DIF III - Global Co-Investment Fund LP v Babcock & Brown International Pty Limited

[2019] NSWSC 527

Supreme Court

New South Wales

Medium Neutral Citation:

DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited [2019] NSWSC 527

Hearing dates:

18 to 22, 25, 26 and 28 February, 1, 4 to 8 and 11 March 2019

Decision date:

13 May 2019

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

The proceedings (including all cross-claims) be dismissed

Catchwords:

EQUITY – Fiduciary relationships – Promoters –whether fiduciary relationship existed on basis of being promoter of commercial transaction – indicia of fiduciary relationships – whether relationship exhibited characteristics of fiduciary relationship
EQUITY – Fiduciary duties – duty of utmost candour and honesty – whether existence of duty consistent with current authority – duty to avoid position of conflict or undisclosed profits – whether obligation to disclose potential conflicts and profits – whether disclosure was means of negating consequences of position of conflict – whether entitled to be relieved of consequences of any breaches by relevant clauses of agreements – whether relevant clauses void under s 12EB of ASIC Act 2001 (Cth) – application of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd – whether entitled to relief under s 1318 of Corporations Act 2001 (Cth)
EQUITY– Remedies – equitable compensation – for breach of fiduciary duty – whether loss caused by breach – whether knowledge of particular facts negates causation – whether knowledge of particular facts said to give rise to breach can be inferred
EQUITY – Contribution – whether claim for contribution arises in respect of breach of fiduciary duty – whether claim for contribution time-barred – whether common obligation or co-ordinate liability to make good same loss – whether not liable for contribution because of release of other party from whom contribution is sought
CONTRACT – release – whether release applied to other defendants – whether jointly or jointly and severally liable
MISLEADING AND DECEPTIVE CONDUCT – s 1041H of the Corporations Act 2001 (Cth) – s 12DA of ASIC Act 2001 (Cth) – representation – whether approval of investment constituted representation as to commerciality of investment – whether misleading and deceptive – whether representation constituted representation concerning a future matter – s 769C of Corporations Act 2001 (Cth) and s 12BB of ASIC Act 2001 (Cth) – whether there were reasonable grounds for making representation – evidential burden for establishing reasonable grounds – on whose behalf was representation made
MISLEADING AND DECEPTIVE CONDUCT – s 1041H of the Corporations Act 2001 (Cth) – s 12DA of ASIC Act 2001 (Cth) – silence – whether failure to disclose information constituted misleading and deceptive conduct – whether reasonable expectation that information would be disclosed
MISLEADING AND DECEPTIVE CONDUCT - s 1041H of the Corporations Act 2001 (Cth) – s 12DA of ASIC Act 2001 (Cth) – quantification of loss – Potts v Miller – time at which loss should be assessed – whether to account for subsequent events
MISLEADING AND DECEPTIVE CONDUCT - s 1041H of the Corporations Act 2001 (Cth) – s 12DA of ASIC Act 2001 (Cth) – defences – whether liability is excluded by agreements – whether contrary to public policy – whether void under s 12ED of ASIC Act 2001 (Cth) – whether to excuse under s 1318 of the Corporations Act 2001 (Cth) – whether relevant defendants are concurrent wrongdoers and as a consequence whether claims apportionable – discretion of court under statute to apportion based on responsibility for damage or loss – contributory negligence
TORT – negligent misstatement – whether duty of care owed – whether existence of duty of care inconsistent with contract – features of relationship – scope of duty
CONTRACT – Implied terms – statute – whether warranties under s 12ED of ASIC Act 2001 (Cth) are implied – definition and characteristics of ‘small business’ – whether liability excluded by relevant agreements – whether clauses of relevant agreements void under s 12EB of ASIC Act 2001 (Cth) – whether conduct of relevant defendants constituted breach of express terms of agreement – meaning of ‘gross negligence’
INSURANCE – Liability insurance – professional indemnity insurance – notification – whether evidence of knowledge of facts or circumstances from which it might reasonably be concluded that claim would be made – application of s 54 of Insurance Contracts Act 1984 (Cth) – other express exclusions in policy
INSURANCE – directors and officers – notification – whether claims made arise out of circumstances notified during policy period – s 54 of Insurance Contracts Act 1984 (Cth) – other express exclusions in policy

Legislation Cited:

Australian Securities and Investments Commission Act 2001 (Cth)
Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)
Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)
Insurance Contracts Act 1984 (Cth)
Law Reform (Miscellaneous Provisions) Act 1946 (NSW)
Limitation Act 1969 (NSW)
Trade Practices Act 1974 (Cth)

Cases Cited:

ABN AMRO Bank NV v Bathurst Regional Council; (2014) 224 FCR 1; [2014] FCAFC 65
Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418
Armitage v Nurse [1998] Ch 241
Baden v Société Générale pour Favoriser le Dévelopment due Commerce et de l’Industrie en France [1992] All ER 161
Baxter v Obacelo Pty Ltd (2001) 205 CLR 635
Boardman v Phipps [1967] 2 AC 46; [1966] 3 WLR 1009
Bonython v Commonwealth (1950) 81 CLR 486; [1951] AC 201
Breen v Williams (1996) 186 CLR 71
Briginshaw v Briginshaw (1938) 60 CLR 336
Bryan v Maloney (1994-1995) 182 CLR 609
Friend v Booker (2009) 239 CLR 129; [2009] HCA 21
Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199
Burke v LFOT Pty Ltd (2002) 209 CLR 202
Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25
Celtherne Pty Ltd v WKJ Hauliers Pty Ltd [1981] 1 NSWLR 606
Central Railway of Venezuela v Kisch (1867) LR 2 HL 99
Central Trust Co v Rafuse (1986) 31 DLR (4th) 48; [1986] 2 SCR 147
Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; [2016] FCAFC 17
Community Association DP No 270180 v Arrow Asset Management Pty Ltd & Ors [2007] NSWSC 527
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Edgewater Homes Pty Ltd v Donohoe [2019] NSWSC 44
Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193
FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38
Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89; [2007] HCA 22
Fire and All Risks Insurance Co Ltd v Powell [1966] VR 513
Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2001] FCA 1628; 188 ALR 566
Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21
Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181
Grimaldi v Chameleon Mining NL (No 2) (2012) FCR 296; [2012] FCAFC 6
Hanave Pty Ltd v LFOT Pty Ltd (formerly Jagar Projects Pty Ltd) and Ors [1999] FCA 357
Henjo Investments Pty Limited v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546
Hope v Bathurst City Council (1980) 144 CLR 1
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54
James Thane Pty Ltd v Conrad International Hotels Corp [1999] QCA 516
John Alexander Clubs Pty Ltd v White City Tennis Club Limited (2010) 241 CLR 1; [2010] HCA 19
Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118
McCann v Switzerland Insurance Australia Ltd & Ors (2000) 203 CLR 579
Meriton Apartments Pty Ltd v The Owners Strata Plan No 72381 [2015] NSWSC 202
Michael Wilson & Partners Limited v Nicholls (2011) 244 CLR 427; [2011] HCA 48
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31
New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126
News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410
Paul Dainty Corp Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495
Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1977-1978) 139 CLR 231
Potts v Miller (1940) 64 CLR 282
QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd (2009) 24 VR 326; [2009] VSCA 124
Red Sea Tankers Ltd v Papachristidis (The “Hellespont Ardent”) [1997] 2 Lloyd’s Rep 547
Scruttons Ltd v Midland Silicones Ltd [1962] AC 446
Sucden Financial v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm)
Tepko Pty Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19
The Owners – Strata Plan 74602 v Eastmark Holdings Pty Ltd [2015] NSWSC 1981
Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574
Tracy v Mandalay Pty Ltd (1953) 88 CLR 215
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; [1988] HCA 44
United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1
Wilkie v Gordian Runoff Ltd & Anor (2005) 221 CLR 522
Wyzenbeek v Australasian Marine Imports Pty Ltd (No 2) [2018] FCA 1517
XL Petroleum Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448

Texts Cited:

Professor P D Finn in “The Fiduciary Principle” in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989)

Category:

Principal judgment

Parties:

DIF III – Global Co-Investment Fund LP (formerly Babcock & Brown DIF III - Global Co-Investment Fund LP) (First Plaintiff)
DIF III GP Limited (Second Plaintiff)
Babcock & Brown International Pty Ltd (ACN 108 617 483) (First Defendant)
Babcock & Brown LP (Second Defendant)
DIF Capital Partners Limited (ACN 101 611 438) (Third Defendant)
Robert Neil Topfer (Fourth Defendant)
Phillip Hartley Green (Fifth Defendant)
Fergus John Neilson (Sixth Defendant)
Harry Nicholson (Seventh Defendant)
Robert Rupert Officer (Eighth Defendant)
The Royal Bank of Scotland Plc (Sixteenth Defendant)
RBS Equity Corporation (Seventeenth Defendant)
Certain Underwriters subscribing to Lloyd’s policy FD014280g (Thirty Fourth Defendant)
Certain Underwriters subscribing to Lloyd's Policy Numbered BD0391FD014600G (Thirty Fifth Defendant)
Certain Underwriters subscribing to Lloyd's policy numbered B0391FD014610G (Thirty Sixth Defendant)
Certain Underwriters subscribing to Lloyd's policy numbered B0391FD017580G (Thirty Seventh Defendant)
Allianz Australia Insurance Limited (First Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | First Third Party)
XL Insurance Company SE (formerly known as XL Insurance Company Limited (Second Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Second Third Party)
QBE Underwriting Limited (Third Cross Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Third Third Party)
Aspen Insurance UK Limited (Fourth Cross Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Fourth Third Party)
Liberty Mutual Insurance Company trading as Liberty International Underwriters (Fifth Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Fifth Third Party)
Certain Lloyd's Underwriters comprising Markel Syndicate 3000 at Lloyd's subscribing to Contract No B0391FD023290G (Sixth Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Sixth third Party)
London Australia Underwriting Pty Limited on behalf of Novae Syndicates Limited (Syndicate 2007 at Lloyd's) (Seventh Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Seventh Third Party)
HCC International Insurance Company PLC (Company No. 01575839) (Eighth Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Eighth Third Party)
Chubb Insurance Australia (formerly known as ACE Insurance Limited) (Ninth Cross-Defendant to First Cross Claim | Second Cross Claim and Third Cross Claim | Ninth Third Party)
Spin Holdco Inc (Fourteenth Third Party | Cross Defendant to Fourth Cross Claim)

Representation:

Counsel:

 

I M Jackman SC with R D Glasson and B Ng (Plaintiffs)
P J Brereton SC with C Mitchell (First and Second Defendants)
D R Sulan with P Strickland (Fourth Defendant)
R Scruby SC with L E Hulmes (Fifth Defendant)
P Knowles with S Snow (Sixth and Seventh Defendants)
J Shepard with J E Treherne (Eighth Defendant)
P Zappia QC with J McComish (Sixteenth and Seventeenth Defendants)
M A Jones SC with R P V Carey (Thirty Fourth to Thirty Seventh Defendants)
S R Donaldson SC with C J Peadon (First to Ninth Cross Defendants | First to Ninth Third Parties)
S H Parmenter QC with N J Hickey (Fourteenth Third Party)

