Aequitas v AEFC - [2001] NSWSC 14

No judgment structure available for this case.

Reported Decision:
(2001) 19 ACLC 1006

New South Wales

Supreme Court

CITATION: Aequitas v AEFC [2001] NSWSC 14

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 5532/91

HEARING DATE(S): 23, 24 & 30 June, 1 & 2 July, 3 August, 1, 20 & 23 September 1999

JUDGMENT DATE:
9 April 2001

PARTIES :

Aequitas Limited and Aequitas No.1 Limited (P)
Sparad No.100 Limited (formerly Australian European Finance Corporation Limited) (D1)
AEFC Leasing Pty Limited (D2)
John Gledhill (D3)

JUDGMENT OF: Austin J

COUNSEL : S Rares SC and N Perran (P)
A J Meagher SC and P Brereton (D)

SOLICITORS: Cutler Hughes & Harris (P)
Holman Webb (D)

CATCHWORDS: COMPANY LAW - financial adviser's and promoter's fiduciary duties - directors' duties - breach of duty - EQUITY - negative content of fiduciary duties - remedies for breach of fiduciary duties - where rescission not available - equitable compensation for causally connected but unforeseeable losses - PRINCIPAL & AGENT - secret commission - ingredients - element of inducement - knowledge by principal, where principal is a fledgling company controlled by promoters

LEGISLATION CITED: Fair Trading Act (NSW) 1984, ss 42, 68
Trade Practices Act (Cth) 1974, ss 52, 82

CASES CITED: Alati v Kruger (1955) 94 CLR 216
AM Spicer & Son Pty Ltd (In Liq) v Spicer (1931) 47 CLR 151
Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870
Armstrong v Jackson [1917] 2 KB 822
Astley v Austrust Ltd (1999) 73 ALJR 403
Attorney-General for Hong Kong v Reid [1994] 1 AC 324
Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488
Barnes v Addy (1874) LR 9 Ch App 244
Beach Petroleum NL v Johnson (1993) 115 ALR 411
Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1
Bernard Elsey Pty Ltd v Commissioner of Taxation (1969) 121 CLR 119
Bonds & Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Breen v Williams (1986) 186 CLR 71
Brickenden v London Loan & Savings Co [1934] 3 DLR 465
Briginshaw v Briginshaw (1938) 60 CLR 336
Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129
Chan v Zacharia (1984) 154 CLR 178 198
Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390
Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285
Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Cook v Deeks [1916] 1 AC 554
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370
Derry v Peek (1889) 14 App Cas 337
Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213
Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193
Emma Silver Mining Co Ltd v Lewis & Son (1879) 4 CPD 396
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Ex parte James (1803) 8 Ves Jn 337
Farrington v Rowe McBride & Partners [1985] 1 NZLR 83
Federal Supply & Cold Storage Co of South Africa v Anghern & Piel (1910) 80 LJ(PC) 1
Ford v Andrews (1916) 21 CLR 317
Furs Ltd v Tomkies (1936) 54 CLR 583
Gibson v Jeyes (1801) 6 Ves Jn 266
Gluckstein v Barnes [1900] AC 240
Gray v New Augarita Porcupine Mines [1952] 3 DLR 1
Hamilton v Whitehead (1988) 166 CLR 121
Hawkins v Clayton (1988) 164 CLR 539
Haywood v Roadknight [1927] VLR 512
Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761
Herron v McGregor (1986) 6 NSWLR 246
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Hovenden & Sons v Millhoff (1900) 83 LT 41
Humphris v Jenshol (1997) 160 ALR 107
Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189
In re a Solicitor; Ex parte Incorporated Law Society [1894] 1 QB 254
Jacobus Marler Estates v Marler (1913) 85 LJPC 167n
JC Houghton & Co v Nothard, Lowe & Willis Ltd [1928] AC 1
Jones v Dunkel (1959) 101 CLR 297
Ladywell Mining Co v Brookes (1887) 35 ChD 400
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392
Lamb v Cologno (1987) 163 CLR 1
Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
Liquidators of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189
Livingston v Rawyards Coal Co (1880) 5 App Cas 25
Maguire v Makaronis (1997) 188 CLR 449
Mayor & c of Salford v Lever [1891] 1 QB 168
McInerney v McDonald [1992] 2 SCR 138
McPherson v Watt (1877) 3 App Cas 254
Nocton v Lord Ashburton [1914] AC 932
Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Panama & South Pacific Telegraph Company v India Rubber Gutta Percha & Telegraph Works Co (1875) LR 10 Ch App 515
R v Byrnes (1985) 183 CLR 501
R v Ghosh [1982] QB 1053
Re Hampshire Land Co [1896] 2 Ch 743
Re Kape Breton Co (1885) 29 ChD 795
Re Morvah Consuls Tin Mining Company (McKay's Case) (1875) 2 ChD 1
Rejfek v McElroy (1965) 112 CLR 517
Richard Brady Franks Ltd v Price (1937) 58 CLR 112
Royal Brunei Airlines v Tan [1995] 2 AC 379
Salomon v Salomon [1897] AC 22
Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322
Spence v Crawford [1939] 3 All ER 271
T Mahesan S/O Thambia v Malaysia Government Officers’ Co-operative Housing Society Ltd [1979] AC 374
Target Holdings Ltd v Redferns [1996] 1 AC 421
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Tracy v Mandalay Pty Ltd (1953) 88 CLR 215
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 182 CLR 102
Wagon Mound (No 1) [1961] AC 388
Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514
Warman International Ltd v Dwyer (1994) 182 CLR 544
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
White v Jones [1995] 2 WLR 187

DECISION: See last two paragraphs.

INDEX

Introductory outline	Paragraphs 1-13
Evidentiary difficulties	14-22
The formation of AEFCAS and its relationship with AEFC	23
The joint venture agreement	24-28
The retainer of AEFCAS to provide corporate advice to the Rendell group	29-32
The acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries	33
Development of the restructuring proposal	33-38
AEFC agrees to the proposal	39-40
Implementation of the proposal	41-45
Documentation of the purchase by AEFC Leasing	46-49
The consideration supplied by AEFC Leasing	50-51
The acquisition and starting up of Aequitas and Aequitas No 1	52
Mr Gledhill's strategy for AEFC	52-58
The formation of Aequitas and Aequitas No 1	59-62
Early decisions	63-67
Did Aequitas retain the joint venture for advisory work, and if so, what was scope of the retainer?	68-86
The acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries	87
Calculations of purchase price	88-90
AEFC's decision to sell to Aequitas No 1	91-100
Settling the text of the sale of shares agreement	101-104
The sale of shares agreement	105-107
The role of Law & Milne	108-114
Payment of $69,400 to CASO as a ‘commission’	115
The financial difficulties of the Rendell group during the period from 3 October 1985 to 1 April 1986	116-121
The financial crisis of December 1985	122-129
AEFC declines to re-negotiate the deficiency guarantee	130-132
The Turner report	133-135
AEFC's information about Rendell in December 1985/January 1986	136-145
Rendell's further decline in February/March 1986	146-152
The private placement of shares in Aequitas	153
Planning for capital raising	153-158
The Aequitas private placement memorandum	159-166
Fundraising under the private placement memorandum	167-173
Mr Gledhill's report of April 1986 and the formation of AEFC Equities	174-179
Consequences of AEFC's decision not to invest in Aequitas No 1	180-182
The capitalisation and preparations for listing of Rendell Industries	183
The issue of shares to Rendell employees	183-188
Private placement of Rendell shares and options	189-191
The Pond Report and Mr Pond's appointment as executive chairman	192-199
Planning for the flotation of Rendell Industries, and the rights and options issue	200-209
Difficulties between Mr Pond and Mr Griffin	210-212
The listing of Rendell Industries	213-218
The failure of the Rendell group	219-229
Responses to the Rendell failure within AEFC	230
Enforcement of AEFC’s security over Rendell assets	231-236
Termination of the joint venture and dissolution of AEFCAS	237-244
Internal review of AEFC procedures	245-250
The effect of Rendell's failure on Aequitas and Aequitas No 1	251-256
Claims and legal proceedings	257-260
What did AEFC and AEFCAS know about the financial plight of Rendell group at the time of the purchase of shares by Aequitas No 1, and the issue of the Aequitas private placement memorandum?	261-275
The plaintiffs' causes of action	276-277
The content of fiduciary duties	278-288
Whose informed consent would avoid breach of fiduciary duty by AEFC and AEFC Leasing?	289-290
Discharge of the duty by informed consent	291-295
Can the knowledge and consent of Messrs Mullins and Rees be attributed to Aequitas and Aequitas No.1	296-306
Breach of the fiduciary duty of financial advisers	307
The scope and nature of the duty	307-310
To whom was the duty owed?	311
Who owed the duty?	312-320
The content of the fiduciary duty, and the breaches of duty	321-322
Disclosure and informed consent	323-325
Breach of the fiduciary duties of directors of Aequitas and Aequitas No 1	326
Breaches of duty by Mr Mullins and Mr Rees by their overall conduct	327-334
Breach of duty by Mr Mullins' failure to disclose $69,400 commission	335-340
Conclusions as to breach of directors' duties	341
Breach of the fiduciary duty of promoters	342
The fiduciary duty of promoters	343-345
Identifying the promoters	346-362
Conclusions as to breach of directors' duties	363
Secret commissions (bribes)	364-366
The nature of a bribe	367-370
Were bribes given in the present case?	371-377
Conclusions as to bribes	378-379
Remedies in respect of bribes	380-382
Liability for knowing involvement in breaches of equitable duties	383-404
Fraudulent misrepresentation and misleading or deceptive conduct	405-409
Conspiracy	410-412
Breach of contract	413-420
Negligence	421-422
Measure of recovery	423-424
Rescission	425-433
The plaintiffs’ losses	434-439
Account of profits	440
Measure of recovery at common law and in equity	441-456
Interest	457-464
Exemplary damages	465-466
Conclusions	467-468

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

MONDAY 9 APRIL 2001

5532/91 AEQUITAS LIMITED & ANOR V SPARAD NO.100 LIMITED (FORMERLY AUSTRALIAN EUROPEAN FINANCE CORPORATION LIMITED) & 2 ORS

JUDGMENT

HIS HONOUR:

Introductory outline

1 Australian European Finance Corporation Ltd (‘AEFC’) was a merchant bank, owned at all relevant times by the Commonwealth Bank of Australia (51%) and some foreign banks (Banque Nationale de Paris as to 19%, Banca Nazionale del Lavoro as to 15% and Dresdner Bank AG as to 15%). Its general manager and principal executive officer, at all relevant times, was Mr J B Gledhill, who was also a director. In 1984 AEFC entered into a joint venture agreement with Corporate Advisory Services (Operations) Pty Ltd (‘CASO’), a company controlled by Mr G E Mullins, to conduct the business of providing corporate advisory services. Under that agreement a company called AEFC Advisory Services Pty Ltd (‘AEFCAS’), owned by AEFC (51%) and CASO (49%), was constituted as the manager of the joint venture business on behalf of the venturers.

