surprising as, in many ways, the smoothing cover argument is potentially the appellants' strongest point on appeal. There was evidence on which such an argument was capable of being sustained. Speaking generally, I would be reluctant to resolve such an important issue by way of a pleading point. Of course, the circumstances may compel such a conclusion. 413 A number of questions remain to be resolved before determining whether the appellants should be allowed to raise the smoothing cover argument on appeal. The first step towards answering these questions requires an understanding of the role that pleadings play in a case such as this. 414 The appellants commenced proceedings by way of summons, which is the prescribed form of originating process in the Commercial List: Uniform Civil Procedure Rules (UCPR) Rule 6.4(3). A summons is not a pleading: (UCPR Rule 1.2 and dictionary). Nevertheless, McDougall J referred to the 6FAS, the defences and cross-claims as "pleadings" and it is evident that before his Honour the parties treated them in the same manner as pleadings (as they did on appeal). His Honour said at [113]: The issues in this case were articulated through the 6FAS, defences thereto and a large number of cross-claims (thirty-seven [sic – thirty-eight] in all). The parties referred to these as 'pleadings', although they were governed not by the rules relating to pleadings but by the requirements of the former Practice Note (PN) 100. Nonetheless, it is convenient, and in substance inaccurate, to use the term 'pleadings', having regard to the manner in which the 6FAS, the defences, the cross-claims and the defences thereto are structured. 415 PN 100 (now substantially replicated by PN SC Eq 3) relevantly stated: 6(1) … the summons shall be in the form in Annexure 1, endorsed with a statement setting out, in summary form: a) The nature of the dispute; b) The issues which the plaintiff believes are likely to arise; c) The plaintiff's contention; and d) … (2) The plaintiff's contentions should: a) avoid formality; b) state the facts on which the plaintiff relies together with adequate particulars; c) identify the legal grounds for the relief claimed. 416 Thus, according to PN 100, the summons should include a statement of the plaintiff's contentions and these, in turn, should set out not only the facts on which the plaintiff relies (together with adequate particulars), but the legal grounds for the relief claimed. 417 McDougall J (at [278]) referred to Brambles Australia Ltd v Tatale Pty Ltd [2006] NSWSC 204 where Bergin J (a judge with considerable experience of the Commercial List) observed that statements of contentions served essentially the same purposes as pleadings. Her Honour said that the requirements of PN 100 were intended (at [9]): to ensure that each party knows the case made against it and sets the ambit within which pre-trial procedures such as discovery will proceed. The pleadings also define the limits within which the trial will be conducted. 418 Under the Commercial List practice, the parties, in stating the facts, have "greater latitude than under the pleading rules in explaining the plaintiff's legal contentions and issues arising from the facts." (Bernard Cairns, Australian Civil Procedure, 7th ed (2007) at 87). This practice allows parties in the Commercial List, in pleading their cases, to comply fully with the surprise rule and to lay their cards on the table in the clearest possible way. They are expected to do this. This practice is the basis on which the Commercial List operates. 419 In Dare v Pulham the High Court said (at 664): Pleadings and particulars have a number of functions: they furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it; they define the issues for decision in the litigation and thereby enable the relevance and admissibility of evidence to be determined at the trial; and they give a defendant an understanding of a plaintiff's claim in aid of the defendant's right to make a payment into court. Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings. (footnote omitted) 420 As to the importance of pleading issues clearly and the obligations of parties in this regard, Allsop J observed in White v Overland [2001] FCA 1333 (at [4]): [B]y way of general principle I would simply like to make perfectly plain my view that in the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are. Any practice of quietly leaving footprints in correspondence or directions hearings to be uncovered some time later in an attempt to reveal that a matter was always in issue should be discouraged firmly. Even if something has been said, where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said. Litigation is not a game. … In the long run, the only consequence of keeping issues hidden or not clearly identifying them is to disrupt the business of the court leading to the waste of valuable public resources and to lead to the incurring of unnecessary costs by the parties, costs which ultimately have to be borne by someone. These observations were approved by Heydon JA in Nolan v Marson Transport Pty Limited [2001] NSWCA 346; (2001) 53 NSWLR 116 (Mason P and Young CJ in Eq agreeing) at [29], 128. 421 Recently, in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243, Allsop P returned to the topic. His Honour emphasised (at [160] to [165]) the need for clarity, precision and openness in delineating the issues in a long and complex trial in the Commercial List. His Honour stressed that any matter that may cause surprise must be pleaded. He observed (at [162]): Indeed, from the late 1970s and early 1980s, the Commercial List of this Court … has been sought to be run on the strict basis of the clear and full enunciation of issues for trial, in a way that has always demanded the fullest co-operation among parties and legal practitioners to delineate and illuminate the real issues in dispute. 422 At trial, there may be a departure from the pleadings where adherence to them would be unjust or unfair. In Banque Commerciale SA (In Liq) v Akhil Holdings Limited [1990] HCA 11; (1990) 169 CLR 279 Mason CJ and Gaudron J said at (286-287): The function of pleadings is to state with sufficient clarity the case that must be met: In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities. Ordinarily, the question whether the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their respective rights and liabilities is to be answered by inference from the way in which the trial was conducted. It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground such an inference. 423 Dawson J (at 293) quoted the following statement by Isaacs and Rich JJ in Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; (1916) 22 CLR 490 at 517: But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest. And observed: (at 296-297): But modern pleadings have never imposed so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties. Special procedures apart, cases are determined on the evidence, not the pleadings. 424 The following propositions may be extracted from these authorities: (a) The rule that, in general, relief is confined to that available on the pleadings secures a party's right to a basic requirement of procedural fairness. (b) Apart from cases where the parties choose to disregard the pleadings and to fight the case on additional issues chosen at the trial, the relief that may be granted to a party must be founded on the pleadings. (c) It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground an inference that the parties have chosen a different basis to the pleaded issues for the determination of their respective rights and liabilities (d) Acquiescence giving rise to a departure from the pleadings may arise from a failure to object to evidence that raises fresh issues – it is in this sense that "cases are determined on the evidence, not the pleadings". (e) While cases are to be decided upon a basis that embraces the "real controversy" between the parties, the real controversy has to be determined in accordance with the principles stated. 425 The next point is that a departure from the pleaded issues is a matter for the discretion of the trial judge. In Mummery v Irvings Pty Ltd Dixon CJ, Webb, Fullagar and Tayor JJ said (at 112): There is, of course, no doubt that the question of extending the issues [on the pleadings] at the trial was peculiarly within the discretion of the trial judge. 426 In Coal and Allied v AIRC [2000] HCA 47; (2001) 203 CLR 194 Gleeson CJ, Gaudron and Hayne JJ said (at [19]): "Discretion" is a notion that "signifies a number of different legal concepts". In general terms, it refers to a decision-making process in which "no one [consideration] and no combination of [considerations] is necessarily determinative of the result". Rather, the decision-maker is allowed some latitude as to the choice of the decision to be made. (footnotes omitted) 427 The High Court has occasionally used the language of "duty" in speaking of circumstances under which a trial judge should allow a case to be decided on the basis of issues not revealed by the pleadings. In Leotta v Public Transport Commission (NSW) Stephen, Mason and Jacobs JJ spoke (at 668) of "the duty of the trial judge to leave the issue of negligence to the jury". In Banque Commerciale SA (In Liq) v Akhil Holdings Limited, Dawson J said (at 297): It is incumbent upon the trial judge to see that the pleadings or particulars are amended so that the record reflects the proceedings as they have been conducted, but his failure to do so will not result in the invalidity of those proceedings. 428 These observations have to be seen in the wider context of the well-settled rule that the question whether cases are to be resolved by reference to issues beyond those pleaded is a matter for the discretion of the trial judge. The statements of the kind to which I have referred in the preceding paragraph were made in a context where, not to go beyond the pleadings, would be "unreasonable or plainly unjust" (House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504-505). See also State of Queensland v JL Holdings Pty Limited [1997] HCA 1; (1997) 189 CLR 146 at 173 per Kirby J. 25. The need to plead the materiality of the contraventions 429 The test for what is material in a prospectus was stated by Farwell J in Cackett v Keswick [1902] 2 Ch 456 at 464: The test must be, Is the omission material? And if the Court sees that the fact omitted is of such a nature that it might reasonably deter, or tend to deter, the ordinary investor from entering into the contract, this is sufficient. It is in great measure an inference of fact to be drawn by the court or a jury from the circumstances of the case. If a material fact is omitted from a statement put forward to induce a person to enter into a contract, and he does enter into the contract on the faith of that statement, it is a fair inference that he would not have contracted if he had known of the fact, and that in this sense the omission induced the contract. Stirling LJ, in the same case (at 477) said that the question to be asked in regard to materiality was: "[W]ould the knowledge of such [an undisclosed] contract affect the mind of a reasonable investor thinking of taking shares in this company?" 430 It is important to bear in mind the different way in which materiality is dealt with in each of s 995 and s996. I repeat that s 995 concerns conduct in connection with any dealing in securities that is misleading or deceptive or likely to mislead or deceive. The term "material" does not form part of s 995 and forms no part of the elements that need to be proved to establish a contravention of the section (although it will generally be the case that conduct will not be misleading or deceptive unless there is some misrepresentation or omission that is material). The term "material" also forms no part of s 1005, which provides for civil liability for a contravention of s 995. A "material statement" in a prospectus that is false or misleading, or a "material" omission from a prospectus, on the other hand, is a necessary element of a contravention of s 996. Moreover, the element of "a material statement that is false or misleading" or "a material omission" from a prospectus is an element of the civil liability that, in accordance with s 1005, arises from a false or misleading statement in, or omission from, a prospectus. 431 The fact that the element of materiality, in the sense noted, is an essential ingredient of civil liability for a contravention of s 996 requires the pleading of the grounds on which it is alleged that the statement in question is "material" or the "omission" is "material" (unless this is obvious). 432 What has been said in regard to materiality in cases involving 52 of the TPA casts light on materiality regard to s 995. In Fraser v NRMA Holdings Limited (1995) 55 FCR 452 the Full Court of the Federal Court (Black CJ, von Doussa and Cooper JJ) at 467-468, when dealing with misleading and deceptive conduct involving a prospectus, said: Where the contravention of s 52 allegedly involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that which was said involved error or how that which was left unsaid had the potential to mislead or deceive. Errors and omissions to have that potential must be relevant to the topic about which it is said that the respondents' conduct is likely to mislead or deceive. The need for an applicant to establish materiality is of particular importance in a case like the present one where the proposal is complex, and involves difficult questions of commercial judgment and matters of degree and conjecture as to the future about which there is room for a range of honestly and reasonably held opinions. 433 The materiality of the misleading conduct on which the appellants now seek to rely was not evident from the mere assertion in the pleadings that the line item for retrocession cover in the prospectus balance sheet had been overstated, or even that it was misleading to omit leg two from that balance sheet. Neither the connection between the retrocession cover item and the net worth covenant, nor the possibility that the increase in the prudential margin was not a genuine estimate of liabilities but an attempt to counter the inappropriate increase in retrocession cover, was apparent from the prospectus balance sheet or the prospectus. Further, the case as pleaded did not indicate that the appellants were relying on misleading conduct based on a failure to disclose a lack of integrity on the part of NCRH and its directors. 434 This case is to be contrasted with Abigroup (No 3). In Abigroup (No 3) the relevant misleading conduct was a statement to the effect that contour plans (showing natural surface levels at the work site) did not exist. The natural inference to be drawn from such an allegation was that, contrary to the representation, such plans did in fact exist. The mere making of the allegation of the omission indicated the case that was being brought. In contrast, the case the appellants seek to argue on appeal is based on factual material entirely unrelated to the positive allegations made in 6FAS. 435 UCPR r 14.14 provides: (1) In a statement of claim, the plaintiff must plead specifically any matter that, if not pleaded specifically, may take the defendant by surprise. 436 Consistently with that rule, where what is misleading is the suppression or non-disclosure of something disadvantageous, or of something that would have induced the plaintiff to alter its position, then in my opinion it is generally necessary, were it not obvious, to allege what was suppressed or not disclosed. In addition, if it is not obvious what is material about what was conveyed or not disclosed, it may be necessary to make this clear in the pleadings if they are to fulfil their function of disclosing the case sought to be made out and avoiding surprise. 437 As Hodgson JA (with whom Mason P and Handley JA agreed) observed in Kirby v Sanderson [2001] NSWCA 44; (2001) 54 NSWLR 135 at [20], 142-143 when referring to the Rules of the District Court and Supreme Court which require the pleading of material facts: It might appear that these rules do not require that causes of action be stated in pleadings: the requirement is to have a statement of material facts, and indeed to have only such a statement. However, in my opinion - (1) "Material" means material to the claim, that is, to the cause or causes of action which are relied on. (2) The requirement of a statement of material facts does not exclude the allegation of legal categories, such as duty of care, fiduciary duty, trust and contract. (3) The general requirement to avoid surprise means that material facts must be stated in such a way that a defendant can understand the materiality of the facts, that is, how they are material to a cause of action. 438 In my opinion, the dictates of procedural fairness as embodied in the surprise rule required the pleading of the materiality of the misleading or deceptive conduct that the appellants contended contravened s 995. I would add that, irrespective of the fact that materiality in the respects mentioned is a necessary element of any contravention of s 996, the surprise rule also required the pleading of the materiality of any statement or omission alleged to found the causes of action based on that section. 439 The smoothing cover argument, as Mr Jackson pointed out on more than one occasion, involves reflections on the integrity of NCRH, its directors and other persons involved in the preparation of the prospectus balance sheet. Mr Jackson submitted that those who caused the prospectus balance sheet to overstate the retrocession recoveries, to reflect retrocession cover obtained after June 1998 in the June 1998 accounts, to increase the claims provision and to omit reference to leg two, displayed, self-evidently, a lack of propriety and integrity. 440 Lord Buckley, in Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, articulated the obligation on a plaintiff to plead dishonesty as follows (at 268): An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well recognised rule of practice. This does not import that the word "fraud" or the word "dishonesty" must necessarily be used … The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity. (footnotes omitted) 441 The appropriate approach was explained by Anderson J in Oldfield Knott Architects Pty Limited v Ortiz Investments Limited [2000] WASCA 255 at [135]: The rule is very strong in civil litigation that if a party wishes to allege dishonesty as a form of breach of duty, that party must make it clear in its formal pleadings that this is the party's case. As the authors of Odgers "Principles of Pleading and Practice" tell us in the 21st edition at 113, under the heading "Charges of Misconduct and Negligence": "Particularity is especially needed where the pleading contains an imputation on the character of your opponent; as then it is only right and fair that he should know definitely before the trial what is the charge which is made against him. Justice requires you to define the accusation you bring against anyone; and this is a very different thing from setting out the evidence by which you intend to establish it. 'The court will require of him who makes the charge that he shall state that charge with as much definiteness and particularity as may be done, both as regards time and place' (per Lord Penzance in The Marriner v Bishop of Bath and Wells [1893] P 145 at p146). ... Each party is entitled to know the outline of the case that his adversary is going to make against him, and to bind him down to a definite story"). 442 As to the rule where fraud is alleged, see UCPR r 14.14(3), Krakowski v Eurolynx Properties Limited [1995] HCA 68; (1995) 183 CLR 563 at 573, per Brennan, Deane, Gaudron and McHugh JJ; Dow Hager Lawrance v Lord Norreys (1890) 15 App Cas 210 at 221 per Lord Watson. 443 In my opinion, the appellants were required to plead expressly any part of their case that relied on lack of integrity on the part of NCRH and those involved in the prospectus and the prospectus balance sheet. 26. A deliberate decision to omit the smoothing cover argument 444 His Honour did not address the smoothing cover argument except as regards errors in line items in the accounts. The appellants submitted that he did not apply his mind to the argument and did not address the question whether the appellants were entitled to raise it. 445 Of course, if his Honour did not apply his mind to the smoothing cover argument, that would be a failure on his part properly to exercise the discretion which the law placed in him. The mere fact, however, that his Honour did not mention the issue does not mean that he forgot about it (as the appellants submitted). The question is whether his Honour regarded the smoothing cover argument merely as an issue outside the pleadings and, for that reason, deliberately omitted to address it. Above, under the heading "23. The conduct of the trial and the smoothing cover argument", I noted that McDougall J expressly stated that a departure from a party's pleaded case would not be permitted and the appellants accepted this ruling and did not "propose to depart from that unless circumstances change". The circumstances are such that his Honour's omission to refer to the smoothing cover argument is open to be regarded simply as a manifestation of the policy that he had warned the parties he would adopt in regard to issues that were not pleaded. 446 In Beale v GIO of NSW (1997) 48 NSWLR 430 Meagher JA (at 443) dealt with the duty of a judge to give adequate reasons: [T]here are three fundamental elements of the statement of reasons which it is useful to consider. First, a judge should refer to relevant evidence. There is no need to refer to the relevant evidence in detail, especially in circumstances where it is clear that the evidence is being considered. However, where certain evidence is important or critical to the proper determination of the matter and it is not referred to by the trial judge, an appellate court may infer that the trial judge overlooked the evidence or failed to give consideration to it: North Sydney Council v Ligon 302 Pty Ltd (1995) 87 LGERA 435. Where conflicting evidence of a significant nature is given, the existence of both sets of evidence should be referred to. … The obvious extension of the principle in North Sydney Council is that, where findings of fact are not referred to, an appellate court may infer that the trial judge considered that finding to be immaterial. … Further, it may not be necessary to make findings on every argument or destroy every submission, particularly where the arguments advanced are numerous and of varying significance … . (some footnotes omitted) 447 Applying the same reasoning to the question that presently arises, it is also open to infer that, because the smoothing cover argument was of such importance to the appellants, the omission by McDougall J to refer to it gives rise to the inference that his Honour overlooked it. After all, when regard is had to the length of the trial, the extent and complexity of the evidence, and the number of the issues, such an omission might be thought to be understandable. 448 The question is which of these two available competing inferences is correct. 449 The judge at [117] referred to "extremely detailed and often repetitive written submissions" that he had received after evidence was complete, and said: Although those submissions were required (at my direction) to address, and in some cases did address, the [agreed issues], they also addressed numerous other points. I have spent a great amount of time reading and considering those written submissions, as I have done reading the transcripts of the oral addresses that followed them. However, the sheer volume, detail and repetitive nature of those submissions are such that it is neither practicable nor desirable to refer to every submission on every point, and I shall not do so. Nor, having regard to the way in which I propose to decide this case, is it necessary that I should do so. I do however wish to make it clear that I should not be taken to have overlooked a submission simply because I do not refer to it in these reasons. 450 His Honour's statement that an omission on his part to deal with unpleaded issues should not give rise to an inference that he had not considered them does not mean that his Honour in fact applied his mind to the smoothing cover argument. It does mean, however, that his Honour intended to determine what issues were pleaded and to deal only with those, without necessarily mentioning all the unpleaded issues. This would explain his omission to refer to the smoothing cover argument in a way that does not impute inadvertence to his decision-making process. 451 This approach by his Honour might be regarded as unusual, but this was a most unusual case. It would have been a most laborious and time-consuming task to identify all the unpleaded issues that his Honour considered were not necessary to address. His judgment was necessarily very lengthy even without setting out the issues that he considered should be ignored. His Honour structured his reasons by reference to the 162 agreed issues and he had warned the parties that he would regard these issues as of fundamental importance. The inference is strong that he considered that what had occurred and what he had said in relation to the list of agreed issues were sufficient explanation for not dealing with issues that were neither listed in the agreed statement of issues nor pleaded. I am not prepared to say that, in the particular circumstances, his Honour's approach was unjustified. 452 The smoothing cover argument did not form part of the agreed issues. From everything that had occurred during the trial in regard to the importance of the pleadings and the agreed issues, each party must have been conscious of the acute need for the pleadings and the agreed issues to reflect the issues that each wished to be determined. Each party knew that, at the very least, there would be serious obstacles in the way of advancing an argument not pleaded or listed in the agreed issues. It must have been obvious that the way to avoid those obstacles was to apply for an amendment of the relevant pleading. The appellants were represented by four counsel, including highly experienced eminent senior counsel. I can only infer that there were sound forensic reasons for them deciding, firstly, to abandon the smoothing cover pleading in 4FAS and, secondly, not to attempt to resuscitate it in 6FAS. 453 His Honour's meticulous treatment of the case as a whole is a further factor that stands as an obstacle to the proposition that he inadvertently "forgot" about the smoothing cover argument. I regard that as unlikely having regard, firstly, to his Honour's express statement that he had spent "a great amount of time reading and considering [the] written submissions [and] the transcripts of the oral addresses" and, secondly, to the fact that the smoothing cover argument was raised, forcefully, during closing addresses. 454 Accordingly, I am not persuaded that McDougall J's omission to deal with the argument was caused by inadvertence on his part. 27. No error in not dealing with the smoothing cover argument 455 There were factors both for and against a considered discretionary decision being made by the trial judge to allow the case to be extended to encompass the smoothing cover argument. 456 The principal factors supporting such a decision were as follows. First, the appellants, in opening their case, asserted that they proposed to establish a case based on that argument. Secondly, several parties adduced evidence directly relevant to the smoothing cover argument and there was much cross-examination on this evidence. Thirdly, the appellants in closing presented lengthy submissions based on the smoothing cover argument. Fourthly, the respondents, generally, responded in their closing submissions to the merits of that argument. 