 

Solicitors:

  Piper Alderman (Plaintiffs)
Herbert Smith Freehills (First and Second Defendants)
Webb Henderson (Fourth Defendant)
Henry Williams Lawyers (Fifth Defendant)
Arnold Bloch Leibler (Sixth and Seventh Defendants)
Minter Ellison (Eighth Defendant)
Allens Linklaters (Sixteenth and Seventeenth Defendants)
Norton Rose Fulbright (Thirty Fourth to Thirty Seventh Defendants)
Moray & Agnew (First to Second Cross Defendants | First to Second Third Parties)
Colin Biggers & Paisley (Third to Ninth Cross Defendants | Third to Ninth Third Parties)
King Wood Mallesons (Fourteenth Third Party)

File Number(s):

2018/125142

Publication restriction:

None

table of contents

Introduction

Outline of the facts - paragraph 1

The issues - paragraph 16

Factual background

The PPM - paragraph 33

Investigation of the Coinmach Transaction - paragraph 39

Babcock & Brown approves the investment in Coinmach - paragraph 42

RBS agrees to underwrite equity of USD136 million - paragraph 58

Babcock & Brown agrees to increase its investment - paragraph 59

The Merger and other agreements signed - paragraph 60

RBS begins to have reservations about the transaction - paragraph 64

Further marketing material from Babcock and Brown - paragraph 71

Coinmach’s first quarter results for the year ended 31 March 2008 - paragraph 73

The partnership and management agreements - paragraph 75

Further concerns of RBS - paragraph 88

Approval by the Investment Committee and General Partner - paragraph 101

Position resolved with RBS and transaction settles - paragraph 123

The breach of fiduciary duty claims

The claims against Messrs Topfer and Green - paragraph 137

Did Messrs Topfer and Green owe the Partnership fiduciary duties? - paragraph 144

Did Messrs Topfer and Green breach their fiduciary duties? - paragraph 158

Causation and loss - paragraph 168

Were the claims against Messrs Topfer and Green for breach of fiduciary duty released by the release of BBIPL and BBLP? - paragraph 174

Messrs Topfer and Green’s claim for contribution in respect of their breaches of fiduciary duty - paragraph 177

BBIPL and BBLP’s liability - paragraph 179

Are Messrs Topfer and Green entitled to equitable contribution? - paragraph 182

Is the claim for equitable contribution time-barred? - paragraph 187

Other issues - paragraph 190

The statutory claims

The claims based on the Investment Committee approval - paragraph 199

Was the representation conveyed by the approval? - paragraph 201

Was the representation misleading or deceptive? - paragraph 207

Reasonable grounds - paragraph 215

Particular 1 – the growth assumptions - paragraph 222

Particular 2 – the June 2007 and September 2007 results - paragraph 231

Particular 3 – forecast cash flows were line-ball - paragraph 235

Particular 4 – Forecast losses - paragraph 237

Particular 5 – The trend in vacancy rates - paragraph 239

Particular 6 – increases in prices at 2.5 per cent and load volumes - paragraph 240

Particular 7 – RBS threats - paragraph 243

Particular 8 – the Investment Committee Memo - paragraph 246

Other matters - paragraph 247

Was the Investment Committee Representation made on behalf of the Manager? - paragraph 253

The claim based on Messrs Topfer and Green’s non-disclosure - paragraph 254

The statutory claims against the Manager - paragraph 258

Causation - paragraph 262

Loss - paragraph 267

Affirmative defences - paragraph 270

The negligence claims - paragraph 278

Negligent misstatement by the Investment Committee - paragraph 282

Negligent breach of duty by the Investment Committee - paragraph 284

Negligent breach of duty by the Manager - paragraph 293

The breach of contract claim - paragraph 294

Did the Management Agreement include the terms implied by s 12ED of the ASIC Act? - paragraph 299

Clauses 6.7 and 6.8 of the Partnership Agreement and cls 5.1(a) and 5.1(b) of the Management Agreement - paragraph 302

Breach - paragraph 306

Damages - paragraph 312

The claims against the PI Insurers - paragraph 316

The PI Policy - paragraph 319

The notifications - paragraph 328

The issues - paragraph 337

Failure to give notice of known circumstances - paragraph 339

Was the claim against Messrs Topfer and Green a claim for “Civil Liability”? - paragraph 350

The “Directorial Act” exclusion - paragraph 353

The conflicts exclusion - paragraph 355

The deductible - paragraph 365

The claims against the D&O Insurers - paragraph 367

The policy - paragraph 369

The issues - paragraph 376

The notification issue - paragraph 377

The “Insured Person” issue - paragraph 382

The Professional Services exclusion - paragraph 393

The conduct exclusion - paragraph 400

Insured v Insured US Claims Exclusion - paragraph 402

Orders - paragraph 406

Judgment

​​Introduction

Outline of the facts

1. Babcock & Brown Limited (BBL) was, until its collapse in 2009, a public company listed on the Australian Securities Exchange which carried on business in Australia and elsewhere as a specialist investment and advisory firm. It will be convenient to refer to the BBL Group and its members as “Babcock & Brown”.

2. BBL’s businesses included a funds management business carried on through the third defendant, DIF Capital Partners Limited, formerly known as Babcock & Brown Direct Investment Fund Limited (the Manager). The Manager had been established in 2003 and prior to the events giving rise to this litigation had previously established two successful private investment funds known as “DIF I” and “DIF II”. The Manager was a wholly owned (indirect) subsidiary of BBL. It did not appear at the hearing.

3. The Manager had an Investment Committee comprising the fourth defendant, Mr Robert Topfer, the fifth defendant, Mr Phillip Green, the sixth defendant, Mr Fergus Neilson, the seventh defendant, Mr Harry Nicholson and the eighth defendant, Professor Bob Officer. Mr Topfer was the Global Head of Corporate & Structured Finance of Babcock & Brown and a member of the Group’s Executive Committee. Mr Green was the Chief Executive Officer and Managing Director of the Group and the Chair of its Executive Committee. Mr Neilson was Chief Executive Officer of the Manager. Mr Nicholson was the Chief Investment Officer, Private Equity of the Manager. Professor Officer was an Independent Non-Executive Director of the Manager and Chair of the Investment Committee.

4. The first defendant, Babcock & Brown International Pty Ltd (BBIPL), was an intermediate holding company through which BBL held operating and investment subsidiaries in Australia, North America, Europe and the Asia Pacific. One such subsidiary (itself held through an intermediate holding company, Babcock & Brown Investment Holdings Pty Ltd (BBIH)) was the second defendant, Babcock & Brown LP (BBLP). BBLP was the main operating company through which BBL held assets in the United States.

5. In March 2007, the Manager sponsored and promoted through a Private Placement Memorandum (the PPM) a new fund. It will be convenient on occasions to refer to that fund as the DIF III Fund. Ultimately, on 30 August 2007, the first plaintiff, DIF III – Global Co-Investment Fund LP (formerly Babcock & Brown DIF III Global Co-Investment Fund LP) (the Partnership), a limited liability partnership established under the laws of Delaware, was set up to hold funds contributed by investors, who became limited partners of the Partnership. The second plaintiff, DIF III GP Limited (formerly known as Babcock & Brown DIF III GP Limited) (the General Partner), a company incorporated in the Cayman Islands, was the General Partner of the Partnership and in that capacity had sole responsibility for the Partnership’s management. Pursuant to a Management Agreement dated 6 September 2007, the Manager was appointed to manage the investments of the Partnership. It was intended that funds raised through the PPM would be invested in projects and businesses identified by Babcock & Brown and in which Babcock & Brown also proposed to acquire an interest. The target for contributions to the fund was approximately USD350 million, although subscriptions were eventually closed on 30 May 2008 with a total equity investment from investors of only USD80.7 million.

1. At about the same time as the PPM was issued, Babcock & Brown was approached by Deutsche Bank, one of the financial advisors of Coinmach Services Corporation, concerning the possibility of acquiring that company. Coinmach was a publicly listed Delaware corporation which was the leading provider of outsourced laundry equipment services for multi-family housing properties in North America. Its core business, known as the “route business”, involved leasing communal laundries in multi-dwelling buildings and installing and servicing laundry equipment in those buildings. Coinmach also had a laundry machine rental business, which rented out laundry and other household appliances, and a laundry equipment distribution business.

2. For the purposes of considering the acquisition, Babcock & Brown established the Coinmach Deal Team consisting of Ms Berry Talintyre, Mr Jake Haines, Ms Sridhara Ramachandran and Mr Justin Levi. Ms Ramachandran was an employee of BBLP. The other three members of the team were employees of Babcock & Brown Australia Pty Ltd, but were seconded to BBLP during the Coinmach transaction. The Coinmach Deal Team was supervised by Mr Topfer and ultimately the Group’s Executive Committee. The proposed acquisition was given the code name within Babcock & Brown as “Project Spin”.

3. On 21 March 2007, BBLP, in a letter signed by Ms Talintyre, submitted to Deutsche Bank a “preliminary non-binding indication of interest” in acquiring Coinmach.

4. Ultimately, BBLP’s bid was successful and agreement was reached to acquire all of Coinmach’s issued shares for a final total price of USD1,460,920,000, including transaction costs (the Coinmach Transaction). For that purpose, Babcock & Brown incorporated Spin Holdco Inc which acquired Coinmach on 20 November 2007 through the merger of its subsidiary, Spin Acquisition Co, with and into Coinmach.

5. In connection with the transaction, the sixteenth defendant, The Royal Bank of Scotland Plc (RBS), and Deutsche Bank agreed to provide financing for the acquisition. In addition, the seventeenth defendant, RBS Equity Corporation (RBS Equity), a wholly owned (indirect) subsidiary of RBS that was incorporated in New York, agreed to underwrite equity of USD136,000,000 in return for certain fees to be paid by Babcock & Brown. It was RBS Equity’s intention to sell down its equity as soon as possible and RBS’s intention to syndicate its debt.

6. The balance of the equity to acquire Coinmach came largely from various companies in the Babcock & Brown Group and the Partnership. Those companies all invested through Babcock & Brown Spinco LLC (B&B Spinco). The total equity investment of B&B Spinco was USD176.3 million. BBIPL, through BBIH, originally agreed to invest USD92 million of that amount. However, the amount of its investment was reduced to USD67 million and, following approval from the Investment Committee, the difference of USD25 million was invested by the Partnership. On completion of the transaction, BBLP was entitled to be paid an origination fee of approximately USD21.6 million.