2 During 1985, following deregulation of the Australian financial markets, AEFCAS (and through it, the joint venture) became involved in a series of transactions relating to the affairs of a building group, the Rendell group. Three of the main individuals involved in the affairs of AEFCAS and the joint venture were Mr Mullins, Mr G L Rees and Mr RG Porteous. During the period between May 1985 and August 1986, Mr Mullins was a director of AEFCAS, Mr Rees was a consultant to AEFCAS and Mr Porteous was a director of AEFCAS. Mr Gledhill, the general manager of AEFC, was a director of AEFCAS, and was also a director of AEFC Leasing Pty Ltd, a wholly-owned subsidiary of AEFC. Mr Mullins, Mr Rees and Mr Porteous were not directors or employees of AEFC, and had no financial interest in AEFC.

3 In July 1985 the joint venture (through AEFCAS) was retained by the Rendell group, then privately owned by the Rendell family, to assist with the restructuring of Rendell's finances. It advised that the Rendell group's interest-bearing debt should be replaced with equity. In October 1985, in consequence of that advice, a company called Rendell Industries Ltd acquired control of the Rendell group from the Rendell family, and AEFC Leasing became the owner of 74.8% of the shares of Rendell Industries. The cash consideration which AEFC Leasing provided for those shares was $250,000. Additionally it was said to have ‘procured’ AEFC to provide a deficiency guarantee to the ANZ Bank so as to allow the cancellation of some personal guarantees given by the former owner of the Rendell group, and to provide finance facilities to the Rendell group.

4 Mr Mullins became chairman and a director of Rendell Industries, as well as a director of the main operating company, Rendell Industries (Holdings) Pty Ltd (‘RIH’) . Mr Rees became a director of Rendell Industries, and the deputy general manager of AEFC, Mr J N Gallois, became a director of RIH.

5 The idea was conceived that Aequitas, originally a shelf company, would become a listed company, which would (through a subsidiary eventually known as Aequitas No 1) make investments introduced to it by the joint venture. It is not clear whether the idea came from Mr Mullins, Mr Rees or Mr Gledhill, but it was developed in discussions and memoranda by all three of them. The selected investments were intended to be desirable investments of a kind too risky to meet the prudential guidelines under which AEFC had to work as a merchant bank.

6 Prior to 16 October 1985, Mr Mullins was the managing director and Mr Rees was a director of Aequitas. From 16 October 1985 Mr Rees was managing director and Mr Mullins continued as a director. Messrs Mullins and Rees and their wives were directors of Aequitas No 1.

7 As it happened, the first and only investment made by Aequitas, through its wholly-owned subsidiary Aequitas No 1, was the acquisition of AEFC Leasing's 74.8% shareholding in Rendell Industries. The purchase price was $960,000, the agreement for purchase being made on 25 November 1985. Of that purchase money $50,000 was to be ‘passed through the joint venture accounts’. The plaintiffs say this was a secret commission.

8 Subsequently arrangements were put in place, principally by Mr Rees and Mr V M Kelly (Senior Manager Project Finance, AEFC) acting under the guidance of Mr Gledhill, for shares in Aequitas to be distributed by stockbrokers Bache Cortis & Carr (‘Bache’), using a private placement memorandum. Sufficient funds were raised to permit settlement of the purchase of the Rendell Industries’ shares to take place on 1 April 1986. AEFC Leasing made a profit of $710,000 (less the $50,000 fee to AEFCAS and some interest costs) on the transaction, having bought the shares for $250,000 in October 1985. AEFC agreed to pay a commission of $69,400 to CASO on receipt of the $960,000. The plaintiffs say this was another secret commission.

9 In June 1986 Rendell Industries was floated on the second boards of the Sydney and Melbourne Stock Exchanges. Very shortly afterwards, its managing director, Mr Griffin, resigned. By August 1986 the Rendell group was clearly insolvent and AEFC appointed a receiver to assets of Rendell Industries. Subsequently the Rendell group failed and Aequitas' shareholding was valueless. The plan for stock exchange listing of Aequitas was abandoned. Amidst recriminations, AEFCAS was dissolved, to prevent it from becoming a defendant in legal proceedings.

10 By a statement of claim filed in 1991 and subsequently amended several times, Aequitas and Aequitas No 1 have sought relief against AEFC (which subsequently changed its name to Sparad (No 100) Ltd), AEFC Leasing and Mr Gledhill. They seek to rely on causes of action based on: the fiduciary duties of financial advisers; directors and promoters; secret commissions; fraudulent misrepresentation; misleading and deceptive conduct; conspiracy; negligence; breach of contract; and (in the case of AEFC Leasing and Mr Gledhill) liability for knowing involvement in breaches of equitable duties.

11 Much of the hearing time was taken up by the submissions of the parties on questions of law relating to the scope and application of the various causes of action asserted by the plaintiffs. The availability of these causes of action depends on a close analysis of the facts.

12 I shall first make some observations about evidentiary difficulties that have arisen in the case. I shall then make my findings of fact under the following headings:

· the formation of AEFCAS and its relationship with AEFC;

· the retainer of AEFCAS to provide corporate advice to the Rendell group;

· the acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries;

· the acquisition and starting up of Aequitas and Aequitas No 1;

· the acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries;

· the financial difficulties of the Rendell group during the period from 3 October 1985 to 1 April 1986;

· the private placement of shares in Aequitas;

· the capitalisation and preparations for listing of Rendell Industries;

· the listing of Rendell Industries;

· the failure of the Rendell group;

· responses to the Rendell failure within AEFC;

· the effect of Rendell's failure on Aequitas and Aequitas No 1; and

· claims and legal proceedings.

13 I shall then analyse and apply the law with respect to each of the causes of action relied upon by the plaintiffs.

Evidentiary difficulties

14 The case was heard over a relatively short time. Very few affidavits were read and oral evidence was given only by Mr Gledhill. The defendants did not call Mr Kelly or Mr Gallois, who were officers of AEFC involved in the affairs of the Rendell group and the Aequitas companies. It appears that Mr Gallois is in Egypt and the absence of evidence from him can therefore be explained. However, the evidence indicates that Mr Kelly is in Sydney and could have been called. I infer from the facts that his evidence would not have assisted the defendants' case: Jones v Dunkel (1959) 101 CLR 297.

15 The position of Messrs Mullins and Rees has given me some concern. They were central players in the affairs of the parties and the Rendell group. Inevitably I must make findings with respect to their conduct. In the nature of this case, my findings must relate to questions of propriety and honesty, as well as prudence. Their conduct has been trenchantly criticised by the plaintiffs, and it has not been in the interests of the defendants to protect or defend them. They are not parties to the present proceedings. However, they are defendants in proceedings 5874 of 1991, in which the defendants in the present proceedings seek to protect themselves by claiming recovery against Messrs Mullins and Rees in the event that I find them to be liable. They have not given evidence in the present case, but given the allegations made against them by the present defendants as plaintiffs in the other proceedings, it is not surprising that they have not been called. They are likely to be seriously prejudiced, in a practical sense, by the findings I shall make against them, even though my findings will not set up any res judicata or estoppel against them. In these circumstances, I have tried to limit my findings against Messrs Mullins and Rees to the matters necessary to be determined for the purposes of the present case.

16 Serious allegations have been made by the plaintiffs against Mr Gledhill, including allegations of dishonesty and participation in fraud. These are archetypally circumstances in which one must bear in mind Dixon J's explanation of the standard of proof in Briginshaw v Briginshaw (1938) 60 CLR 337, 362-3. This is a case where the seriousness of the allegations made, and the gravity of the consequences flowing from a finding against Mr Gledhill, are considerations that affect the question whether the issue has been proved to the Court's reasonable satisfaction. As his Honour said, in such matters ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony, or indirect inferences. In some older cases, it was said that allegations of fraud must be ‘clearly’ proved: for example, Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha and Telegraph Works Co (1875) 10 Ch App 515, 530. The High Court explained such observations in Rejfek v McElroy (1965) 112 CLR 517, 521, observing that ‘the 'clarity' of proof required, where so serious a matter as fraud is to be found, is an acknowledgment that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved’.

17 Mr Gledhill gave affidavit and oral evidence. I do not accept his evidence on certain specific points, as I shall indicate during the course of this judgment. My overall impression of Mr Gledhill in the witness box is that he was not consciously dishonest, rather that he had a strong conviction of his innocence in a moral sense of the charges made against him. His recollection of events was highly selective - for example, he clearly recollected an approach by Mr Mullins for purchase of the Rendell Industries shares in November 1985 and what he said in that approach, and he recalled telephoning Mr Griffin to discuss the proposal, and yet he cannot recall why he agreed to the payment of $69,400 to CASO after having already agreed to a commission of $50,000 to AEFCAS. This selective recollection of events appears to have operated, conveniently, in Mr Gledhill's favour.

18 His evidence brings to mind some remarks on the psychology of recollection by Street CJ, in his Report of the Royal Commission of Inquiry into Certain Committal proceedings against K. E Humphreys (July 1983):

19 In the present case, I believe that Mr Gledhill's steady conviction about his own innocence fermented to reconstruction, which in turn escalated to selective recollection. I therefore regard his evidence as having little weight, compared with the documentary evidence which, to a substantial degree, speaks for itself.

20 A great deal of documentary evidence was adduced. The plaintiffs' case relies on those documents and invites the Court to construe them and make inferences favourable to their contentions. The Court is asked to reconstruct from the documents evidence which occurred about 15 years ago. The plaintiffs' delay of nearly five years in commencing proceedings, and the further delay of over eight years between the commencement of the proceedings and the hearing, have not been fully explained. (I shall return to this point when considering the availability of interest.) The delays have made my task a difficult one.

21 Courts have frequently warned about the risk of prejudice and injustice that delay in bringing proceedings to hearing may create. For example, in Herron v McGregor (1986) 6 NSWLR 246, McHugh JA described the consequences of delay in these words:

‘Memories fade. Relevant evidence becomes lost. Even when written records are kept, long delay will frequently create prejudice which can never be proved affirmatively.’

22 The difficulties presented by such a long delay between the events and the hearing should not be understated. However, in the present proceedings the Court's findings are less dependent on the recollections of witnesses, and therefore the frailties of human memory, than is commonly the case. Although some of the documents are ambiguous, the Court at least has before it, in the documents, the actual words that were used so many years ago. That being so, it appears that it is possible to do justice notwithstanding the long delay, by a process of reconstruction of past events on the basis of and by inference from the documents, and such other evidence as is credible. Except to the extent that claims may be statute barred, I see no ground for preventing the plaintiffs from making out their case simply by reason of the delay.

The formation of AEFCAS and its relationship with AEFC

23 Prior to May 1984, Mr Mullins and others carried on business in the field of corporate advisory services under the registered firm name of ‘Corporate Advisory Services’. Their business was acquired at that time by their company, CASO. On 9 May 1984 CASO entered into a joint venture agreement with AEFC and with the company that was to be the manager of the joint venture business, which changed its name to AEFCAS. The agreement recited that AEFC was desirous of becoming involved in the field of corporate advisory services and believed that because of its reputation and standing it could influence and direct business. The agreement established an unincorporated joint venture between AEFC and CASO (‘the venturers’), managed by AEFCAS.