457 The principal factors contrary to such a decision were as follows: (a) The appellants were required to plead the elements of the smoothing cover argument, including the element of materiality. In addition, the appellants were required to plead any alleged lack of integrity on the part of NCRH and those involved in preparing the prospectus and the prospectus balance sheet. They did not, however, plead these matters either expressly or impliedly. (b) The only reasonable inference that the respondents could draw from 6FAS as a whole and the agreed issues was that the smoothing cover transaction was material to the extent that it affected NCRH's assets and liabilities as line items in the prospectus balance sheet. (c) The fact that evidence relevant to the smoothing cover argument was adduced is of limited significance as that evidence was also relevant to affirmative statutory defences pleaded by the respondents, several cross-claims and credibility of witnesses and parties. The respondents did not know that that evidence was being adduced in connection with the smoothing cover argument. (d) The way the appellants should have informed the respondents that the evidence in question would be relied on for the smoothing cover argument was by applying to amend 6FAS. The appellants did not seek to do this. (e) The respondents did not agree to or acquiesce in the appellants advancing the smoothing cover argument. Moreover, and significantly, McDougall J made it clear that he would address only the pleaded issues. The appellants accepted this, but did not apply to amend. (f) Had the smoothing cover argument been pleaded, the case for the respondents may have been conducted in a different way. Whether or not Dresdner was deceived and whether or not such deception, if it occurred, was intended, or achieved, may have been investigated. Generally, the evidence may have been adduced differently (both in chief and in cross-examination). (g) The appellants led expert accounting evidence against PWC and PWC led evidence in response. This was the only accounting evidence led in the case. The expert evidence led by PWC was to the effect that it was legitimate to include, in the prospectus balance sheet, a transaction entered into after that date. That evidence was not accepted by McDougall J, and it may seem unlikely that more accounting evidence would have made any difference to this. But if the smoothing cover argument had been pleaded against the directors and Messrs Williams and Aroney, and also against Phillips Fox, there may well have been expert accounting evidence called on their behalf. 458 In In Re Will of Gilbert (dec'd) (1946) 46 SR (NSW) 318 (at 323), Jordan CJ said: [T]here is a material difference between an exercise of discretion on a point of practice or procedure and an exercise of discretion which determines substantive rights. In the former class of case, if a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely if, a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in chambers to a Court of Appeal. 459 This statement has been cited with approval by the High Court on several occasions. See Ellis v Leeder [1951] HCA 44; (1951) 82 CLR 645 at 653; Adam P Brown Male Fashions Pty Limited v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170 at 177; Paringa Mining and Exploration Company Plc v North Flinders Mines Limited [1988] HCA 53; (1988) 165 CLR 452 at 457-8. Thus, in reviewing decisions by trial judges relating to practice and procedure, appellate courts are required to exercise particular caution: Adam P Brown Male Fashions Pty Limited v Philip Morris Inc at 177. 460 In my opinion, in this case no particular degree of caution is called for. The matters that tend to support his Honour's decision not to allow the issues to go beyond the pleaded issues have overwhelming cogency. I would not interfere in it. 28. Can the smoothing cover argument be raised on appeal? 461 Under this heading I shall assume (contrary to the conclusions to which I have come above) that his Honour either inadvertently did not consider the smoothing cover argument or committed some error in reaching his decision not to allow it. On that assumption it would be open to this Court to examine the matter afresh and to consider whether the appellants should be allowed to raise the smoothing cover argument on appeal, in a manner that goes beyond the pleadings. 462 There was evidence capable of establishing that the item of US$13.839M for retrocession recoveries in the prospectus balance sheet might have been a material misstatement or involved a material omission and was misleading in a number of respects. These may be formulated as follows: (1) The retrocession recoveries figure of US$13.839M was false as it should have been US$5.7M less. (2) NCRH's accounts as at 30 June 1998 in that respect did not give a true and fair view of the financial position of the company. (3) There were material non-disclosures in the following respects: (a) The figure of US$13.839M was reached by wrongly including only one part of a two-part transaction. If both parts had been included (as they should have been if the transaction were to have been included at all), the figure would have been US$5.7M less. (b) The transaction in any event occurred after the closing date of the accounts and should not have been included at all. (c) Subject to the waiver agreement, NCRH was in breach of the net worth covenant. (d) The accounts did not show that, subject to the waiver agreement, NCRH was in breach of the net worth covenant. (e) The transaction had been entered into, and accounts prepared in that way, with the purpose of showing NCRH as complying with that covenant. (f) The persons responsible for the transaction knew that it was wrong and dishonest to prepare the accounts in this way. (g) Nevertheless they did so dishonestly in order to present a false view of the company's position. (h) They did so in order to deceive Dresdner. (i) Those in control of NCRH who were responsible for the prospectus knew of the above non-disclosures and nevertheless concealed them in order to mislead the public. (j) Those in control of NCRH who were responsible for the prospectus showed a lack of integrity in failing to disclose one or more of the above. 463 The evidence in the case might be capable of supporting a finding of all of these matters, if they had properly been issues at the trial but, on the pleadings, only (1), (2) and (3)(a) were raised against the directors and Messrs Williams and Aroney. The appellants submitted that, in addition, (3)(c) and (d) were raised against Phillips Fox but, in my opinion, for the reasons I have given, that submission should not be upheld. Matters 3(e) to (j) were not raised against anyone. McDougall J made findings in terms of 3(b); and in my opinion it was reasonable for him to do so although it was not alleged in the pleadings. There were no submissions to the contrary. 464 In Saffron v Societe Miniere Cafrika [1958] HCA 50; (1958) 100 CLR 231 Dixon CJ, McTiernan and Menzies JJ said at 240: It would be wrong and would destroy the value of commercial causes procedure if a court upon appeal were to decide a case by reference to matters which were not raised as issues upon trial. This is sufficient ground to refuse, on appeal, to allow the smoothing cover argument. 465 Further, I have indicated that, had the smoothing cover argument been pleaded by the appellants, evidence could have been adduced by one or more of the respondents, by way of evidence in chief or cross-examination, that possibly could have prevented the argument from succeeding. For that reason, the appellants should not be allowed to raise the smoothing cover argument on appeal: Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 at 438; Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 at 8. 466 Generally, in this regard, the observations of Gleeson CJ, McHugh and Gummow JJ in Whisprun Pty Ltd v Dixon (2003) HCA 48; (2003) 77 ALJR 1598 are of direct relevance. Their Honours said (at [51] 1608): It would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when no question of further evidence is admissible, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to expense that may not be recoverable on a party/party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs. (footnotes omitted) 467 It is quite plain that, should the smoothing argument succeed, a new trial, at least on many issues, would be necessary. The costs of a new trial would be very heavy. The inconvenience of a new trial, after the first trial ran for 106 days, would be of the highest order. The basic reason for the new trial would be the appellants' failure to amend 6FAS to reflect the smoothing cover argument. In this regard the observations of Dixon J in Burston v Melbourne & Metropolitan Tramways Board [1948] HCA 36; (1948) 78 CLR 143, (at 167) are particularly pertinent: The court's jurisdiction to order a new trial depends upon the demands of justice. Often it would be unjust to set aside a verdict for a reason which but for the default of the party moving would never have existed. What is done and omitted at the trial is an important consideration to be weighed in determining a new trial application … . See also Ketteman v Hansel Properties Pty Ltd [1987] AC 189 at 220 per Lord Griffiths. 468 On the assumption that this Court, in the exercise of its discretion, would be entitled to allow the smoothing cover argument going beyond errors in line items in the accounts to be raised on appeal, I would, for the reasons I have given, decline to do so. I would hold that it would not be fair and just to the respondents to allow the smoothing cover argument thus to be raised. 469 Each respondent submitted that should this Court, on pleading grounds, refuse to allow the appellants to raise the smoothing cover argument, it should not go on to consider whether any respondent engaged in misleading conduct based on that argument. The respondents submitted that to do otherwise would be unfair, as the Court would have concluded, in effect, that the respondents were not adequately apprised of the smoothing cover case sought to be against them. I accept this submission and shall accede to the respondents' request. 470 It remains to consider the appellants' submission that there was contravention of s 996 of the Corporations Law in no more than that the figure of US$13.839M in the line item for retrocession recoveries receivable was false, and that the falsity was not any the less because the increase in the prudential margin had been made in order to offset the benefits of leg one. The submission, however, did not grapple with the need for materiality. On the pleaded case, the materiality lay in the effect of the line item on the line item for NCRH's net assets, not in the falsity of the line item for retrocession recoveries itself. That was how McDougall J dealt with the matter: see earlier in these reasons. Consistently with that approach, it is clear from Mr Saville's evidence that his interest lay in the net asset position of NCRH and not the preceding line items. In my opinion, this aspect of the smoothing cover argument fails. VII The Trowbridge/NTA argument 29. The pleaded case 471 Paragraph 109 of 6FAS, under the heading "Claims against the Directors, Williams and Aroney", pleaded that NCRH represented: (a) In the draft prospectus and the prospectus, that the provision for NCRH's outstanding claims liability as at 30 June 1998 was adequate; Particulars Pages 1 and 3 of the draft prospectus and the prospectus and section 10 of the draft prospectus and the prospectus. (b) In the draft prospectus and the prospectus, that an independent actuarial review by Trowbridge had confirmed the adequacy of NCRH's claims provisioning; Particulars Page 3 of the draft prospectus and the prospectus (c) In the prospectus, that '[h]owever, in recognition of the uncertainty highlighted in the Trowbridge Consulting Actuaries Report and to provide additional comfort as to the adequacy of its reserves, the Company is seeking to procure further retrocessional protection, on a stop loss basis, to insulate itself against claim deterioration. As a result, relative retrocessional expense is expected to increase'; Particulars Section 4.3 of the prospectus. 472 Paragraph 121 of 6FAS asserted that, as at 18 November 1998, these representations were false in five respects, namely: (a) On 27 August 1998, PWC (Pat Murray) advised Peck, Deery, Morrisey, Daya and Aroney, at a meeting of the Audit Committee of NCRH, that he recommended the company adopt a higher prudential margin, of at least US$9 million, but this advice was not followed in the accounts included in the draft prospectus and the prospectus at page 24. (b) On or about 26 August 1998, each of the Directors, and Williams and Aroney, were aware from the Half Yearly Report 1998 and Recommended Action Plan, that Rob Johnson, Senior Underwriter of the New Cap Group, recommended the application of a prudential margin of 15% in addition to the net discounted central estimate, which advice was not followed by NCRH in the accounts included in the draft prospectus and the prospectus at page 24. (c) Each of the Directors, and Williams and Aroney were aware on or about 25 August 1998 that Verne Baker, internal actuary for the New Cap Group, had provided a central estimate for claims provisions of US$154.7 million excluding prudential margins. Trowbridge had reviewed that figure and provided a central estimate, excluding prudential margin, of US$151.1 million at that time. (d) The New Cap Group's net central estimate for its claim provisions, including a US$14 million prudential margin at or about October 1998, was US$141.1 million. (e) The net central estimate of the New Cap Group's claims provisions of US$139.6 million referred to in the Trowbridge report dated 26 October 1998, at page 43 of the prospectus, included no prudential margin. 473 Paragraph 122 of 6FAS alleged that on or before 18 November 1998 each of the directors and Messrs Williams and Aroney knew or ought to have known of the matters referred to in paragraph 121. 474 As regards Phillips Fox, paragraph 178AH of 6FAS alleged that the representations contained in the prospectus were false as alleged in paragraph 121 and, accordingly, Phillips Fox engaged in conduct that was misleading or deceptive or likely to mislead or deceive. 475 As regards PWC, paragraph 265A(a) alleged falsity as pleaded in paragraph 121 and that PWC, accordingly, engaged in misleading conduct. 30. The judge's findings as to the Trowbridge/NTA argument 476 McDougall J found that the representations alleged in paragraph 109 were made (see [657] and [659]). In dealing with the falsity of these representations as alleged in paragraphs 109(a) and (b) of 6FAS, he pointed out (in [816]) that the prospectus disclosed: (1) The view of Trowbridge that the discounted net central estimate as at 30 June 1998 was US$139.6 million. (2) The view of Trowbridge that the provision made in the half yearly accounts 'is reasonable, although … it does not include a prudential margin of any significance'. … (3) That NCRH accepted Trowbridge's view of the appropriate discounted net central estimate. (4) The impact on NTA of adding a prudential margin to that net central estimate of between 5% and 10%. ... (5) That there had been a deterioration in the claims position because of the impact of catastrophe claims after 30 June 1998. (6) The likely impact on both the balance sheet and NTA of those events … . 477 His Honour said (in [817]) that when the representations alleged in paragraphs 109(a) and (b) were considered in the light of these additional disclosures, "it is very difficult to see how the matters alleged in 6FAS paragraph 121 are capable of falsifying them". 478 The appellants' main argument to McDougall J relating to the falsification pleaded in paragraph 109 of the FAS was: By 18 November 1998, Trowbridge had advised that the central estimate which NCRH had adopted in its 30 June 1998 accounts, which were published in the prospectus, was inadequate by US$14 million. Trowbridge did not "confirm the adequacy" of the company's claims provisioning. (See [818] of his Honour's reasons). 479 The "independent actuarial review by Trowbridge" is the Trowbridge report dated 26 October 1998 that formed part of the prospectus. In regard to whether Trowbridge had confirmed the "adequacy" of their report, his Honour observed (at [820]): [T]here may be a semantic distinction between the wording of the prospectus and the wording of the Trowbridge report. In the chairman's letter, Mr Ghose said that "the adequacy of [NCRH's] claims provisioning … has been reviewed by a leading independent actuarial firm." On page 3 of the report, the investment highlights set out included, under the heading "Company Fundamentals", the statement that "[a]n independent actuarial review by Trowbridge confirms the adequacy of the Company's claims provisioning". 480 After examining the issue McDougall J concluded at [823] that Trowbridge had confirmed that the claims provision as at 30 June 1998 was "reasonable". His Honour observed: If Trowbridge were intending to draw some distinction between adequacy and reasonableness, the distinction is not explicit. But if it were intending to do so, the point could only be that, on Trowbridge's view, the 'reasonable' provision adopted by the company 'does not include a prudential margin of any significance'. 481 The judge then referred to aspects of the prospectus and observed that "the representation as to adequacy was intended to speak of the provision that was made in the half yearly accounts, as at the time at which that provision spoke". His Honour held that that representation was not intended to refer to the adequacy of the 30 June 1998 provision as at 18 November 1998. He was of the view "that this must have been clear to any reasonable and careful reader of the prospectus" (see [824]). His Honour concluded at [825] that the representations alleged in paragraphs 109(a) and (b) were not falsified by the fact that, as at 18 November 1998, "it had become apparent that catastrophe claims after 30 June 1998 were likely to render the provision inadequate to the extent of about US$14 million". 482 Further, his Honour held at [826] that a reasonable reader of the prospectus would not have been misled by the variation in language between "adequate" and "reasonable" and that reasonable readers would have gone to the Trowbridge report to see for themselves what it said ([826]). 483 In dealing with the paragraph 109(c) representation, his Honour said, "none of the matters alleged in 6FAS paragraph 121 are capable of falsifying it, and the plaintiffs did not so submit". 484 His Honour therefore concluded that the conduct of NCRH alleged in the relevant paragraphs of 6FAS was not misleading or deceptive (see [829]). 31. The Trowbridge/NTA argument on appeal 485 According to the appellants' written submissions (1 Orange 77-78): 247. The prospectus thus contained statements that: (a) NCRH's current estimated NTA was between A$2.06 and A$2.20 per share; (b) Apart from the losses from Swissair III and Hurricane Georges, no other events had occurred which would have a material effect of NCRH's results for 1998; and (c) A review by Trowbridge confirmed the adequacy of NCRH's claims provisioning. 248. The appellants' contention is that, as at 18 November 1998, the second and third statements were misleading. In fact, at the time the prospectus was issued there was a significant risk that further claims would make NCRH's provisions inadequate. 249. The appellants maintain claims arising out of this aspect of the prospectus against each of the Directors, Mr Williams, Mr Aroney, the Macquarie parties, Philips Fox (through Mr Peck and Mr Mutton) and PWC. 486 In his oral submissions in reply, Mr Jackson supplemented the Trowbridge/NTA argument in two respects. 487 First, he submitted that the prospectus represented that Trowbridge had agreed with the 5% to 10% prudential margin that NCRH took into account in the prospectus balance sheet whereas, in fact, Trowbridge had not so agreed. 488 Secondly, he submitted that the representation in the prospectus that Trowbridge regarded NCRH's claims provisions as adequate was misleading on the ground that the 5% to 10% prudential margin was less than what Trowbridge considered to be reasonable. 489 Thus, the Trowbridge/NTA argument as presented on appeal was based on the grounds stated in paragraphs 247(b) and (c) of the appellants' written submissions and the two additional grounds raised by Mr Jackson in reply. It is not clear that the ground stated in paragraph 247(b) of the written submissions is available to the appellants, since the statement there relied on is quite different from the representation pleaded in paragraph 109(a) of 6FAS. It is unnecessary to decide. For the reasons set out below, I would not uphold the Trowbridge/NTA argument. 32. Was NCRH aware of any other event material to its 1998 results? 490 The prospectus did not represent that, apart from losses from Swissair III and Hurricane Georges, no other event had occurred which would have a material effect on NCRH's results for 1998. Rather, after referring to the Swissair 111 crash and Hurricane Georges, the prospectus stated [T]he Company is not aware of any other event which will have a material impact on its second half results. (6 Blue 2422) 491 There was no evidence that, at the time of the prospectus, NCRH or any of its directors, was aware of any other relevant events. 492 The appellants contended in their written submissions that, at the time the prospectus was issued: [t]here was a significant risk that further claims would make NCRH's provisions inadequate. (1 Orange 78 [248]) 493 The Trowbridge report forming part of the prospectus made express reference to uncertainty in estimating liability for claims and stated that such an exercise involves "some degree of speculation". The report stated that there was no guarantee that the Trowbridge estimate of claims liability would be sufficient to meet the eventual cost of claims occurring prior to 30 June 1998. It stated that deviations between the actual and expected experience would occur in the normal course of events and pointed out that the normal uncertainty was greater for reinsurance business. 494 The prospectus referred to "the uncertainty highlighted" in the Trowbridge report (6 Blue 2422), to potential adverse effects from "volatile and unpredictable natural and other disasters" and mentioned that "a single catastrophic event … or the frequency or severity of catastrophic events could exceed the company's estimates" (6 Blue 2435). The prospectus stressed the risks involved in NCRH's business and how difficult it was to be certain of the forecasts made. This was particularly so in a section headed "Company Risks". (6 Blue 2436-2437) 495 The appellants relied on the fact that, by November 1998, Mr Ghose formed the view that NCRH needed to obtain stop loss cover to move claims from the 1997 insurance year into later years. Mr Ghose told a meeting of Macquarie representatives on 18 November 1998, before the board finally approved the prospectus, that the loss for 1998 could be as much as US$30M. At that meeting the board resolved to "revisit the stop loss cover before allotment of the converting notes" and that the DDC should review any developments regarding the stop loss contract. At Mr Ghose's suggestion, the following insertion was made to the prospectus: [I]n recognition of the uncertainty highlighted in the Trowbridge Consulting Independent Actuary's Report and to provide additional comfort as to the adequacy of its reserves, the Company is seeking to procure further retrocessional protection, on a stop loss basis, to insulate itself against claimed deterioration. As a result relevant retrocessional expense is expected to increase. In fact, the stop loss cover contemplated by Mr Ghose to which the appellants referred in this context, was never obtained. 496 Macquarie, rightly, pointed out that Mr Ghose's stop loss proposal was not relied on at trial to falsify the representation in the prospectus relating to Trowbridge's confirmation of the adequacy of NCRH's reserves. 497 Importantly, McDougall J, in an unchallenged finding, held at [555] that the appellants' submissions "elevated Mr Ghose's 'gut feel' as to the possible worst case scenario into an actual US$30 million underprovision". His Honour said, "I think that Mr Ghose was simply pointing out … the potential downside in an investment in the converting notes". His Honour was of the opinion that Mr Ghose was not expressing a view "either that there was a real likelihood of a further deterioration of the magnitude suggested (US$28 million), or that he had reason to think that there might be a further deterioration of that magnitude". 498 Macquarie submitted (1 Orange 225): Dr McKenzie's unchallenged evidence was that Mr Ghose's explanation for the [stop loss] proposal was that the company's major shareholders had advised they had no tolerance for further losses in 1999, that the company should increase write offs in 1998 to assist in reporting profit in 1999 and that they would prefer to lock in the 1998 year end NTA of $1.85-$1.90 per share with the stop loss cover rather than have the current position of net assets of $2.06-$2.20 but with uncertainty. Thus, the motivation for the stop loss cover was not some undisclosed latent deterioration. It was the desire to reduce the variance around the central estimate as disclosed by the sensitivity analysis in the Trowbridge prospectus report. 499 I accept these submissions. I accept that the stop loss proposal was not a response to a known, quantifiable loss (this being, in essence, the finding of McDougall J). The appellants have not shown that his Honour erred in these findings. 500 In my opinion, the matters to which I have referred make it plain that the statement in the prospectus that NCRH was not aware of any other event which would have a material impact was not misleading or deceptive. 33. The statement in the prospectus as to the "adequacy" of the claims provisions 501 I repeat that the relevant misleading conduct pleaded is the representation in the prospectus "that an independent actuarial review by Trowbridge had confirmed the adequacy of NCRH's claims provisioning" (paragraph 109(b) of 6FAS). The falsifying allegations are pleaded in paragraph 121 of 6FAS (referred to above). 502 The first paragraph of the Trowbridge report recorded two requests by NCRH. By the first, NCRH asked Trowbridge to undertake an assessment of its outstanding claims liability as at 30 June 1998. By the second, NCRH asked Trowbridge to examine the progress of claims from 30 June 1998 to the date of the report and to comment on the implications of such claims for the 1998 financial results and the adequacy of the outstanding claims provision. 503 In dealing with the first request, the report noted that while NCRH had adopted a provision for outstanding claims of $141.1M in its half-yearly accounts, Trowbridge's net central estimate for liabilities was $139.6M. According to Trowbridge, the difference was not material. 504 Trowbridge expressed its conclusion as to NCRH's provision for outstanding claims as follows: We thus conclude that the provision is reasonable, although we note that according to our assessment it does not include a prudential margin of any significance. 505 The report stated that the exact amount of the claims liability could not be estimated with certainty. Trowbridge observed: The assumptions from which our estimate has been derived are, in our opinion, reasonable but depend for their accuracy on future events that involve some degree of speculation. Hence, while we consider that our estimate is reasonable having regard to the information available, there is no guarantee that it will be sufficient to meet the eventual cost of claims occurring prior to 30 June 1998. Deviations between the actual and expected experience will occur in the normal course of events. 