7. Before the transaction completed, RBS raised concerns about it. There is a dispute about precisely what those concerns were to which it will be necessary to return. The result, however, was that on the day the acquisition completed, BBLP and RBS Equity, among others, entered into two escrow agreements by which amounts totalling USD21.5 million and USD13,479,236.82 were held in escrow by Wells Fargo Bank to compensate RBS Equity for losses it suffered on its investment in Coinmach. The amount paid into the escrow accounts included the origination fee payable to BBLP.

8. The investment was not a success. In late 2009, Coinmach’s debt was restructured. The result of that restructure was that the existing shareholders’ interest in Coinmach was greatly reduced in exchange for a right to receive certain deferred profits. Ultimately, the Partnership received USD1,338,805 in May 2013 and a further USD89,564 in August 2013 in respect of its investment. It claims the difference between its investment (USD25 million) plus investment costs of USD1,093,562.77 less the amount it has received from the defendants. Those claims have spawned a number of cross-claims.

9. Originally, Ms Talintyre and Mr Richard Umbrecht, the head of the United States Division of Babcock & Brown’s corporate finance business unit and a member of the Babcock & Brown Executive Committee who participated in some of the events giving rise to these proceedings, were also named as defendants. However, those claims were settled before the commencement of the hearing and nothing further needs to be said about them.

10. In addition, during final submissions, the plaintiffs settled with BBIPL and BBLP and discontinued their claims against them. However, those claims still remain relevant because of cross-claims for contribution against BBIPL and BBLP which remain on foot; and there is a question whether the release of those claims had the effect of releasing some of the claims against Messrs Topfer and Green. Also during final submissions, the plaintiffs settled with RBS and RBS Equity. At the same time, the cross-claims for contribution involving RBS and RBS Equity were discontinued and RBS discontinued a cross-claim it had against Spin Holdco that relied on an indemnity which that company had given in favour of RBS. The result is that the claims involving RBS and RBS Equity can also be put to one side.

The issues

16. Broadly speaking, the plaintiffs’ remaining claims are of four types.

17. First, it is alleged that each of the BBIPL, BBLP, Mr Topfer and Mr Green (the Promoter Defendants) were promoters of the Coinmach Transaction and in that capacity owed fiduciary duties to the Partnership in relation to its investment in Coinmach. Mr Topfer and Mr Green are also said to have owed fiduciary duties as directors of the Manager and members of the Investment Committee. In addition, Mr Topfer is said to have owed fiduciary duties as a director of the General Partner. Each is said to have breached the fiduciary duties they owed by failing to disclose to the Partnership what might neutrally be referred to as RBS’s position in relation to the transaction. As I will explain, there is a dispute concerning precisely what the plaintiffs are entitled to advance consistently with the final version of their claim, which is set out in the Second Further Amended Commercial List Statement (SFACLS).

18. The claim that the Promoter Defendants breached their fiduciary duties is put in two ways. First, it is alleged that each of the Promoter Defendants owed a duty to disclose to the plaintiffs RBS’s position. Second, it is alleged that each of the Promoter Defendants (and Messrs Topfer and Green by reason of the fiduciary duties arising from their other positions) were in a position of conflict arising from their knowledge of RBS’s position and their interest or duties to others in seeing the Coinmach Transaction complete. It is alleged that that position of conflict could only have been overcome with the fully informed consent of the Partnership, which was not obtained. The plaintiffs claim equitable compensation in respect of the breaches of duty calculated as the amount of the Partnership’s investment plus the costs of investment less the amount the Partnership has received.

19. In addition, the plaintiffs plead that each of BBIPL and BBLP knowingly assisted in Messrs Topfer and Green’s breaches of duty. They also originally claimed equitable compensation in respect of that conduct. As I have said, the claims against BBIPL and BBLP have been discontinued. They only remain relevant to claims for contribution made by Mr Topfer and Mr Green.

20. Second, a number of claims are made alleging that one or more defendants engaged in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act 2001 (Cth) (the Corporations Act) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The pleading is, to say the least, confused. However, as finally put, it appears that those claims can be divided into three categories.

21. First, it is alleged that each member of the Investment Committee by approving the recommendation to invest in Coinmach represented to the General Partner that the investment was commercially advisable and worthwhile. That representation is said to have been misleading and deceptive because the representation was either a representation as to a future matter or a representation that the members of the Investment Committee held the opinion that the investment was commercially advisable and worthwhile, and in either case the members of the Investment Committee did not have reasonable grounds for making the representation. Various reasons are given to which it will be necessary to return. In addition, to the extent that the representation is said to concern a future matter and the claim is made under the ASIC Act, the plaintiffs rely on s 12BB(2), which provides that a person is taken not to have had reasonable grounds for making a representation unless evidence is adduced to the contrary.

22. The Manager is said to be vicariously liable for the conduct of the Investment Committee. In final submissions, it was also suggested that the representation was made by the Manager by communicating the decision of the Investment Committee to the General Partner. Again, there is a question concerning whether the case as advanced in final submissions went beyond the one pleaded.

23. Second, it is alleged that Messrs Topfer and Green engaged in misleading and deceptive conduct by failing to disclose RBS’s position in relation to the investment. The obligation to disclose RBS’s position is said to have arisen in two ways. One is that the failure to disclose that matter made the representation arising from approval by the Investment Committee misleading. The Manager is said to be vicariously liable for that conduct. The other is that an investor would reasonably have expected Messrs Topfer and Green as promoters of the transaction to disclose RBS’s position and for that reason the failure by them to do so was misleading and deceptive.

24. Third, it is alleged that the Manager engaged in misleading and deceptive conduct by failing to disclose RBS’s position and that there was a substantial risk that the investment would not be commercially viable.

25. In each case, it is said that the Partnership would not have made the investment had the misleading and deceptive conduct not occurred. The Partnership and the General Partner on behalf of the Partnership claim damages under s 1041I of the Corporations Act and s 12GF of the ASIC Act. Again, those damages are said to be calculated as the amount of the investment plus the cost of the investment less the amount recovered. Curiously, no claim for damages under those sections is made against Mr Neilson, Mr Nicholson or Professor Officer. In final submissions, the plaintiffs contended that that was an oversight; and they made it clear that they had sought damages from those three defendants as well.

26. The third claim or group of claims consist of allegations that each member of the Investment Committee owed a common law duty of care in representing to the General Partner that the investment was commercially advisable and worthwhile and in providing services under the Management Agreement. Messrs Topfer and Green are said to have breached that duty of care by failing to disclose to the Partnership RBS’s position in relation to the investment. Each member of the committee is said to have breached that duty by failing properly to assess the investment in a number of respects. Those respects correspond to the matters relied on for the contention that the members of the Investment Committee did not have reasonable grounds for making the representations that form the basis of the statutory causes of action. Again, the Manager is said to be vicariously liable for the conduct complained of.

27. A similar case is pleaded against the Manager on the basis that:

1. It owed the plaintiffs a duty of care which it breached;

2. It breached (unidentified) “express and implied terms of the Management Agreement”; and

3. It breached a warranty implied by s 12ED of the ASIC Act that the services provided by it would be rendered with due care and skill.

28. Fourth, the plaintiffs, exercising leave granted to them under the Civil Liability (Third Party Claims Against Insurers) Act2017 (NSW) (the 2017 Act), seek to recover the amount for which the Manager is liable from insurers who provided professional indemnity insurance to Babcock & Brown.

29. Each of these claims raises a number of issues and defences to which it will be necessary to return.

30. In addition to the plaintiffs’ claims, the proceedings give rise to a number of cross-claims. Some of those appear to be misconceived because they are claims for contribution in respect of apportionable claims. However, as I have said, Messrs Topfer and Green do make claims for contribution against BBIPL and BBLP in respect of the breach of fiduciary duty claims against them. One issue in relation to those claims is whether they are time-barred.

31. There are also two remaining substantive groups of cross-claims. First, BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson have filed cross-claims against the insurers who provided relevant directors and officers liability insurance (the D&O Insurers) to Babcock & Brown. BBIPL and BBLP seek indemnity for costs they have incurred in funding the defences of Messrs Green, Topfer, Neilson and Nicholson and for any loss for which they are liable to indemnify those individuals. Each of BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson seek indemnity for their own liability. The D&O Insurers deny liability on a number of grounds.

32. Second, each of the Investment Committee members other than Professor Officer have filed cross-claims against the PI Insurers claiming an indemnity in respect of any liability they have to the plaintiffs together with payment of their defence costs. Those cross-claims raise similar issues to the claim made by the plaintiffs against the PI Insurers.

Factual background

The PPM

33. As I have said, the PPM was issued in March 2007. It stated that the fund was “targeting US$350 million of equity capital commitments, including co-investments by Babcock & Brown and its affiliates of 10 per cent of the total Fund commitments” and that the investment objective was “to earn a minimum net unleveraged IRR [internal rate of return] of 20% by primarily co-investing with B&B and its affiliates in “event-driven” private equity, developmental infrastructure, operating leasing and structured finance, and opportunistic real estate globally”. The term of the fund was intended to be seven years. The PPM indicated that the Manager would charge an annual fee equal to 2.0 per cent of the net invested capital.

34. The PPM contained a section setting out the investment process intended to be followed by the Manager. Under the heading “Screening/Due Diligence” it stated:

In general, initial screening begins with a request by DIF [the Manager] to receive a brief summary of the transaction from the originating B&B project team. If DIF determines that the transaction merits further review, the DIF management team will begin a stringent “triple-layer” due diligence process that involves: (i) reviewing data provided by the transaction originator and the target company; (ii) capitalizing on the DIF management team’s expertise in the sector under review; and (iii) utilizing third-party sources to assist with due diligence. In general, due diligence of a transaction involves:

•   an industry overview (including an evaluation of macroeconomic trends, barriers to entry and customer/supply dynamics), conducted with the assistance of third-party experts;

•   a focused investment and credit analysis (including an analysis of management, historical performance, competitive positioning and any areas of risk/uncertainty); and

•   a tax, legal and structuring review.

Because portfolio construction is an important element of DIF’s investment process, screening and due diligence involves seeking portfolio diversification across investment sectors, geography and asset weightings.

35. The PPM also stated that “the Fund” would generally consider only those transactions forecast to yield “a pre-tax, gross, unlevered IRR in excess of 23%”.

36. The PPM stated that all investments would be considered by a Compliance Committee “which is specifically charged with responsibility for protecting investors from conflict-of-interest risk”. Following approval by the Compliance Committee, the PPM stated that the “DIF management team” would prepare an investment recommendation addressed to the Investment Committee, which was required to review and approve each investment.

37. The PPM stated that investment in the Fund “involves a high degree of risk”. It went on to state “As a result, the investor may lose all of its investment” and later “An investment in the Fund should only be considered by persons who can afford a loss of their entire investment”.