The joint venture agreement

24 Some of the key provisions of the joint venture agreement were as follows:

25 The joint venture agreement provided for six directors of AEFCAS, with three representing each venturer. The board initially comprised Mr Gledhill (chairman), Mr C E Peysson and Mr C W Gallagher (for AEFC), and Mr Mullins, Mr R G Porteous and Mr K S McMorrine (for CASO).

26 The full-time services of Mr Mullins and Mr Porteous were provided by CASO under the joint venture agreement, ‘for purposes of the [corporate advisory] Business and the Joint Venture’. Mr Rees was not a director of AEFCAS, but was a consultant whose services were provided in the same way by CASO under the agreement. Mr Mullins, Mr Porteous and Mr Rees performed their services for the joint venture, rather than for AEFCAS as manager. This is a point of some importance, as I shall explain later.

27 The directors' report of AEFCAS for the year ended 30 June 1986 records that the principal activity of the company was to act as manager, agent or nominee for the purposes of the joint venture for the provision of corporate advice, and that the company had not carried out any operation other than as manager of the joint venture. I infer, therefore, that contractual commitments undertaken by AEFCAS were joint venture commitments, assuming that AEFCAS had the requisite authority of the venturers.

28 At some time late in 1985 or early in 1986, the management of the joint venture prepared a lengthy document entitled ‘Proposed Restructuring & 1986 Corporate Plan’. The document reviewed the operations of AEFCAS as manager of the joint venture, after the acquisition of shares in the Rendell group and their subsequent sale to Aequitas. Management recommended to Mr Gledhill that some changes be made to the joint venture agreement, particularly relating to the remuneration of senior executives of the joint venture and the relationship between AEFCAS as manager of the joint venture and the Project Finance Division of AEFC. It was suggested that AEFCAS should contact private clients of AEFC to interest them in equity investment opportunities and that AEFCAS should broaden its activities in various ways, including an extension to underwriting. These proposals led to a written agreement dated 13 March 1986, which varied the joint venture agreement, principally with respect to the distribution of profits.

The retainer of AEFCAS to provide corporate advice to the Rendell group

29 The Rendell group was a private corporate group owned by interests associated with Mr Norman Rendell. In late 1984 and 1985 the group was looking for assistance to overcome what management perceived to be a liquidity problem produced by rapid growth of the group's business. The board had prepared a document entitled ‘A Blue Print for Survival & Growth’ in November 1984. That and other documents were supplied to AEFCAS. The ‘Blue Print’ identified a pressing need to rearrange the borrowing structure of the group to lessen the group's dependence on an expensive secondary line of credit.

30 The Rendell group had attained valuations of a property at 55-57 Halstead Street South Hurstville, owned by one of the group companies. On 20 July 1984 Mr J C Elvy of Finch Freeman Associates Pty Ltd had valued the property on a basic land value and replacement cost basis, at ‘in the vicinity of’ $1.75 million. He expressed the opinion that if the property was sold and leased back ‘the property value could be between $1.9 - $1.95 million’. In October 1984 Baillieu Hardie Gorman Pty Ltd had valued the property ‘for mortgage purposes’ at $950,000, on behalf of ANZ Mortgage Fund.

31 Mr Mullins and Mr Porteous embarked on discussions with the Rendell group which culminated in a retainer for the joint venture. A letter to AEFCAS from the managing director of RIH, Mr R M Griffin, dated 6 June 1985 proposed to retain the services of AEFCAS as corporate adviser to the Rendell group. According to the letter, ‘the principal purpose of the appointment [was] to assist with the restructuring of Rendell's finances, improving its leverage and enabling management participation in equity, to assist management in achieving the Board's corporate strategy …, enabling the company to achieve a Public Listing at an appropriate time’. Mr Mullins responded on behalf of AEFCAS by letter dated 18 July 1985, accepting the appointment and setting out the terms and conditions of the engagement. One of the conditions was that AEFCAS would have the right of first refusal on future fundraising opportunities for the duration of its appointment.

32 On the face of the documents, the entity undertaking to provide corporate advisory services was AEFCAS. However, in contracting to do so, AEFCAS was acting as the agent of the venturers under the joint venture agreement of 9 May 1984. Mr Mullins and Mr Rees, who worked on the Rendell assignment, did so pursuant to their retainer by the joint venture, rather than on behalf of AEFCAS. The principals to the contract for provision of corporate advisory services, apparently not disclosed as such to the Rendell group, were therefore AEFC and CASO.

The acquisition by AEFC Leasing of 74.8% of the shares in Rendell Industries

Development of the restructuring proposal

33 Mr Mullins and Mr Rees set to work on the joint venture's retainer by the Rendell group over the ensuing weeks. It appears that from the outset, the intention of Mr Mullins and Mr Rees was that AEFC would become financier to, and investor in, the Rendell group. On behalf of the joint venture, Mr Rees negotiated with Mr N Rendell and AEFC, with a view to developing a proposal in which AEFC would take a significant equity position in the Rendell group. Once he had substantially negotiated an agreement in principle with Mr N Rendell, he submitted his proposal in written form to Mr Kelly of AEFC.

34 Mr Rees assessed the business of the Rendell group favourably, observing that it had an unbroken history of increasing profitability until 1981, but subsequently some business errors (principally the funding of construction of a grand new head office from retained earnings) had an impact on results. He proposed that the business be acquired by an entity in which AEFC would have the majority interest. This would be achieved in several steps.

35 First, a new company would be formed, majority owned by interests associated with AEFC. An AEFC entity would subscribe $250,000 by way of share capital and share premiums to the new company. The minority interests in the new company would be associated with existing management of Rendell. When the proposal was eventually taken up and acted upon, the new company was formed which was eventually named Rendell Industries Ltd, although it retained its shelf company name (Janam Holdings) for a while and a different corporate name was envisaged at first. For convenience, I shall refer to the new company, at all stages, as Rendell Industries. Next, Rendell Industries would buy all the issued shares in the holding company of the Rendell group (RIH) for $250,000. The purchaser would assume guarantees to the ANZ Bank that had been given by interests associated with Mr N Rendell. Equity up to $500,000 would be offered to staff on commercial terms.

36 Mr Rees developed the proposal for AEFC to make an equity investment in the Rendell group on the basis of information supplied to him by the Rendell group. One of the documents supplied to AEFCAS upon its appointment was an audited balance sheet for the Rendell group as at 31 March 1985, which gave an excess of assets over liabilities of $ 1,607,000, compared with $796,000 as at 30 June 1985. The difference is explained principally by an upwards revaluation of land and buildings from $1,454,000 to $ 2,454,000 and an increase in bank debt.

37 Some discussion notes dated 16 July 1985, the author of which is not identified, appear to have been prepared as a basis for interesting AEFC in the proposal for it to inject equity capital into the Rendell group. The notes refer to the Rendell group as having a net worth on a going concern basis of $900,000 excluding goodwill, according to the managing director's advice. They appear to assume that an asset liquidation would realise $2,320,000, although no attempt was made to justify that figure. Mr Rees' written submission to Mr Gledhill dated 23 July 1985 stated that according to ‘preliminary figures’, the group had a minimum going concern value in excess of 3.5 times the initial purchase cost ($250,000). Mr Rees envisaged a revaluation and an equity injection of up to $500,000 by employees, leaving AEFC with 50.5% of the restructured group at a value of $910,000.

38 The existing owners were said to be prepared to sell at $250,000 in order to release the burden of personal guarantees. The proposal noted that the plan was to list the new holding company within 12 months, and this would provide liquidity. The implication of ‘liquidity’ was that AEFC would be able to sell down its interest in the market. The document noted that, in addition to the potential equity return and advisory fees, lending opportunities would be available to AEFC.

AEFC agrees to the proposal

39 Mr Kelly took up the proposal as noted in an internal AEFC memorandum dated 25 July 1985. The memorandum noted that the proposed guarantee of ANZ credit lines would be for an amount of $1.64 million, and that the ANZ credit lines were secured over the freehold property owned by the company which had a book value of $1.9 million and a market value of approximately $2.2 million. These figures are higher than the valuations referred to above. The memorandum noted that the public listing of the company within six to 12 months would provide the opportunity for AEFC to on-sell its shareholding at a profit. This implies that at 25 July 1985, the early on-sale of the shares to be acquired by AEFC was in contemplation, but through the listing of the Rendell group rather than by sale to Aequitas. The memorandum noted that the guarantee would be terminated within 12 months, either through reduction of the ANZ credit lines or through the sale of the freehold to extinguish the ANZ debt. The memorandum estimated that AEFC could expect to recoup conservatively in the range of $910,000 to $1.234 million from the sale of shares on the market. It observed that approval for AEFC's investment in Rendell would probably be required from the Foreign Investments Review Board.

40 Mr Gledhill added some handwritten notes to Mr Kelly's memorandum on the same day. Mr Gledhill noted that the proposal had been discussed with the chairman of AEFC, who was willing for the investment to be handled under management delegated authority. It was noted that approval was given to the investment of $250,000 on the basis proposed by Mr Rees, subject to resolution with Holman Webb (AEFC's solicitors) of the appropriate investment vehicle. Mr Gledhill's note identified a significant problem with the transaction, namely that it would require Foreign Investments Review Board approval because of AEFC's non-Australian status, but evidently Mr Gledhill believed that the need for approval could be avoided if the investment was appropriately structured.

Implementation of the proposal

41 Having obtained AEFC's approval to the proposal, Mr Rees and Mr Mullins then went about implementing it. Mr Mullins secured the approval of the Rendell group and the vendors, the interests associated with Mr Norman Rendell. Mr Rees sought and obtained the consent of the ANZ Bank to the conversion of the collateral securities into a ‘deficiency guarantee’ under which ANZ would agree with AEFC to pursue its other securities first (namely its first mortgage on the South Hurstville property and a first floating charge over the Rendell group assets). He and Mr Kelly contemplated that once the deal had been consummated, further approaches would be made to the ANZ to completely extinguish the guarantee (see Mr Kelly's internal memorandum dated 2 August 1985).

42 Early in August 1985 AEFC provided the Rendell group with unsecured short-term financial accommodation of $350,000 to reduce its ANZ overdraft, because the group was experiencing ‘liquidity problems’. The facility was provided on the basis that it would be repaid from the proceeds of the issue of Rendell shares to staff, which was anticipated to take place no earlier than late August 1985. Mr Kelly's internal memorandum dated 2 August 1985, which recommended that the facility be granted, calculated that with the additional loan AEFC's exposure to the Rendell group by way of equity investment, loan and guarantee would be $1,171,000. This was on the basis that the borrowings guaranteed to ANZ stood at $2,171,000 and the maximum realisation of the Hurstville freehold under a forced sale would be $1,600,000. Evidently Mr Kelly did not rely on a formal valuation for his estimate of realisation on a forced sale, using instead the book value of the freehold, then recorded as $2 million, and allowing a 20% margin to reflect the forced sale situation. He estimated the net worth of the Rendell group on a ‘going concern’ basis as $1,454,000.