506 The next part of the report examined NCRH's claims experience subsequent to 30 June 1998 (this being relevant to the second request). Trowbridge pointed out: Based on the company's response to us, there were no other advices between 30 September and 23 October which would have a material bearing on the adequacy of the provisions at 30 June 1998 or on subsequent results. The report identified the most likely net loss to NCRH in respect of the major events noted as being $14.8M. 507 Trowbridge's conclusion "that the provision [for outstanding claims of $141.1M] is reasonable" appeared in a section of the report under the heading "Results at 30 June 1998". It is clear that that comment was directed to the claims provision in the accounts as at 30 June 1998. 508 I turn now to the way in which the prospectus treated what was said in the Trowbridge report. 509 A letter from the chairman of NCRH (Mr Ghose) to shareholders (incorporated in the prospectus) stated, "[t]he main uncertainty relating to New Cap Re's NTA is the adequacy of its claims provisioning which has been reviewed by a leading independent actuarial firm". There is nothing misleading about this statement. I would note that Mr Ghose here appears to be speaking of the situation as at the date of the prospectus. 510 The crucial statement on which the appellants rely is made under the headings "Investment Highlights" and "Company Fundamentals". Preceding this statement is the observation that "an investment in the converting notes and in the company has the following key features of which investors should be aware". The first "key feature" is that: "[t]he company has a new management team and a revised underwriting strategy designed to improve operating performance". Then follows the statement said to be misleading or deceptive, namely: An independent actuarial review by Trowbridge confirms the adequacy of the company's claims provisioning. 511 The statement in question does not identify the date at which the confirmation by Trowbridge was given. Although the matter is not without ambiguity, the general impression given by the words used and their context in the prospectus (without reference to the report itself) is that Trowbridge had confirmed the adequacy of the claims provisioning at the date of the prospectus. As I have noted, the Trowbridge report, in fact, expressly confirmed only that the company's provision for outstanding claims as at 30 June 1998 was reasonable. 512 The statement in the prospectus that the Trowbridge report confirmed the "adequacy" of NCRH's claim provisions does not coincide precisely with the Trowbridge report (which used the word "reasonable" instead). The difference between "adequate" and "reasonable" depends on the particular context in which these two terms are used. It could not be said that "adequate" means adequate to cover any claims that are made. That, obviously, was not the intention – the Trowbridge report makes it abundantly clear that the provision for claims was based solely on estimates and there were many unforeseeable risks involved. In context, I would construe "adequate" in the sense of "adequate claims provisioning by a reinsurance company". In this sense "adequate" would have to be measured by standards generally accepted in the reinsurance industry. In my view, the word "reasonable", as used in the Trowbridge report, would have to be construed in the same way. I do not think that there is a material difference between the two words. 513 In coming to this conclusion I have borne in mind that, whereas Mr Minty of Trowbridge appeared to equate "adequate" with "reasonable" and testified (11 Black 5653) that the way in which NCRH treated its claims provisioning "was adequate from the point of view of meeting the requirements of the accounting standards and the actuarial standards at the time", another Trowbridge actuary, Mr Atkins, thought that there was a distinction between "adequate" and "reasonable" (11 Black 5891). I repeat, however, that any such distinction in the present context would not give rise to a material misstatement or omission (or misleading conduct). 514 A possible argument is that, in saying the provision was "reasonable", Trowbridge was saying that it constituted a reasonable assessment of the value of outstanding claims, whereas an "adequate" provision would require in addition a prudential margin over and above that reasonable assessment. A difficulty with that argument, apart from the evidence referred to in the previous paragraph, is that the prospectus included the Trowbridge report itself, and also explicitly pointed out the effect on NTA of adding a prudential margin of 5 per cent to 10 per cent to Trowbridge's calculation. 515 The appellants submitted: [T]he Trowbridge report addressed] the 30 June 1998 figure [for claims provisioning] by reference to claims data up to 30 September 1998 together with consideration of three specific claim events up to 23 October 1998 on the assumption that these were the only material further claims and expressed a limited conclusion (that the provision as at 30 June 1998 had been 'reasonable'). The statement in the body of the prospectus, however, made an unqualified statement in the present tense. 516 I repeat that Trowbridge's conclusion with regard to the period 1 July 1998 to 30 September 1998 was that, subject to reservations and disclaimers and based on information it had received from NCRH, claims occurring from 1 July 1998 to 23 October 1998 would not have a material bearing on the adequacy of the provisions at 30 June 1998 or on subsequent results. 517 Two points may be made from this conclusion. First, the fact that Trowbridge's opinion was based on information given to it by NCRH does not detract from the proposition that it was formed after an independent review. It was not suggested that Trowbridge's entire report was not, in fact, substantially dependent on information given to it by NCRH. Secondly, the inference that flows from Trowbridge's conclusion, as at the date of the report, that no advices between 30 September and 23 October had a material bearing on the adequacy of the claims provisions as at 30 June, is that Trowbridge continued to be of the view, as at the date of the report, that the claims provisions in the 30 June 1998 accounts were reasonable. 518 Taking into account that view (and accepting that there is no material difference between "adequate" and "reasonable"), it was not misleading to state in the prospectus that, as at the date of the Trowbridge report, Trowbridge had confirmed the adequacy of the company's claims provisions. 34. The two additional points made by the appellants in reply 519 Mr Jackson argued that the Trowbridge report did not express any opinion as to the adequacy of the 5% to 10% prudential margin taken into account by NCRH. He submitted: The Trowbridge report does not, itself, confirm the adequacy of the provisioning. If you go to the prospectus, page 2421 … what you see the company saying in the prospectus is that the company accepts the Trowbridge Consulting view on the appropriate net central estimate, and if one adds the prudential margin of between 5 to 10% to that, in accordance with the company's policy, you go down by US5 cents to 15.5 cents per share, which gives you the $2.06 to $2.20 in Australian shares. The point we wish to make is that that isn't saying that Trowbridge says 5 to 10% is right; what it is saying is if you add 5 to 10% to Trowbridge you get that. 520 While I accept this submission, it must be borne in mind that the claims provision that Trowbridge expressly stated to be "reasonable" was the provision adopted by NCRH as at 30 June 1998 for outstanding claims, namely, $141.1M. This provision has nothing to do with the prudential margin of 5% to 10%. The fact that the provision of $141.1M did not allow for a prudential margin is irrelevant for present purposes (as according to the Trowbridge report that provision was "reasonable"). 521 The prospectus noted that, "if a prudential margin of between 5% to 10% was added" to the net central estimate of US$139.6M calculated by Trowbridge (as opposed to the US$141.1M allowed for by NCRH), "this would have the effect of reducing the net tangible asset backing for Ordinary Shares by between US7 cents and US15.5 cents per share." Reducing the NTA by between US7 cents and US15.5 cents per share results in an NTA of between US$2.06 to US$2.20 per share. The critical factors were, firstly, Trowbridge's opinion that the provision of $141.1M adopted by NCRH was reasonable and, secondly, the effect that the 5% to 10% prudential margin had on the NTA. As to the first, the appellants do not now challenge the reasonableness of the representation of the NTA at the latter level. As to the second, the effect of the 5% to 10% prudential margin on the NTA was correctly disclosed in the prospectus. 522 Accordingly, I do not accept that the representation was misleading on the first ground relied on by Mr Jackson in reply. I turn now to the second additional ground. 523 Mr Jackson referred to evidence that cast doubt on the adequacy of the 5% to 10% margin. Mr Minty accepted that a prudential margin of 10% "was at the bottom end of the reasonable range for a company in [NCRH's] circumstances." There was also evidence that a senior underwriter in NCRH considered that a 15% prudential margin was desirable and that Mr Atkins recollected that there was agreement, at least between him and Mr Johnson - a senior underwriter of NCRH - that the 15% "would be something which the company should target". There was other evidence to similar effect, including testimony by Mr Baker, NCRH's internal actuary. 524 On this basis, Mr Jackson submitted that the 5% to 10% prudential margin was not approved by Trowbridge and was not a prudential margin Trowbridge regarded as adequate. This, he argued, falsified the representations in the prospectus that "an independent actuarial review by Trowbridge confirms the adequacy of the Company's claims provisioning" and that (taking into account "the Company's claims provisioning") NCRH's NTA was between approximately A$2.06 and A$2.20. 525 The respondents submitted that this argument fell outside the case argued at trial by the appellants. I do not think that is correct as paragraphs 121(b) and (c) of 6FAS alleged that the "prospectus claims reserve adequacy representations" were falsified by reference to the recommendation by Mr Johnson of an application of a prudential margin of 15% and a provision by Mr Baker of a central estimate for claims provisions of US$15.7M excluding prudential margin. Furthermore, in the appellants' written submissions in chief at trial, they put the Trowbridge/ NTA argument as follows: (a) NCRH rejected the advice of its internal actuary, Trowbridge and PWC on the amount of the central estimate of claims which should have been contained in the 30 June 1998 accounts (paragraphs 121(a) and (c) [of 6FAS]). (b) NCRH rejected the advice of each of PWC, Verne Baker and Rob Johnson in the amount of prudential margin it should have carried on the 30 June 1998 accounts (paragraphs 121 (b) and (d) of the 6FAS). (c) By 18 November 1998, Trowbridge had advised that the central estimate which NCRH had adopted in its 30 June 1998 accounts, which were published in the Prospectus, was inadequate by US$14 million. Trowbridge did not "confirm the adequacy" of the company's claims provisioning (paragraph 121 (e)). (15 Red 3572 –3573) 526 McDougall J dealt with this argument as follows: [819] The relatively ancient history referred to in sub paras (a) and (b) [of the appellants' written submissions made at trial] appears to me to have no relevance to the question of the falsification of the Prospectus Claims Reserve Adequacy Representations as at 18 November 1998. Things had moved on by then. Trowbridge had reviewed the provision. The basis of its review was set out in its Prospectus Report. I have referred more than once to relevant aspects of that report. The question of truth or falsity as of 18 November 1998 depends on what was known at that date. Of course, matters of history may be relevant: but only to the extent that they are not superseded, or that they inform later matters. I do not understand how the first two matters continued to be relevant once Trowbridge had reconsidered the adequacy of the claims provision, in circumstances where the prospectus included Trowbridge's (short form) report and where NCRH made plain that it accepted Trowbridge's view as set out in that report. 527 In my view, his Honour's reasons answer the second ground raised in reply by Mr Jackson. VIII THE TRADING PROSPECTS ARGUMENT 35. The pleading of the trading prospects argument 528 As against the directors and Mr Williams and Mr Aroney, the appellants pleaded in paragraph 107 of 6FAS that in the prospectus NCRH represented that: [A]s a result of a new management team and a revised underwriting strategy, the prospects for the New Cap Group for the second half of 1998 were good. This representation differs from that pleaded in paragraph 55(e) as the word "positive" in 55(e) has been replaced by "good" in paragraph 107 and the period said to be relevant is the second half of 1998 and not 1999 as paragraph 55(e) asserts. 529 The appellants alleged in paragraphs 73 and 74 of 6FAS that these representations were misleading and deceptive because: (a) The business underwritten during 1997 and 1998 was of poor quality. (b) The large proportion of the business written in 1997 was the responsibility of Mr de Chelard who also wrote the majority of the 1998 business; losses associated with former underwriting practices under Mr de Chelard could be expected to continue throughout 1998 and 1999. (c) NCRH had no financial capacity, at least without the proceeds of the note issue, to write profitable business. These allegations were picked up in the claims against Phillip Fox and PWC (6FAS paragraphs 178AH and 265A). 530 On appeal, the trading prospects argument in Case 2 is brought only against Macquarie, PWC and Phillips Fox. 36. The trading prospects representation 531 McDougall J pointed out at [666] that in paragraph 107 of 6FAS the representation alleged in regard to trading prospects was tied by particulars to page 3 of the prospectus. His Honour noted that page 3 of the prospectus stated that NCRH had "a new management team and a revised underwriting strategy designed to improve operating performance". His Honour noted further that there were other statements that related to the financial well being of NCRH, including the reference to the independent review of Trowbridge confirming "the adequacy of the company's claims provisioning" and a reference to NCRH's "conservative investment philosophy and US dollar capital base". His Honour said at [670]: In my view, the relevant material on page 3 of the prospectus is intended to suggest that NCRH had sought to address the causes of its past poor performance. Such a suggestion may well carry with it the implication, or inference, that the steps taken were believed, or hoped, to have been appropriate. But it does not follow that, by saying that past mistakes had been addressed, NCRH was representing that its prospects for the second half of 1998 were good. I would reach that conclusion simply on the basis of the language used on page 3, but I accept the submission put for Messrs Beach, Deery and Morrissey that other material disclosed in the prospectus in any event makes it impossible to spell out a representation that prospects for the second half of 1998 were "good". 532 The appellants submitted that the prospectus contained an express statement on the "positive impact" of the changes in relation to underwriting strategy on the 1999 results. Such a statement appeared in section 4.4 of the prospectus as follows: The Company believes that 1998 is a year of transition for it. The Company has taken substantial steps in laying a technically strong foundation and instilling a more disciplined underwriting culture which should begin to positively impact the Company in 1999. 533 The statement in question said nothing, however, about "results". It stated merely that changes should begin to "positively impact the Company in 1999", not that the financial results should begin to be positive or good. 534 There were other statements in the prospectus that gave the impression that the financial position of NCRH was likely to improve in 1999. These included the references to the changes in management and the revised underwriting strategy. In addition, the prospectus asserted that the loss for the six months ending 30 June 1998 "resulted predominately from claims development relating to the 1996 and 1997 underwriting years … which were underwritten when the company was in its infancy, and was mainly confined to a few clients within [particular] classes of [insurance]". (6 Blue 2421). The implication of this statement was that, as the company was no longer in its infancy, such losses were no longer to be expected. 535 There were, however, many other statements in the prospectus that emphasised and warned of the risks to which NCRH was exposed. These statements included the following: Underwriting risk Because the Company underwrites catastrophe and other classes of reinsurance, the Company's operating results and financial condition could be adversely affected by volatile and unpredictable natural and other disasters. A single catastrophic event could affect multiple geographic zones and multiple classes of business or the frequency or severity of catastrophic events could exceed the Company's estimates. This may result in volatility in the Company's results in any financial year. Cyclical Nature of the Insurance and Reinsurance Industry Historically, the reinsurance industry has been cyclical, with reinsurers experiencing significant fluctuations in operating results due to competition, catastrophic events, levels of capacity and general economic conditions. There can be no assurance that premium rates will not decrease further. (6 Blue 2435) 536 The prospectus warned that the company was subject to regulatory restrictions dependent on the countries in which it did business. It stated: It is not possible to predict the future impact of changing laws or regulations on the operations of a reinsurer such as the Company and such changes could have a material adverse effect on the Company. (6 Blue 2435, 2436) 537 The prospectus warned that the Company's success would depend in substantial part upon its ability to attract executives and underwriting personnel. It stated: There can be no assurance that the Company will be successful in attracting or retaining qualified employees. Failure to do so could have a material adverse effect on the company. (6 Blue 2436) 538 The prospectus expressed a warning about the reliability of NCRH's claim reserves. It pointed out that the reserves were estimates based on several variable factors and stated: The estimation of reserves by recently formed reinsurers, such as the Company, may be inherently less reliable than the reserve estimations of a reinsurer with a stable volume of business and an established claims history. The point was emphasised as follows: There can be no assurance that claims will not exceed the Company's claims reserves and have a material adverse effect on the Company's financial condition or results. 539 Under the heading "Lack of Operating History" the following was stated: The Company has a limited operating history. Businesses that are in their early stages of development present substantial business and financial risks and may suffer significant claims. … There can be no assurance that the Company will be successful in implementing its business strategy. (6 Blue 2436) 540 The prospectus warned: The Company competes with major domestic and foreign reinsurers, many of which have greater financial, marketing and management resources. Additionally, the Company may in the future compete with new market entrants. … Competition … is based on many factors … . This competition could prevent the Company from attracting profitable business. (6 Blue 2436) 541 The prospectus warned that NCRH's credit rating might be affected adversely by the lack of an appropriate credit rating. It warned that NCRH only had a "BBB plus" claims paying rating from a rating agency. The prospectus warned that this was likely to dissuade some from reinsuring with it (6 Blue 2436). The prospectus warned that it had no assurance that retrocessional reinsurance would be available to it on appropriate and acceptable terms. It warned that its own retrocession providers could become insolvent in the event of major catastrophe claims "or otherwise" (6 Blue 2436). The prospectus contained several other warnings, involving potential adverse effects from foreign currency fluctuations, legal disputes and market-wide risks and fluctuations inherent in any securities portfolio. Other risks were mentioned. Under the heading "General" the following was stated: The above summary of risk factors is not intended to be exhaustive. Shareholders and other prospective investors should read this Prospectus carefully taking into account all of the above factors and weigh the potential risks and rewards before deciding whether to subscribe for Converting Notes. If uncertain, they should seek professional advice. 542 There is ample and long standing authority at the highest level that to understand what representations are being made in the prospectus the document should be read as a whole. It is sufficient to refer to Aaron's Reefs Ltd v Twiss [1896] AC 273 at 281 per Lord Halsbury LC. Having undertaken that task, I come to the same conclusion as McDougall J, namely, the prospectus did not represent that "as a result of a new management team and a revised underwriting strategy, the prospects for the New Cap Group for the second half of 1998 were good". IX THE NOTE ISSUE PURPOSES ARGUMENT 37. The pleading of the note issue purposes argument 543 Paragraph 108 of 6FAS alleged: In the Draft prospectus and the Prospectus, NCRH also represented that the purposes of the issue of the Converting Notes were to: (a) recapitalise NCRH to widen the business available to the New Cap Group; (b) replace existing debt with more efficient capital; (c) meet the increasing capital standards of the industry; (d) position the New Cap Group for an enhanced claims paying rating. Particulars Page 1 of the Draft Prospectus and the Prospectus. Section 4.5 of the Draft Prospectus and the Prospectus. 544 Paragraph 119 of 6FAS pleaded the respects in which the appellants alleged that the purposes of the capital raising, as represented in the prospectus, were false. These respects included identifying losses NCRH had incurred since 30 June 1998 (set out in the Trowbridge report included in the prospectus) and, further, the following allegations: … (d) In order for NCRB to maintain its licence to write reinsurance business, it had to maintain a statutory and capital surplus of US$100 million. (e) NCRH was in default of a net worth covenant under its loan agreement with Dresdner, entitling Dresdner to immediate repayment of US$25 million; (f) A large proportion of the New Cap Group's assets were … tied up as collateral for letters of credit issued by Chase; (g) As a result … the New Cap Group was facing a cash flow squeeze, in that it would have difficulties meeting its claims prior to the receipt of premiums in the 1998/1999 renewal season; and (h) As a result … , if NCRH did not receive substantial capital from the Converting Notes Issue, NCRA and NCRB would not have been able to continue writing business. Paragraph 119, in essence, alleged matters that constituted material omissions from the prospectus of a misleading kind. 545 6FAS pleaded adequately that full disclosure would have made the issue unattractive as investors would have believed that they were becoming financiers of last resort to NCRH. 546 Macquarie, PWC and Phillips Fox contend that a cause of action, resting on allegations that default on the Dresdner loan would have resulted in the issue not proceeding at all, was not pleaded. (1 Orange 220 [209]). In the light of the conclusions to which I have come, however, it is unnecessary to consider this issue. 38. The elements of the note issue purposes argument 547 The respondents do not dispute that the prospectus made statements as set out in the four sub-paragraphs of paragraph 108 of 6FAS. They submit that his Honour correctly held that they were not shown to be false. The appellants challenge these findings. 548 Essentially, the note issue purposes argument is that: (a) Taking into account NCRH's overall financial position, without the note issue succeeding it would not have been able to comply with the net worth covenant. (b) If NCRH had been in breach of the net worth covenant, Dresdner would have called up its loan. (c) Were Dresdner to have called up its loan, NCRH could not have carried on (or would have had great difficulty in continuing to carry on) its business. (d) Accordingly, a fundamental purpose of the note issue was to obtain further funds so as not to be in breach of the net worth covenant and to pay Dresdner. (e) To omit disclosing this purpose was misleading or deceptive. 549 The appellants submit that it must have been obvious to Dr Mackenzie, Messrs Peck and Mutton, and Mr Murray, that the principal purpose of the note issue was to repay Dresdner "and the disclosure in the prospectus which advanced other motivations was misleading". (1 Orange 73) 550 The appellants submit that, had full disclosure of the purpose of the note issue occurred, "it would have made the issue unattractive as investors would have perceived that they were in effect becoming financiers of last resort to NCRH." In addition, the appellants submit, the disclosure of the default on the Dresdner loan (that is, the breach of the net worth covenant) would have raised questions as to the credibility of the management and board of NCRH. The appellants submit that, for these reasons, if it had been necessary to disclose the purpose referred to above "the issue would not have proceeded at all". (1 Orange 73) 551 I accept that, if it were a purpose of the note issue to acquire capital to conceal a breach of the net worth covenant and to keep NCRH alive as a viable going concern, there would be a material misstatement or omission amounting to misleading conduct in failing to disclose this purpose in the prospectus: see in this regard Edgington v Fitzmaurice [1885] 29 Ch D 459. 552 The prospectus expressly stated what the purposes of the issue were in terms slightly different from those pleaded in paragraph 108 of 6FAS. Section 1.2 of the prospectus was in the following terms: 1.2 Purpose of the Issue and Institutional Placement The purpose of the Issue and Institutional Placement is to raise additional capital to meet the following objectives: - to increase the Company's capital base in order to meet the increasing capital standards of the insurance industry and thereby assist the writing of reinsurance business; - to replace borrowings of approximately US$23.75 million; and - to position the Company for an enhanced claims paying rating. 553 In addition, section 4.5 was in the following terms: 4.5 Purpose of the Issue and Institutional Placement Based on the operational and structural changes made, the Company believes it is well positioned to enter a more profitable phase of its existence. To capitalise on the opportunities available to it, the Company is seeking to raise capital. The Issue and Institutional Placement are intended to: - Recapitalise the Company to widen the business available to it. This will allow the company to exercise greater selectivity in risks underwritten; - Replace the existing debt with more efficient capital; - Meet the increasing capital standards of the industry; - Position the Company for an enhanced claims paying rating. This should also reduce the Company's need to collateralise its risk positions. 554 The reference in section 1.2 to borrowings of approximately US$23.75M was a reference to the Dresdner loan. The words in section 4.5, "replace the existing debt with more efficient capital" should, reasonably, be read with section 1.2. Sections 1.2 and 4.5, read together, represented that a purpose of the issue was to replace the existing debt of approximately US$23.75M with more efficient capital. It was not suggested that this was in any respect untrue. 