38. The PPM also describes the possibility of conflicts in some detail. In relation to those it stated:

If such conflicts arise, certain business units of Babcock & Brown may act to protect the interests of investment banking clients, or Babcock & Brown’s own interests as a lender or counterparty, ahead of the Fund’s co-investment interests. In addition, situations may arise in which the Fund does not co-invest in an otherwise qualifying opportunity because DIF determines that an irresolvable conflict of interest exists. By acquiring Interests in the Fund, each Limited Partner will be deemed to have acknowledged the existence of actual and potential conflicts of interest, including, but not limited to, those described in this Memorandum, and to have waived any claim with respect to the existence of any such conflict of interest.

And later:

Resolution of Conflicts

Conflicts of interest that arise between DIF, on the one hand, and Babcock & Brown, its affiliates, any existing or future affiliated fund or Babcock & Brown’s clients, on the other hand, will be discussed and resolved on a case by case basis by senior management of Babcock & Brown and its affiliates and representatives of DIF. Any such discussions will take into consideration the interests of the relevant parties and the circumstances giving rise to the conflict. DIF will have the power to resolve, or consent to the resolution of, conflicts of interest on behalf of, and such resolution will be binding on, the Fund. Investors should be aware that conflicts will not necessarily be resolved in favour of the Fund’s interests.

In addition, DIF has appointed a fully independent Compliance Committee that is specifically charged with responsibility for protecting investors from conflict-of-interest risks. If the General Partner acts in a manner, or pursuant to the standards and procedures, approved by the Compliance Committee with respect to a conflict of interest, then the General Partner and its affiliates will not have any liability to the Fund or the Limited Partners for such actions taken in good faith by them, including actions in pursuit of their own interests.

Investigation of the Coinmach Transaction

39. At about the same time as Babcock & Brown started promoting the DIF III Fund, it commenced limited due diligence investigations of Coinmach which led to the preliminary non-binding indication of interest to acquire Coinmach dated 21 March 2007.

40. Following that letter, Babcock & Brown commenced a more detailed due diligence of Coinmach and the Coinmach Deal Team prepared what was known within Babcock & Brown as a “Heads Up Capital Approval Request”. That document was a precursor to a formal Capital Approval Request (CAR). The Heads Up CAR was sent to Mr Topfer on 2 April 2007. It stated that it was anticipated that Babcock & Brown would pay USD14 per share for all the shares in Coinmach, which was a premium of approximately 29 per cent on the 30 day weighted average price, making a total purchase price of USD1,450 million made up of USD1,060 million in debt and USD390 million in equity. The existing net debt of Coinmach was USD645 million. It was anticipated that USD100 million would come from Babcock & Brown and USD50 million from “DIF” and further sums from other Babcock & Brown entities. The CAR commented that on these figures the expected IRR was approximately 20 per cent (30.4 per cent for Babcock & Brown assuming an investment of USD100 million and an upfront fee of USD28 million).

39. In connection with the due diligence process, Mr Haines created a financial model for Coinmach relying on information obtained from the due diligence process. As might be expected, the model went through a number of iterations, some of which were reviewed by Mr Topfer and Mr Green.

Babcock & Brown approves the investment in Coinmach

42. On 2 May 2007, Ms Talintyre distributed a CAR seeking approval for USD85 million of equity funding from Babcock & Brown for the Coinmach Transaction. That amount included USD35 million “short term bridge for DIF equity subject to DIF approval”. It observed that Babcock & Brown’s total exposure would be reduced by an upfront fee of approximately USD27 million.

43. The CAR contained an outline of Coinmach’s historical financial results including the following figures for revenue:

2001	2002	2003	2004	2005	2006	2007 Adj	CAGR (2001-2007Adj)
Revenue
Route	449.9	456.2	450.8	449.6	452.9	461.3	475.0	0.91%
Stores	21.6	21.9	20.6	20.0	19.6	20.3	19.6	-1.63%
Rental	18.3	22.4	28.7	32.6	34.4	36.1	38.7	13.25%
Distribution	38.3	38.4	35.0	28.9	31.7	25.7	26.9	-5.69%
Sub Total	528.1	538.9	535.2	531.1	538.6	543.5	560.2	0.99%
% growth	2.0%	-0.7%	-0.8%	1.4%	0.9%	3.1%

44. The table also contained the following figures for Free Cash Flow which was said to be “Calculated as EBITDA – Maintenance CapEx – Growth Capex (rental)”:

2001	2002	2003	2004	2005	2006	2007 Adj	CAGR (2001-2007Adj)
Free Cash Flow	79.2	87.1	72.7	72.0	91.7	95.3	102.6	4.41%
FCF as % revenue	15.0%	16.2%	13.6%	13.6%	17.0%	17.5%	18.3%
% growth	9.9%	-16.4%	-1.0%	27.3%	3.9%	7.8%

45. The CAR also contained an analysis of the main effects on revenue, which showed that the principal changes in EBITDA between the 2001 financial year and 2007 financial year (adjusted) (which ended on 31 March) were caused by a decrease in loads per machine of 3 per cent from 2001 to 2007 and an increase in “average vend price per load” from $0.93 in 2001 to $1.16 in 2007 (which was said to represent a compound annual growth rate (CAGR) of 3.8 per cent).

46. The CAR also contained the following projections for revenue from 2008 to 2012:

2007 Adj	2008E	2009E	2010E	2011E	2012E	CAGR (2007 Adj -2012E)
Revenue
Route	475.0	504.9	532.7	565.7	598.9	633.4	5.9%
Stores	19.6	20.0	20.4	20.8	21.2	21.6	2.0%
Rental	38.7	40.8	44.0	47.4	50.7	54.3	7.0%
Distribution	26.9	27.3	27.7	28.2	28.6	29.0	1.5%
Sub Total	560.2	593.0	624.8	661.9	699.4	738.3	5.7%
% growth	5.9%	5.4%	5.9%	5.7%	5.6%

47. The increases in revenue were attributed to what were described as a number of “current initiatives”. The main contributing factor was described as “Tuck-In Acquisitions” which was explained in these terms in the CAR:

The bid model assumes Coinmach can acquire ~$25m of acquisitions per annum. This level of activity is significantly below the aggregate value of opportunities currently being investigated by the company. It is assumed that the acquired companies are purchased for a fully integrated valuation of ~5x EBITDA which is higher than the historical average multiples paid for acquisitions.

48. Other current initiatives were said to include targeted marketing to colleges, additional collection services, continued growth in the rental business and additional efficiencies from IT deployment.

49. The forecast IRR (pre-management fees) was approximately 21.2 per cent on the basis of an exit multiple of 7.7 times revenue in 2011.

50. The CAR lists a number of “Potential Upside Opportunities” including an increase in the machine base of one per cent per annum (approximately 6,600 machines per year), the acquisition of Mac-Gray, the second largest laundry facilities management business in the United States, and the provision of services for other types of modular machine systems. The one per cent increase in the machine base was said to be based on advice from management.

51. The CAR in a section headed “8.2 Debt Funding” stated:

A total amount of between USD1,175 million and USD1,200 million is being sought (including revolver/capex facility). The RBS proposal which is being utilized as the benchmark provides for:

(a)   A first lien term loan facility of USD700 million;

(b)   A first lien, delayed draw down term loan facility of USD50 million (for capex/acquisitions);

(c)   A first lien revolving credit facility of USD50 million (for capex/acquisitions);

(d)   USD175 million of unsecured senior notes (includes bridge facility); and

(e)   USD225 million of unsecured senior subordinated notes (includes bridge facility).

52. The information contained in the CAR was also distributed to potential investors, including Mr Will Peterson, the portfolio manager of the Everest Babcock & Brown Opportunity Fund, which was another Babcock & Brown fund that was proposing to invest in Coinmach. In response to queries raised by Mr Peterson in relation to the assumption that there would be zero growth in loads per machine for each year of the model compared to actual declines in the period from 2002 to 2007, Mr Haines said:

Loads per machine are driven by two primary factors: vacancy rates (# of people in the buildings) and vend prices (in-building prices relative to substitutes such as the local laundromat). The trends you are observing reflect a combination of both (to different degrees) over time. The initial period declines are due to increases in vacancy rates while the decline in later periods (particularly 2006 and 2007) are driven by price increases (5.4% price increases in each of the last two years). We did a lot of analysis and examined the correlation of price increases to vacancy-adjusted loads per machine (i.e. normalising for the impact of any vacancy moves) and discovered that at price increases above 2.5 – 3.0% one could expect a fairly linear reduction in load volumes. That said, at price increase below 2.5%, the impact on load volumes was fairly minimal.

The forecasts in the model take into consideration the interplay between price and load volumes. That is, we have assumed 2% price growth per annum which we feel very comfortable reconciles to stable load volumes. If we were to assume higher price growth (say, 4%) we would have to incorporate an assumption about load declines (which in my view would be ~1% in that instance).

Vacancy rates are still well above the long-term average and are expected to decline over the next 5 years. We also believe vacancy rates will decline further within the low ‘B’ and ‘C’ grade building segments as a result of subprime defaults, tightening credit etc which will benefit Coinmach. We have NOT built in any growth as a result of improvements to vacancy rates in our base case.

53. Together with the CAR, Babcock & Brown prepared a PowerPoint supplement. On the summary page under the heading “Historical Performance” it stated:

Discussions with management and further analysis suggests price increases can continue at levels below 3% per annum without impacting load volumes.

54. The CAR supplement contained a number of other tables and charts, including an analysis showing the explanation for the change in EBITDA between 2001 and 2007 (adjusted). The supplement also included the following table:

3-Yr Avg
Change in Vend Price:	1.3%	5.4%	5.4%	4.0%
Change in Adjusted Loads Per Machine(1):	-2.0%	-3.2%	-3.5%	-2.9%
Net ‘Effective’ Price Increase:	-0.7%	2.2%	1.9%	1.1%

(1) Loads Per Machine adjusted for changes in vacancy assuming declines in load per machine are perfectly correlated to increases in vacancy rates

55. On 7 May 2007, the Executive Committee approved the investment and, on the same day, BBLP submitted its proposal to acquire Coinmach. The offer was to acquire 100 per cent of the shares in Coinmach at USD13.55 per share in cash. The offer records that Babcock & Brown had arranged committed debt financing from RBS, Deutsche Bank and Merrill Lynch and included commitment letters from the lenders.

56. Babcock & Brown was selected as the preferred bidder on 10 May 2007.

57. During April and May 2007, Ms Talintyre circulated to potential equity investors in Coinmach a number of documents including an information memorandum and a financial model relating to Coinmach. A copy of that document was sent to Messrs Nicholson and Neilson.

RBS agrees to underwrite equity of USD136 million

58. It appears that Babcock and Brown were having some difficulties in raising the required equity for the transaction. It raised that matter with RBS, which on 1 June 2007 agreed to underwrite USD136 million of equity with the intention of selling all the equity pending further investigations to determine whether RBS should hold any of the shares it agreed to underwrite.