43 Upon documentation of the purchase transaction on 3 October 1985, AEFC made a revolving term loan of $1.17 million to the Rendell group, charged over the assets and undertaking of the group, to replace an existing external loan of $750,000, retire AEFC's short-term financial accommodation of $350,000 and provide additional working capital to Rendell. This took AEFC's total exposure to the Rendell group to $1,991,000.

44 Holman Webb advised that an AEFC entity should make the investment after obtaining the approval of the Foreign Investments Review Board, on the assumption that the approval would be subject to a requirement that the investing entity divest itself at a later time. But another structural problem arose. If AEFC came to hold indirectly more than 50% of the shareholding in the Rendell group as at 30 June 1986, it would be necessary for the Rendell group to be consolidated into AEFC's balance sheet, and that would ultimately lead to consolidation into the Commonwealth Bank's balance sheet. That was thought to be an undesirable outcome. Therefore, it was proposed that a separate company be set up that would be owned 50% by AEFC and 50% by the management of CASO. But in a handwritten note dated 21 August 1985, Mr Gledhill said that the acquisition should be made through a wholly-owned subsidiary of AEFC called AEFC Leasing (which was a ‘clean’ AEFC subsidiary not being otherwise used) and that the ownership of AEFC Leasing could be addressed at a later stage.

45 A shelf company called Janam Holdings Ltd was acquired early in September 1985 and was set up to become the new holding company of the Rendell group. As I have mentioned, it was eventually re-named Rendell Industries Ltd. AEFC Leasing subscribed for 100 shares of $1 each at a premium of $2,499 per share, constituting its investment of $250,000 in the new entity. The company's five other shares were acquired by individuals. The shares were later split into 20 cent shares (some documents in evidence indicate that the share-split resolution was passed on 27 September 1985, while others suggest that the resolution was passed on 3 October 95). A new board was appointed, which included Mr Mullins and Mr Rees. The new board set about implementing the transaction, planning for an issue of shares to employees and a stock exchange listing, and also planning an acquisition with a view to expanding the business to become a conglomerate in the building industry.

Documentation of the purchase by AEFC Leasing

46 Documentation for the purchase of the Rendell group by Rendell Industries was executed early in October 1985. There were three principal agreements. By a Deed of Agreement dated 2 October 1985 Rendell Industries agreed to issue an additional 1,299,895 fully paid shares of $1 each to AEFC Leasing or as it may direct, said to be in consideration of AEFC Leasing procuring short-term financing and a guarantee of the ANZ lines of credit by AEFC. AEFC Leasing directed that 972,645 of the shares be issued to it, 38,500 be issued to AEFCAS, 96,250 be issued to a company related to Mr Griffin called Daranlas Pty Ltd and 192,500 be issued to a company related to Norman Rendell called WNR Nominees Pty Ltd. It was later asserted that the shares issued to WNR Nominees were part of the consideration for the purchase of the RIH shares, and the shares issued to AEFCAS were in lieu of payment of advisory fees.

47 The evidence indicates that this document was drafted at a later time and backdated to 2 October 1985, to reflect a non-written agreement recited in a notice of meeting of the shareholders of Rendell Industries held on 3 October 1985.

48 Secondly, there was a Sale of Shares Agreement dated 3 October 1985. By that agreement Mr Norman Rendell and interests associated with him sold all of the issued shares in RIH to Rendell Industries for $250,000. The agreement provided for the Rendell interests to lend $200,000 to RIH, guaranteed by Rendell Industries and repayable when Rendell Industries raised $500,000 by private placement (contemplated to be made to employees) or on 3 April 1986. Rendell Industries undertook to arrange for the release of the personal guarantees given by the vendors to the ANZ Bank.

49 Thirdly, there was a Shareholders Agreement between the shareholders of Rendell Industries and that company. The agreement set out the final shareholdings in Rendell Industries. AEFC Leasing was to hold 74.83%, AEFCAS 2.96%, WNR Nominees 14.81%, and Daranlas 7.40%. The agreement made provisions for the corporate governance of Rendell Industries and for the constitution of the boards of that company and RIH. It provided for the repayment of a loan account to Mr and Mrs Rendell and the issue of 3,125,000 shares to the employees at par, 16 cents per share payable on application and the balance of four cents per share to be satisfied out of the company's share premium account. (Completion of the issue of the shares would dilute AEFC Leasing's interest to 50.5%.) The proceeds of the share issue would be applied to repay the loan of $200,000 made by the Rendell interests to RIH. The agreement also provided for Rendell Industries to appoint AEFCAS as corporate adviser for the issue of the shares to employees and the admission of the company to stock exchange listing.

The consideration supplied by AEFC Leasing

50 As we shall see, the Rendell Industries shares were later sold to Aequitas No 1 for $960,000. It is therefore of some importance to identify the true consideration paid by AEFC Leasing to acquire the shares. Part of the overall transaction involved Norman Rendell being relieved of his guarantee obligations to the ANZ Bank, by AEFC undertaking liability under what became a deficiency guarantee. Another part of the overall transaction was that AEFC would provide loan facilities to the Rendell group. In my opinion, these elements of the overall transaction were commercially necessary, in the sense that the acquisition by AEFC Leasing would have been otherwise unlikely. It is somewhat artificial to say, as the Deed of Agreement dated 2 October 1985 does, that AEFC Leasing ‘procured’ these commitments by AEFC. However, that proposition is true if it simply means that AEFC Leasing's participation in the transaction brought along with it the additional commitments by AEFC. In that sense, AEFC Leasing provided a consideration that was real and not illusory.

51 This is not to say, however, that these additional elements of the consideration are to be offset against the higher sale price obtained by AEFC Leasing, in order to calculate AEFC Leasing's profit on the Rendell transaction. At the time, Mr Kelly's calculations indicated that there was very little risk to AEFC in undertaking the deficiency guarantee, and adequate protection for AEFC in respect of its loan facilities. Events later took a turn decidedly for the worse, but the contemporaneous assessment by Mr Kelly, shared by Mr Gledhill, Mr Mullins and Mr Rees, was that AEFC Leasing stood to make a very substantial profit if could dispose of the Rendell Industries shares for a price reflecting the value they attributed to the shares. This is confirmed by the fact that when the transaction was completed, AEFC Leasing lodged $690,000 in a Lloyds' account as the amount representing the profit on sale of the Rendell Industries shares. That amount was not taken directly to profit, in order to allow ‘maximum flexibility in accounting/tax strategies’.

The acquisition and starting up of Aequitas and Aequitas No 1

Mr Gledhill's strategy for AEFC

52 As early as August 1985, before completion of the acquisition of the Rendell group, the joint venture and the management of AEFC were developing plans which ultimately led to the establishment of Aequitas and Aequitas No 1. Mr Gledhill prepared a board paper, dated 2 September 1985, which he presented to the October 1985 meeting of the board of AEFC. The paper outlined a strategy of ‘equity investment/funding by specially structured company vehicles’. Several generic situations were identified in which it could be appropriate for AEFC to subscribe for shares, with AEFCAS and the joint venture earning fees on the restructure of the company and AEFC providing loan finance to the restructured group.

53 Mr Gledhill put forward two structures for equity investments. In some cases, it would be appropriate, he thought, for AEFC to make a ‘direct’ investment. However, where the investment gave rise to a majority holding, it would be necessary to avoid consolidation of the acquired entity in AEFC's balance sheet. This would be done by using AEFC Leasing (to be re-named AEFC Equities) as the investment vehicle, funded by loans from AEFC, and reconstituting that company so that 50% of its shares would be held by CASO, with AEFC holding only 50%. AEFC's shares would have preferred dividend rights and CASO's holding would give it no returns on the investment save for a management fee paid to AEFCAS. I shall refrain from commenting on whether this highly artificial structure would successfully avoid the accounting consolidation requirements of the time, but I note that it certainly would not do so under the legal and accounting requirements in force today.

54 Mr Gledhill noted that management and ‘the resources of the Advisory Service’ (by which he meant, presumably, the joint venture) were investigating the feasibility of forming a listed public company, for the purpose of medium to long term corporate equity investment, with AEFC having a shareholding of not more than 15% in the public company (the limit apparently being intended to avoid foreign investment problems for the public company). An Australian investment committee would assess the suitability of investment proposals for AEFC Equities and for recommendation to the public company.

55 Mr Gledhill stated:

56 Mr Gledhill then noted the foreign investment problem. He observed that each investment made by AEFC Equities would require approval from the Foreign Investments Review Board. He said it was impracticable to turn AEFC Equities into an Australian company for foreign investment purposes, but he noted that the proposed publicly listed investment vehicle would be an Australian company. If it took an option over an AEFC Leasing investment, the case for Foreign Investments Review Board approval would be greatly strengthened.

57 The flavour of Mr Gledhill's discussion of the proposal for a publicly listed investment vehicle was to emphasise the advantages to AEFC and the joint venture, without paying any attention to the attractiveness of the listed vehicle to its potential shareholders, beyond the observation that it would look for long-term returns from stable investment opportunities. It is hard to see how the uses which Mr Gledhill contemplated for the listed entity would assist its board to pursue such an investment strategy.

58 Mr Gledhill's board paper was debated by the directors of AEFC at their meeting in October 1985. It appears, though the evidence is not clear, that the board gave Mr Gledhill's views some cautious support, given they resolved that a further report be prepared for the May 1986 meeting covering developments in this area during the intervening period, impliedly sanctioning the proposition that such developments were authorised.

The formation of Aequitas and Aequitas No 1

59 The publicly listed investment vehicle contemplated by Mr Gledhill's board paper came to life as Aequitas Ltd. Aequitas was originally a shelf company called Elonhay Ltd and its wholly owned subsidiary, Aequitas No 1, was a shelf company called Marktan Nominees Pty Ltd. The cost of acquiring Elonhay was paid by Aequitas itself from an amount of $1,500 advanced to it by a company associated with Mr Mullins and two other companies (probably associated with Mr Rees and Mr Elvy).

60 The shareholders of Aequitas between 10 September 1985 and 10 March 1986 were Mr Mullins and Mr Rees, their respective wives and Mr J Elvy, a consultant provided to Aequitas by CASO. Mr Mullins was appointed managing director on 18 September 1985, and he remained in that position until 16 October 1985, when Mr Rees replaced him. Mr Elvy ceased to be an employee of CASO in February 1986. He agreed with CASO at that time to resign as a director of Aequitas and to transfer his share in it to Mr Porteous or such other person as CASO should direct.

61 On 10 March 1986 Mr H M Rich, a director of various public companies including News Corporation Ltd and Ansett Transport Industries Ltd, became a shareholder. On 12 March 1986 Mr R A Donohoe (a former banker and stockbroker) and Mr A C Pond (a director of various Australian companies including Hunter Douglas and City Mutual Life Assurance Ltd, and by that time executive chairman of Rendell Industries) became shareholders. Companies associated with Mr Mullins and Mr Rees (Shop Two Pty Ltd and Morespeach Pty Ltd respectively) became shareholders on 12 March 1986.