555 Section 6.2 of the prospectus stated that the pro forma balance sheet forming part of the prospectus illustrated the financial position of NCRH on the assumption that the Dresdner loan would be repaid out of the proceeds of the note Issue. This reinforced the representation referred to in the previous paragraph. 556 The prospectus did not, however, state that NCRH was in default of the net worth covenant and the only way in which Dresdner could be paid was from capital raised by the note issue. It also did not state that if the note issue did not succeed, NCRH could not continue to carry on its business, or would have great difficulty in doing so. It follows that the note issue purposes argument depends substantially on: (a) Whether NCRH was in breach of the net worth covenant. (b) Whether Dresdner would have called up its loan had NCRH been in breach of the net worth covenant. (c) Whether, without the note issue succeeding, NCRH would have been able to discharge its obligations to Dresdner and carry on its business. (d) NCRH's perception of these matters and whether that perception provided a material purpose in undertaking the capital raising. 557 These questions involve matters of inference to be drawn from all the relevant circumstances. The task of the court in such an exercise is discussed in Costa v The Public Trustee of NSW [2008] NSWCA 223. The resolution of these questions requires an examination of the relevant undisputed facts and the facts found by McDougall J. 39. The net worth covenant and the Dresdner loan 558 I have mentioned that on 24 June 1998 Dresdner agreed to a 60-day waiver of defaults under the loan facility. The temporary waiver lapsed as no agreement was arrived at within the 60 day period. Dresdner did not then call up the loan but entered into further negotiations with NCRH. I have mentioned that, from January 1997, there had been a continuing history of default by NCRH in relation to the Dresdner loan facility. Dresdner had agreed to various waivers of these defaults. (16 Red 3755 [1363]) 559 McDougall J found that, as at 19 August 1998, Dresdner "was not inflexible" on the then amended net worth covenant of US$125M, but "extensive negotiation" and "perhaps something in exchange" would be required to achieve a further reduction. (16 Red 3761 [1379]) 560 On 11 October 1998 Mr Valencourt of Dresdner wrote to NCRH, stating: "New Cap is indeed in technical violation of the covenants in the … agreement". As McDougall J observed: Nonetheless, Dresdner did not call up the loan, or declare default, or attempt to exercise its rights. It entered into further negotiations with NCRH to restructure the facility. (16 Red 3761 [1381]) 561 In a memorandum to the Dresdner credit committee of 11 October 1998, Mr Valencourt discussed the possibility of calling up the Dresdner loan but stated that the condition of NCRH did not "warrant such precipitous action on our part" (16 Red 3763 [1384]). 562 On 17 November 1998, the waiver agreement was executed. Dresdner thereby waived, until 29 January 1999, breaches that NCRH had committed of the net worth covenant. The waiver agreement was conditional on Macquarie underwriting the note issue and on Dresdner being repaid US$13.75M forthwith. The underwriting by Macquarie was effected on 18 November 1998, the day the prospectus was issued. NCRH paid Dresdner US$13.75M at about the time the waiver agreement was entered into, thereby reducing the amount owing to Dresdner to US$10M. 563 At about the time the prospectus was issued, Dresdner believed that NCRH's net worth was slightly in excess of US$125M (16 Red 3762 [1383]). In truth, NCRH's net worth at about that time was about US$119.6M. It does not seem that Dresdner knew of this fact (although Mr Ghose asserted that it did). 564 McDougall J made two significant findings in this respect. First, he found that, had NCRH disclosed a net worth of US$119.6M as at 30 June 1998, Mr Valencourt's recommendation to the Dresdner credit committee would not have been different. Secondly, he found that, had such disclosure been made, the Dresdner loan facility would have been amended to reduce the net worth covenant to US$100M (16 Red [1385, 3764). His Honour found that that at the relevant time "Dresdner was not desirous of declaring a default" and there was no basis for concluding that Dresdner would have acted any differently had it known that the net worth of NCRH was US$119.6M (16 Red 3762 [1383]). In other words, his Honour concluded that, as at November 1998, had Dresdner known the actual net worth of NCRH, it would not have terminated the loan and called up the debt. In my opinion, there was ample evidence to support these findings and they have not been shown to be susceptible to appellate intervention in accordance with the well-known tests. 565 His Honour observed: I do not think that it is correct to say that repayment of the Dresdner loan was forced. … It is plain that Dresdner would want the facility repaid. It does not follow, however, that repayment was forced or involuntary. It was in the interests of NCRH to repay the facility. If it could so through a capital raising that would improve its equity position and overcome the tax disadvantages attaching to the Dresdner facility. I have no doubt that Dresdner was very happy to be presented with the repayment program offered by the converting note issues but it does not follow that the representation as to this aspect of the purpose was false simply because Dresdner was keen to get its money back. Dresdner had not made demand nor had it threatened action. (15 Red 3432 [388]) In my view, these findings are also supported by the evidence and have not been shown to be wrong. 566 Accordingly, I accept that, as at 18 November 1998, had Dresdner known that NCRH was in breach of the net worth covenant, it would not have called up its loan. 567 As at 18 November 1998, NCRH, technically, was in breach of the net worth covenant as the waiver agreement was being held in escrow pending the completion of the note issue. The completion, however, was virtually assured (Macquarie had underwritten the issue). Moreover, Dresdner had been repaid its loan save for US$10M, and was due to have the balance repaid on completion. These are further reasons for finding that immediately prior to the issue of the prospectus, had Dresdner known that NCRH was in breach of the net worth covenant, it would not have called up its loan. 40. NCRH would have been able to pay Dresdner 568 McDougall J held (at [804]) that, on the information available as at 18 November 1998, NCRH and its board were entitled to (and did) conclude that the company could continue to trade and meet its obligations. 569 In submitting that his Honour was wrong in this conclusion, the appellants relied heavily on the half yearly report (dated 26 August 1998) compiled by various executives and officers of NCRH, including Mr Daya, Mr Williams and Mr Aroney. The executive summary of the half yearly report recorded that NCRH had sustained "a substantial underwriting loss for the 6-month period to June 30, 1998". It stated that NCRH's "pre-eminent problem" was lack of sufficient capital to be considered as acceptable reinsurance security. The executive summary stated that NCRH had "therefore reached a critical point". It stated that there was a need for the board and management to act swiftly in implementing an effective strategy that would address the issues raised. 570 The half yearly report referred to the Dresdner bank facility and stated that any breach "would result in an immediate repayment of principal". In dealing with the letters of credit, the half yearly report stated that NCRH could not continue if the Chase letters of credit facility was cancelled. According to the half yearly report, "With limited LOC capacity to collateralise risk positions, clients will not renew existing business and will seek quotations for alternative capacity". The report stated, "without additional capital, we would only get distressed business and increase the likelihood of further losses". (4 Blue 1429) 571 According to the half yearly report, the "single all-encompassing hurdle toward future operation" was insufficient capital. It stated, "[a]ll other issues are a function of capital". It urged immediate and sole concentration "on the capital question" (4 Blue 1432). It commented: Without an injection of additional capital, the company would have insufficient capital to continue in its current form. The security committees of most major brokers would deem the company unacceptable security and resist using it for new or renewal business. A continuance of operations could risk further loss. Some emerging market clients would continue to do business with the company and premium levels would undoubtedly fall below $100 Million in 1999. 572 McDougall J noted that the issues raised by the half yearly report were recognised as early as April 1998 and discussed again in a business plan dated 26 October 1998. By November 1998, the views of the board were contrary to those in the half yearly report. His Honour noted at [803] that cash flow projections provided to the directors up until 18 November 1998 suggested that NCRH would have sufficient cash to enable it to meet its obligations for the remainder of the calendar year and until 12 January 1999, when it was expected that the net proceeds of the converting note issue would become available. His Honour remarked: [803] … Certainly, the cash flow position as projected did not disclose a superabundance of liquidity; particularly if (as was modelled on a "worst case scenario") the whole of the outstanding Dresdner debt of US$23.75 million were required to be repaid. Certainly, the directors were concerned at the company's present and projected cash situation. They were right to be concerned. Certainly, the directors required Mr Aroney and others to monitor and report on the cash situation. Again, they were right to do so. [804] None of this shows that, on the information available as at 18 November 1998, NCRH would be unable to continue in business without the proceeds of the capital raising. As I attempt to show, the evidence supports his Honour's conclusions. 573 There was evidence that, after the capital raising, the amount of NCRH's "free funds" was not likely to be a concern, and that the letter of credit and collateral arrangements with Chase would not be a significant source of liquidity constraints. (Blue 2/686 – 687, 694, 788-789, 800 and see Black 7/3380; Black 16/3381) 574 Dr McKenzie testified: [T]here was never a set of numbers that indicated that the company could be insolvent, even on the absolute worst case of Dresdner demanding full repayment and claims being at the outer end. (Black 7/3239) Messrs Peck, Williams and Murray gave similar evidence (see Orange 1/203, footnote 265). 575 A cash flow analysis by Mr Aroney, on which the appellants relied, was modelled on a "worst case scenario", and was inconsistent with many cash flow documents produced by NCRH from October to December 1998. These showed that there would be cash in hand available as a "Dresdner buffer" ranging from about $30M to $50M (see Black 10/5258-5362). Cash flow projections referred to by McDougall J (at [803]) showed that NCRH would be able to meet its liquidity requirements even if Dresdner required full repayment before 31 December 1998. 576 The cash flow was considered by the DDC at a meeting on 27 October 1998 and the minutes of that meeting record: While the [cash flow] documents showed that there was a possibility that cash and amounts of collateral in the LC facility could be tight towards the end of 1998/beginning of 1999 the company's projections were accepted as reasonable. (Blue 5/1873) 577 The letters of credit were issued for two reasons. First, when a US cedent notified a claim, NCRH would issue a letter of credit to it for the amount of the claim. Secondly, certain classes of business that NCRH undertook required an acknowledged credit rating; this resulted in NCRH issuing a letter of credit to the cedent at the time of writing the policy as security for any claim that might arise. By the time of the note issue, NCRH had determined that it would no longer issue letters of credit on the latter "up front" basis. [Blue 2/686 and 789]. In other words, NCRH had adopted a policy of only issuing letters of credit when a US cedent notified a claim. This meant that, as reinsurance contracts secured by letters of credit came off risk, assets held as security for the letters of credit would gradually become free over time. This tended to reduce the letters of credit as a factor that could affect NCRH's ability to continue carrying on business. 578 Macquarie drew attention to the fact that there had been an improvement in NCRH's results subsequent to Mr de Chelard's departure. The 1998 book of business was performing better than the 1997 book of business. There had been a significant improvement in the net loss ratios for the 1998 underwriting year. 579 NCRH did not need the proceeds of the note issue to pay the first instalment of US$13.75M to Dresdner. His Honour found (and I have referred to evidence that supported his finding) that, although NCRH planned to pay the balance owing of US$10M out of the capital raising, it could continue to trade and meet its obligations even without the capital raising. I am not persuaded that he was wrong. 580 In closing, at trial, the appellants contended that, in order to continue writing business with its current set of broker clients, NCRH required more capital than it had at 30 June 1998. McDougall J pointed out (at [795]) that this proposition was not one that the appellants had pleaded as a falsifying matter. His Honour declined to deal with this proposition because it had not been pleaded. For reasons that I have given in regard to pleading issues that have earlier arisen, I consider that his Honour did not err in adopting this approach. I am not satisfied, in any event, that the factual assertion that the Company needed more capital to continue its business is correct. 581 McDougall J said (at [805]) that the appellants submissions were "heavily informed by hindsight". His Honour concluded (at [811]): As at 18 November 1998, the information available to NCRH and its directors indicated that, although with careful attention and management, the company could meet its obligations and continue in business. There was not at that time any reason to think that NCRH would have to defer paying debts otherwise due until it could satisfy them out of the cash flow generated by premiums written for business in January 1999. 582 I am not persuaded that his Honour erred in so finding. 583 It was not established that the directors considered that repayment of Dresdner was forced upon NCRH, or that concern over breach of the net worth covenant and ability to re-pay Dresdner drove the capital raising. NCRH's decision to pursue a capital raising dated from April 1998, well before (for example) Mr Valencourt's letter of 11 October 1998. NCRH was the moving party in the arrangements made with Dresdner which reduced its loan to US$10M. I have referred to the evidence of Dr McKenzie and Messrs Peck, Williams and Murray contrary to fear of insolvency, even on the worst case of Dresdner demanding full repayment and claims being at the outer end of estimates. Each of Messrs Beech, Murray and Donnelly gave evidence involving that they did not perceive that Dresdner would force repayment. Of course, a purpose of the capital raising was to repay Dresdner, and that was referred to in the draft prospectus and the prospectus by the purpose "replace existing debt with more efficient capital". But there was not established what the appellants submitted was a half truth in failing to disclose a substantial purpose of avoidance of Dresdner calling up its loan for breach of the net worth covenant and inability, or difficulty (if the capital raising did not succeed so that Dresdner could be paid) in continuing to carry on business. 584 In my opinion, for the reasons I have given: (a) The smoothing cover argument (other than in relation to line items in the accounts) fails as it was not pleaded, it was not a live issue at the trial and, for that reason, the primary judge did not deal with it, he did not err in that respect and, in any event, it would be unjust to allow the argument to be raised on appeal. The argument in relation to line items in the accounts fails on the ground that there was no material misstatement or omission in the accounts. (b) The Trowbridge/NTA argument fails essentially on the ground that the conduct relied on was not misleading. (c) The trading purposes and note issue purposes arguments fail on the ground that the representations relied on were not misleading. X CASE 2 41. Cases 2.1 and 2.2 fail 585 As I have mentioned, Case 2.1 (against the directors) is based on contraventions of s 996 and Case 2.2 (against Messrs Peck, Aroney and Williams), is based on a knowing involvement in a contravention of s 996. The contraventions alleged are based on the smoothing cover and the Trowbridge/NTA arguments. As, for the reasons I have given, those arguments fail, Cases 2.1 and 2.2 also fail. There is, however, a further ground on which I would not uphold Cases 2.1 and 2.2. 586 The appellants in Cases 2.1 and 2.2 contend that s 996 enables them to recover on the following basis: (a) The prospectus contained a material statement that was false or misleading or contained a material omission. NCRH thereby contravened s 996 and the directors, by reason of s 1006(2), attract civil liability for that contravention. Messrs Peck, Aroney and Williams were knowingly involved in that contravention and, hence, by s 79, attract civil liability in respect thereof; and (b) The appellants acquired securities pursuant to that prospectus. The securities were worthless. Hence, the appellants are persons who, within the meaning of s 1005(1), suffered loss or damage "by conduct of another person that was engaged in contravention of a provision of this part or part 7.12". The conduct in question is the issuing of a prospectus containing a material statement that was false or misleading, or a material omission. 587 In other words, the appellants argue that, in regard to Case 2.1 and Case 2.2, they can recover damages for a contravention of s 996 without proof that they were misled or that they relied on the material statement that was false or misleading or the material omission. 588 Section 1007 supports this submission. It provides: 1007 No liability to person with knowledge of relevant matter A person referred to in subsection 1006(2), or a person who authorised or caused the issue of the prospectus, is not liable in action under section 1005 to a person who suffered loss or damage as a result of a false or misleading statement in, or an omission from, the prospectus if it is proved that, when the last-mentioned person subscribed for the securities to which the prospectus relates, that person knew that the statement was false or misleading or was aware of the omitted matter. 589 Thus, by s 1007, a defendant who issues a prospectus that does not comply with s 996 is not liable if the defendant can prove that the plaintiff (who invested in securities issued pursuant to that prospectus) knew of the matters giving rise to the contravention. An inference arises from s 1007 (and the defence provided thereby) that proof that the prospectus misled the plaintiff is not an element of an action under s 996. On the other hand, if the defendant proves that the plaintiff was not misled, the defendant is not liable. 590 I shall assume that the appellants' argument is correct. Such a case would be within the mischief addressed by s 996, because the investor who did not read the prospectus, would nevertheless expect that, if the truth were such that it was not likely that a prospectus containing this truth would be issued, a prospectus which did contain that truth would be likely to receive such adverse publicity as to warn the investor off. 591 In my opinion, proof that the loss was caused by conduct that contravened s 996 must include proof of one of the two following sets of circumstances: (a) First, had s 996 not been contravened, the corporation concerned would not have issued the offending prospectus but would have issued a different prospectus in non-contravening form and the different prospectus would have caused the plaintiff not to invest in the securities that gave rise to its loss. (b) Secondly (and alternatively), the corporation concerned would not have issued a prospectus at all and, hence, would not have issued the securities that gave rise to its loss. 592 Unless one or other of these sets of circumstances is proved, the plaintiff would not have proved that its loss was caused "by conduct" within the meaning of s 1005(1). Without such proof, a causal connection, as required by s 1005(1), between the loss claimed and the contravening conduct has not been established. Mere proof of a material false statement or omission does not constitute proof that a different prospectus, on which the plaintiff would not have relied to its detriment, would have been issued, or no prospectus would have been issued. This approach accords with "a common law practical or commonsense concept of causation" which, like s 82(1) of the TPA, s 1005(1) takes up: Compare Wardley Australia Limited v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ. 593 Where an element of a plaintiff's case under s 996 is that either a different prospectus would have been issued which would have caused the plaintiff not to purchase the securities, or no prospectus (and no relevant securities) would have been issued, the plaintiff's summons or statement of claim should allege these facts. Not to plead them would be contrary to the surprise rule: cf Digi-Tech (Australia) Ltd v Brand & Ors [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 184; at [164]). 594 At trial, as part of Case 2.1 and Case 2.2, the appellants did not prove that NCRH would have issued a different prospectus (which would have resulted in the appellants not making any NCRH-related investments), or NCRH would not have issued any prospectus (which would have had the same consequence). McDougall J did not deal with this matter, as he was not called upon to do so. On this basis, Case 2.1 and Case 2.2 fail as well. 42. Case 2.3: The board was not misled 595 Cases 2.3(a), (b), (c), and (d) are based on the smoothing cover, Trowbridge/NTA, trading prospects and issue purposes arguments. As, in my opinion, these arguments all fail, Case 2.3 fails. There are, however, other grounds on which I would hold that Case 2.3 (in all its manifestations) fails. I deal under this heading with the first of these other grounds. 596 I reiterate that Case 2.3 (unlike Cases 2.1 and 2.2) is based on a contravention of s 995 (not s 996). 597 Paragraph 39D of 6FAS was in the following terms: On 18 November 1998, each of Peck, Williams, Aroney, McKenzie on behalf of Macquarie, Murray and Payne on behalf of PWC, and Mutton on behalf of Phillips Fox [the DDC respondents] represented to the board of NCRH that there was no material statement in the Draft Prospectus (defined in paragraph 53(a)) that was false or misleading, there was no material omission from the Draft Prospectus and neither the issue of the Prospectus nor the offer of the Converting Notes involved conduct that was misleading or deceptive (DDC representation). 598 At trial, the appellants alleged that the representation so pleaded was false and misleading. 599 Issue 30, subject to one reservation by the appellants, was in the following terms: Whether, as a matter of law, the plaintiffs can succeed in a misleading or deceptive conduct case based on the "DDC representations" in circumstances where neither Saville nor the Plaintiffs relied on those representations. The appellants' reservation was that the word "directly" should be inserted after "relied". 600 Issue 31 included the question whether the NCRH board relied on the DDC representations in resolving to issue the prospectus. 601 On appeal, the appellants submitted in regard to Case 2.3: (a) In making the DDC representation the DDC respondents engaged in misleading conduct and thereby contravened s 995. (b) The misleading conduct alleged was based on the smoothing cover, Trowbridge/NTA, trading prospects and note issue purposes arguments. (c) The NCRH board relied on the DDC representations in resolving to issue the prospectus. (d) But for the misleading conduct, a different prospectus or no prospectus would have been issued and the appellants would not have invested in NCRH. (e) The appellants suffered loss or damage by the conduct of the DDC respondents. 602 Under Case 2.3, the appellants did not argue that they were misled. They pleaded in paragraph 39D of 6FAS that the DDC respondents made false representations to the board. 603 In [514] McDougall J said: Although there was but scant evidence that any director paid any attention to the activities of the DDC, I think it safe to accept that each director (with the possible exception of Messrs Daya and Peck, who were members of the DDC) would not have resolved to sign the Prospectus unless satisfied that the DDC had reported appropriately. To that extent, I think, the directors may be taken to have relied upon the representations made by the DDC prior to the issue of the Prospectus. His Honour erred in stating that Mr Daya was a member of the DDC. 604 The appellants did not dispute these findings. In their written reply submissions, they asserted that the judge's finding at [514] was "sufficient". This was consistent with what they argued orally. Mr Oslington submitted that his Honour held that the directors of the board did not rely on the DDC (T386). Mr Jackson, in reply, accepted this and said (at T1478): We don't challenge the trial judge's findings that the board didn't rely on the representations made by the DDC. 605 Mr Jackson submitted: The important thing was that they had a report from the DDC which was a unanimous report, which is saying, in effect that the prospectus could go ahead. That's the important bit. He argued (at T1479): What we say in relation to Case 2.3 is, in the end, fundamentally simple. It is that the board wouldn't have issued the Prospectus unless there was a report from the DDC which certified to put it shortly, in terms of the report that was actually made. Your Honours, we would say that it is immaterial, in the sense of irrelevant, if I can put it that way, that a director such as Mr Peck, who knew the true situation as at 18 November, might not have relied on – and I put the word in inverted commas – the correctness of the certification contained in the relevant report. Rather, it was the fact that the certification was being given that was the significant feature. 606 "Reliance" is in a sense an inappropriate description of the board's attitude to the DDC report. True it is that the board regarded the DDC report as a "certification", but only in the sense of a sine qua non of proceeding to resolve to issue the notes. The board's attitude did not involve any element of reliance on the truth of anything stated in the DDC report. In my opinion, the appellants' argument wrongly equates reliance, in the sense described, with being misled (that is, as part of the element of misleading conduct in a cause of action based on s 995). 607 As Case 2.3 is based on conduct said to have misled the board, it falls into the class of case where identified persons are alleged to have been misled. In Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 the High Court said (at [100]): In their joint judgment in Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 at 202, Deane and Fitzgerald JJ observed that whether or not conduct amounted to a representation was 'a question of fact to be decided by considering what [was] said and done against the background of all surrounding circumstances'. Their Honours continued (at 202): In some cases, such as an express untrue representation made only to identified individuals, the process of deciding that question of fact may be direct and uncomplicated. In other cases, the process will be more complicated and call for the assistance of certain guidelines upon the path to decision. 