Babcock & Brown agrees to increase its investment

59. On or about 7 June 2007, one of the proposed investors in Coinmach, Hamilton Lane, encountered problems in obtaining approval to invest USD7 million. As a result, approval was sought to increase Babcock & Brown’s investment to USD92 million. That approval was given by Babcock & Brown’s Executive Committee on 8 June 2007 in the expectation that the investment would be sold down as quickly as possible.

The Merger and other agreements signed

60. Between 10 and 14 June 2007, a number of agreements were entered into relating to the proposed acquisition. They included a Consortium Agreement dated 10 June 2007 between Babcock & Brown, various investors, and RBS, a Merger Agreement dated 14 June 2007 between Coinmach and Spin Holdco and Spin Acquisition Co and a Commitment Letter dated 14 June 2007 from RBS Securities Corporation and Deutsche Bank Securities Inc and a number of other Deutsche Bank companies which was signed by Spin Holdco.

61. Under the terms of the Consortium Agreement (1) Spin Holdco would be incorporated as the vehicle to acquire Coinmach; (2) B&B Spinco LLC would be incorporated as the vehicle through which investors (other than RBS and certain senior executives of Coinmach) would invest; (3) following closing of the Coinmach Transaction, RBS would syndicate its equity stake; (4) RBS would have a period of 20 business days to determine whether it would retain any of its equity stake; (5) during the period up until 15 November 2007, Babcock & Brown would co-ordinate and arrange the sale of shares that RBS did not wish to retain; (6) RBS would obtain that right after 15 November 2007; (7) upon closing, Spin Holdco would pay BBLP an Origination Fee of 1.5 per cent of the total transaction value (defined to exclude that fee), which ultimately amounted to USD21.8 million; and (8) BBLP would pay all transaction fees, but those would be reimbursed by Coinmach on completion.

62. Under the terms of the Merger Agreement either party was entitled to terminate the agreement if completion had not occurred by 30 November 2007. If Spin Holdco did not complete the acquisition of Coinmach, Spin Holdco and Spin Acquisition Co agreed to pay Coinmach a fee of USD15 million together with its expenses up to USD2 million (the Cancellation Fee). Under a separate letter agreement dated 13 June 2007, Babcock & Brown agreed to reimburse Spin Holdco for those amounts. The merger was subject to approval by Coinmach’s shareholders.

63. Under the terms of the Commitment Letter, RBS and Deutsche Bank agreed to provide the following facilities: (1) a term loan facility of USD725 million; (2) a first lien, delayed draw term loan facility of USD50 million; (3) a first lien revolving credit facility of USD50 million; (4) a USD175 million senior bridge facility; and (5) a USD225 million senior subordinated bridge facility. The letter provided for syndication of the loans. It also contained the indemnity which was the subject of RBS’s cross-claim against Spin Holdco.

RBS begins to have reservations about the transaction

64. Following execution of the Merger Agreement, RBS considered its position in relation to its obligation to underwrite USD136 million of equity. It appears that it decided not to hold any equity. In addition, there were regulatory issues associated with it holding more than 19.9 per cent of the capital of Coinmach beyond the end of the year. In that context, RBS began to have some misgivings about its agreement, which increased over time. The earliest evidence of those misgivings is an email dated 17 July 2007 from Ms Lindsey McMurray, Head of Equity Finance at RBS, to Ms Laura Newman of RBS and Mr William Cumming, Managing Director of RBS Equity. In that email, Ms McMurray said:

ok. had a long chat with leith [Mr Leith Robertson, the chair of RBS’s Corporate Markets Equity Investment Committee]. he does not like the business for all of the reasons that we have discussed in detail at committee – fundamentally declining business at full multiples. I explained the short term view that we were taking. as a general point, he loved the business first time around but on reading further it appears they are just paying too much for a declining business. there does not seem to [sic] anything smart in the story.

65. In the SFACLS, the plaintiffs contend that, sometime prior to 14 November 2007, RBS, in the light of its concerns about its equity commitment, offered to BBLP and/or BBIPL that it would pay the whole of the Cancellation Fee on behalf of BBLP if the Coinmach Transaction did not complete. That offer is defined in the SFACLS as “the RBS Proposal”. The plaintiffs contend that that proposal was put to Mr Green by Mr Robertson on or around 22 August 2007. However, the evidence does not support that allegation.

66. The evidence is that there was a conversation between Mr Green and Mr Robertson on 22 August 2007. Following that conversation, Mr Robertson sent an email to Ms McMurray and others reporting on the conversation. The email relevantly said:

I said that we would likely be fully flexing the debt & probably would have a real struggle in syndicating the debt at negotiated prices. He said he was open to a discussion but we also discussed if there was some way of withdrawing from the deal. Is there a break clause? He said he was happy enough about the equity & was totally understanding that a hold was maybe not for our book at this time.

The reference to “fully flexing the debt” was a reference to a right RBS had to increase the interest rate on the debt up to an agreed maximum in order to make the debt more attractive for syndication.

67. It appears that a report of the conversation reached Ms Talintyre who spoke to Mr Cumming and said that she understood that Mr Robertson had put the pleaded proposal to Mr Green in a telephone conversation. It seems that Mr Cumming relayed the effect of his conversation with Ms Talintyre to Mr Euan Hamilton, the Global Head of Leverage Finance of RBS, who then sent Mr Robertson an email on 23 August 2007 in which he said:

Here is my question, Babcocks are suggesting you said on your call the other day that rbs would pay the break up fee - $15m - if they pulled the deal. They are also asking us to pay them the fee they would earn on the Equity!!!

Please tell me you didn’t really say this too [sic] them. It may or may not be a good thing to explore, but we have some leverage on them at moment which I don’t want to lose!!

68. Mr Robertson replied to that email later that day saying:

The concept of breaking the transactions was raised by their Ceo not by me. I had laid it on about how we would probably flex & burn fees + a bit to shift the debt. Please go back to the US B&B team & tell them the idea was put to me by Phil Green.

Interesting is it worth breaking at $15m? Re horrible capital treatment if we cant [sic] sell the equity or debt by year end?

I think Phil is not that enthused with the deal but does not want to say that to his US team!!

69. At about the same time, Ms Talintyre sent an email to Mr Cumming which she copied to Mr Green saying:

With reference to our conversation last night, it appears as though there was a miscommunication of the purpose of Leith’s call through the ‘middlepeople’ chain and that in fact Leith rang to discuss a non Spin related opportunity in the main and the discussion re Spin itself wasn’t exactly as I was initially told and portrayed in the call – hence any conversation you have (and hopefully haven’t already had) with Leith should be tempered in that vein!

70. It is plain from these emails that no proposal was put to Babcock & Brown by RBS of the type alleged on or about 23 August 2007.

Further marketing material from Babcock and Brown

71. Babcock & Brown were responsible for finding buyers for the RBS shares (up until 15 November 2007) and continued to market the investment to potential investors. For that purpose, it continued to work on the model and to prepare other documents to be provided to potential investors. One document was a PowerPoint presentation summarising the transaction. Relevantly, that presentation included a slide headed “Load volume and price increase assumptions also reconcile with history” which contained the following:

A.   The primary drivers of load volumes are vacancy and price. There does not appear to be a structural shift to substitutes which is having a material impact on load volumes

B.   Price is a primary lever to increase profitability and price increases are managed at a local level based on the local machine profile, particular lease arrangements and average pricing relative to substitutes:

•   Currently, it is understood that the company’s target is $1.25 (i.e. all machines under $1.25 vend price will be selectively increased over the course of the next 12-18 months)

•   Machine revenues are monitored after each price increase to examine the effect on loads and cash flow per machine

C.   Since 2002/03, the company’s focus has been on managing cash flow per machine and price growth has been a key element of this strategy

D.   The commercial due diligence process has focused on the relationship between price and load volume declines:

•   Correlation between price and load volumes on a city-by-city basis broadly support a relationship whereby price increase of 3%+ negatively impact load volumes …

•   Price increases below 3% do not appear to have a material impact on load volumes (i.e. do not force substitution)

•   This is supported by the economics of laundromats which are typically single-facility operations that are exposed to cost inflation of 3%+ per annum (utilities, retail rent, higher capital costs due to less purchasing power etc.)

E.   The base case assumes price growth of 2% per annum and 0% growth in load per machine volumes as a means of addressing the observed relationship between price and loads:

•   It is expected that there is a further upside to the volume forecast as a result of improvements in vacancy rates generally and, more specifically, with respect to low ‘B’ and ‘C’ grade buildings which will be positively exposed to the impact of increasing sub-prime mortgage defaults …

•   No impact from declining vacancy rates is assumed in the base case model (i.e. represents potential upside)

72. Ms Talintyre sent a copy of that PowerPoint presentation, together with a copy of the financial model, the legal and tax due diligence reports and an equity investment memorandum to Messrs Nicholson and Neilson on 6 July 2007. The equity information memorandum contained a disclaimer in these terms:

This Memorandum has been prepared by Babcock & Brown from information provided by Coinmach Service Corp and its subsidiaries and affiliates (“Coinmach”). Babcock & Brown makes no promise, guarantee or representation as to the accuracy or completeness of this Memorandum, or of any other information or materials, whether written or oral, that have been, or may (without implying any obligation to do so) at any future date be prepared or furnished by Coinmach or Babcock & Brown. Babcock & Brown has not undertaken and will not undertake a review of the financial condition, collateral or affairs of Coinmach or of any of its affiliates, whether or not set forth or referred to herein either presently or at any future date, and will not undertake to advise any investor of any information coming to its attention during such time.

It is expected that an interested recipient will conduct an independent investigation of the proposed transaction. Nothing in this Memorandum should be construed as legal, financial or tax advice, or as a recommendation by Babcock & Brown or Coinmach that any recipient of the information contained herein participate in the transaction. Each recipient should consult its own professional advisors regarding such matters.

Coinmach’s first quarter results for the year ended 31 March 2008

73. On 9 August 2007, Coinmach finalised its accounts for the first quarter of the 2008 financial year (that is, for the three months ending 30 June 2007). Those accounts showed that revenue had decreased by approximately USD2.2 million or two per cent for the three month period as compared to the prior year’s corresponding period. Most of that decline related to a two per cent decline in revenue from the route business which was primarily attributed “to a decline in same store sales attributed to increased vacancy rates in certain geographical areas”.

74. Mr Haines sent an email to RBS on 11 September 2007 commenting on those results. In that email he said:

As discussed last week, the shortfall to budget is approximately $2m at the EBITDA line ($1.2m at the cash flow line). The primary driver is a shortfall in revenue in the route business which is caused by the run-rate effect of machine losses in Q407 (continuation of strategy to purge below hurdle rate contracts) and a decline in number of phones serviced. Compounding the Q4 machine losses, the implementation of regular price increases was delayed somewhat this year until the strategy could be discussed post the Q108 results. Also, the month-by-month budget figures tend not to build in the seasonal variance that is historically experienced by the business in June / July / August.