62 Aequitas and Messrs Mullins and Rees and their respective wives were the shareholders in Aequitas No 1 from 31 October 1985. The directors of that company were Messrs Mullins and Rees and their respective wives during the period from 31 October 1985 to 12 March 1986. On 12 March 1986 the wives resigned and Messrs Rich, Pond and Donohoe were appointed directors in their place.

Early decisions

63 The minutes of the meeting of directors of Aequitas held on 18 September 1985 record various decisions of a kind necessary for a newly launched company to take. The minutes indicate that preparatory work had been done by Mr Mullins and Mr Rees. For example, they met with Law & Milne and the board accepted their suggestion that this firm be appointed as lawyers to the company. Mr Rees established a cheque account for the company. Mr Mullins told the board that he would meet with Law & Milne regarding the preparation of an option agreement in respect of the shares held by AEFC Leasing in Rendell Industries. The board agreed that discussions be held with representatives of various accounting firms with a view to the appointment of auditors. It was agreed that Mr Porteous would contact, amongst other firms, Arthur Young & Co, and it was agreed that the accounting firms would be interviewed by Mr Rees and Mr Porteous.

64 Prior to 3 October 1985 someone on behalf of Aequitas (probably Messrs Rees and Porteous) met with representatives of Arthur Young & Co, a firm that was independent of AEFC and AEFCAS. On 3 October 1985 Arthur Young submitted a proposal addressed to Mr Mullins as managing director of Aequitas. The proposal was prepared on the basis that opportunities for business would come to Aequitas from AEFC and from external opportunities; that the business of Aequitas would be separate from but would complement the corporate advisory business of AEFCAS; and that Aequitas would take a longer term view of investments than AEFC, whose investment positions would be taken for only about 6 to 18 months, so there would be opportunities for Aequitas to invest by taking out existing AEFC positions.

65 A meeting of representatives of Aequitas, Arthur Young and Law & Milne took place on 30 October 1985. Messrs Mullins, Rees and Porteous were there. There was discussion about the establishment of Aequitas No 1, and concern was expressed that if the acquisition of the Rendell Industries shares took place after Rendell Industries had distributed shares to staff, the acquisition would be subject to the Companies (Acquisition of Shares) Code, the predecessor of Chapter 6 of the Corporations Law. This was because, after the employee share issue, Rendell Industries would have more than 15 members and would hence be subject to the provisions regulating an acquisition that causes an entitlement to voting shares to exceed 20 percent.

66 Subsequently to that meeting, Aequitas No 1 was acquired and an offer was made to purchase the Rendell Industries shares owned by AEFC Leasing.

67 AEFCAS prepared a brochure which referred to the ‘close association’ between Aequitas and AEFC, saying that the formation of Aequitas was strongly supported by AEFC and referring to their ‘unique relationship’. The brochure quoted Mr Gledhill and referred to a relationship with AEFC ‘and it shareholders’. Adjacent to those remarks there was a picture of Martin Place including the Commonwealth Bank head office. Eventually the brochure was withdrawn, after Mr Mullins referred it to Mr Gledhill for review on 15 May 1986.

Did Aequitas retain the joint venture for advisory work, and if so, what was scope of the retainer?

68 A crucial issue in this case is whether the joint venture was ever retained by Aequitas for corporate advisory work, and if it was, what was the scope of the retainer. The principal evidence is in three categories.

69 First, there is a letter from Mr Porteous as a director of AEFCAS to the managing director of Elonhay dated 23 August 1985. It is a submission for the appointment by Elonhay of AEFCAS for a period of 12 months ‘to provide specialist advice on structure and approach to the raising of equity, initially by private placement and subsequently through Stock Exchange listing’. At the time, AEFCAS was acting only in its capacity as manager for the joint venture.

70 The defendants submit that this letter must have been prepared after 10 September 1985. This is because the letter was addressed to Elonhay, which was not acquired from the shelf company provider until 10 September 1985. However, I do not regard this as sufficient for me to find that the letter was not authentic, or (if authentic) was not entered into on the date that it bears. The formation of the public company that became Aequitas was a subject of active consideration by Mr Gledhill, and (I infer) Mr Mullins and Mr Rees as well, in August 1985, since the idea was sufficiently mature to be included in Mr Gledhill's board paper of 2 September 1985. Consistently with the external facts, it would have been open to Mr Porteous or someone else to contact the shelf company provider and ascertain the name of the available shelf company on 23 August, even though the transaction to acquire the company was not completed until 10 September. The evidence provided by Mr Porteous' letter of 23 August implies that this occurred.

71 It appears that no contract of retainer was entered into before 10 September, since the letter of 23 August is an offer rather than confirmation of an existing agreement, and the shelf company provider certified on 10 September that Elonhay had not entered into any agreements or transactions. The letter of 23 August invited the managing director of Elonhay to accept the offer by signing and returning an enclosed copy of the letter. There is no direct evidence that this was done, or that the offer was otherwise formally accepted. The question is whether it was accepted informally, for example by conduct. It is difficult to answer this question, because Mr Mullins and Mr Rees were the principal embodiment of the joint venture, and AEFCAS, and also Aequitas at this time.

72 There is some evidence that Mr Mullins and Mr Rees regarded themselves as providing corporate advice to Aequitas as well as to the joint venture during the period from September to November 1985, and that Mr Gledhill regarded them as doing so. Mr Gledhill's memorandum of 12 November 1985 refers to the Rendell Industries investment, and says that since that time AEFCAS had formed ‘an independent equity vehicle to be known as Aequitas Ltd’. The same memorandum refers to the sum of $50,000 being passed through the joint venture accounts of AEFCAS ‘in recognition of the part played in structuring the transaction’. Obviously AEFCAS was acting for the joint venture, and was being rewarded accordingly. But the language of Mr Gledhill's memorandum implies that, in his view, AEFCAS was also involved in the formation of Aequitas and the ‘structuring’ of the transaction from the viewpoint of Aequitas.

73 Similarly, when Mr Kelly wrote to Arthur Andersen & Co for advice as to the tax consequences of the Rendell transaction on 26 February 1986 (a letter specifically approved by Mr Gledhill), he described Aequitas No 1 as a ‘public investment company managed by AEFCAS’. An application for approval of an Australian currency facility, directed to AEFC's Sydney office by management (perhaps Mr Kelly) in about January 1986, describes Aequitas as a company formed by AEFCAS. Law and Milne, who had been appointed the solicitors of Aequitas on 18 September 1985, appear to have dealt with Mr Rees at AEFCAS, submitting drafts of the sale of shares agreement to him.

74 Secondly, there is evidence concerning various payments by Aequitas to AEFCAS. On 30 April 1986 Aequitas drew a cheque in favour of AEFCAS for $28,357.12, requisitioned by Mr Rees and approved by Mr Porteous by a cheque requisition which stated that the payment was for AEFCAS' services in negotiating a lease of premises and the employment of Mr Hinton, and for ‘general matters and advice’. A memorandum of fees for that amount was directed by AEFCAS to Aequitas on 10 June 1986. It was expressed to be for the period 23 September 1985 to 31 March 1986, for work which included the matters noted on the cheque requisition and also ‘general advice in relation to structure of the Aequitas group including composition of Board of Directors, discussions with Lawyers, Accountants and Stockbrokers’, and ‘advising on the proposed public flotation of Aequitas including private placement to selected institutions’.

75 Two further memoranda of fees were rendered by AEFCAS to Aequitas on 10 June 1986. The first related to advice during May on various matters concerning Rendell and other proposed investments, in the sum of $7,811.20 (including disbursements). The second related to general advice during April regarding fundraising by private placement memorandum, and discussions with brokers and institutional investors, as well as assisting in a marketing program to promote the company's name in the marketplace and preparation of papers on potential equity opportunities for presentation to the directors, in the sum of $3,805 (including disbursements). A cheque requisition dated 16 June 1986 for payment of both accounts was signed by Mr Rees and Mr Porteous. The audited financial statements of AEFCAS for the year ended 30 June 1986 showed no income or profit for the company, presumably because these receipts were accounted for as joint venture receipts.

76 The defendants draw attention to the fact that the period stated in the memorandum of fees dated 10 June 1986 began five days after the directors of Aequitas, at their meeting on 18 September 1985, resolved to appoint Law and Milne as solicitors to the company and to authorise Mr Mullins to meet with them concerning the preparation of an option agreement over the shares held by AFEC Leasing in Rendell Industries. In other words, they say, the occasion for providing advice with respect to the Rendell Industries acquisition had already passed before the joint venture commenced work for Aequitas. Additionally, they submit, the description of work done in the memorandum of fees makes no specific mention of Rendell Industries, a matter sufficiently important to have been expressly recorded if work had actually been done on it.

77 I do not accept these submissions, having regard to the contrary evidence to which I have referred. The meeting of 18 September 1985 was the first meeting of the directors of Aequitas after the company had been acquired from the shelf company provider and the board had been reconstituted accordingly. The directors did not decide at that meeting to commit the company to the acquisition of the Rendell Industries shares. They simply authorised Mr Mullins to have discussions with Law and Milne. The occasion for corporate advice on the acquisition of the Rendell Industries shares had not expired prior to 23 September, when (according to the memorandum of fees) advisory work commenced.

78 Even if (contrary to my view) the directors of Aequitas decided to acquire the Rendell shares before AEFCAS commenced to provide advisory services to Aequitas, there was still a great deal of advisory work needed, covering the raising of money to permit Aequitas No 1 to complete the purchase of the Rendell shares, the contents of the private placement memorandum to be issued by Aequitas, and the structure of the purchase.

79 It is true that the memorandum of fees did not expressly refer to Rendell Industries, but it would be dangerous to base inferences on the omission, for which there are various possible explanations - for example, given that by 10 June 1986 the acquisition had turned sour and the Rendell group was in severe financial trouble, the drafter of the memorandum of fees may have thought it politic not to refer specifically to that assignment.

80 Thirdly, the private placement memorandum issued by Aequitas in March 1986 contains a section headed ‘Company Particulars’, with a subheading ‘Retained Advisers’. Under those headings AEFC is described as ‘Merchant Banker’ and AEFCAS is described as ‘Corporate Adviser’. This suggests, though not conclusively, that AEFCAS had the status of corporate adviser as a general matter, without the limitations contended for by the defendants. The defendants submit that there is no evidence that AEFC (and more specifically Mr Gledhill) approved or was asked to approve the terms of the memorandum before it was distributed. However, the private placement memorandum contained an open letter by Mr Glenfield on behalf of AEFC, dated 10 March 1986, in which Mr Gledhill referred to the formation of Aequitas by Mr Mullins (whom he described as managing director of AEFCAS) and Mr Rees (whom he described as a consultant to that company). The letter referred to Aequitas as a valuable adjunct to the operations of both AEFC and AEFCAS. At the very least, the letter was an implied endorsement by AEFC of the private placement memorandum, in terms that were consistent with the proposition that AEFCAS was corporate adviser to Aequitas.

81 On balance, I find that the evidence supports the conclusion that Mr Mullins or Mr Rees, on behalf of Aequitas, accepted the AEFCAS offer of 23 August 1985 by their conduct, at some time between 10 and 18 September 1985. Thereafter there was a contract of retainer for the provision of corporate and financial advice between the joint venturers by their agent, AEFCAS, as adviser and Aequitas as client.