608 The High Court went on to observe (at [104], 86) that in Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 Deane and Fitzgerald JJ emphasised (at 200) that "no conduct can mislead or deceive unless the representee labours under some erroneous assumption". It is noteworthy that Deane and Fitzgerald JJ proceeded (at 200): The nature of the erroneous assumption which must be made before conduct can mislead or deceive will be a relevant, and sometimes decisive, factor in determining the factual question whether conduct should properly be categorised as misleading or deceptive or as likely to mislead or deceive. 609 These passages illustrate that there may be a close connection between the element of conduct that is misleading and the element of causation, namely whether such conduct results in any person being misled. This has long been recognised. In Brown v Jam Factory Pty Ltd [1981] FCA 35; (1981) 53 FLR 340 Fox J said (at 349): One looks to the audience, or the relevant part of it, and, eccentricities and absurdities aside, asks whether the conduct complained of was to them misleading or deceptive; but the question is not simply whether they (or he) were (or was) misled. Whether the conduct was misleading or deceptive is a matter for the court … Conduct will not mislead or deceive a person having a conscious awareness of the true facts or correct information. 610 In a case based on misleading conduct directed against identified individuals, and the person alleged to have been misled is not induced by the conduct in question to act or refrain from acting, there is no "erroneous assumption" in the sense required to establish misleading or deceptive conduct. The absence of an erroneous assumption is fatal to the cause of action based on misleading conduct. That is so irrespective of whether that absence is regarded as a failure to prove that the conduct is misleading or as a failure to prove causation. 611 I repeat that the appellants' accepted that McDougall J found the board did not rely on the representations made by the DDC and expressly took the position that they did not challenge that finding. The case must therefore be approached on the basis that the board did not act on the truth of the representations by the DDC. Accordingly, the board must be taken to have acted otherwise than under an erroneous assumption induced by those representations. It follows, in my view, that the DDC respondents did not engage in conduct that was misleading or deceptive or likely to mislead or deceive. Hence, the appellants failed to establish a contravention of s 995 and Case 2.3 against the DDC respondents fails on this ground. 43. Case 2.3 and Digitech 612 There is yet a further ground on which I would not uphold Case 2.3. 613 The appellants, in Case 2.3, did not allege or prove that they were misled. Digi-Tech (Australia) Ltd v Brand stands against their contention that they can succeed in a s 995 cause of action (and Case 2.3 is based on such a cause of action) without making out a case that they were misled. 614 Digi-Tech concerned s 51A and s 82 of the TPA. Certain investors invested in a scheme based on Digi-Tech's products. Digi-Tech provided misleading forecasts concerning certain of the products to a firm of accountants. The accountants devised an investment scheme based on these products and valued the scheme by assuming the correctness of the misleading forecasts. A Mr Urwin, who was not involved in the misleading conduct, proposed the scheme to investors who invested in it. The investors argued that, had Digi-Tech not been guilty of misleading conduct the accountants would not have given a high valuation to the products and Mr Urwin would not have proposed the scheme. On this basis, the investors would not have invested in the scheme and would not have suffered any loss. The investors' cause of action, so argued, did not involve the investors being misled. 615 This Court (Sheller, Ipp and McColl JJA) held that the relief so claimed was based on a flawed "but for" test for causation. The Court held that, under s 82(1) of the TPA, persons who claim damages on the ground of misleading or deceptive conduct in contravention of s 52, and who allege that they incurred those damages by acquiring something in consequence of such conduct, must prove that they were misled by that conduct. If that is not proved, the plaintiffs fail to establish that the damages claimed were suffered "by" that conduct. 616 Ford Motor Company of Australia Ltd v Arrowcrest Group Pty Ltd [2003] FCAFC 313; (2003) 134 FCR 522 is consistent with Digi-Tech. In that case Lander J (with whom Hill and Jacobson JJ agreed) said at 539: None of the cases relied upon support Ford's contention that causation can be established in a misrepresentation case without proof that the misrepresentations were relied upon. They support a different (but irrelevant proposition for the purpose of this case) that an applicant may establish causation in such a case by proving that a third party relied upon the misrepresentations and that party's reliance caused the applicant's damage. 617 The approach adopted in Digi-Tech is to be distinguished from cases such as Janssen-Cilag Pty Ltd v Pfizer Pty Ltd [1992] FCA 437; (1992) 37 FCR 526 where a person, by misleading conduct, induces another to act to the prejudice of the plaintiff. In the Janssen-Cilag Pty Ltd v Pfizer Pty Ltd category of case the plaintiff is a passive victim of misleading conduct. No action or omission by the plaintiff affects the loss it suffers. By contrast, in the Digi-Tech category of case, the plaintiff acts or refrains from acting to his or her prejudice by reason of conduct of a third party brought about by the defendant's misleading conduct; the plaintiff's conduct is a necessary link in the chain of causation. 618 The rationale of Digi-Tech is that loss incurred by plaintiffs in acting (or refraining from acting) to their prejudice can only be loss caused "by" conduct contravening s 52 if the plaintiffs are misled by that conduct. Likewise, in my view, such plaintiffs can only succeed in cases based on a contravention of s 995 if, in fact, they are misled. I stress that by "such plaintiffs" I mean plaintiffs who claim to have suffered loss brought about by their own actions or omissions coupled with misleading conduct by the defendants. As was noted in Digi-Tech, were it otherwise, such plaintiffs could succeed on the ground that, by making false representations, the defendants engaged in misleading conduct, even though the plaintiffs well knew the truth of the representations or were indifferent to them. As I have noted, different considerations apply to the Janssen-Cilag Pty Ltd v Pfizer Pty Ltd category of case. 619 McDougall J followed Digi-Tech in holding that in Case 2.3 the appellants did not prove that they suffered loss "by" the conduct of the DDC respondents. The appellants did not contend that Digi-Tech was wrongly decided (and I do not think that it was). In my view, his Honour was correct in the approach that he adopted. XI CASE 3.1 44. Case 3.1 and Digi-Tech 620 Case 3.1 was brought against the DDC respondents and is based on a contravention of s 995. Mr Daya was not a member of the DDC and is not a DDC respondent. 621 The contravention alleged was the provision by the DDC of a supplementary report to the board (constituted by a sub-committee comprised of Messrs Peck and Daya) on 12 January 1999, to the effect that nothing had come to their attention causing them to believe that there was a material statement or omission in the prospectus or any significant change affecting any matter in it. 622 Various respondents contended that Case 3.1 was not available on pleading grounds. It is not necessary to consider these grounds, save for an allegation of misleading conduct based on the failure of the DDC respondents to disclose to the board certain losses of which they became aware in December 1998 and January 1999. The latter ground is discussed below under the heading "Case 3.1: The DDC supplementary report". 623 The appellants contended that, by 12 January 1999 (that is, the date of the supplementary report by the DDC and the date on which the notes were issued) there had been significant changes affecting certain matters in the prospectus. The appellants contended that the existence of these changes meant that the representations made in the DDC supplementary report were misleading or deceptive. They argued that, by this misleading conduct, the board was misled into issuing the notes. The issuing of the notes, in turn, caused the appellants to suffer loss (as they invested in the notes which turned out to be worthless). 624 As is the case with Case 2.3, the appellants do not allege that they were misled. In this respect Case 3.1 falls into the same category as Case 2.3. Therefore, for the reasons that I have previously given, the appellants fail in regard to Case 3.1 by reason of the approach adopted in Digi-Tech. Any loss caused by the appellants on the basis postulated by Case 3.1 is not loss caused "by" the contravening conduct alleged (within the meaning of s 1005). 625 I go on to explain why, in my opinion, Case 3.1 fails on other grounds as well. 45. Case 3.1: The board was not misled 626 Mr Saville never saw the DDC supplementary report. Hence, the appellants' were compelled to argue that the board (not the appellants or Mr Saville) was misled by the DDC. 627 I have pointed out that, on the appellants' argument, "it was the fact that the certification was being given that was the significant feature" (T1477) . The appellants argued that the crucial fact was that the DDC supplementary report was a "trigger" for the issuing of the notes. The submission is encapsulated by the following submissions by Mr Jackson: It is alright to say that Mr Peck knew that, Mr Daya knew that. Mr Peck wasn't personally misled; Mr Daya wasn't personally misled. However, the point is, your Honours, that the giving of the certificate, in effect – I call it the certificate – was what brought about the issue of the notes. If one asks the question, "would the notes have been issued if there hadn't been the certification by the DDC?", the answer, in our submission, is, as the judge was inclined to think, "no". 628 Thus, the appellants approached Case 3.1 as they approached Case 2.3. They accepted, in reality, that the directors were not misled by the conduct of the DDC, but relied for misleading conduct on the fact of the making of the supplementary report (rather than anything in it that misled the directors). The "certificate" constituted by the supplementary report is said to be the relevant misleading conduct. No erroneous assumption is asserted. 629 I accept that the supplementary report was a sine qua non to the issuing of the notes - but for the DDC's "certificate", the notes would not have been issued. But that does not make provision of the supplementary report misleading conduct. As it was not proved that the board was misled, Case 3.1 fails. 46. Case 3.1: The DDC supplementary report 630 On 5 January 1999, the board resolved to delegate to Messrs Peck and Daya power to approve the issue of the notes and "any matters arising in relation to the content of the prospectus during the period from the issue of the prospectus on November 18, 1998." 631 Messrs Peck and Daya, so acting as delegates, met on 12 January 1999. The supplementary report was tabled at the meeting "in relation to matters arising since the issue of the prospectus on 18 November 1998 and today's date." 632 The resolution to which on 12 January 1999 Mr Peck and Mr Daya came, that is, that the notes be issued, confirmed: [T]hat they are of the opinion that, based on the report of the Due Diligence Committee referred to above, and their own knowledge of the company and its operations: (a) there is no deficiency in the Prospectus because it contains a material statement that is false or misleading nor is there any material omission from the Prospectus; (b) in relation to the Prospectus there has been no significant change affecting a matter included in the Prospectus and no significant new matter has arisen affecting the Prospectus. (13 Blue 6086) 633 The appellants submitted that the failure of the supplementary report to draw attention to material changes that had occurred between the date of the prospectus and 12 January 1999 falsified the following statements in the report: Each member of the [DDC] is of the opinion (relying on reports from the management of the Company and, in the case of matters falling outside his/her area of expertise, on those members of the [DDC] with the appropriate expertise or to whom a particular investigation was assigned) that nothing has come to their attention to cause them to believe: (a) that there is any deficiency in the Prospectus because it contains a material statement that is false or misleading or that there is any material omission from the Prospectus; and (b) in relation to the Prospectus that there has been any significant change affecting a matter included in the Prospectus or that any significant new matter has arisen which information about would have been required by part 7.12 of the Corporations Law to be included in the Prospectus if the matter had arisen when the Prospectus was prepared. 634 The appellants submitted that the material changes in question were: (a) Stop loss cover had not been obtained in accordance with Mr Ghose's stop loss proposal raised on 18 November 1998. (b) The losses that NCRH disclosed to the ASX on 23 December 1998; (c) Further losses that came to NCRH's attention in December 1998 and January 1999; (d) Mr Daya's proposal for a special prudential margin which he raised at the DDC meeting on 12 January 1999, and; (e) The fact that Trowbridge had not provided a further report by 12 January 1999. 635 The appellants contended that these matters affected the following three representations in the prospectus: (a) NCRH's current estimated NTA was between A$2.06 and A$2.20 per share; and (b) There were no events of which NCRH was aware which would lead to material further losses in 1998 apart from those identified in the prospectus; (c) A review by Trowbridge confirmed the adequacy of NCRH's claims provisioning. 636 As these matters concerned the belief of each of member of the DDC, the appellants needed to prove that the individual members of the DDC knew of them and that one or more of them falsified the statement by each DDC member in the supplementary report that nothing had come to his attention that caused him to believe that there was a deficiency in the prospectus or a significant change affecting matters in it or a significant new matter which should have been included in it. 637 I have dealt above with Mr Ghose's stop loss proposal (see above [495]-[499]. For the reasons I have given, I do not think that that proposal was evidence of significant changes that falsified statements made in the prospectus. It was not a response to a known, quantifiable loss. It is correct that the prospectus said that, in recognition of the uncertainty highlighted in the Trowbridge report and to provide additional comfort as to the adequacy of its reserves, NCRH was seeking stop loss cover as further retrocession protection to insulate itself against claimed deterioration. This, however, did not mean that the fact that stop loss cover had not been obtained was a material change affecting that statement. 638 I have accepted the submission that the motivation for the stop loss cover was not an undisclosed latent deterioration, but the desire to reduce the variance around the central estimate as disclosed by the sensitivity analysis in the Trowbridge report. Failure to fulfil that desire could reasonably be regarded by the members of the DDC as not being a significant change or new matter affecting a matter included in the prospectus. 639 Thus, I do not accept the argument based on the stop loss proposal. 640 On 23 December 1998 NCRH made a statement to the ASX concerning recent claims received, including claims from the Swiss Air Flight 111 crash and Hurricane Georges. Mrs Dianne Williams of NCRH, however, disclosed these losses to Mr Saville in a private meeting a day or two before the ASX announcement was made. At this meeting, Mr Saville was given and taken through a draft of the announcement (13 Blue, (5914-1-5914-2). He also downloaded the final announcement on 23 December 1998 (13 Blue 5924). McDougall J held (at [557]) that the ASX announcement had come to Mr Saville's attention and that he understood it. In particular, Mr Saville understood that the announcement reduced NCRH's NTA from $2.06-$2.20 (according to the prospectus) to $1.95 (McDougall J at [143(5)], [144]). As his Honour observed, after the ASX announcement: [N]either [Mr Saville] nor the [appellants] made any complaint, or sought to withdraw from the commitments that they had then made; on the contrary, a number of the [appellants] waded into the market and bought rights and after 31 December 1998 notes (and shares). Mr Saville's conduct speaks volumes concerning the materiality of the information disclosed to the ASX on 23 December 1998. 641 Thus, I do not accept the argument based on the losses that NCRH disclosed to the ASX on 23 December 1998. 642 The appellants submitted that in December 1998 further losses, having a gross effect of US$12.1M came to the attention of NCRH. They asserted that as at 12 January 1999 yet further losses on stop loss contracts of US$2.5M had been reported. The appellants submitted that these adverse changes had a material affect on the NTA and the DDC should have disclosed them to the board. The DDC respondents, on the other hand, submitted that the appellants should not be allowed to raise this "further losses" argument as it had not been pleaded. 643 Case 3.1 is based on what were described in 6FAS as the Prospectus NTA Representations. These representations are contained in paragraph 129 of 6FAS. Paragraph 154(a) pleads that Messrs Williams, Aroney and Peck contravened s 995 by reason of the "matters pleaded in [paragraph 129]". 6FAS does not plead a case based on the Prospectus NTA Representations against the other DDC respondents. Furthermore, the appellants were not able to point to any part of the Prospectus NTA Representations, as defined in paragraph 129, that pleaded allegations under Case 3.1 relating to the further losses in December 1998 and January 1999 on which they relied in their submissions. 644 McDougall J did not deal with the further losses argument and I infer that he did not do so because it was not pleaded. It was not suggested that his Honour erred thereby. 645 I would uphold the DDC respondents' submission that the appellants should not be allowed to raise the further losses argument as it was not pleaded at trial. 646 The special prudential margin Mr Daya proposed was not evidence of a realisation that further losses would be incurred. Dr McKenzie testified that, at the meeting of the DDC that led to the supplementary report, either Mr Daya or Mr Williams explained that the proposal was "to ensure that past business does not adversely impact 1999 results" and that if such a reserve were to be adopted, it would be a change in accounting policy. Dr McKenzie recorded in his notebook that the prudential reserve concept did not imply deterioration in NCRH's "book" (6 Blue 2718 See generally 2 Blue 755). The evidence of other persons who attended the meeting was to similar effect (12 Black 6369.18, 9 Black 4791.17-47, 13 Black 6601.45-6602.10). 647 Moreover, McDougall J in effect found (at [941], 15 Red 3607) that Mr Daya did not propose a special prudential margin to the DDC members. The minutes of the DDC meeting of 12 January 1999 record merely that Mr Daya was considering recommending the creation of a special prudential margin. 648 Thus, I do not accept the argument based on Mr Daya's proposal in question. 649 I turn now to the fact that by 12 January 1999 Trowbridge had not provided a further report. The appellant submitted that the fact that Trowbridge had not reported was itself material and called for disclosure because of the statement in the prospectus that a review by Trowbridge "confirms the adequacy of the Company's claims provisioning"', which by reason of subsequent events would not necessarily (and in their submission did not) hold good; it needed to be updated. Certain of the respondents submitted that this was outside the case pleaded against them, but it is unnecessary to consider that matter. 650 Disclosing that Trowbridge had not further reported was material only if there was a basis for thinking that Trowbridge might report adversely to the adequacy of NCRH's claims provisioning. 651 Messrs Williams and Aroney informed a DDC meeting that took place on 17 December 1998: [I]t was likely that the Committee would not be able to have any meaningful snapshot of the Company's likely year end result before the time for allotment of the notes. (6 Blue 2477) 652 Dr McKenzie accepted that advice and McDougall J accepted his evidence (at [544]). There is nothing to suggest that the other DDC members did not have the same view. 653 At the time of the note issue, Dr McKenzie understood that the work being done by Trowbridge would not be completed until at least February 1999 (7 Black 6413-6414). In fact, Trowbridge did not complete the work in question until late March 1999. (13 Blue 6097) 654 Mr Daya informed Messrs Peck, Williams and Mutton in a telephone call on 21 December 1998 that: Trowbridge do not have anything to add to what has already been discussed. Trowbridge's numbers are very crude and cannot be relied on. It would be unwise to do anything with them. (3 Blue 1312 [365]-[366]) This was reported to Dr Mckenzie and other members of the DDC (3 Blue 1312). 655 McDougall J accepted the evidence of Dr McKenzie to the effect that he expected that (at [566]): Trowbridge would have withdrawn its consent to be named, and for its report to be included, in the prospectus, or at least to have advised the DDC if it had formed a view prior to 12 January 1999 that its report had become materially inaccurate. This finding was not challenged. 656 His Honour made the unchallenged finding (at [564]) that: There was nothing, apart from the disclosed possible loss of $12.1 million gross of set offs, to indicate that there was anything other than a theoretical risk of loss because of further adverse claims experience. To the extent that there was a theoretical risk of loss (because adverse claims development is one of the hazards of insurance and reinsurance), Mr Saville was aware of it. 657 For these reasons I do not accept that the omission to wait for the Trowbridge report, or to reveal that Trowbridge was working on a further report which had not been completed, was a material change or otherwise something that required disclosure. 658 I would dismiss the appeal in regard to Case 3.1. XII CASE 3.2 47. Case 3.2 as put at trial and the judge's findings 659 Case 3.2 is based on contraventions of s 995 and is brought against Mr Daya alone. According to Case 3.2, had the contraventions associated with the decision of NCRH to proceed with the issue of the notes not occurred, the note issue would have been terminated (3 Orange 752 paragraph 18). 660 McDougall J found that Mr Daya was liable to the appellants for direct contraventions of s 995 and as an accessory to NCRH's contraventions. The conduct giving rise to the contraventions was Mr Daya's omission to disclose to the DDC and the board information he had been given by Trowbridge in December 1998 and January 1999 about increases in claims that NCRH had received. Mr Daya's knowledge, however, was NCRH's knowledge and NCRH failed to disclose that information to the appellants. Thus, the finding of liability against Mr Daya was on a different basis to that which the Case 3.1 respondents had to face. 661 His Honour found that on 23 December 1998 Trowbridge gave Mr Daya a copy of a model summary it had prepared. That summary took account of claims data until the end of November 1998 (the latest information then in Trowbridge's possession). The model summary showed a discounted net provision of US$204.483M, including a prudential margin of US$10.187M (at [914]). 662 On 29 and 30 December 1998 Trowbridge gave Mr Daya a model summary showing a discounted net provision of US$214.229M, including a prudential margin of US$10.641M (at [917]). 663 On 8 January 1998 Trowbridge gave Mr Daya a model summary as at that date, together with other data. The material contained a discounted net claims provision of US$249.608M, including a prudential margin of US$11.886M (at [920]). 664 McDougall J found (at [924]) that the proper inference to be drawn from Mr Minty's evidence was that on 11 January 1999 he gave Mr Daya a model summary showing a discounted net provision of US$244.376M, including a prudential margin of US$11.637M. His Honour said that this inference was supported by the agenda for the meeting of 11 January and by Mr Minty's and Ms Robertson's handwriting on their copies of that agenda. His Honour considered that, in all the circumstances, it was likely that Mr Minty would have given that model summary to Mr Daya at the meeting. In Mr Daya's written submissions he challenged this finding, but I did not understand Mr Braham to persist in this challenge in his oral submissions. In any event, I think that his Honour was correct. 665 As I have mentioned, at trial the appellants contended that Mr Daya was liable to them under Case 3.2 on one of two alternative bases. The first was that he was independently liable for contravening s 995. The second rested on Mr Daya's accessorial liability under s 79 of the Corporations Law (that is, for contraventions of s 995 committed by NCRH). 666 Mr Daya's potential liability on both bases falls into two separate categories. The first involves information which, on 23 and 29 December 1998, Trowbridge disclosed to Mr Daya (the December information). The second involves information that Trowbridge disclosed to Mr Daya between 1 January 1999 and 12 January 1999 (the January information). 667 McDougall J found, on both bases, that there had been contravention of s 995. As regards Mr Daya's independent liability, his Honour found that Mr Daya had engaged in misleading or deceptive conduct by omitting to disclose the December and January information to the DDC and the board. As regards Mr Daya's accessorial liability, his Honour found that NCRH, with knowledge of that information through Mr Daya, had engaged in misleading or deceptive conduct by omitting to disclose the December and January information to the appellants. Mr Daya was held to have been knowingly concerned in the contraventions of s 995 constituted by NCRH's misleading or deceptive conduct and therefore liable to the appellants under s 79 of the Corporations Law for any loss or damage they sustained thereby. 668 The December information consisted of model summaries that Trowbridge gave to Mr Daya on 23, 29 and 30 December 1998. The 23 December 1998 model summary took account of claims data until the end of November 1998 (the latest information then in Trowbridge's possession) and showed a discounted net provision of US$204.483M, including a prudential margin of US$10.187M (at [914]). The 29 and 30 December 1998 model summaries showed a discounted net provision of US$214.229M, including a prudential margin of US$10.641M (at [917]). 669 The January information consisted of model summaries that Trowbridge gave to Mr Daya on 8 and 11 January 1999. The 8 January model summary showed a discounted net claims provision of US$249.608M, including a prudential margin of US$11.886M (at [920]). The 11 January model summary showed a discounted net provision of US$244.376M, including a prudential margin of US$11.637M. 670 McDougall J considered that the December information "showed at least the possibility, and more realistically the likelihood, of a very severe deterioration in the outstanding claims liability" (at [997]). His Honour held the December information to be material and stated (at [1041]): A deterioration in reserves (had it occurred) of either of the orders of magnitude disclosed to Mr Daya [in December 1998] would have had a significant impact on the NTA per share … A deterioration in reserves of the order disclosed would translate to a gross diminution in NTA per share of approximately US$0.70 to US$0.80. Of course, this gross impact might require to be adjusted by reason of other matters; but the sheer magnitude of the possible impact required disclosure. 