YTD machine counts in both the route and college segments are up reflecting positive market conditions for Coinmach. Price increases are now flowing through and will continue to be implemented throughout September and October. The company has also undertaken to reduce operating expenses by $1-1.25m over the next month and corporate G&A by $1m over the next several months.

Management has affirmed that the impact of these actions in addition to the contribution of the additional machine count and price increases should result in Coinmach hitting their full-year budget (excluding the impact of acquisitions).

The partnership and management agreements

75. On 28 August 2007, the Babcock & Brown Executive Committee met and approved an investment by Babcock & Brown in the Partnership of USD35 million.

76. The Partnership was formed pursuant to an agreement dated 30 August 2007 (the Partnership Agreement). On 6 September 2007, following the entry into subscription agreements with various investors, the Partnership Agreement was amended and re-stated. The agreement is expressed to be governed by the laws of the State of Delaware.

77. The Partnership Agreement (as amended) invests the General Partner with exclusive and full control of the business and affairs of the Partnership: cls 2.8; 6.1(a). It provides for entry into the Management Agreement with the Manager: cl 6.1(d). It also provides that the General Partner may delegate the authority to approve investments to a “committee of principals” from the General Partner called the “Investment Committee”. It also states that any delegation does not relieve the Manager or General Partner of the duties they owe to the Partnership: cl 6.1(e).

78. Clause 6.7 relevantly provides:

Liability of the General Partner. None of the General Partner, the Investment Committee, the Manager, the Advisory Board members or any member, manager, shareholder, partner, director, officer, employee, agent, advisor, representative or Affiliate of the General Partner, the Investment Committee, the Manager or the Advisory Board members (or any of their respective members, managers, shareholders, partners, directors, officers, employees, agents, advisors, representatives or Affiliates), shall be liable to any Limited Partner or the Partnership for (a) any action taken, or failure to act, with respect to the Partnership unless such action taken or failure to act constitutes fraud, gross negligence or willful misconduct, (b) …

79. Clause 6.8 contains an indemnity by the Partnership in favour of the same persons against losses, liabilities, damages, costs or expenses which those persons may directly or indirectly become subject in connection with the General Partner or Partnership.

80. On 6 September 2007, the Partnership entered into the Management Agreement with the Manager. That agreement is expressed to be governed by the laws of Victoria.

81. Under cl 2.1, the Partnership appointed the Manager “as its exclusive agent to invest and manage the Portfolio”. “Portfolio” is defined to mean “all assets of the Partnership which the Partnership notifies to the Manager in writing to be invested and managed by the Manager under this Agreement”. There is no evidence of a written notification in accordance with this clause. However, it appears that the parties proceeded on the basis that the DIF III Fund was to be invested by the Manager in accordance with the Management Agreement; and no submission to the contrary was made in the proceedings.

82. Clause 3.1 of the Management Agreement relevantly provides:

The Manager must:

(a)   invest and manage the Portfolio for and on behalf of the Partnership in accordance with this Agreement;

…

(g)   exercise all due diligence and vigilance in carrying out its functions, powers and duties under this Agreement.

83. Clause 4.4 provides:

Delegation

(a)   The Manager may delegate its powers under this Agreement to a committee of principals from the Manager (Investment Committee).

(b)   Any delegation of power by the Manager to the Investment Committee will not relieve the Manager of its duties owed to the Partnership.

(c)   The Partnership may, in their discretion, at any time change the composition of, or the number of, persons serving on the Investment Committee and any appointments made by the Partnership shall be conclusive upon the Partnership.

84. It is unclear what is meant by “principals” in the expression “committee of principals from the Manager”. A similar expression is used in the Partnership Agreement. The issue was not addressed in any detail in submissions. No party submitted that the expression meant that it was intended that members of the Investment Committee act as principals rather than as agents for the Manager. It appears that the reference to “principals of the Manager” was intended to be a reference to senior employees of the Manager.

85. Clause 5.1(a) of the Management Agreement provides:

Neither the Manager nor any of its related bodies corporate, directors, officers, employees, shareholders and other agents (each, an Indemnified Party), shall be liable to the Partnership or to the Limited Partners for any Loss arising from any act performed or omitted by such parties arising out of or in connection with the performance by the Manager (and/or its related bodies corporate) of its services under this Agreement or arising out of the Partnership’s business or affairs, except to the extent that any such Loss are primarily attributable to the gross negligence or wilful misconduct of such Indemnified Party.

86. Clause 5.1(b) contains an indemnity by the Partnership in favour of the same persons against losses, liabilities, damages, costs or expenses to which the Indemnified Party may become subject in connection with any matter arising out of or in connection with the performance by the Manager of its services under the agreement.

87. Clause 11.3 relevantly provides:

The Manager warrants and represents to the Partnership that the Manager:

(a)   has and at all times during the terms of this Agreement have the skill, facilities, capacity and staff necessary to perform the duties and obligations under this Agreement;

(b)   will ensure that sufficient competent investment management staff experienced in fund management will have charge at all times of the conduct of, and will maintain close supervision of, the investment and management of the Portfolio;

…

Further concerns of RBS

88. Lehman Brothers collapsed in mid-September 2007, which triggered what RBS described in some of its internal correspondence as a “melt-down” in credit markets. That, in turn, prompted additional concerns about its exposure to the Coinmach Transaction. On 21 September 2007, Mr Hamilton sent an email to Ms McMurray and Mr Cumming in which he said:

As we are all in the same country next week, can we have a chat on the equity position here. I think we actually need to get Leith to call his mate in Australia and lay it out quite clearly for him – his equity is way under water and he should be seeking to exit this deal and pay the break up fee if needs be. Its madness that they still want to pursue – the girl [referring to Ms Talintyre] they have over here has no idea what she is doing.

It appears that the reference to “his mate in Australia” was a reference to Mr Green. Mr Green denied in cross-examination that he received a call from Mr Robertson on the issue. There is no reason to doubt that evidence and I accept it.

89. On 28 September 2007, Ms Newman sent an email to various employees of RBS including material for “the report on potential distressed equity”. The material relevantly included the following:

Exposure

Equity of $136m was underwritten, we opted for a hold position of $0m. None of the equity to date has been sold down. ….

Current Issues

Due to the changes in credit market conditions, the debt will be fully flexed and even with that the debt is viewed to be underwater. Due to the flex, we also believe that the equity may need to be sold below par value.

90. On 1 October 2007, Ms Talintyre sent an update to a number of employees of Babcock & Brown on the financing. The update observed that the proposed financing was one of the last “covenant lite etc debt package committed to in the US before the credit meltdown”. The email went on to state:

Unsurprising Deutsche Bank and RBS aren’t particularly happy now … as they currently have an estimated US$90m gross loss …

The email also stated:

Despite their ‘pain’ they have verbally repeatedly reaffirmed their intention to fund. They are, however, making life difficult, through haggling over every provision in the documents …

The email continued:

Our strategy, too [sic] date, has been to maintain our requirement to keep all provisions as committed to in the commitment papers include covenant lite and PIK toggle, and we also have a series of precedents of ‘comparable’ deals by ‘first tier private equity sponsors’ which support more user-friendly ‘baskets’ than they have initially offered.

We do expect, however, to allow them to ‘flex’ the pricing (by either 25 or 50bp depending on the ultimate rating) as it is pretty hard to argue that they will be able to achieve a ‘successful syndication’ based on the current terms.

91. On 2 October 2007, Mr Topfer sent an email to Mr David Crescenzi at Deutsche Bank stating:

If you want to get out of the deal the company break costs are $17m and our fees are $25m. We are happy to consider it.

92. Mr Crescenzi replied on 3 October 2007 stating that “We intend to honor our obligations as we understand them”. He also said “I’d like to review with you alternative financing structures for the Coinmach acquisition financing that can be successfully syndicated in today’s capital markets”.

93. On 19 October 2007, Ms Talintyre sent an email to Mr Michael Larkin, the Chief Financial Officer of Babcock & Brown, which was copied to Mr Topfer and Mr Umbrecht, in response to an email he had sent her about a delay in the settlement of the Coinmach Transaction. After pointing out that Babcock & Brown had been unable to negotiate an extension with Coinmach but had effectively obtained an extension because of delays in obtaining SEC approval, Ms Talintyre said:

[W]e have been very careful however in providing any responses to anyone due to the US litigious society and banks being nightmare since credit meltdown and basically have been saying no comment since August when I was back in Oz and there were some brief discussions with the banks about them potentially paying us out the break fee plus our upfront fee/costs etc (Rob, Phil etc are aware of these discussions) – i will give u a call to provide further background but in summary we shouldn’t be providing any commentary apart from the company has now called the shareholder vote for Nov 9 and under terms of merger agreement (which is public) we fund 3 bus days thereafter (if we want to say this at all) – rgds

This is another document on which the plaintiffs rely in the SFACLS in support of the allegation that RBS had proposed that it would pay the whole of the Cancellation Fee on behalf of BBLP if the Coinmach Transaction did not complete.

94. On 22 October 2007, Ms Talintyre sent an email to Mr Green, Mr Topfer and Mr Umbrecht in which she relevantly said:

We have had a rather staggering call from RBS Equity (Lindsey McMurray (Head of PE team based in London – she reports to Leith Robertson (we understand he looks after both lev fin and equity which obviously provides some interesting ‘conflicts’ in times like these)) and William Cumming (MD based in NYC)) earlier today. Key points as follows:

(i)   They wanted to give us a ‘quick heads up’ that they are ‘reassessing their options with respect to the equity’; and,

(ii)   Reasons included (a) debt/mkt turmoil, (b) whether can selldown to below 20% by year end (note this was NOT a condition in their equity commitment letter) and (c) when they will be able to exit the deal.

We reminded them that they had a binding equity commitment …

95. On 22 October 2007, Ms Talintyre sent an email to Ms McMurray and Mr Cumming in which she said:

We understand from our telephone call earlier today that The Royal Bank of Scotland plc (“RBS”) is “reassessing” whether it will fund its equity commitment in connection with the pending acquisition of Coinmach Service Corp. (the “Acquisition”) by Babcock & Brown.

As I am sure you are aware, on June 14, 2007 RBS executed a binding commitment letter (the “Commitment Letter”) to provide $136,000,000 of cash equity in connection with the Acquisition. On that same date, RBS also executed a binding letter (referred to as the “Consortium Agreement”), in which it reiterated its commitment to make a $136,000,000 equity investment on the closing date of the Acquisition. Both the Commitment Letter and the Consortium Agreement remain in full force and effect, and neither they nor any other document (including the exhibits to the Consortium Agreement) provide RBS with the right to withdraw or terminate.

…

At this stage we ask you (i) to reaffirm your commitment, as set forth in the Commitment Letter and Consortium Agreement, and (ii) to provide us with any comments you may have on the equity-related documents by the end of the week.