82 The defendants submit that if (contrary to their submission) there was a contract of retainer in the terms of the letter of 23 August 1985, it did not extend to advice on investments generally, or on any investment in Rendell Industries. By its terms, the letter was limited to the provision of advice ‘on structure and approach to the raising of equity ... by private placement or through stock exchange listing’. In my opinion, if a company with some ideas but no assets seeks advice on its structure and the correct approach to raising equity and listing, advice on the acquisition of assets would be part of an appropriate and comprehensive response. Such a company would need to acquire one or more businesses or investments to make it attractive to private and public investors. Advice about the kinds of assets likely to appeal to investors would fall within the terms of such a retainer. While such a retainer would probably not require the adviser to seek out investment opportunities, it would be within the scope of the retainer for the adviser to draw the company's attention to an investment opportunity of which it was aware, and make an assessment of that opportunity accordingly.

83 In summary, my view is that the contract of retainer contained an implied undertaking by the joint venturers, by their agent AEFCAS, to provide objective advice on the acquisition of assets appropriate to permit the company to raise equity by private placement or through stock exchange listing, including advice about the kinds of assets likely to appeal to investors, and advice about and assessment of any investment opportunities known to the adviser. I regard such an implied term as reasonable and equitable, necessary to give business efficacy to the contract of retainer, so obvious that it ‘goes without saying’ capable of clear expression, and consistent with the express terms of the letter of 23 August 1985. Hence the condition stipulated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283, are satisfied.

84 I do not accept that the further amended statement of claim, which referred only to ‘the opportunity to invest in shares in Rendell Industries’, was limited so as to prevent the plaintiffs from asserting at the hearing that the retainer covered specific advice about the Rendell transaction. I find that it did.

85 The defendants say that there was no ‘opportunity’ to invest in the shares in Rendell Industries in October/November 1985, since (according to a memorandum by Mr Kelly dated 10 October 1985) AEFC Leasing was at that time proposing to retain the shares until after the listing of Rendell Industries. However, in my view, AEFC had not made any firm decision on the matter. Mr Gledhill's board paper of 2 September 1985 indicates that the prospect of passing on such an investment to Aequitas was an available alternative.

86 Considered together, the evidence establishes that Aequitas engaged AEFCAS, which acted as manager for the joint venture, to provide corporate advice on matters including the acquisition and financing of the purchase of Rendell Industries shares from AEFC Leasing. The venturers, AEFC and CASO, were liable as principals to supply AEFCAS with corporate advice on these matters, through the personnel of the joint venture.

The acquisition by Aequitas No 1 of the 74.8% shareholding in Rendell Industries

87 On 6 November 1985 Law & Milne, solicitors, submitted to Mr Rees a draft agreement for the sale by AEFC Leasing of its shareholding in the Rendell group to Aequitas No 1 Ltd, which did not include the number of shares to be sold nor the consideration to be paid. A further draft including this information was prepared on 7 November, the draft agreement being dated 8 November. The document envisaged sale for $910,000, of which $1,000 would be paid on settlement not later than 11 November 1985, and the balance would be postponed to 31 March 1986.

Calculations of purchase price

88 Mr Rees made some notes about the purchase price, presumably between the time of the first and second drafts. His notes do not indicate any re-assessment of calculations that had been made for the purpose of the acquisition by AEFC Leasing in the previous month. The notes take the par value of the shares, and make a deduction for dilution, to take into account the proposed employee share issue. The notes identify the price of $910,000 as the figure ‘incorporated in the submission’. This appears to be a reference to Mr Rees' submission to AEFC dated 23 July 1985, recommending the initial purchase by AEFC Leasing. Mr Rees' notes give the impression that the purchase price was to be $910,000 because that was the figure AEFC had been encouraged to expect, at that time of AEFC Leasing's acquisition of the shares.

89 On 8 November 1985 Mr Rees prepared an analysis of the value of a 50.5% shareholding in Rendell Industries ‘post committed employee issue’. According to that analysis, the ‘on market’ range of values of that holding was between $1.768 million and $2.273 million. This suggests that Mr Rees regarded the acquisition price for Aequitas No 1 as below the market price, but on the other hand, the valuation makes some significant though unstated assumptions about the Rendell group being successfully floated by stock exchange listing. It does not appear to have been a rigorous assessment, and does not rely on any external valuation of the Hurstville property.

90 Mr Gledhill gave evidence that he was unaware of these calculations by Mr Rees. The defendants say that in those circumstances, Mr Rees cannot have been acting in the interests of AEFC or the joint venture, because if he were, he would have disclosed his calculations to Mr Gledhill in case Mr Gledhill wanted to increase the purchase price in accordance with them. I do not accept this submission. Given the nature of the calculations, I regard them as part of the planning by Mr Rees to ensure that investors would subscribe for the shares in Aequitas, in order to achieve the overall objectives of AEFC and the joint venture. They formed part of the pattern exhibited, as well, by Mr Rees' analysis dated 18 December 1985, in which he concluded that on the basis of maintainable future earnings after tax, Rendell Industries had a value of between $1.484 million and $1.855 million, and consequently that a revaluation of Aequitas No 1's interest by $700,000 was ‘reasonably justified’. Similar calculations were prepared in January 1986.

AEFC's decision to sell to Aequitas No 1

91 At Mr Gledhill's request, Mr Rees prepared a discussion paper dated 11 November 1985, setting out the case for AEFC to sell its shares in the Rendell group as opposed to continuing to hold the shares in the expectation of increased value after listing. In it, Mr Rees observed that the net assets of Rendell had been purchased at a ‘steep discount’, and calculated that the profit on sale would be 5,400% on an annualised basis. Amongst the advantages of selling, in his view, were that profit would be crystallised before the year-end, releasing funds for further deals and setting a successful example by achieving the ‘corporate goal of higher profit from asset base’, while giving Aequitas the impetus to raise funds. However, a measure of control over the financing of Rendell would be lost and the possibility of further profits from the investment would be forgone.

92 The assessment by Mr Rees of the threats to the value of the investment in the Rendell group is interesting, especially in light of the information he possessed about Rendell's financial position (discussed below). He observed that the Rendell group was ‘one sector based’ and the building sector was in decline and carried a stigma with the market, that sub-contractors were high-risk, that there was a loss history, that management was too thin and new, that one debtor (presumably Concrete Constructions, for whom Rendell was doing substantial work) dominated the company's receivables, that Rendell would be listed ‘only to allow the investor to sell’, that overall the market was in decline, and that there was a high risk from supplier support to Rendell's competitor. He expressed the opinion that the risks would be heavily weighted by the market, and that the role of passive investor (a role, it is noted, that was envisaged for Aequitas) would be easier for AEFC if risks were spread. These observations imply that an equity investment in the Rendell group in November 1985 would be imprudent.

93 On the basis of Mr Rees' notes and a discussion with Rendell's managing director, Mr Griffin, Mr Gledhill prepared an internal memorandum dated 12 November 1985. He noted that AEFC's strategy had been to dispose of the Rendell investment once the company had been floated on the Second Board of the Stock Exchange in 1986. However, AEFCAS had formed Aequitas as the listed investment entity that had been foreshadowed in his board paper for the October 1985 board meeting. He noted that AEFC would not now be a shareholder in Aequitas, but CASO would hold a B class share giving it 60% of the voting rights, and accordingly, management control. A public capital raising for Aequitas was proposed, raising some $5 million, initially to be subscribed to $2 million. Aequitas No 1 had been formed as a wholly-owned subsidiary of Aequitas as part of a strategy to keep Aequitas ‘takeover-proof’.

94 Mr Gledhill reported that Aequitas had made an offer to buy AEFC's Rendell investment, the offer being contained in the Sale of Shares Agreement prepared by Law & Milne. He noted that it would be necessary for Aequitas to purchase the shares before the proposed private placement of shares to management took place, because if the sale to Aequitas was delayed, Aequitas would have to offer to purchase the management shares. I assume this was because the issue of the management shares would take the number of shareholders in Rendell Industries above the threshold at which the takeover legislation of the time would have become applicable.

95 Referring to Mr Rees' background notes and his discussion with Mr Griffin, Mr Gledhill said he was satisfied that it was in the best interests of AEFC to dispose of its shareholding in Rendell and crystallise its profit. He said:

‘I believe it is it in AEFC's best long-term interests for Aequitas to get off the ground as a viable equity investment company as this will provide the vehicle for the on-selling of equity investments taken by AEFC as they are fed to us by the Advisory Service.’

96 Mr Gledhill decided that AEFC would proceed with the sale subject to the consideration being increased to $960,000, and some slight amending of the draft in other respects. He said:

‘I have indicated to Mr Mullins that, when settlement takes place, an amount of $50,000 will be passed through the joint venture accounts of AEFC Advisory Services in recognition of the part played in structuring the transaction.’

97 Mr Gledhill gave some evidence, orally and by affidavit, about the circumstances leading up to AEFC Leasing's sale of the Rendell Industries shares to Aequitas No 1. His evidence was that Mr Mullins approached him and proposed ‘that the investment company he was forming acquire all the [Rendell Industries] shares held by AEFC Leasing’. He said Mr Mullins had a draft share sale agreement, which provided for a purchase price of $910,000. This appears to be the draft prepared by Law & Milne on 7 November 1985. Mr Gledhill said he responded by suggesting a figure of $960,000, which was closer to the par value of the shares (approximately 4.8 million shares of a par value of 20 cents each), and that he asked Rees for the discussion paper to which I have referred. He said he asked Mr Rees to prepare a discussion paper on the arguments for and against AEFC Leasing holding its equity investment in Rendell Industries.

438 However, I do not regard the acquisition of further shares (categories (3) and (4)) or the making of loans to the Rendell group (categories (5), (6), and (9)) as foreseeable consequences of the defendants' wrongdoing. It is true that these events would not have occurred but for Aequitas No 1 becoming involved with the Rendell group in consequence of the purchase of shares induced by two of the defendants' breaches of duty. But it was not, in my view, foreseeable that Aequitas and Aequitas No 1 would voluntarily choose to make further investments in the Rendell group. At most, it could be foreseen that they would be under some pressure or temptation to do so.

439 To the extent, therefore, that the plaintiffs' entitlement to damages is limited by considerations of foreseeability, I would limit their recovery to categories (1), (2), (7) and (8). It thus becomes necessary to consider whether there is a basis for recovering the additional categories of loss in a manner that sidesteps the requirement of foreseeability. It appears, for reasons I shall now set out, that the plaintiffs are entitled to recover the additional categories of loss because of the fact that the wrongdoing of two of the defendants amounted to breaches of fiduciary duty entitling them to equitable compensation, not merely torts and breaches of contract entitling them to common law damages.