671 In dealing with the independent liability of Mr Daya, McDougall J found (at [931]), in the context of Mr Daya having been given the December and January information: Mr Daya dishonestly maintained silence when the question was asked at the 12 January 1999 DDC meeting (he being one of those present), whether anyone knew of anything material that should be communicated to the DDC. On any view, the [December and January information was] material … It is quite clear in my mind that if Mr Daya had communicated to the DDC on 12 January 1999 the substance of the information being provided to him by Trowbridge, the DDC would not have recommended to the Board (or its delegates) to issue the converting notes but would have recommended, instead, that the capital raising be terminated (or 'pulled' to use an expression that was bandied about in cross-examination). 672 His Honour held (at [1052]) that "Mr Daya's conduct in withholding the information from his fellow directors and from management was, independently of his accessory liability, misleading or deceptive". 673 His Honour said (at [1061]): I have no doubt that, if the extent of the likely further deterioration had been disclosed in December 1998 or prior to 12 January 1999, the DDC would not have recommended to the delegates of the Board that it issue, and the Board would not have issued, the converting notes. 674 Accordingly, his Honour found that, had either the December information or the January information been disclosed, the DDC would not have recommended that the board issue the notes and the board would not have issued them. Thus, it is sufficient for the appellants to succeed in their case against Mr Daya based on his independent liability if they establish liability on his part for contravening conduct either in December or in January. 675 In dealing with Mr Daya's accessorial liability, McDougall J observed (at [989]): [T]he knowledge gained by Mr Daya in the course of his dealings with Trowbridge was the knowledge of, or is to be imputed to, NCRH. 676 McDougall J held (at [1049]) that "the matters communicated by Trowbridge to Mr Daya, and through him to NCRH" in December 1998 and January 1999 imposed on NCRH an obligation of disclosure. His Honour held that NCRH's failure to comply with that obligation, whilst proceeding with the note issue, was misleading or deceptive and contravened s 995. His Honour held (at [1050]) that Mr Daya was "clearly a person knowingly involved" in NCRH's contravention. 677 A necessary element of the appellants' claim under Case 3.2 based on Mr Daya's accessorial liability is that they were misled by the contravening conduct of NCRH (on the basis that Mr Daya's knowledge was to be attributed to it). In this regard, McDougall J held (at [1061]): I think that an announcement of deterioration of the magnitude suggested by Trowbridge's model summaries in January 1999 would have persuaded [Mr Saville] that the plaintiffs, to the extent that it was possible to do so, should not proceed with their investments. In other words, I think, Mr Saville would have sought to ensure that, so far as possible, the plaintiffs did not complete their commitments . 678 It is implicit in this finding that NCRH, by not disclosing the January information, misled the appellants. 679 His Honour proceeded (at [1062]): [D]eterioration of the magnitude suggested by the Trowbridge model summaries of January 1999 would have convinced Macquarie that there had been a material adverse change, and that it should not expose the sub-underwriters to the likely consequences of that change. I think that a likely deterioration of that magnitude would have persuaded Macquarie to terminate the sub-underwriting agreement, as undoubtedly it would have been entitled to do. 680 His Honour stated (at [1063]): Thus, I think, the losses suffered by those plaintiffs who had agreed to subscribe for converting notes or to sub-underwrite the issue would have been avoided had Mr Daya and NCRH complied with their obligations. 681 Thus, his Honour held Mr Daya to be liable both independently and as an accessory to NCRH. The appellants failed against Mr Daya only because his Honour determined that they had failed to prove the loss they suffered in consequence of Mr Daya's contraventions. I have expressed above the view that his Honour erred in this respect. 682 On appeal, the appellants relied on his Honour's determination of liability on the part of Mr Daya and challenged the findings that they had not proved their loss. Mr Braham challenged his Honour's findings as to liability on two broad grounds. Firstly, he submitted that a number of crucial findings made by his Honour were outside the pleadings. Secondly, he submitted that his Honour misunderstood certain of the evidence and made incorrect findings in consequence. 683 Although Mr Braham submitted, generally, that findings his Honour made concerning the December and January information were not open on the pleadings, he differentiated in two important respects between the December and January information. 684 Mr Braham challenged the judge's understanding of the evidence as to the materiality of the December information. On the other hand, while he also challenged the finding that the January information was material, I think that in the end the challenge was scarcely maintained. Mr Braham correctly accepted that the scale in the increase in claims provisions in January was significant (T983, 993, 994). The increase in claims was far greater than could be offset by earned premiums and retrocession recoveries, and in my view his Honour's finding was correct. 685 In addition, Mr Braham submitted that his Honour's findings of misleading conduct in regard to the January information assumed an obligation on the part of NCRH to advise investors, after the expiry of the application period relating to the notes, of significant changes that might affect statements made in the prospectus, whereas no such obligation existed. 48. The pleading (in Case 3.2) of Mr Daya's independent liability 686 Mr Daya's amended notice of contention asserted, in effect, that, on the pleadings, it was not open to McDougall J to find that Mr Daya withheld the December and January information from the DDC and the board and that he thereby contravened s 995. Mr Braham submitted orally that, on the pleadings, it was not open to McDougall J to find Mr Daya had acted dishonestly, this not having been pleaded. 687 Paragraph 105(b) of 6FAS alleged that, in the prospectus, NCRH represented that it was not aware of any material claims that would have a significant impact on NCRH's financial position for the second half of 1998, other than those identified in s 4.3 of the prospectus. Paragraph 105(c) alleged that NCRH represented in the prospectus that its current estimated net tangible assets represented a share price of between approximately A$2.06 and A$2.20 per share. These representations formed part of what was described as "the Prospectus NTA Representations". 688 Paragraph 128 of 6FAS alleged, in effect, that Mr Daya was under a duty to inform Mr Saville of any change in circumstances that would render any of the Prospectus NTA Representations false. Paragraph 129 alleged that, in the period from 18 November 1998 to 12 January 1999, NCRH became aware of circumstances that rendered the prospectus NTA representations false. Paragraph 129 went on to allege in sub-paragraphs (j) and (k) that Trowbridge had advised Mr Daya of the December information and in sub-paragraphs (l) and (m) of the January information. 689 Paragraph 132 of 6FAS alleged, in effect, that by the matters pleaded in paragraph 129 NCRH engaged in misleading or deceptive conduct. Paragraph 141 alleged that, by reason of the matters referred to in paragraph 129, NCRH ought to have withdrawn the prospectus prior to 12 January 1999. Paragraph 152 alleged that Mr Daya was knowingly concerned in the contraventions of NCRH pleaded in paragraphs 132 and 141. Paragraph 154 alleged that Mr Daya thereby engaged in misleading or deceptive conduct. Paragraph 155 alleged that were it not for the contraventions pleaded in paragraph 154 the notes would not have been issued or acquired. 690 As Mr Braham submitted, however, 6FAS did not plead that Mr Daya failed to disclose the January information to the DDC or the board. Further, it did not plead that Mr Daya thereby engaged in misleading conduct and it did not allege dishonesty against him. I therefore would uphold Mr Braham's submissions in this regard. 691 McDougall J observed (at [40]): Before the hearing of these proceedings commenced, the solicitors acting for Mr Daya sought and obtained leave to file notice of Ceasing to Act. This occurred, as I understand it, because the insurance company by whom in reality they were instructed denied liability under the relevant policy. Although Mr Daya had prepared, and there has been filed, a detailed statement of evidence, he was not represented and took no part in proceedings. He was contacted by the Court to ascertain whether he wished to give evidence, and replied that he would not do so. He said, relevantly, that his solicitors had ceased to act 'given that my personal financial situation has prevented me from defending the claims made against me in these proceedings'. Thus, he said: "[a]lthough I would like to be in a position to respond to the allegations made against me by the plaintiffs, my impecunious financial position does not allow me to participate and as such I am unable to give evidence. 692 Accordingly, Mr Daya did not participate in the agreement of the statement of issues by reference to which McDougall J structured his judgment. As he did not agree to those issues, they can in no way be binding on him. 693 It was incumbent on the appellants to ensure that each case they wished to make against Mr Daya was properly pleaded, at least to the extent that each element of each respective cause of action was pleaded. As they failed to plead the crucial elements that Mr Daya failed to disclose the December and January information to the DDC and the board, and that he thereby engaged in misleading conduct, no case based on those allegations could be found against him. In my opinion, his Honour erred in this respect. 49. Mr Daya's conduct in December 1998 694 Mr Daya's conduct in December 1998 is relevant both to his independent liability (which under the preceding heading, I have held should fail as it was not adequately pleaded) and his accessorial liability. I propose now to deal with that aspect of Case 3.2. 695 The appellants' case in regard to Mr Daya's December 1998 misleading conduct involved comparing the net provisions for claims in December with the net provision for claims in the prospectus. The appellants submitted that the increases were so large as to indicate that there had been a materially adverse change to NCRH's financial position that should have led to NCRH abandoning the note issue. 696 The net provision for claims in the prospectus was US$141M plus a 5% to 10% prudential margin (used for the purposes of calculating the NTA). (see [920]) 697 The model summaries that Trowbridge gave to Mr Daya were based on claims data for the periods reflected in each summary. The model summaries given to Mr Daya in December 1998 showed increases over the net provision for claims in the prospectus (allowing for the prudential margins) of between about US$52M to about US$62M. 698 The model summaries that Trowbridge gave to Mr Daya in January 1999, showed increases over the net provision for claims in the prospectus (allowing for the prudential margins) of between about US$91M to about US$95M. 699 Mr Braham submitted that, unlike the increases in the January information, the increases in the December information were not significant. He submitted that the December information increases were not so large as to be self-evidently of concern as due allowance still had to be made for the receipt of premiums over the relevant period. Additionally, the business of NCRH had grown over the two years prior to December and an increase in claims was to be expected. Recoveries expected from retrocession cover constituted a further factor of which account had to be taken. This was particularly relevant as the assessment of these amounts was difficult and time consuming; Trowbridge only completed this assessment in January 1999. 700 Mr Greenwood, for Trowbridge, submitted that the increases in the December claims provisions, of themselves, did not show any deterioration in the financial position of the company. He submitted that, ordinarily, no conclusion could be drawn simply from the fact of an increase in provisions for outstanding claims. That is because an increase in the claims provision, unless it was obviously extraordinarily and unexpectedly large, would not indicate the earned premiums and retrocession recoveries receivable in the relevant period. 701 In December 1998 it was expected that NCRH's earned premiums from June to December 1998 would have increased by A$15M per month. Thus, the additional A$90M that would then be available on the assets side of the balance sheet would have to be compared to what was then expected to be A$10M per month of attritional claims, amounting to some A$60M. On this basis, Mr Braham submitted, an increase in the provisional claims provisions from A$140M as at 30 June 1998 (as reflected in the prospectus balance sheet) to A$204M (reflected in the model summary of 23 December 1998) or even A$214M (reflected in the model summary of 29 December 1998) was not necessarily significant. As I indicate below, the evidence of the Trowbridge actuaries, Mr Minty and Mr Atkins, supported this submission. 702 In January 1999 the incoming claims situation worsened dramatically without any proportionate increase in premiums received. 703 Mr Minty described the 23 December 1998 model summary as a "draft" (11 Black 5729 M). He agreed that it did not reflect earned premium in the period June to December 1998 and accepted that, by December 1998, earned premium income had "moved by nearly A$100M". (Black 5731 P – S, 5732 P – T). He was of the opinion that, in order to assess whether an increase in the net claims provision represented a significant change to the company's overall position, it would be necessary to examine the balance sheet as a whole. (11 Black 5755Q) 704 Mr Minty said that the increase in the net claims provision as at 23 December 1998 would not have led him to conclude that there was a material difference between the position as at that date and as at 30 June 1998 (11 Black 5756 L – P). He said that the 23 December model summary did not alert him to any significant change "in the need for the company's provisioning" between 30 June 1998 and 23 December 1998. (11 Black 5731 T – 5732 C). He did not accept that the net claims provision in the model summary of 23 December 1998 constituted any deterioration from the position conveyed by the Trowbridge report in the prospectus. (11 Black 5757 J – L). The following exchange is relevant: Q. Mr Minty, by 31 December 1998, you knew that Trowbridge's net central discounted estimate of claims liability for New Cap as at 30 June 1998, as expressed in the report in the prospectus, by virtue of events which had since occurred was no longer accurate? A. There were claims which had emerged since the date of the prospectus report but which I believed were still within the bounds of what the prospectus report referred to in terms of the development of costs, so that as at 31 December 1998 I had not formed that view. 705 The appellants referred to other evidence by Mr Minty that appeared to be inconsistent with some of his evidence quoted above. Mr Minty was cross-examined as follows after having been shown the transcript of his liquidator's examination on 29 May 2000 (11 Black 5644 T – 5646 G): Q. It is perfectly plain, isn't it, Mr Minty, that the answer that you gave was to the effect that that document, the 29 December model summary, showed, on a reasonable interpretation of that document, that the company's position was deteriorating alarmingly? A. That's what I said, yes, but – Q. And that was the best evidence that you could give many years closer to the event than we are now? A. And having gone through the process of being led through the evidence, yes. … Q. The number $214M is the gross position at 31 December. Even allowing for the sixth months from the 30 June figure which is in the prospectus report, that was certainly a substantial increase, wasn't it? A. It was, yes. Q. And more than you would have expected at face value? A. Perhaps at face value without going back and checking, as I say, things like earned premium and the other matters which would have impacted the final result, yes. Q. Earned premium was something that you were able to extrapolate to any point that you wanted, wasn't it? A. If we had sat down to it – yes, we did, and it was in certain files. It wasn't summarised on this summary. Q. You had the data to 30 November and you had the earned premium data there, didn't you? A. That's correct. Q. Had you wanted to, it was not a difficult matter to extrapolate that last month of earned premium, was it? A. No, that's correct. Q. It is a regular function, is it not? A. It is a straightforward function to do, yes. Q. Bearing those answers in mind, Mr Minty, the deterioration on its face demonstrated by the 29 December model summary was such that you would have wanted to revise your prospectus report or at least to undertake further work, before confirming the accuracy of your prospectus report; is that not the case? A. I believe that's the case, yes. 706 McDougall J found that Mr Minty (and Mr Atkins, to whose evidence I refer next) were seeking to the best of their ability to give honest evidence, and that, within the limits of memory, their evidence should be accepted as reliable. It follows that their evidence must be accepted at face value. In particular, their evidence at the trial should be accepted and the evidence given by them during the liquidator's examination should be regarded as having lesser weight. On this basis, I consider that the cross-examination of Mr Minty which I have quoted did not detract significantly from his opinion given elsewhere when testifying, expressed clearly and more than once, that the increases in the net claims provisions in the December model summaries did not of themselves indicate a significant change from the financial position of NCRH as reflected in the prospectus. 707 Mr Atkins described the model summary of 23 December as a "working model" and said, "there was lots of refinement still to be done" (11 Black 5902 M – P). When asked whether the net claims provision of $204M in the 23 December model summary "was a very substantial increase from previous provisions", he replied: The provision at June was $150M. $204M is $54M more, which is about what I would expect. 708 Mr Atkins testified: It's not clear at all that those figures [the increase in the discounted net provisions shown in the 23 December model summary] reflected a deterioration in anything. As I said, the number was $50M higher. The earned premium for the company for half a year was about $90M, if I remember correctly, so it would be quite expected for the cost of claims to have increased by something in the range of $60M to $70M over six months. That wouldn't necessarily all be outstanding; some if it would have to be paid – some of it would have been paid. But on its own, that 23 December result doesn't show a deterioration in anything. 709 The following exchanges in Mr Atkins' cross-examination are significant: Q. Is the position that, to your observation, Mr Daya didn't appear to react as you would have expected when you were providing him with model summaries in December 1998 and January 1999? A. Its correct in respect of January. Q. In respect of the 8 January model summary that we just had a look at? A. Yes. (11 Black 5898 U) And: Q. You recognise don't you in paragraph 30 of your main statement that your evidence at the liquidator's examination in 2000 was to the effect that you were aware in December 1998 of a very large increase in claims being reported to New Cap? A. Yes. Q. And at the time you gave that evidence to the Court in 2000, that was your honest recollection? A. Yes. Q. The position that you take now is that Trowbridge was not aware until January 1999 of a large increase in the number of claims being reported to New Cap; is that right? A. Yes. (11 Black 5901 K) 710 The point was emphasised in further cross-examination. Q. You agree, don't you, that your evidence was to the effect that the $204 Million figure reflected a significant deterioration? A. That's what I said. Q. And that was the truth, wasn't it? A. No. (11 Black 5903K) 711 The following exchange must also be noted: "Q. And that the 23 December model summary reflected a deterioration worse than such an expected value? A. As I've explained, that interpretation is incorrect – the interpretation that I gave to the court at that time. Q. What I want to suggest to you is that the reason you are seeking to resile from that interpretation is that you recognise a potential liability for Trowbridge stemming from that answer? What do you say to that? A. No. 712 McDougall J accepted that at trial Mr Atkins was attempting to tell the truth and expressed the same view of Mr Atkins's credibility as he did of Mr Minty. Accordingly, Mr Atkins' evidence at the trial should be accepted in preference to the evidence given by him during the liquidator's examination. 713 Messrs Peck and Murray gave evidence to the effect that they would have regarded the information contained in the December model summaries (had they known of it) as reflecting an extremely serious adverse change to the company. Mr Daya was not legally represented at the trial and he did not cross-examine Messrs Peck and Murray about that testimony (in fact, he was not present when they testified). In particular, the explanations given by Messrs Minty and Atkins as to why the December model summaries did not reflect a material adverse change were not put to Messrs Peck and Murray. 714 In my opinion, the evidence of the actuaries, Messrs Minty and Atkins, provides convincing support for Mr Braham's argument that the December model summaries did not reveal a significant deterioration in NCRH's financial position since the prospectus. 715 The appellants submitted that the "key findings" by McDougall J on this issue were as follows (at [1041]) and [1042]): For the reasons that I have given in paras [996] and [997] above, the information conveyed by Trowbridge to Mr Daya and through him to NCRH was material. A deterioration in reserves (had it occurred) of either of the orders of magnitude disclosed to Mr Daya would have had a significant impact on the NTA per share. One of the key features of the converting note issue was the represented NTA share (and the comfort that this would give noteholders through their priority over shareholders and, assuming that things went to plan, the conversion mechanism). A deterioration in reserves of the order disclosed would translate to a gross diminution in NTA per share of approximately US$0.70 to US$0.80. Of course this gross impact might require to be adjusted by reason of other matters; but the sheer magnitude of the possible impact required disclosure. It must follow that, having regard to the representations as to NTA that I have found when made in the Prospectus, the failure to disclose the possible or likely significant impact of deterioration in reserve was misleading or deceptive. 716 The appellants submitted: In these paragraphs, his Honour quantifies the effect of what Mr Daya was told in the summaries on the NTA. His Honour recognised that this gross impact may have to be adjusted by reason of other matters, but that regardless of this the possible impact required disclosure. 717 The appellants submitted that these observations were a complete answer to Mr Braham's submission that the judge needed to, and did not, consider other matters, such as unearned premium, before concluding whether a deterioration in reserves was a matter that needed to be disclosed. 718 The problem with his Honour's findings at [1041], however, is that they pay no regard to the evidence of Messrs Minty and Atkins that the December information claims provisions, alone, did not have "a significant impact on the NTA per share". A "deterioration in reserves of the order disclosed" would only "translate to a gross diminution in NTA per share of approximately US$0.70 to US$0.80" if no regard is had to whether other items, such as increases in earned premiums and retrocession recoveries, compensate for the increases in the reserves. 719 In my opinion, the evidence of Mr Minty and Mr Atkins does not justify the finding, in regard to the increased claims provisions in the December model summaries, that "the sheer magnitude of [their] possible impact required disclosure". If I am correct in that view, his Honour's reference to the fact that the "gross impact might require to be adjusted by reason of other matters" does not cure the problem. The basic error, with respect to his Honour, was to find, contrary to the evidence of Mr Minty and Mr Atkins, that the amount of the increases, alone, was so large as require disclosure. 720 His Honour held (at [1061]): I have no doubt that, if the extent of the likely further deterioration had been disclosed in December 1998 or prior to 12 January 1999, the DDC would not have recommended to the delegates of the Board that it issue, and the Board would not have issued, the converting notes. 721 In my respectful view, his Honour's misunderstanding of the effect of the increase in the claims provisions infected this finding. I appreciate that the evidence of Mr Peck and Mr Murray is consistent with it, but I have pointed out that Mr Daya was not present to challenge them on the issue. Moreover, once the judge accepted the credibility of the actuaries, the weight of their evidence on the issue must outweigh that of Mr Peck and Mr Murray. First, the actuaries are experts in the field and his Honour accepted their evidence, generally. Secondly, it is apparent from the transcript that the opinions of Mr Peck and Mr Murray were given as immediate responses in cross-examination and were not based on a reflective consideration of the issue. In particular, they do not seem to have borne in mind the need to take account of expected earned premiums income and retrocession recoveries or that explanation by the actuaries might have changed their first reaction. 722 In my opinion, when due regard is had to the evidence of Mr Minty and Mr Atkins, Mr Daya did not engage in misleading or deceptive conduct in relation to the December information as alleged. 723 I should mention that there is another basis on which Mr Daya, potentially, engaged in misleading conduct by failing to disclose information that came to his attention in December 1998. On 23 and 30 December 1998 Mr Daya attended meetings with Ms Robertson, an actuary employed by Trowbridge. These meetings were held to enable NCRH to give Trowbridge the information necessary to enable it to prepare the model summaries. Mr Daya and Ms Robertson discussed individual contracts in considerable detail and it would be open to find that Mr Daya was informed, in effect, that there had been a grave change in the financial position of NCRH. This, however, was not a matter pleaded against Mr Daya. 724 Mr Braham stressed that 6FAS pleaded only misleading conduct on Mr Daya's part based on knowledge he derived from the net provisions for claims contained in the model summaries. Mr Braham pointed out, correctly, that 6FAS did not allege that Mr Daya's misleading conduct was based on anything other than that knowledge. 