96. RBS responded to that email on 24 October 2007 in these terms:

In response to your October 22nd email message, I want to assure you that RBS is aware of its rights and obligations under the Commitment Letter and the Consortium Agreement. While we may not agree with your characterization of those documents, we do not feel it would be constructive to debate them with you. Indeed, I want to make sure that there is no misunderstanding on the part of B&B: RBS has not revoked any commitment to provide equity funding. At this point, we are simply evaluating the Spin transaction. Based on the tenor of your email message, it appears that B&B has completed its internal evaluation process and stands ready, willing and able to fund its commitments. Please confirm that my understanding is correct.

97. Ms Talintyre gave that confirmation in an email dated 25 October 2007.

98. On 26 October 2007, RBS sent Ms Talintyre an email commenting on revised “equity documents” that had been sent the previous day. The email said:

As you will see, we worked through the equity documents with a view to addressing some of the concerns we raised Monday regarding our $136mm equity bridge based on the limited progress in syndication …

The equity documents do not, however, address the significant commercial concerns that we continue to have as an equity bridge provider. …

99. Ms Talintyre replied to that email on 26 October 2007. In that response she relevantly said:

We would like to understand your ‘significant commercial concerns’ and why you suddenly stated on Monday 22nd October that you were ‘reassessing’ whether you will fund your equity commitment and what had changed since the conversation of Tuesday 16 October.

We will review and consider your proposed change to the equity documents. However, as you know, many of the changes vary the terms of the binding commitment papers that RBS and the other equity investors signed prior to the execution of the merger agreement, and it is on the basis of those commitment papers that we and the other equity investors expect the deal to be closed.

100. On 30 October 2007 there was a meeting between representatives of RBS and Babcock & Brown to discuss RBS’s equity contribution. At that meeting, RBS raised two options. One was “to convert our existing $136mm into a preference tranche, at a market rate”. The other was described in these terms in an internal RBS email:

Option two, is the current deal whereby RBS fund $136mm of equity pari-passu with B&B. The upfront acquisition fee of $21MM being charged to the transaction by B&B is escrowed until such time the RBS bridge equity is fully sold down. Should the equity need to be discounted in order to move the position, then it would be “marked-to-move”. The $21MM acquisition fee would be used to subsidize the sell down at Par.

Approval by the Investment Committee and General Partner

101. In the meantime, the Manager was pressing ahead with obtaining the Investment Committee’s approval of the investment. It was one of several investments being considered by the Partnership at the time and ultimately was the second investment made by the Partnership. The first was an investment of USD42 million in Coogee Resources.

102. Mr Nicholson had indicated to Ms Talintyre on or about 12 October 2007 that the Partnership should be able to make an initial investment of USD25 million or USD30 million in Coinmach. On 17 October 2007, he asked Ms Talintyre for the latest financial model, latest presentation, the latest information memorandum and information on the Babcock & Brown fee structure for the Coinmach Transaction, which were provided. It appears that subsequently Mr Haines took Mr Nicholson through the model over the telephone.

103. The likelihood is that during the course of that conversation Mr Nicholson asked Mr Haines to update the model so that it assumed that the investment in Coinmach would be held for a period of three and a half years and that the annual price increase per load would be 2.5 per cent, not the 2 per cent originally assumed in the model. It appears that Mr Nicholson was concerned that there would be a problem marketing the investment “if we are in a position where we have to sell at 21.5% instead of our minimum hurdle of 23%” (to quote from an email he sent to Mr Haines on 31 October 2007).

104. Mr Haines sent Mr Nicholson the requested model on 26 October 2007. His covering email observed:

The base case IRR (i.e. 2.0% price growth) increased slightly versus the previous model as a result of pushing out the closing date to November 14th (which is currently the expected closing date). The increase in price growth from 2.0% to 2.5% resulted in a 2.6% increase in IRR.

105. On 26 October 2007, Mr Nicholson sent an email to the Compliance Committee outlining the transaction and seeking its approval for it. That approval was given in these terms on 29 October 2007:

Resolved that the investment by DIF III Global CoInvestment Fund of a maximum US$50m in the Coinmach transaction, plus associated costs, be approved subject to:

for Insured Persons: (a) any actual or alleged breach of duty (including an Employment Practice Breach), breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act done by an Insured Person in their capacity as such; or (b) any matter claimed against an Insured Person solely because of their status as such; …

372. The Related Claims clause provides:

Any Claim made after the expiry of the Policy Period (or applicable Discovery Period) which alleges, arises out of, is based upon or attributable to any fact alleged in, or Wrongful Act which is pertinent to a:

(i)   Claim first made during the Policy Period (or applicable Discovery Period); or

(ii)   circumstance reasonably expected to give rise to a Claim

which was notified to the Insurer during the Policy Period (or applicable Discovery Period) will be accepted by the Insurer as having been made at the same time as the previously notified Claim was made or the previous circumstance notification, and notified at the same time as the previously notified Claim or circumstance.

373. The D&O Policy contains the following relevant exclusions:

The Insurer shall not be liable to make any payment under this policy in connection with any Claim arising out of, based upon or attributable to…

Professional

Services:

the provision of third party professional services of any kind. For the avoidance of doubt, this exclusion shall not apply to any Claim alleging that an Insured Person failed to supervise an Employee.

Insured v Insured (US Claim – Outside Entities)

(i)   any Claim brought on behalf of any Outside Entity in which an Insured Person serves or served in accordance with the "Outside Directorships" Extension; or

(ii)   any US Claim which is brought by or on behalf of any Company or any Insured Person…

…

Conduct

(i)   the improper use of position or information to gain any profit or advantage or cause detriment to any Company;

(ii)   conduct involving a wilful breach of duty in relation to any Company; or

(iii)   any criminal, dishonest or fraudulent acts or omissions;

374. “Outside Entity” is relevantly defined in Endorsement Nine (and then subsequently Endorsement Eighteen) to mean:

(b)   any entity in which the Company directly or indirectly owns or owned greater than 0%, but not more than 50%, of the issued or outstanding voting shares or equity or other interest at, on, or prior to the commencement of the Policy Period…

(d)   any entity in which the Company has 0% ownership of the issued or outstanding voting shares or equity or other interest during the Policy Period…

375. In accordance with Endorsement Nine (which was replaced by Endorsement Eighteen) an Insured Person serves or served in accordance with the “Outside Directorships” extension if the person is a “representative of any Company who is or was appointed as a director, officer, trustee, authorised person or manager of an Outside Entity at the specific request or approval of the Company”.

The issues

376. The D&O Insurers deny liability on five grounds:

1. They submit that the claims in respect of which indemnity is sought do not arise out of the notice of circumstances relied on by the relevant claimants;

2. They submit that the claims made against Messrs Topfer, Green, Nicholson and Neilson were not made against them as Insured Persons;

3. They rely on the exclusion in respect of professional services;

4. They rely on the conduct exclusion (and, in particular, the exclusion in respect of wilful breach and dishonesty); and

5. They rely on the Insured v Insured US claims exclusion.

The notification issue

377. The relevant claimants rely principally on a letter dated 28 August 2009 from BBIPL to AIG Australia and InterRisk which was in substantially the same terms as the letter of that date to InterRisk and Integro giving notice to the PI Insurers (which is quoted in para 333 above). Mr Topfer (whose submissions are adopted by Messrs Nicholson and Neilson) also relies on the letter dated 9 February 2009 from Mr Hanson, which was copied to the D&O Insurers on 2 November 2009 (outside the policy period) and a copy of the Statement of Claim which was sent to Allianz (one of the D&O Insurers) on 3 January 2014, although that notification is not pleaded as notification under the policy.

378. The notification issue raises similar issues to those raised in relation to the claim under the PI Policy. There is a question whether all or some of the D&O Insurers received the 28 August 2009 letter before the expiration of the policy. However, the D&O Insurers accept that any late notification is cured by s 54 of the Insurance Contracts Act. Their point is that the claim in respect of which indemnity is sought (these proceedings) was not “based upon or attributable to any fact alleged in, or Wrongful Act which is pertinent to a … circumstance reasonably expected to give rise to a Claim … which was notified …” to the insurers. Consequently, the claim does not fall within the circumstances notified extension in the policy.

379. In the case of the D&O Policy, unlike the PI Policy, the knowledge of the claimant of the circumstances is irrelevant. The only question is whether the claim that was made arises out of the circumstances that were notified (whether late or not). The connection between what is notified and the claim in respect of which indemnity is provided (based upon or attributable to any fact alleged in, or Wrongful Act which is pertinent to, a circumstance of the requisite character) is expressed in terms which make limited grammatical sense. It seems evident, however, that the connection is intended to be a broad one. Even so, I do not accept that there is a sufficient connection in this case. The difficulty is that what was notified was a potential claim by BBGP. That claim depended on the relationship and conduct between BBGP and those against whom the claim might be brought. On the other hand, the claims in this case depend on the relationship and conduct between the plaintiffs and a different, although perhaps overlapping, group of potential defendants. In my opinion, it could not reasonably be expected that the plaintiffs would bring a claim based on the way in which the Partnership’s investment was managed because there were circumstances that suggested some other entity might bring a claim because of the way its investment in the same company (Coinmach) was managed.

380. In this case, Mr Topfer also relies in his written closing submissions on notice of the proceedings, which was given on 3 January 2014. As I have explained, the D&O Policy, unlike the PI Policy, does not take as the starting point for the circumstances notified extension that the circumstances be known to the insured (or some other identified group). It simply gives the person seeking an indemnity an option to notify circumstances within the policy period and treats any claim arising from those circumstances as a claim within the policy period. Section 54 of the Insurance Contracts Act cures any late notice provided the insurer is not prejudiced. It may, therefore, be arguable that s 54 applies even to the notice given on 3 January 2014. However, as I have said, that notice was not pleaded. If it had been, it would have raised the question whether the D&O Insurers were prejudiced by notice that late. For those reasons, it cannot be relied on now.

381. It follows that the claims that are made do not arise out of circumstances that were either notified during the policy period or later notifications in respect of which relief under s 54 of the Insurance Contracts Act is available. For that reason alone, all the claims against the D&O Insurers must fail.

The “Insured Person” issue

382. The D&O Insurers contend that the members of the Investment Committee, when they gave their approval to the investment in Coinmach, were not acting as “Insured Persons” as required by the definition of “Wrongful Act” because in taking that decision they were not acting as a director etc or taking part in the management of any Company – specifically, the Manager. The analogy they sought to draw was with a solicitor in a law firm advising a client about a transaction, who plainly when doing so was not participating in the management of the law firm.

383. I do not accept that submission, at least in the broad way that it is put. The task of the Court is to interpret the words used having regard to “the commercial circumstances which the document addresses, and the objects which it is intended to secure”: McCann v Switzerland Insurance Australia Ltd & Ors (2000) 203 CLR 579 at [22] per Gleeson CJ; Wilkie v Gordian Runoff Ltd & Anor (2005) 221 CLR 522 at [15] per Gleeson CJ, McHugh, Gummow and Kirby JJ. The present policy was negotiated between sophisticated parties. BBL was represented by an insurance broker. Directors and officers liability insurance is normally obtained separately from professional indemnity insurance; and it is to be expected that where they are, as in this case, both policies will be drafted to reduce the possibility of overlap. The insuring clause and the exclusion in respect of third party professional services should be interpreted having regard to that context.