Account of profits

440 It appears to me that the plaintiffs’ submissions elect, in effect, to pursue equitable compensation rather than an account of profits. This they are entitled to do: Warman International Ltd v Dwyer (1995) 182 CLR 544, 559. In view of my findings concerning the consideration, there would be a recoverable profit on the sale of shares, measured by the difference between the purchase price of $960,000 and the amount paid by AEFC Leasing for the acquisition, less a cost of funds component for that amount. Mr Gledhill calculated the profit at $90,000, and the Court would accept that calculation. However, by seeking equitable compensation rather than an account for profits the plaintiffs will recover the whole $960,000, and much more besides.

Measure of recovery at common law and in equity

441 Leaving aside the question of exemplary damages, the measure of loss for negligence is the restoration of the plaintiffs to the position they would have been in but for the defendants' tort: see, for example, Livingston v Rawyards Coal Co (1880) 5 App Cas 25, 29 per Lord Blackburn. The measure of damages for breach of contract is different in formal terms, since it includes expectation loss, but it produces a result identical in substance with the tort measure of damages in the present case. Both in tort and contract, the defendants are liable for the foreseeable consequences of their conduct: Wagon Mound (No 1) [1961] AC 388, 426.

442 Equity intervenes in a case of breach of fiduciary duty, not so much to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff: Maguire v Makaronis (1997) 188 CLR 449, 465; Warman International Ltd v Dwyer (1994) 182 CLR 544, 557-8. Nevertheless breach of an equitable duty may lead, in an appropriate case, to an order for the payment of compensation rather than specific relief such as rescission. Equitable compensation, to be distinguished from common law damages, is available in the case of breach of the fiduciary duty of an adviser or promoter: Nocton v Lord Ashburton [1914] AC 932, 956; Warman International Ltd v Dwyer (1994) 182 CLR 544, 556-7. The order for the payment of compensation is designed to make good a loss in fact suffered by the person to whom the duty is owed and which, using hindsight and commonsense, can be seen to have been caused by the breach: Target Holdings Ltd v Redferns [1996] 1 AC 421, 439. Like the tort measure of damages, an order for the payment of equitable compensation is designed to restore the plaintiffs to the position they would have been in but for the defendants' equitable wrongdoing: Target Holdings, at 432. But it appears that there are some differences in the principles for the assessment of loss. Foreseeability and remoteness in the common law sense, and the doctrine of novus actus interveniens, are not applied in assessing equitable compensation: Maguire v Markaronis, at 470; Target Holdings Ltd v Redferns, at 434; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262, 275.

443 It is essential, however, that the losses made good are only those which on a common sense view of causation, were caused by the breach: O'Halloran, at 273 per Spigelman CJ (citing Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 163 per McLachlin J, dissenting). The Court must identify ‘the criteria which supply and adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty’: Maguire v Makaronis, at 473; O'Halloran, at 276. The rules for recovery of equitable compensation are still developing, and there is a normative aspect to the determination of issues of causation: Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1, 90.

444 In some cases of equitable compensation, the courts adopt what Spigelman CJ referred to as ‘a stringent test to the selection of those events preceding loss which are to be taken as causing the loss’: O'Halloran, at 276-7. Where the fiduciary is a trustee who has been disloyal or has failed to observe the rules for due administration of the trust, the trustee must replenish the trust fund by restoring the assets that have been lost by reason of the breach, or compensation for the loss of those assets: Target Holdings Ltd v Redferns, at 434; Maguire v Makaronis, at 471. In this context, losses will be taken to have been caused by the breach if, but for the breach, the loss would not have occurred (Target Holdings Ltd v Redferns, at 434; Maguire v Makaronis, at 470), and no closer connection between the loss and the breach will be required.

445 The approach taken to trustees is also taken where a company director uses a power to dispose of company property for improper purposes, since in both cases the beneficiary of the duty is in the position of vulnerability: O'Halloran, at 277. An even stricter approach to causation was taken in Brickenden v London Loan & Savings Co [1934] 3 DLR 465. In that case Brickenden was a solicitor who acted for both a proposed mortgagor and a proposed mortgagee, in a transaction from which he would personally gain. He was found to have breached his duty by non-disclosure of material facts. The Privy Council held (at 91) that Brickenden could not ‘be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the [client's] action would be solely determined by some other factor ...’. Their Lordships continued: ‘Once the Court has determined that the non-disclosed facts were material, speculation as to what course the [client], on disclosure, would have taken is not relevant.’

446 If Brickenden's case governs the circumstances, it is not even relevant to inquire whether, but for the non-disclosure, the transaction would have been entered into. It might therefore be thought that Brickenden's case has dispensed entirely with the requirement of causation. However, in Beach Petroleum (at 91-94) the Court of Appeal carefully analysed the judgments at all levels in Brickenden, and concluded that it is not authority for the general proposition that in cases of breach of fiduciary duty, the Court cannot consider what would have happened if the duty had been performed. They said (93):

‘Brickenden

447 In Maguire v Makaronis, at 470-4, the High Court did not express a concluded view on Brickenden's case, but took the view that there is no need to apply it to cases of rescission, where the equity to set aside the transaction is immediately generated by the breach of duty, and questions of causation do not arise.

448 The same ‘but for’ test of causation is applied to claims for equitable compensation for consequential loss. Here the courts do not hesitate to consider what the beneficiary of the duty would have done had there been no breach. Questions of foreseeability, remoteness, and novus actus interveniens are irrelevant. Thus, in Commonwealth Bank of Australia v Smith (1991) 42 FCR 390, 395, customers of the Bank relied on the Bank's advice as to the value of a hotel and its financial viability, and consequently purchased the hotel. It was held that the Bank had breached its fiduciary duty in giving the advice, because it had conflicting duties to the purchaser and seller of the hotel, the seller also being a bank customer. The court awarded the purchasers damages measured by the difference between the amount paid for the hotel and its true value, plus interest. The purchasers' claim for damages for consequential loss, measured as the difference between what the purchasers would have received had they stayed in the employment which they held immediately before purchasing the hotel, and the net profits of the hotel, was rejected. This was because the purchasers had already decided to leave their employment and conjecture as to what their position would have been had they not purchased the hotel was pure speculation.

449 In the present case, the breaches of fiduciary duty by AEFC and AEFC Leasing relate to conflicts between interest and duty. AEFC stood to derive substantial indirect benefits (through the increase in value of its subsidiary, AEFC Leasing, and through eventual receipt of the $50,000 commission), and AEFC Leasing stood to gain a substantial direct benefit (its profit), from the sale of the Rendell Industries shares to Aequitas No 1. AEFC was a principal of the joint venture which undertook to provide corporate and financial advice to Aequitas, and both AEFC and AEFC Leasing were promoters of Aequitas and Aequitas No 1. They did not make timely disclosure of all material facts relevant to the transaction, to the independent directors or potential investors. The undisclosed material facts included the profit that AEFC Leasing stood to gain on the transaction, and the declining financial circumstances of the Rendell group. They allowed a materially false and incomplete private placement memorandum to be issued.

450 Accurate and full disclosure to the Aequitas board prior to the sale transaction would not have prevented Aequitas No 1 from contracting to buy the shares, since at the date of the contract it was under the control of Messrs Mullins and Rees, who were aware of all relevant matters. Accurate and full disclosure immediately after the appointment of the independent board would probably not have brought the transaction to an end, since there was no right of review for termination in the contract and it was too late at that stage for the independent directors to have any influence over the content of the private placement memorandum. A fortiori, such disclosure as was made to Mr Pond in the second half of March 1986, for the purpose of preparation of his report, would not have brought the transaction to an end, even assuming that the same information was fully available to Messrs Rich and Donohoe. But in my opinion, it is very likely that accurate and full disclosure in the private placement memorandum would have dissuaded investors from applying for shares in Aequitas, as disclosure would have informed them that Aequitas No 1 would be paying much more for the Rendell Industries shares than had been paid by the vendor seven weeks before the contract of sale, and that the Rendell group was suffering from chronic and acute cash flow difficulties. Indeed, an accurate and full private placement memorandum would effectively have amounted to a warning against investment.

451 Aequitas No 1 would not have been able to complete the purchase transaction if investors had been discouraged from subscribing for shares in Aequitas. If that had occurred, it is unlikely that AEFC Leasing would have sought to enforce the contract against Aequitas No 1, but if it had done so, Aequitas would have had by that time sufficient independent directors that it could have taken proceedings for rescission of the contract for breach of duty. It is probable that, instead of completing the purchase transaction on 1 April 1986, the plaintiffs would have terminated the purchase by no later than that time. Consequently, Aequitas and Aequitas No 1 would not have suffered loss through the Rendell Industries transaction, but for the breaches of duty by AEFC and AEFC Leasing failing to ensure that accurate and full disclosure was made in the private placement memorandum.

452 These factual conclusions lead me to hold that the breaches of fiduciary duty by AEFC and AEFC Leasing caused Aequitas and Aequitas No 1 to suffer the losses of which they complain. It is not necessary for me to rely on Brickenden's case. However, it seems to me that the present facts fall within Brickenden's case, even on the narrow ratio ascribed to that case by the Court of Appeal in Beach Petroleum. In other words, in this case the element of causation between breach and loss is satisfied, for the purposes of equitable compensation, whether or not Brickenden remains good law in Australia.

453 On the state of the authorities, the plaintiffs are entitled to be restored to their position prior to 25 November 1985, and to recover all of the losses that they would not have incurred but for the defendants' breaches. If the breaches had not occurred, the plaintiffs would not have completed the purchase transaction on the 1 April 1986 and would have terminated the contract by that time. Therefore, they would not have made the short-term loan of 3 April 1986 or any of the subsequent loans, and they would not have made the loan of $486,375 and converted it into equity. All those steps have led to losses of the amounts invested, and consequential losses. They are all recoverable as equitable compensation.

454 The defendants say that contributing fault is to be taken into account when making a determination of the amount of equitable compensation to which a plaintiff is entitled: Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213, at 383-391, especially at 389. Assuming that this statement of principle is correct (notwithstanding dicta to the contrary, to which his Honour refers), it has no application in the present circumstances. There was no contributing fault, on the part of the plaintiffs, to their own loss.

455 It is true that, from late March 1986, the directors of Aequitas had available to them the information supplied by Mr Pond for the purposes of his report. That information showed the acute financial difficulties of the Rendell group, but (as I have said) it did not establish that the company was insolvent. It was open to a person in the position of Mr Pond, expert in the affairs of the building industry, to take the view that the problems of the Rendell group were cash flow problems (acute though they were), which could be overcome by the injection of additional funds. That, in effect, is the view Mr Pond in fact took. I have also found that the information supplied to Mr Pond provided grounds for serious concern about the solvency of the Rendell group in the future. But consistently with that finding, it was open for Mr Pond to believe, as he did, that the injection of further funds by Aequitas and others would enable the problem to be solved. Potential investors, as I have found, would be likely to take a more conservative view.

456 It follows, in my opinion, that while the plaintiffs would be entitled to recover the losses in categories (1), (2), (7) and (8), but not the losses in categories (3), (4), (5), (6), and (9) as common law damages for tort and breach of contract, all nine categories of loss are recoverable as equitable compensation for breaches of fiduciary duties.