725 The appellants advanced a number of submissions based on evidence of Mr Daya's knowledge that he obtained independently of the model summaries. In my opinion, however, Mr Braham's pleading point on this issue should be upheld. The submissions in question concern misleading conduct that reflects on Mr Daya's integrity. I have emphasised the need to plead allegations of this kind expressly. This need was particularly acute as regards Mr Daya, as he was neither legally represented nor present in court. In my opinion, the appellants' omission to plead such allegations means that Mr Daya was not called upon to meet a case so based. Accordingly, I do not have regard to those submissions. 50. The pleading (in Case 3.2) of Mr Daya's accessorial liability based on the January information 726 In the light of my conclusions in relation to Mr Daya's conduct in December and the December information, the appellants' accessorial liability argument in Case 3.2 based on the December information fails. I have not yet dealt with Mr Daya's accessorial liability in Case 3.2 based on the January information. I turn firstly to the way in which that case was pleaded. 727 Paragraph 129 6FAS pleaded that between 18 November 1998 and 12 January 1999 NCRH became aware of the January information and this information rendered the Prospectus NTA Representations false. 728 Paragraph 130 alleged that Mr Daya knew that the January information rendered the Prospectus NTA Representations false. 729 Paragraph 132(a) pleaded that by reason of various matters, including those pleaded in paragraphs 129 and 130, NCRH engaged in misleading or deceptive conduct in contravention of s 995(2). 730 Paragraph 141 pleaded that prior to 12 January 1999, by reason of the matters referred to in paragraph 129 (relevantly, the falsification of the Prospectus NTA Representations by the January information), NCRH ought to have withdrawn the prospectus, given reasonable public notice of the withdrawal, and the reasons for the withdrawal. 731 Paragraph 143 pleaded that "in the premises" the appellants suffered loss or damage. 732 Paragraph 152 pleaded that by reason of various matters, including those pleaded in paragraph 130 (that is, Mr Daya's knowledge of the January information and its falsification of the Prospectus NTA Representations), Mr Daya was a person who was knowingly concerned in the contraventions of NCRH pleaded in paragraphs 132 (that is, NCRH's misleading conduct arising out of the falsification of the Prospectus NTA Representations by the January information) and 141 (that is, NCRH's failure to withdraw the prospectus and give reasonable public notice and reasons for the withdrawal). 733 Paragraph 153 pleaded that, by reason of the matters pleaded in paragraph 130 (Mr Daya's knowledge that the Prospectus NTA Representations were falsified by the January information), Mr Daya was a person involved in the contravention of part 7.11 and/or 7.12 of the Corporations Law by NCRH. 734 Paragraph 155 pleaded that, were it not for the contraventions pleaded in paragraph 153, the rights, notes and shares that were ultimately acquired by the appellants would not have been issued or acquired. 735 These paragraphs, difficult though they are to follow, pleaded a cause of action containing the following elements: (a) The prospectus made the Prospectus NTA Representations. (b) To the knowledge of Mr Daya and NCRH, the January information falsified the Prospectus NTA Representations. (c) In the circumstances, NCRH should have withdrawn the prospectus. (d) NCRH contravened s 995 in that, notwithstanding the falsification of the Prospectus NTA Representations by the January information, it failed to withdraw the prospectus and give notice and reasons for the withdrawal. (e) Mr Daya was knowingly concerned in that contravention. (f) Were it not for the contravention, the rights, notes and shares would not have been issued and the appellants would not have acquired them. (g) In consequence the appellants have suffered loss or damage. 736 6FAS does not plead expressly that investors would expect to be told by NCRH if, to its knowledge, events occurred in the period between the issuing of the prospectus and the issuing of the notes that substantially falsified the Prospectus NTA Representations. In my opinion, however, it was obvious from the allegations pleaded in paragraphs 129, 130, 132(a), 141 and 143 that this was an element of the case being brought against Mr Daya. The inference that investors would expect that, if such events occurred, NCRH would inform investors of them is based on commonplace notions of commercial morality. It is also based on practical expediency (as evinced by the fact that the board met immediately before issuing the notes to determine whether there had been any materially adverse changes since the prospectus was issued). In my view, the situation is similar to that in Abigroup (No 3) where the natural inference to be drawn from the allegation of the representation that contour plans did not exist was that such plans did in fact exist. The natural inference to be drawn from the pleaded allegations that NCRH contravened s 995 by reason of the fact that, to its knowledge, subsequent events falsified the Prospectus NTA Representations and that, accordingly, the prospectus ought to have been withdrawn, is that NCRH should have disclosed the truth. 737 6FAS also does not plead that, had the truth been disclosed, the appellants would have objected to the notes being issued and would have had their money refunded. I do not think, however, that such a pleading was strictly necessary. These matters may be regarded merely as particulars of the allegations that NCRH ought to have withdrawn the prospectus and its failure to do so caused the appellants to suffer damage. 738 In my opinion, therefore, the case against Mr Daya, based on his accessorial liability for NCRH's contraventions of s 995, was adequately pleaded. 51. The effect of the expiry of the application period 739 Mr Braham submitted that there was no obligation on NCRH, either by statute or contract, to inform investors of material adverse changes after 31 December 1998, when the application period expired. He submitted that the period between the expiry of the application period and the date on which the notes were to be issued was: [A] period of time where the company [was] left to the ministerial task of simply arranging the issue of the notes, without the obligation to continually have regard to and inform investors of material changes in circumstances. 740 Section 1024 of the Corporations Law imposes an obligation on a corporation to lodge a supplementary or replacement prospectus. The obligation arises if, during the application period, the corporation becomes aware that there has been a significant change affecting a matter included in the prospectus, or a significant new matter has arisen information about which would have had to have been included in the prospectus when it was originally prepared. 741 By s 1024(2), a corporation, as soon as practicable after becoming so aware, must lodge a supplementary or replacement prospectus containing particulars of the change or new matter that has arisen. The purpose of such a prospectus is to correct a deficiency in the original prospectus and to provide particulars about the change or new matter in question (s 1024A and s 1024B). 742 If a supplementary or replacement prospectus is issued, an application form relating to the original prospectus is no longer "current" (s 1024E(1)). By s 1024E(3), where an application form is no longer current, the corporation must give the person who applied under such a form notice stating which of options 1 or 2 (specified in sub-sections 4 and 5 of s 1024E) the corporation is going to follow. 743 Option 1 allows the corporation to treat the application as having been withdrawn and to refund the money to the person who has made application (s 1024E(4)). Option 2 requires the corporation, subject to a qualification, to issue the securities to the applicant. The qualification is that, if a material adverse change has occurred, the corporation must give the person who has made the application a reasonable opportunity to return the securities and to obtain payment of the monies paid in respect of them (s 1024E(5)). 744 The obligation under the Corporations Law to issue a supplementary or replacement prospectus is therefore dependent on the corporation receiving the relevant information within the application period. 745 Mr Braham submitted that a corporation is not obliged, under the Corporations Law, to issue a supplementary or replacement prospectus if it becomes aware of a material adverse change after the application period has expired. I would accept that submission, although as I explain below, it does not affect the finding of misleading conduct that McDougall J made. 746 As McDougall J found, the knowledge of Mr Daya as to what was in the model summaries is to be attributed to NCRH. The application period relating to the notes expired on 31 December 1998. Mr Daya was given the January information after that date. Thus, NCRH was not obliged by the Corporations Law to issue a supplementary or replacement prospectus by reason of the January information (as Mr Daya received that information after the application period had expired). 747 The prospectus contained an offer to issue notes. Investors accepted this offer by sending application forms to NCRH. Under the contract that thereby was constituted, NCRH became obliged to issue notes to each investor who had duly applied for them. Mr Braham submitted that, under the contracts thereby constituted, the risk in regard to material adverse changes passed to the investors no later than the expiry of the application period. I would be inclined to accept this submission as well. 748 These submissions, however, have no bearing on whether Mr Daya engaged in misleading conduct within the meaning of s 995 in regard to his failure to disclose the January information to the board. 749 I repeat that this part of Case 3.2 is based on McDougall J's finding of misleading conduct constituted by NCRH becoming aware, in January 1999 of the January information, failing "to take any appropriate action in response" (at [1060]) and while so failing, "proceeding with the converting note issue" (at [1049]). Accordingly, a material part of the misleading conduct is the silence of NCRH in regard to the extraordinary increase in the claims provisions reflected in the January 1999 model summaries. 750 In commenting on "A Lawyer's Guide to Misleading or Deceptive Conduct" (1989) 63 Australian Law Journal 250 (an article by French J, as his Honour then was), Samuels JA observed in Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 at 88: As French J said, silence is not misleading only where there is a duty to disclose at common law or in equity. It may simply be the element in all the circumstances of the case which renders the conduct in question misleading or deceptive … . 751 And, as Black CJ said in Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 at 32: Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. See also the remarks of Gummow J in Demagogue Pty Ltd at 40, and Fraser v NRMA Holdings Ltd at 466. 752 Accepting for the purposes of these reasons that, after 31 December 1998, NCRH was not obliged by statute to issue a supplementary or replacement prospectus and, after that date, the contractual risk of adverse changes passed to the applicants for the notes, a finding of misleading conduct arising out of a failure to disclose the January information is not precluded. Although NCRH was not obliged, by statute, to issue a supplementary or replacement prospectus, it does not necessarily follow that it would still have issued the notes. Nor does it follow that because by contract NCRH was obliged to issue the notes to each investor and, on the expiry of the application period, the risk of adverse changes had passed, NCRH necessarily would have proceeded to issue the notes regardless of any change of circumstances. 753 Section 1.6 of the prospectus provided that, until allotment and issue of the notes, the application monies would be held in trust for applicants in a separate bank account. Further, it was a term of the notes that they would be issued be 12 January 1999 "or such other date as the board determines" (s 8.2 of the prospectus, 6 Blue 2438). It follows that one of the steps that the board could have taken, had it learned of the January information before 12 January 1999, was to postpone the issue date. That would have been the most likely immediate step that the board would have taken. This would have enabled the board to consider the matter further. It would also have enabled investors to object to the issue of the notes before the issue took place. 754 On 5 January 1999, after the expiry of the application period, the DDC - at the board's direction - met to consider whether the note issue should proceed. One of the DDC's tasks was to consider whether changed circumstances had had a materially adverse impact on NCRH's financial position. On 12 January 1999, the board (through Messrs Peck and Daya, as delegates) met to consider the same question. These matters indicate, strongly, that the board accepted that there were practical measures that could be taken in response to any such materially adverse changes. An obvious measure, in such circumstances, was to cancel the issue. 755 I repeat that McDougall J held (at [1061]) that had the appellants learned of the January information they would have sought to ensure that, so far as possible, they would not have to "complete their commitments". Significantly, his Honour also held (at [1061]) that, had the January information been disclosed prior to 12 January 1999, the Board would not have issued the notes. It is implicit in those findings that, in such circumstances, the board would probably have informed investors of the adverse changes, offered to cancel the issue and to return the application moneys. It is also implicit in the judge's findings that the appellants would have accepted such an offer. In my opinion this would have occurred despite NCRH being contractually obliged to issue the notes. 756 The silence of NCRH and Mr Daya about the January information meant that NCRH issued the notes on 12 January 1999 in circumstances under which the appellants were deprived of the opportunity to object to the notes being issued and to obtain a refund of their application moneys. 757 In my opinion, even if it is accepted that NCRH was not obliged by statute or contract to inform investors of material adverse changes after 31 December 1998 (when the application period expired) it was still open to the Court to find that in all the relevant circumstances NCRH's conduct was misleading or deceptive or was likely to mislead or deceive. Thus, in my opinion, Mr Braham's submissions based on the expiry of the application period and the passing of risk under the contracts between investors and NCRH do not answer Case 3.2 based on the accessorial liability of Mr Daya. 52. The nature of the misleading conduct in the accessorial liability case 758 In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546 Lockhart J (with whom Burchett J and Foster J agreed) said (at [555]): Misleading or deceptive conduct generally consists of representations, whether express or by silence; but it is erroneous to approach s 52 on the assumption that its application is confined exclusively to circumstances which constitute some form of representation … [U]ltimately in each case it is necessary to examine the conduct, whether representational in character or not, and ask the question whether the impugned conduct of its nature constitutes misleading or deceptive conduct. 759 Gummow J in Demagogue Pty Ltd v Ramensky expressed the same approach (at [41]) saying: [C]onsistently with regard to the natural meaning of the terms of s 52, the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation … . 760 The NTA of NCRH was an important factor in the value and viability of the notes. Mr Ghose, the chairman of NCRH, recognised this importance in a letter to shareholders, attached to the prospectus, in which he stated: As at 30 October 1998 the Ordinary Shares were trading in the range A$1.06 to A$1.10 which is approximately half current estimated net tangible assets (NTA) of between approximately A$2.06 and A$2.20. The main uncertainty relating to NewCap Re's NTA is the adequacy of its claims provisioning which has been reviewed by a leading independent actuarial firm. 761 A similar statement was made in the prospectus itself, under the heading "Investment Highlights". The NTA was there stated to be one of the "key features" of the notes (6 Blue 2413). The prospectus discussed the "effect of recent events" on the NTA and in this context stated, "[T]he company is not aware of any other event which will have a material impact on its second half results" (6 Blue 2422). 762 The NTA was substantially dependent on the level of claims received in the relevant period. Hence, the Trowbridge report focused on this issue. NCRH recognised the importance of the extent of its claims liability after 30 June 1998; as appears from the Trowbridge report, NCRH requested Trowbridge to examine the progress of claims after 30 June 1998 "in order to comment on the implications of this experience for 1999 financial results and the adequacy of the outstanding claims provision". It was obvious that the "progress of claims after 30 June 1998" was a major factor that would influence likely investors in taking up the notes. For this reason, the prospectus emphasised that "the adequacy of [NCRH's] claims provisioning … has been reviewed by a leading independent actuarial firm" and that review confirmed "the adequacy of the company's claims provisioning". 763 Section 4.3 of the prospectus included the following statement: [T]he company is not aware of any other event which will have a material impact on its second half results. (6 Blue 2422). 764 In section 11, under the heading "Additional Information," the prospectus stated that the underwriter (Macquarie) was entitled to terminate its obligations under the underwriting agreement should it determine that a stipulated event "has had or will have a material adverse effect on the issue". (6 Blue 2456). One of the stipulated events was stated in the prospectus to be the following: An adverse change occurs, or an event or development occurs that causes or could reasonably be expected to cause a prospective adverse change (including a material breach of any banking or lending covenants …), in the financial or trading position of the company … (6 Blue 2457). 765 The January information disclosed a deterioration of a magnitude that had to have a significant impact on the NTA per share and was highly material to the NTA as disclosed in the prospectus. 766 In my opinion, in the circumstances I have described, including the expectation of investors based on commercial morality referred to in [736], NCRH's conduct in issuing the notes without disclosing the January information was misleading or deceptive. 53. The consequences of the appellants being misled 767 The appellants were not aware of the January information during the period they invested in NCRH. McDougall J found (at [1061]) that, had the January information been disclosed, the appellants would have done everything possible not to proceed with their investments. 768 I have pointed out that it was open to McDougall J to find that NCRH's conduct in issuing the notes without disclosing the January information was misleading or deceptive or was likely to mislead or deceive. I have observed that it is implicit in his Honour's findings that, NCRH – when disclosing the January information - would have offered to cancel the issue and return the application moneys. Further, on the basis of those findings, the appellants would have accepted that offer. Thus, on his Honour's findings, the appellants would succeed in Case 3.2 based on the accessorial liability of Mr Daya, 769 By notice of contention, Mr Daya challenged his Honour's findings that, if the January information had been disclosed prior to 12 January 1999, the DDC would not have recommended to the delegates of the board that NCRH issue, and NCRH would not have issued, the notes. Although directed to Mr Daya's independent liability, should this argument be correct Case 3.2 based on the accessorial liability of Mr Daya might be defeated because NCRH may not have agreed to cancel the note issue when the investors objected. If the notice of contention were to be upheld, the findings that, upon objection being made, the issue would have been cancelled and the appellants' applications moneys returned, might not stand. 770 His Honour's finding that the board would not have issued the notes was based on inference drawn from all the relevant circumstances. Those circumstances, at least on appeal, were not materially in dispute. Accordingly, the Court's task is as discussed in Costa v The Public Trustee of NSW. The central question on this issue is what would the board have done had it been given the January information. 771 On 5 January 1999, the board met by telephone. The directors asked Mr Daya whether there was anything they needed to know before they could authorise the issue of the notes. Mr Daya replied in the negative (2 Blue 883_71 I – K). 772 On 12 January 1999 Mr Peck telephoned Mr Ghose and said: The Due Diligence Committee met today. The note issue can go ahead – there were no outstanding matters raised at the Due Diligence Committee. A supplementary prospectus is not required and all appropriate disclosures have been made by ASX announcements. There has been no significant change or new matter which requires disclosure. (2 Blue 883_72 D – H) 773 Early in February 1999 Mr Peck telephoned Mr Ghose and informed him that Mr Daya had not "been telling us the full story". On 10 February 1999 Mr Peck telephoned Mr Ghose and advised him that many claims had been coming into the system and he was investigating the matter. Mr Ghose telephoned Mr Atkins who said that on 8 January 1999 Trowbridge had given Mr Daya a draft report that made reference to substantial claims flowing into the company. The following exchange occurred: Ghose: I was not made aware of the report or the fact that there were substantial claims. Atkins: I thought that Daya brought it to the attention of the Due Diligence Committee and the board. Ghose: I don't know about the Due Diligence Committee but I can assure you that he didn't bring it to my attention. Atkins: That explains a lot. We were surprised that the offering went ahead. Ghose: Why the hell didn't you call me? Atkins: I assumed Daya spoke to you about this. Ghose: Well he didn't. 774 Thereafter Mr Ghose had another telephone conversation with Mr Peck in which Mr Peck affirmed that there was "a very bad problem with claims". (2 Blue 883_73 – 883_74). 775 A board meeting was held on 17 February 1999. During the meeting the following was said: Ghose: Why was the offering closed when there had been such large losses reported in December 1998 and when there was a report dated 8 January 1999 from Trowbridge dealing with massive claims? Peck: When the Due Diligence Committee signed off on this on 12 January 1999 I asked management whether there had been substantial losses that would materially adversely affect the financial position of the Company and management advised the Committee that there had not. The Committee was not informed of the Trowbridge report of 8 January 1999. Daya: I received the Trowbridge report on the afternoon of Friday January 8 and reviewed it over the weekend. I noted that the losses appeared high but I also noted that there were a number of errors in the report. The Trowbridge report only reports on losses, it does not report on related income from reinsurance, reinstatement premiums and profit commission. When I reviewed the report I believed that the large property losses were reinsured and that the smaller losses were losses arising in the normal course of operation and accordingly were already reserved for. It was not until Peter Aroney prepared a first draft of the company's financial statements for the year ended December 31 on 25 January 1999 that I became aware of the company's financial position. Ghose: Leaving aside the Trowbridge report why weren't we made aware of the losses as they came in during December? Daya: Claims come into the claims department and are usually posted immediately to reserve. The claims department then evaluates and processes the claims before making a readjustment to the reserves and this process usually takes a couple of weeks to complete. Accordingly there is usually a delay between the times that claims are notified to the company and the time that I am informed of changes in the reserves. (2 Blue 883_75) 776 According to Mr Ghose, his reaction was "of complete shock". (2 Blue 883_76) 777 A board meeting was held on 18 February 1999. At that meeting, Mr Daya provided the board with a memorandum which included a financial statement showing net claims incurred of $246M, a net underwriting loss of US$170M, and net assets of $91M. Thus, NCRH, having had net assets of $127M as at June 1998, and having received the proceeds of the note issue, was left with about $91M in net assets. Under the heading "Going Forward," Mr Daya's memorandum stated: It is obvious that the run-off of the past and the events of 1998 have had a catastrophic impact on New Cap Re with its relatively smaller capital base. The irony is that this weakened state coincides with the fact the company has never been in a better position in terms of its management, potential, controls and strategic focus. However, for the company to move forward, against a backdrop of increasing competition and consolidation, it will require a strategic purchaser or investor who can appreciate the value of the company, its people and "niche" book of business. It is important to point out that tax losses in the region of $20 million are also potentially available to an acquiring entity or strategic partner. In the interests of retaining the company's good will in the reinsurance market place, such an entity will have to be sort very quickly after the results are announced." (UDG 505.114 – 115, a document handed up by Mr Gleeson SC). 778 Mr Daya's commentary appears to have influenced the tombstone announcement made on 24 February 1999 to the ASX. I repeat that the announcement stated: [T]he Company has previously indicated that it was negatively impacted by as much as US$41.5 million by catastrophe claims and reserve strengthening in the second half of 1998. This is in addition to the US$14.8 million loss reported in the first half of 1998. It is now clear that [NCRH] has experienced greater claims than were anticipated or known at the time of its last announcement and that the resulting financial impact for the year will be materially greater. As a result, [NCRH] currently anticipates that it will incur an operating loss for the full year 1998 in the region of US$90 million, resulting in a reduction in total capital to approximately US$100 million. After adjusting for the converting notes this equates to a net asset value of approximately A$1.00 per ordinary share. This figure is indicative only. It is subject to final actuarial review and audit finalisation and may change … . 779 The tombstone announcement explained the causes of the loss and the reason for the delay in reporting. It described its policy for the 1999 renewal season and underwriting year and its approach to its business in the future. After the tombstone announcement, the listed price of the notes fell from A$1.40 to A$0.90 (on 26 February 1999). McDougall J observed that at this stage (at [1138]): Mr Saville did not sell, or cause the plaintiffs to sell, their investments; on the contrary, he saw this as a buying opportunity. 