384. The insuring clause provides cover to different categories of person concerned with the management of “a Company” – in this case, principally the Manager. The cover provided is against “Claims”. A “Claim” includes a demand or proceeding for a “Wrongful Act”. A “Wrongful Act” is any actual or alleged breach of duty of various types “done by an Insured Person in their capacity as such”. The claims against Messrs Topfer and Green include allegations that they breached fiduciary duties they owed as directors of the Manager. To that extent at least, the claims against them are claims for Wrongful Acts as directors of the Manager and therefore are covered. Similarly, the General Partner is a “Company” within the meaning of the policy. Consequently, to the extent that claims are made against Messrs Topfer and Green as directors of the General Partner, they too must be covered.

385. The position is less clear in relation to claims against Messrs Topfer, Green, Nicholson and Neilson insofar as it is alleged that they breached duties they owed as members of the Investment Committee and Messrs Topfer and Green insofar as they are said to owe duties as promoters of the Coinmach Transaction.

386. Messrs Topfer and Green are “Insured Persons” because they are directors of the Manager (and a number of other “Companies”). They are not “Insured Persons” on any other basis. In particular, they are not “Employees” who satisfy the requirements of para (iii) of the definition of “Insured Person” because, as directors of the Manager, they are excluded from the definition of “Employee”. Consequently, the question (required by the definition of “Wrongful Act”) that must be asked in relation to them is whether the claims against them are claims for breach of duty etc done by them in their capacity as directors. But what does that mean? One possibility is that they are only covered where they perform functions that only a director of the relevant Company could perform. But that interpretation seems overly restrictive and would exclude many claims that are obviously intended to be covered by the policy – such as claims arising from management decisions taken by executive directors outside board meetings that could be taken by others occupying senior management roles who were not directors. The only other obvious interpretation is that it covers all acts that are usually undertaken by a director in the position the relevant director was in.

387. The D&O Insurers submit that the acts that are covered are those that are taken in connection with the management of the relevant Company (in this case, the Manager). However, that is not the effect of the definition of Wrongful Act; and in my opinion, there is no basis for reading such a limitation into the definition. A person is covered once he or she is identified as a director. And such a person is covered in respect of all acts that person does in that capacity. Once the narrow interpretation is rejected, there is no reason to limit those acts except by reference to the types of acts a director would normally do; and “director” in this context must include an executive as well as a non-executive director.

388. If the definition of “Wrongful Act” is given the broader interpretation, in my opinion, it would cover conduct undertaken by Messrs Topfer and Green as promoters of the Coinmach Transaction and as members of the Investment Committee. A common aspect of the role of a director of a company is to promote transactions in which the company has an interest. Similarly, it is common for directors of a company to serve on important committees of the company. Consequently, when Messrs Topfer and Green served as members of the Investment Committee it could be said that they did so in their capacity as directors of the Manager because it was that capacity which made them appropriate appointees to the committee.

389. Messrs Nicholson and Neilson were undoubtedly employees of the Manager. Consequently they were “Insured Persons” if it could be said that they fell within para (iii) of the definition of “Insured Person” – that is, if it could be said that they were concerned with or took part in the management of the Manager. Assuming it could, the question then arises whether the claims against them were claims for breach of duty etc done by them in that capacity.

390. Both Messrs Nicholson and Neilson occupied senior positions with the Manager. Both were members of the Manager’s senior management team. Consequently, both were concerned with or took part in the management of the Manager and were, therefore, “Insured Persons”.

391. In the case of Messrs Nicholson and Neilson, it might more readily be said that a claim against them was only a claim in respect of a “Wrongful Act” if it arose from acts performed by them in connection with the management of the Manager, on the basis that those acts are the only acts they perform “as such”. However, that would mean that the cover available to them was narrower than the cover available to Messrs Topfer and Green. In my opinion, it is doubtful that that is what the parties to the policy intended. Instead, the extension to employees engaged in management should be read in the same way as the cover available to directors. The first task is to determine whether they are Insured Persons. The answer to that question is clear. They are because they are employees who were concerned with or took part in the management of the Manager. The only question, then, is whether the claim against them is brought against them in respect of an alleged or actual breach of duty etc done by them in that capacity. That question is to be answered by asking whether the relevant acts were acts that might normally be expected to be performed by an employee involved in the management of the company. In this case, it seems clear that they were. It would be normal for senior employees engaged in the management of a company to serve on a committee such as the Management Committee. That is sufficient to say that they undertook that function as employees engaged in the management of the Company.

392. It follows from what I have said that if cover under the D&O Policy depended solely on the question whether the claims were against Insured Persons “as such”, then the claims against Messrs Topfer, Green, Nicholson and Neilson would be covered. They would be entitled to recover the legal fees they have incurred in defending the claims brought against them and BBIPL would be entitled to recover any such costs in respect of which it had provided an indemnity.

The Professional Services exclusion

393. The question raised by the Professional Services exclusion is whether the Claim made by the plaintiffs is one “arising out of, based upon or attributable to … the provision of third party professional services of any kind”. Broadly speaking, the claimants submit that the exclusion does not apply for two reasons. First, the relevant services are not “third party … services”. Second, they are not “professional services”.

394. As to the first of these issues, the claimants submit that the relevant services are the services provided by members of the Investment Committee. Those services were provided to the Manager, not the Partnership. The Manager was not a third party. I do not accept that submission. The Manager had power to and did delegate the task of approving investments to the Investment Committee. The Investment Committee was distinct from the Manager; and as I have pointed out, its composition could be controlled by the General Partner. As the PPM emphasised, its approval was an important mechanism by which the interests of investors in the DIF III Fund were protected. The approval of the Investment Committee was communicated directly to the General Partner and the claims in respect of which indemnity is sought arise out of the decision of the Investment Committee and the communication of that decision to the General Partner as agent for the Partnership. The activities of the Investment Committee occurred as part of a broader process by which the Manager managed the funds of the Partnership. But in the particular circumstances of the case, I do not think it is correct to say that the services provided by the Investment Committee were provided to the Manager. They were provided by the members of the Investment Committee to the Partnership through the General Partner. The Partnership was plainly a third party in that context.

395. Although it was submitted that Messrs Topfer and Green were liable to the Partnership on other bases, in each case that liability is said to have arisen because they owed personal duties to the Partnership. It is difficult to see how, if those personal duties arose, they were not breached in connection with the provision of services to the Partnership rather than, for example, the Manager. Consequently, the conclusion of the previous paragraph applies equally to the other claims made against Messrs Topfer and Green.

396. As to the second issue, the claimants focussed on the role of the Investment Committee. They rely heavily on the following definition of professional services given by the Full Federal Court in Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; [2016] FCAFC 17 at [150]:

It seems to us that the expression “professional services” in the relevant exclusion clause in the present case means services of a professional nature furnished by RBG or one of its subsidiaries involving the application of skill and judgment by the person or persons who carried out the relevant activities on behalf of RBG or one of its subsidiaries being services which fall within the scope of a vocational discipline which is generally regarded as a profession.

397. Applying that definition, they submit that members of the Investment Committee were not involved in the provision of professional services because the relevant services did not fall within a vocational discipline which is generally regarded as a profession.

398. I do not accept that submission. The expression “professional services” is often used in professional indemnity insurance policies as part of the description of cover. It is also used in exclusions from cover contained in various types of policy, including directors and officers liability insurance, as in this case. Courts frequently give the expression a broader meaning in the former context than they do in the latter; and the decision in Chubb is an example of that general approach. Having said that, the task of the Court remains to interpret the words used in the context in which they appear and unless the words used and the context in which they appear are substantially the same, the decisions of other cases are of limited utility.

397. On the conclusions I have reached, the insuring clause covers a broad range of activities. It is to be expected that the exclusion in respect of professional services would have some operation so as to reduce the degree of overlap between the cover provided by the D&O Policy and the cover that it could be expected BBL would obtain under a professional indemnity policy. In the present case, the business of the Manager involved managing the investment of a number of funds, including the DIF III Fund. In connection with that business it made decisions or recommendations on how the funds were to be invested; and, at least in the case of the DIF III Fund, delegated those aspects of its business to the Investment Committee. The task of evaluating particular investments and making recommendations to, or decisions for, others on those investments involved the application of skill and judgment of a professional nature. The exclusion in this case applied to professional services of any kind. It is difficult to see that the exclusion would have any application at all if it did not apply to the types of services the Investment Committee performed. It was not suggested that Babcock & Brown engaged in other activities that could be described more obviously as the provision of professional services. For those reasons, in my opinion, the exclusion applied to the services provided by the Investment Committee.

The conduct exclusion

400. The conduct exclusion relevantly applies to “any Claim arising out of, based upon or attributable to … any criminal, dishonest or fraudulent acts or omissions”. The application of the exclusion does not depend on the form of the Claim but whether it could be said as a matter of fact that the Claim arose out of etc a criminal etc act or omission.

401. On the conclusions I have reached, there was no breach of duty; and if there was, it did not involve any criminal, dishonest or fraudulent conduct. Consequently, this exclusion would not have prevented the claimants from recovering under the policy the legal fees they have incurred.

Insured v Insured US Claims Exclusion

402. This exclusion relevantly applies to “any US Claim which is brought by or on behalf of any Company or any Insured Person. “US Claim” is defined to mean “a Claim brought or maintained within the jurisdiction of, or based upon acts in or any laws of the United States of America, its states, localities, territories or possessions”.

403. In my opinion, this exclusion does not apply for two reasons.

404. First, the D&O Insurers have not established that the claim is a US Claim. Plainly the claim is not brought in the United States. Nor is it based on the laws of the United States. Therefore, it could only be a US Claim if it was based upon acts in the United States. The D&O Insurers submit that the claim was based upon acts in the United States because that is where the negotiations to acquire the shares in Coinmach took place and where the Partnership acquired an indirect interest in Coinmach. But they are not the relevant acts. The relevant acts are the approval of members of the Investment Committee of the investment in Coinmach and what is alleged to be a failure by Messrs Topfer and Green to disclose certain matters. The D&O Insurers do not submit or seek to prove that those acts occurred in the United States.

405. Second, the claim is brought by or on behalf of the Partnership. The Partnership is not a “Company” or “Insured Person”. The fact that the General Partner is a Company cannot alter the position. It does not bring the claim in its own right. Consequently, the claim could not be said to be brought by it for the purposes of the exclusion.

Orders

406. It follows that the proceedings (including all cross-claims) must be dismissed.

407. I will hear the parties on the question of costs at a time fixed with my Associate.

**********

Decision last updated: 13 May 2019