Interest

457 The plaintiffs seek interest at Schedule J rates on all of the losses recoverable by them from the time when the losses were incurred until the date of my orders. The defendants' submission on interest is as follows:

Simonius Vischer & Co v Holt & Thompson

Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd

458 The defendants claim that the plaintiffs were responsible for the delay from 1986 to 1991, when the proceedings commenced. They point out that Aequitas resolved to obtain a review of ‘litigation opportunities’ in relation to Rendell Industries in September 1986, and Law & Milne identified AEFC Leasing and AEFCAS as possible targets in their letter of 27 November 1986. The defendants say no satisfactory explanation has been offered as to why proceedings were not commenced until 6 November 1991. In the circumstances, they say it would be unfair to impose interest with respect to the entire period from 1986 to date.

459 There is some evidence that, after the collapse of the Rendell group, Aequitas went about selling investments that had been made on the recommendation of AEFCAS, but none of them proved to be readily saleable. It appears that asset realisations were delayed by the receivership of the Rendell group, which was concluded in 1989. On 2 March 1990 a Mr Doolan was asked by the directors of Aequitas to investigate and report on the facts and circumstances of the purchase of the Rendell Industries shares. He reported on 13 June 1990, recommending that legal advice be obtained. The plaintiffs' solicitors were then retained and a statement of claim was filed on 6 November 1991.

460 While this evidence tends, to a degree, to explain the delay between 1986 and 1991, it does not justify that delay. It would not be fair, in my view, to require the defendants to pay interest in respect of the period beginning when, on a fair view of the circumstances, the plaintiffs might reasonably have been expected to commence proceedings, and 6 November 1991, when the proceedings in fact began. In my then, given that Law & Milne notified them of the prospect of recovery from AEFC Leasing and AEFCAS on 27 November 1986, the plaintiffs might reasonably have been expected to commence their proceedings by mid-1987. I would therefore not allow interest in respect of the period from 1 July 1987 to 5 November 1991 inclusive.

461 Interest is recoverable, in my view, in respect of the period from the date of incurring each individual loss (the respective dates of payment) and, in each case, 30 June 1987. The plaintiffs will have to make some calculations, with which (one hopes) the defendants will be able to agree, to avoid contention on matters of detail.

462 After the commencement of the proceedings, much of the delay seems to have been caused (perhaps not surprisingly) by the process of discovery. The plaintiffs' solicitors provided particulars on 13 April 1992, a verified defence was filed on 6 August 1992, and the defendants filed their first list of documents on 19 October 1992. The list did not include some important material. The defendants filed their second list of documents on 31 October 1995, comprising 185 pages specifying a total of 2,072 documents. Their third list of documents was filed on 14 February 1997, specifying that out of the total list of documents, 1017 documents were the subject of a claim of privilege. The defendants filed answers to interrogatories on 19 August 1997. Various amendments were made to the pleadings, and other interlocutory issues were addressed. The case was entered into the general list in April 1998.

463 As far as I can see, there is nothing in this chronology to suggest that the plaintiffs delayed the proceedings after they had been initiated. It is not inappropriate that the sum recoverable by the plaintiffs should bear interest during the period commencing on 6 November 1991, when the statement of claim was filed.

464 The further amended statement of claim seeks interest but does not specify whether the interest should be simple or compound. Generally interest is awarded at simple interest rates, even in cases where the plaintiff claims violation of equitable rights. However, compound interest may be ordered against a defaulting fiduciary: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669; Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285, esp at 316-7. I do not regard the plaintiffs’ submission for compound interest as too late. The defendants had the opportunity to respond to it, and did so. In my opinion, during those periods where interest is appropriate, I believe this is a case where compound interest should be ordered. The breaches of fiduciary duty that I have found to exist are serious breaches, although I have not found that Mr Gledhill was motivated by dishonesty. One of the breaches involves the giving of a bribe, a matter which the cases treat particularly seriously, as I have shown.

Exemplary damages

465 The plaintiffs submit that the evidence demonstrates an attitude of contemptuous disregard of the plaintiffs' rights by Messrs Mullins, Rees, Gledhill, and AEFCAS, AEFC and AEFC Leasing. They draw attention to what they allege to be gross and serious breaches of fiduciary duty, and lay particular emphasis on the secret commission. They say that the conduct of the defendants merits punishment, citing Lamb v Cologno (1987) 163 CLR 1, 8-9. They say the defendants' behaviour is akin to the conduct in Gluckstein v Barnes [1900] AC 240, which, according to Lord Macnaghten (at 255), should have caused penal interest to be charged.

466 I disagree with these submissions. Although I regard AEFC and AEFC Leasing as having committed serious breaches of fiduciary duty, principally through the actions of Mr Gledhill, I do not regard their conduct as meriting punishment beyond the remedies that I have found to be available.

Conclusions

467 Aequitas and Aequitas No 1 are entitled to recovery against AEFC for breach of its fiduciary duty as a corporate and financial adviser, and against both AEFC and AEFC Leasing for breach of their fiduciary duties as company promoters. They are also entitled to recovery in respect of a bribe or secret commission of $50,000 paid by AEFC Leasing to AEFCAS for the benefit of AEFC. In addition, Aequitas is entitled to recovery against AEFC for breach of its contractual duty of care, and Aequitas No 1 is entitled to recovery against AEFC for negligent advice. None of the other claims for recovery against AEFC and AEFC Leasing succeeds. No claims for recovery succeed against Mr Gledhill.

468 Aequitas and Aequitas No 1 are entitled to equitable compensation in the capital sums of $965,821.10 and $1,603,830.80, in the total sum of $2,569,651.90. Compound interest is to be ordered from the dates of individual payments to 30 June 1987, and from 6 November 1991 to the date of my orders. I shall direct the plaintiffs to prepare short minutes of orders and stand the matter over to a convenient date for the purpose of making orders and hearing argument as to costs.

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Last Modified: 05/01/2001

Citations

Aequitas v AEFC [2001] NSWSC 14

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Statutory Material Cited

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CITATION:	Aequitas v AEFC [2001] NSWSC 14
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 5532/91
HEARING DATE(S):	23, 24 & 30 June, 1 & 2 July, 3 August, 1, 20 & 23 September 1999
JUDGMENT DATE:	9 April 2001
PARTIES :	Aequitas Limited and Aequitas No.1 Limited (P) Sparad No.100 Limited (formerly Australian European Finance Corporation Limited) (D1) AEFC Leasing Pty Limited (D2) John Gledhill (D3)
JUDGMENT OF:	Austin J

COUNSEL :	S Rares SC and N Perran (P) A J Meagher SC and P Brereton (D)
SOLICITORS:	Cutler Hughes & Harris (P) Holman Webb (D)
CATCHWORDS:	COMPANY LAW - financial adviser's and promoter's fiduciary duties - directors' duties - breach of duty - EQUITY - negative content of fiduciary duties - remedies for breach of fiduciary duties - where rescission not available - equitable compensation for causally connected but unforeseeable losses - PRINCIPAL & AGENT - secret commission - ingredients - element of inducement - knowledge by principal, where principal is a fledgling company controlled by promoters
LEGISLATION CITED:	Fair Trading Act (NSW) 1984, ss 42, 68 Trade Practices Act (Cth) 1974, ss 52, 82
CASES CITED:	Alati v Kruger (1955) 94 CLR 216 AM Spicer & Son Pty Ltd (In Liq) v Spicer (1931) 47 CLR 151 Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870 Armstrong v Jackson [1917] 2 KB 822 Astley v Austrust Ltd (1999) 73 ALJR 403 Attorney-General for Hong Kong v Reid [1994] 1 AC 324 Australian Breeders Co-operative Society Ltd v Jones (1997) 150 ALR 488 Barnes v Addy (1874) LR 9 Ch App 244 Beach Petroleum NL v Johnson (1993) 115 ALR 411 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Bernard Elsey Pty Ltd v Commissioner of Taxation (1969) 121 CLR 119 Bonds & Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Breen v Williams (1986) 186 CLR 71 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 Briginshaw v Briginshaw (1938) 60 CLR 336 Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 Chan v Zacharia (1984) 154 CLR 178 198 Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Cook v Deeks [1916] 1 AC 554 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370 Derry v Peek (1889) 14 App Cas 337 Duke Group Ltd (in liq) v Pilmer (1999) 31 ACSR 213 Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 Emma Silver Mining Co Ltd v Lewis & Son (1879) 4 CPD 396 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 Ex parte James (1803) 8 Ves Jn 337 Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 Federal Supply & Cold Storage Co of South Africa v Anghern & Piel (1910) 80 LJ(PC) 1 Ford v Andrews (1916) 21 CLR 317 Furs Ltd v Tomkies (1936) 54 CLR 583 Gibson v Jeyes (1801) 6 Ves Jn 266 Gluckstein v Barnes [1900] AC 240 Gray v New Augarita Porcupine Mines [1952] 3 DLR 1 Hamilton v Whitehead (1988) 166 CLR 121 Hawkins v Clayton (1988) 164 CLR 539 Haywood v Roadknight [1927] VLR 512 Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761 Herron v McGregor (1986) 6 NSWLR 246 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Hovenden & Sons v Millhoff (1900) 83 LT 41 Humphris v Jenshol (1997) 160 ALR 107 Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 In re a Solicitor; Ex parte Incorporated Law Society [1894] 1 QB 254 Jacobus Marler Estates v Marler (1913) 85 LJPC 167n JC Houghton & Co v Nothard, Lowe & Willis Ltd [1928] AC 1 Jones v Dunkel (1959) 101 CLR 297 Ladywell Mining Co v Brookes (1887) 35 ChD 400 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 Lamb v Cologno (1987) 163 CLR 1 Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 Liquidators of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 Livingston v Rawyards Coal Co (1880) 5 App Cas 25 Maguire v Makaronis (1997) 188 CLR 449 Mayor & c of Salford v Lever [1891] 1 QB 168 McInerney v McDonald [1992] 2 SCR 138 McPherson v Watt (1877) 3 App Cas 254 Nocton v Lord Ashburton [1914] AC 932 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Panama & South Pacific Telegraph Company v India Rubber Gutta Percha & Telegraph Works Co (1875) LR 10 Ch App 515 R v Byrnes (1985) 183 CLR 501 R v Ghosh [1982] QB 1053 Re Hampshire Land Co [1896] 2 Ch 743 Re Kape Breton Co (1885) 29 ChD 795 Re Morvah Consuls Tin Mining Company (McKay's Case) (1875) 2 ChD 1 Rejfek v McElroy (1965) 112 CLR 517 Richard Brady Franks Ltd v Price (1937) 58 CLR 112 Royal Brunei Airlines v Tan [1995] 2 AC 379 Salomon v Salomon [1897] AC 22 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Spence v Crawford [1939] 3 All ER 271 T Mahesan S/O Thambia v Malaysia Government Officers’ Co-operative Housing Society Ltd [1979] AC 374 Target Holdings Ltd v Redferns [1996] 1 AC 421 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 182 CLR 102 Wagon Mound (No 1) [1961] AC 388 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 Warman International Ltd v Dwyer (1994) 182 CLR 544 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 White v Jones [1995] 2 WLR 187
DECISION:	See last two paragraphs.