780 In a report dated 23 March 1999, Trowbridge reviewed claims received by NCRH since 31 December 1998. The March report indicated that, in December 1998, the company received an extraordinarily large number of claims that, in dollar value and quantity, was quite unexpected and far exceeded anything that had previously been experienced. In the period from January 1997 to November 1998, there was one month (February 1998) in which claims marginally exceeded US$20M, and for most months the claims figure was about US$10M or less. Claims in December 1998, however, exceeded US$50M and in January 1999 they exceeded US$20M. These claims excluded various claims for catastrophic events. If claims for catastrophic events are included, claims for December 1998 exceeded US$70M and for January 1999 exceeded US$30M. 781 The March report showed that the large majority of claims were attritional claims. (13 Blue 6116 - 6117). The March report provided for a net discount provision for claims of US$214M. This was the result of a far more refined review than that contained in the model summaries of December 1998 and January 1999. Thus, in hindsight, the amounts of US$249.608M and US$244.376M in the 8 January 1999 and 11 January 1999 model summaries were too high. The March report nevertheless indicated that the period December 1998 to January 1999 was abnormal and devastating to NCRH's financial position. 782 Subsequently, additional claims were received which resulted in NCRH's financial position degenerating further. 783 The evidence strongly supports McDougall J's findings as to the effect the January information would have had on the board's attitude to the note issue and the steps the appellants would have taken had they learned of that information. In my opinion, it is to be inferred that, had the board (after postponing the issue date) informed the appellants of the true financial position of NCRH, the appellants would have objected to the note issue proceeding, NCRH would have offered to cancel the note issue and return the application monies held in trust, and the appellants would have accepted that offer. Accordingly, I would not uphold Mr Daya's notice of contention on this issue. 54. Other Case 3.2 issues 784 Mr Daya pleaded a number of affirmative defences. Mr Braham acknowledged, in my view correctly, that McDougall J's finding of dishonesty in relation to maintaining silence at the 12 January 1999 DDC meeting would make it difficult to maintain the defences in relation to that misleading conduct (T1010-11). In my opinion, the defences cannot avail Mr Daya in relation to the finding of misleading or deceptive conduct in respect of the January information. 785 Mr Braham did not submit that Digi-Tech was an obstacle to Case 3.2 succeeding (as I have held is the position in regard to Case 2.3 and Case 3.1). In my opinion, he was correct in this approach. By concealing the January information, NCRH misled the appellants. Thus Digi-Tech does not apply to Case 3.2 as it does to Case 2.3 and Case 3.1. 786 In the circumstances I consider that Mr Daya is liable as having been knowingly concerned in NCRH's contravention of s 995 as the appellants, under Case 3.2, contend. XIII THE INDIVIDUAL DAMAGES CLAIMS 55. Is it necessary to determine whether Mr Saville caused the appellants to invest? 787 In submissions that were adopted by Mr Daya, Phillips Fox and Macquarie submitted on various grounds that the appellants had failed to prove that Mr Saville had caused them to make the investments in NCRH that led to their losses. 788 McDougall J said (at [1098]) in this regard: [T]he general impression I have is that, one way or another, Mr Saville directly or indirectly caused the plaintiffs to enter into the various transactions upon which they rely to quantify their loss. 789 I do not think that his Honour thereby intended to make a finding. The issue is to a large extent dependant on the credibility of Mr Saville and it would not be open to this court to resolve it. 790 Nevertheless, I do not think that a finding on this issue is necessary for a resolution of Mr Daya's accessorial liability under Case 3.2. Accessorial liability under Case 3.2 does not depend on Mr Saville or the appellants being influenced by NCRH or anyone else to acquire the investments in question. The misleading conduct that is the basis of this case occurred after the prospectus was issued and after appellants had agreed to acquire the investments. They suffered loss because of that acquisition. On the basis of this part of Case 3.2, NCRH – by its misleading silence – deprived the appellants of the opportunity to object to the issue of the notes before the issue was a fait accompli. In consequence they obtained the notes, which were worthless. Had they been told the truth in time, the notes would not have been issued and they would not have suffered loss. 56. AOITL and ESS 791 In submissions that were adopted by Mr Daya, Phillips Fox and Macquarie submitted that AOITL and ESS were not entitled to claim damages in respect of the notes that were the subject of their claims. I shall deal first with AOITL. 792 McDougall J made no finding as to whether AOITL was the proper plaintiff in regard to the notes in respect of which it was claiming. 793 NCRH issued the notes in question to AOITL on 12 January 1999. Mr Saville testified that he decided to purchase the notes in question for AOITL (1 Blue 90 – 91). AOITL was incorporated on 23 August 1996 as a wholly owned subsidiary of AOITP. The directors of AOITL were Mr Bushell and Mr Hambro. The only assets that it ever held were its investments in NCRH. 794 Mr Dick (who argued this part of the case on behalf of Phillips Fox) submitted that this evidence was not sufficient to prove that AOITL authorised Mr Saville to purchase the notes on its behalf. Mr Dick accepted that there was evidence that showed that Mr Saville was authorised to make investments for AOITP, but not for AOITL. He pointed to the fact that the underwriting commitment that led to the issuing of the notes to AOITL was owed by AOITP (not AOITL) and, moreover, AOITP – not AOITL - paid for the notes. He argued that there was no evidence of any obligation that AOITL had to repay AOITP. 795 The notes were in fact acquired by ANZ Nominees Ltd to be held on trust for AOITL (and they were so held). Mr Dick accepted that Mr Saville effected this transaction. His point was that, nonetheless, it was not proved that Mr Saville had the authority of AOITL in causing this to be done and there was no evidence of any trust or nominee arrangement between AOITL and ANZ Nominees. He submitted that it had not been established "that the beneficiary (AOITL) had any knowledge of the transaction at the time [and] ratified the transaction" (T1342) 796 Mr Saville testified, directly, that AOITL took up the notes (1 Blue 18 paragraph 56). He went on to explain why this occurred. 797 In paragraphs 56 to 59 of Mr Saville's statement of 23 July 2003 (1 Blue 18), he testified that, as between AOITP and AOITL, the notes were allotted in particular proportions and in a particular manner so as not to breach "the 15% Rule". Advice in this regard was received from "[AOITL's] tax advisers" and concerned tax payable in the United Kingdom. The "15% Rule", according to Mr Saville, was a rule under "United Kingdom taxation law" whereby "[AOITP] was not required to pay capital gains tax on its portfolio if certain rules were adhered to. One rule was that no one investment, at the date of acquisition, could [comprise] at cost, more than 15% of [AOITP's] portfolio" (1 Blue 18 paragraph 56). According to Mr Saville, the notes in respect of which AOITL sues were allotted to it and not AOITP so that AOITP would comply with that rule. 798 According to Mr Saville, AOITP decided that the notes "held by AOITL should be held in AOITL's share trading or 'speculative' account; which made any subsequent profit or loss taxable" (1 Blue 18 paragraph 57). Mr Saville explained that "by describing AOITL's investments in NCRH as 'speculative' and allocating them to a share trading or 'speculative' account, those investments automatically became taxable". (1 Blue 18 paragraph 58). 799 Mr Saville stated: AOIT's tax advisers considered that in this way [AOITP] would continue to adhere to the 15% Rule and its tax position would be protected in declaring AOITL's investments in NCRH taxable, both [AOITP] and AOPITL would show the necessary good faith to negate any suggestion that the allocation of NCRH investments to AOITL was an attempt to comply with the form, but not the substance of the 15% Rule. 800 It is apparent that the allocation of notes as between AOITP and AOITL was part of a considered scheme. The decision to allot the notes to AOITL was made by AOITP. As AOITL was a wholly owned subsidiary of AOITP, I would infer that AOITP was authorised by AOITL to allot the notes to it. The tenor of Mr Saville's evidence as a whole was that the scheme to comply with the 15% Rule was implemented. Indeed, Mr Saville's evidence was that, to protect AOITP, AOITL was to take steps to ensure that any profit made on the notes would give rise to the payment of tax by it. No evidence to the contrary (either in chief or by cross-examination) was adduced. 801 In my view, Mr Saville's evidence is sufficient to establish AOITL's standing to sue for damages arising out of its acquisition of the notes. There is other evidence that tends to support this conclusion. That evidence is of little weight on its own, but it does create a picture that goes some way to confirm that AOITL acquired the notes as part of an overall scheme to which it was a party. 802 The appellants led evidence by Mr Bushell, the chairman of AOITL, that the notes in respect of which AOITL sued were paid for by it pursuant to an inter-company loan agreement with AOITP. McDougall J held that Mr Bushell's evidence to this effect could not be relied upon as "some loan documents had been prepared and backdated in an attempt to circumvent perceived problems". Mr Bushell apparently backdated the agreement for United Kingdom tax purposes (presumably to ensure compliance with the 15% Rule). 803 McDougall J did not accept that Mr Bushell's evidence provided credible corroboration of any of Mr Saville's evidence (at [148]). Such a finding, however, does not preclude the backdated agreement from providing evidence, by implication, that AOITL agreed to acquire the notes. The thrust of Mr Bushell's evidence as a whole was to the effect that AOITL accepted that it had acquired the notes. 804 The parties to the backdated agreement were AOITP and AOITL. Mr Bushell purported to sign for AOITP and Mr Hambro for AOITL. Mr Dick, relying on the finding that the agreement was backdated, submitted that there was no evidence that the inter-company loan agreement was ever properly executed. He also submitted that the inter-company loan agreement should be regarded as having no effect because it "was not executed prior to the tombstone announcement on 24 February 1999" (T1350). He pointed out that Mr Saville testified that, as at late February 1999, the inter-company loan agreement was not yet operative. Accepting these submissions as correct, the existence of the inter-company loan agreement, even in its backdated form, lends some support (albeit slight) to Mr Saville's evidence that the notes were acquired by AOITL pursuant to an arrangement, for tax purposes, between it and AOITP. 805 The appellants tendered a report by an expert, Mr Silvia. In his report Mr Silvia explained that he was asked to verify each of the transactions in respect of which the appellants claimed damages. The transactions in respect of which AOITL sues were referred to in Mr Silvia's report as transactions 28, 29 and 31 respectively. In his report, Mr Silvia stated: Under transaction 28, AOITL took up 1,411,899 notes in respect of [AOITP's] sub-underwriting obligations to MECM at a cost of $1,835,468.21. Under transaction 29, AOITL took up 850,000 notes in respect of [AOITP']s sub-underwriting obligation to MECM at a cost of $1,105,000.00. These details are confirmed in a letter from MECM dated 6 January 1999. A bank statement confirms that both transactions were paid for by [AOITP] on 11 January 1999. 806 In regard to transaction 31, Mr Silvia's report stated: Under transaction 31, AOITL took up 2,490,071 notes at a cost of $1.30 per right for a total cost of $3,237,092.30. The take up of these rights into [AOITL] has been agreed to confirmation provided by ANZ Nominees dated 30 December 1998. … A cash account statement from ANZ Nominees confirms that transaction 31 was paid for by AOITL. Payment for this transaction was made by AOITL. This is further supported by an Intercompany loan agreement between AOITL and [AOITP]. 807 Mr Silvia gave oral evidence. He was cross-examined, (his cross-examination commences at 4 Black 2083) but not directly about transactions 28, 29 and 31. In my opinion, Mr Silvia's report is evidence that AOITL "took up" the notes in question. That is, there was a decision by AOITL so to act. That evidence, too, is flimsy, but it adds to the picture created by Mr Saville's testimony. 808 For the reasons I have stated, I would not accept Mr Dick's submissions in regard to AOITL. 809 I turn now to ESS. 810 On 15 February 1999 the Royal Bank of Scotland, under the heading "Eastern States Securities – 5,500,000 New Cap Cnv Notes" requested ICM to arrange for delivery of those notes to its agent, ANZ Nominees. On 17 February 1999 ICM gave the necessary instructions and on 26 February 1999 a firm of stockbrokers confirmed that they had "transferred to ANZ Nominees [the notes] on behalf of [ESS] as requested" (see 13 Blue 6091, 6092; 3 Orange 738). 811 Based solely on this evidence, Phillips Fox's written submissions argued, "ESS is neither the legal nor the beneficial owner of … the notes" (3 Orange 738). I do not accept, however, that the documents relied on by Phillips Fox prove a transfer by ESS of its beneficial interest in the notes. The mere fact that the notes were delivered to ANZ Nominees on behalf of the Royal Bank of Scotland is neutral in this regard; it does not alone tend to prove Phillips Fox's submission. 812 In the alternative, Mr Dick submitted that the claim by ESS involved a claim by that company as a beneficiary. This submission was based on the fact that the notes acquired by ESS were renounced by ESS and transferred a company known as Saltbush Nominees Pty Ltd "for the account of [ESS]". ( 1 Blue 272) 813 The fact that the notes were in the name of a nominee company does not mean that ESS had no entitlement to sue. Legal title is not an element of causes of action based on the operation of ss 87(1A), 80, 82 and 52 of the TPA): see Poignand v NZI Securities Australia Ltd [1992] FCA 369; (1992) 37 FCR 363 at 372 per Gummow J. The same is true in regard to causes of action based on the operation of ss 995, 996 and 1005 of the Corporations Law. The true question is simply whether the appellant suffered loss by the contravening conduct. That does not depend on whether the appellants had legal title to the notes. 814 Accordingly, I would not uphold Mr Dick's submissions in regard to ESS. 815 Mr Dick submitted that there was no evidence that AOITL paid for its notes (in this context I refer to notes and rights to notes as "notes"). Assuming that to be correct, there is a prima facie inference that either AOITL acquired the notes by way of a loan agreement with AOITP or a resulting trust arose with AOITL as trustee. On either basis, AOITL would have standing to sue. 57. Payment for the notes 816 In Phillips Fox's written submissions, the submission was made that no general ledgers were produced for ASC, ESS, AOITL and AOITP. It was said that this meant that these companies had not adequately proved that they had paid for their notes. Further, it was submitted that the evidence as to whether a particular appellant paid for its notes was not clear and it seemed as if certain payments were made by an entity other than the holder of the notes in question. It was argued that absence of payment by the holder of the notes meant that the holder had not suffered loss. 817 The notes were acquired, generally, in the course of transactions in which several companies in the group of companies (to which the appellants belonged) participated, and funds were moved around within the group to enable these transactions to take place. The appellants, moreover, proved that each appellant took up the notes for which it sued and proved the purchase price of those notes. 818 In my opinion, in the absence of any evidence that tended to refute that the holder of the notes was either the trustee in respect of or beneficial holder of the notes, the holder must be taken to be entitled to sue for loss computed by reference to the difference between the price of the notes and nil (the latter being the true value of the notes). 58. Mr Daya's liability for damages 819 McDougall J held (at [1063]): [T]he losses suffered by those plaintiffs who had agreed to subscribe for converting notes or to sub-underwrite the issue would have been avoided had Mr Daya and NCRH complied with their obligations. That would not have availed those of the plaintiffs whose alleged loss flows otherwise than from subscription or underwriting. In their cases, the misleading or deceptive conduct could not be said to be causative of any losses sustained by plaintiffs other than those for whom proper disclosure would have provided an avenue of escape. 820 Mr Jackson, on the other hand, submitted that there was no basis for that distinction in regard to Case 3. He submitted: [W]hen Mr Daya misrepresented the position to the DDC on 12 January we had made commitments to acquire all the notes that we did. We had committed to acquire, first of all, of course, the placement and sub-underwritten notes, and, your Honours, equally, we had committed ourselves to acquiring the other notes, the ex-rights ones and he deferred purchase notes, and, of course, they were all [acquired] on the issue going ahead, the allotment going ahead. It is difficult to see how a distinction could be drawn about them. 821 Mr Jackson submitted that, if the consequence of NCRH's conduct was that the issue went ahead when it should not have gone ahead, then the loss that was sustained was the loss occasioned by the issue going ahead. 822 In my opinion, Mr Jackson's submission is correct. Had NCRH not engaged in conduct that contravened s 995, the notes would not have been issued. By NCRH's contravening conduct, in which Mr Daya was knowingly concerned, the appellants suffered loss being the difference between what they paid for the notes less their true value. I have expressed the opinion that the true value of the notes was nil. 823 On that basis, the appellants, individually, are entitled to damages against Mr Daya as follows: (a) ICI is entitled to damages of $1,581,172.80 made up as to $1,720,752.80 in respect of sub-underwritten notes less $139,580 for notes sold on the market on 1 February 1999. (b) AOITL is entitled to damages of damages of $6,177,561 made up as to $3,237,092.30 in respect of ex-rights notes and $2,940,468.70 in respect of sub-underwritten notes. (c) ASC is entitled to damages of $6,500,000 in respect of ex-right notes. (d) AOITP is entitled to damages of $7,540,000 in respect of the acquisition of ex-rights notes. (e) ESS is entitled to damages of $15,964,927.05 made up as to $15,230,845.50 in respect of ex-rights notes and $734,081.55 in respect of deferred settlement notes. ICM makes no claim for damages on appeal. XIV CONCLUDING OBSERVATIONS 59. Kuru 824 I have taken account of the majority's remarks in Kuru v State of New South Wales [2008] HCA 26 about the duty of intermediate courts of appeal to deal with all grounds of appeal, namely: This Court has said on a number of occasions that, although there can be no universal rule, it is important for intermediate courts of appeal to consider whether to deal with all grounds of appeal, not just with what is identified as the decisive ground. (footnotes omitted) 825 This case, however, is far different from Kuru. Kuru was a relatively straightforward case from the point of view of the number of issues involved. The appeal involved a claim for damages for trespass to land and the person. The parties conducted the appeal to this Court on the footing that the single determinative issue as to liability was whether police officers were trespassing in the appellant's flat at a particular moment in time. The quantum of damages was the only other principal issue in the case. This Court (of which I was a member) did not deal with damages and the High Court said that that was wrong. 826 The present proceedings, in contrast, involve, in effect, nine different cases, each with different parties having different interests. The issues in the case are so many, and their identification (particularly by reference to 6FAS and the other pleadings) in many instances so difficult that it is simply not practicable to count them. More than 1000 pages of written submissions were filed before the appeal, hundreds of pages of submissions were handed up during oral argument (many of which were not orally addressed but – quite properly – left for the court to read), and oral argument lasted for four weeks. The arguments were most helpful, and of the highest quality, but they tended to increase the intricacy and density of what was already an extremely complex appeal. It is sufficient to say that, during the appeal, an extraordinarily vast number of issues were canvassed. Although my reasons are more than 200 pages in length, I have deliberately omitted to deal with many of those issues. In the light of what was said in Kuru, I should explain why I have adopted this approach. 827 I have dealt with all the arguments raised on behalf of Mr Daya in support of his argument that Case 3.2 against him should be dismissed. 828 In dealing with each of the other eight cases, I have given more than one ground for my conclusion that the appeal should be dismissed. The grounds in question, in each such case, include either a ground based on a question of practice (namely, whether the argument raised on appeal was pleaded below and whether it should be allowed on appeal) or on a question that turns substantially on factual issues. In essence, I consider that McDougall J made no relevant error. The grounds based on questions of practice and fact do not involve any question of principle that is not well settled. 829 Most of the issues that I have not dealt with involve difficult factual or legal questions that would take many additional weeks to determine. The Court has already devoted far more time and other resources than is normal (even for a significantly complex matter involving a great deal of money) to the hearing and resolution of this appeal. In Visible Results Properties Inc v Sushi Train (Australia) Pty Ltd [2005] FCA 1159, Allsop J (as his Honour then was) said at [29]: The court system is a finite public resource. Judicial time expended on the resolution of one case is time not spent on the resolution of the controversies of other litigants. 830 The point so made is part of the rationale underlying s 57 of the Civil Procedure Act 2005. Section 57(2) requires the practice of the court to be regulated so as best to ensure the attainment of the objects referred to in s 57(1). The object set out in s 57 (1)(c) is "the efficient use of available judicial and administrative resources". In a case such as the present, I do not think that it would be an efficient use of available judicial and administrative resources for this court to deal with more issues than are dealt with in my reasons. 831 Although it is theoretically possible for parties at trial or on appeal to raise a vast number of issues, a judge is not always required to deal with each and every one. It is for the discretion of each individual judge how far to go in resolving issues that do not seem to be essential to the determination of the dispute. Of course, each judge must bear in mind and pay due regard to the possibility of a successful appeal, with consequential expense and inconvenience to the parties and waste of judicial resources, should a retrial be required. As far as reasonably possible, the need for a retrial should not be brought about by a judge's failure to determine issues. Thus, ordinarily, when liability and damages are in issue, the judge should decide both. 832 But it does not follow that judicial duty requires, in every case, the resolution of all issues that the parties raise. Such a practice would result in an indiscriminate use of judicial resources to the prejudice of the general administration of justice. It is neither helpful nor desirable that the ether be flooded with masses of unnecessary obiter dicta. A reasonable balance must be struck between the need to cover all avenues should an appeal succeed and the need to be available to decide other cases. Time limits on submissions and other manifestations of case management are now accepted responses to lengthy litigation. These measures recognise that, if justice is to be administered for the benefit of the entire community, reasonable limits must be imposed on the availability of judicial resources to particular cases. Subject to the criteria I have mentioned, a court is entitled to call a halt after resolving decisive questions. After all, in addition to the factors I have mentioned, the unalterable fact is that the span of human life is limited. 833 Having given consideration, as Kuru requires, to whether I should deal with all the issues raised, I have decided that it is appropriate and consistent with my judicial duty to deal only with those issues discussed in these reasons. 60. Orders proposed 834 No submissions were received as to costs and interest and, as contemplated by the case management orders that were made, other matters in connection with the orders made by McDougall J remain outstanding. In view of the potential complexity of these outstanding matters and the number of parties involved, I consider that a date be allocated for their oral hearing. I do not think that the circumstances are suitable for these matters to be addressed by written submissions. 835 At the hearing of the appeal the appellants applied to amend their notice of appeal. To varying extents there were objections to the amendments, but the submissions were directed to them. One amendment was to bring into the appeal paragraph 55(m) of 6FAS; reliance on that paragraph fell away, and it need not further be considered. The other amendment was to bring into the appeal reliance on the representations in both paras (a) and (e) of paragraph 104 of 6FAS. Leave to amend in that respect should be granted. 836 I propose the following orders: (a) The appeal against Mr Daya succeeds. (b) The orders made by the trial judge in respect of the claims against Mr Daya by ICI, AOITL, ASC, AOITP and ESS are set aside. (c) Mr Daya is ordered to pay damages to ICI of $1,581,172.80. (d) Mr Daya is ordered to pay damages to AOITL of $6,177,561. (e) Mr Daya is ordered to pay damages to ASC of $6,500,000. (f) Mr Daya is ordered to pay damages to AOITP of $7,540,000. (g) Mr Daya is ordered to pay damages to ESS of $15,964,927.05. (h) The appeals are otherwise dismissed. (i) Leave is granted to the appellants to amend the notice of appeal so as to enable them to rely on the representations in paragraphs 104 (a) and (e) of 6FAS. (j) The parties have liberty to apply for any other orders that need to be made in accordance with these reasons. (k) The parties are directed to arrange a date with the registrar for a directions hearing relating to the further disposition of the remaining matters to be resolved in the appeal (including, but not necessarily limited to, costs, interest on the damages awarded, any orders made by McDougall J that should be set aside in accordance with these reasons, and any further orders that need to be made). Thereafter a date will be allocated for the hearing of outstanding matters. 837 For the avoidance of doubt, the orders made in sub-paragraphs (a) to (g) are not orders finally disposing of all the appellants' claims against Mr Daya and all outstanding matters. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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