Donald Financial Enterprises Pty Ltd v APIR Systems Ltd - [2008] FCA 1112

FEDERAL COURT OF AUSTRALIA
Donald Financial Enterprises Pty Ltd v APIR Systems Ltd [2008] FCA 1112
TRADE PRACTICES – misleading or deceptive conduct – applicant claims relief in respect of subscription for 200,000 shares in the first respondent and purchase of 81,904 shares from existing shareholders – whether the first respondent and its directors engaged in misleading or deceptive conduct in failing to disclose the existence and content of the heads of agreement to which the applicant and the executive directors were parties – executive remuneration agreement – where the first respondent and its executive directors disclosed that only 50,000 shares were to be issued between the executive directors when the second heads of agreement contemplated the issue of at least a further 100,000 shares to each - requirement of disclosure in the audited financial statements – whether the first respondent and its executive directors offered the applicant the opportunity to scrutinise and review documents in a folder described as a ‘due diligence folder’ - accessorial liability and the non-executive directors – the applicable statutory regime under the Corporations Act 2001 (Cth), the Trade Practices Act 1974 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) – remedies – share subscription deed declared void ab initio – cross-claim dismissed
CONTRACT – formation – intention to contract – the principle in Masters v Cameron – ‘subject to contract’ – whether the first and second heads of agreement were binding as between the first respondent and the executive directors
Federal Court of Australia Act 1976 (Cth) s 51A
Trade Practices Act 1974 (Cth) ss 4, 51AF, 52, 75B, 82, 87
Corporations Act 2001 (Cth) ss 79, 208, 209, 764A, 766A, 766C, 1041E, 1041H, 1041I, 1324, 1325
Australian Securities and Investment Commission Act 2001 (Cth) ss 12BB, 12BAA, 12BAB, 12CA, 12DA, 12GB, 12GH, 12GM
Fair Trading Act 1992 (ACT) ss 11, 12, 13, 40, 46
Fair Trading Act 1987 (NSW) ss 42, 43, 61
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 applied
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 cited
Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 cited
Bramble Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 applied
Cleary & Anor v Australian Co-operative Foods Ltd & Ors (Nos. 2 and 3) (1999) 32 ACSR 701 cited
Commonwealth v Cornwell (2007) 229 CLR 519 distinguished
Fox v Percy (2003) 214 CLR 118 cited
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 applied
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 cited
Masters v Cameron (1954) 91 CLR 353 applied
Murphy v Overton Investments Pty Ltd (2004) 216 CLR 3 distinguished
Potts v Miller (1940) 64 CLR 282 applied
Re NRMA Ltd; Re NRMA Insurance Ltd (2000) 34 ACSR 2 cited
Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 cited
Thompson v White & Ors (2007) NSW Conv R 56-171 applied
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 cited
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 distinguished
Yorke v Lucas (1985) 158 CLR 661 applied
Elisabeth Peden, JW Carter and GJ Tolhurst, When Three Just Isn’t Enough: the Fourth Category of the “Subject to Contract” Cases (2004) 20 JCL 156
DW McLauchlan, In Defence of the Fourth Category of Preliminary Agreements: Or Are There Only Two? (2005) 21 JCL 286
DONALD FINANCIAL ENTERPRISES PTY LIMITED v APIR SYSTEMS LIMITED, ANDREW HUTCHINGS BROSO, ANDREW RILEY, MAUREEN CANE, DAVID MCGREGOR and NOEL WICKS; APIR SYSTEMS LIMITED v DONALD SHARP and DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST
NSD 1200 OF 2004
EDMONDS J
30 JULY 2008
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1200 OF 2004

BETWEEN:

DONALD FINANCIAL ENTERPRISES PTY LIMITED
Applicant

AND:

APIR SYSTEMS LIMITED
First Respondent

ANDREW HUTCHINGS BROSO
Second Respondent

ANDREW RILEY
Third Respondent

MAUREEN CANE
Fourth Respondent

DAVID MCGREGOR
Fifth Respondent

NOEL WICKS
Sixth Respondent

AND BETWEEN:

APIR SYSTEMS LIMITED
Cross-Claimant

AND:

DONALD SHARP
First Cross-Respondent

DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST
Second Cross-Respondent

JUDGE:

EDMONDS J

DATE OF ORDER:

30 JULY 2008

WHERE MADE:

SYDNEY

THE COURT DECLARES THAT:
1.The Share Subscription Deed between the first respondent, the applicant and the first cross-respondent dated 23 January 2004 is void ab initio.

THE COURT ORDERS THAT:
2.The first respondent forthwith refunds to the applicant the subscription price of the 200,000 shares in the first respondent for which the applicant applied and subscribed.
3.If the first respondent is unable for any reason beyond its control or otherwise fails to comply with order 2 in full, the second and third respondents jointly and each of them severally, refund to the applicant the subscription price of the shares in order 2 and to the extent of the shortfall.
4.Upon full payment to the applicant of the subscription price of the shares in order 2, the applicant deliver to the first respondent a properly executed instrument or instruments of transfer of such shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs.
5.The second and third respondents jointly and each of them severally, forthwith refund to the applicant the purchase price of the 81,904 shares in the first respondent purchased by the applicant from shareholders in the first respondent in exchange for a properly executed instrument or instruments of transfer of the shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs.
6.The first, second and third respondents jointly and each of them severally pay interest to the applicant pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the sum of the subscription price in order 2 and the purchase price in order 5 from 28 January 2004 to 30 July 2008 at the rate or rates applied by the Supreme Court of New South Wales during this period.
7.The first, second and third respondents pay the applicant’s costs of the application; and the fourth, fifth and sixth respondents’ costs of defending the application.
8.The cross-claimant pay the first and second cross-respondents’ costs of defending the cross-claim.
9.The cross-claim be dismissed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1200 OF 2004

BETWEEN:

DONALD FINANCIAL ENTERPRISES PTY LIMITED
Applicant

AND:

APIR SYSTEMS LIMITED
First Respondent

ANDREW HUTCHINGS BROSO
Second Respondent

ANDREW RILEY
Third Respondent

MAUREEN CANE
Fourth Respondent

DAVID MCGREGOR
Fifth Respondent

NOEL WICKS
Sixth Respondent

AND BETWEEN:

APIR SYSTEMS LIMITED
Cross-Claimant

AND:

DONALD SHARP
First Cross-Respondent

DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST
Second Cross-Respondent

JUDGE:

EDMONDS J

DATE:

30 JULY 2008

PLACE:

SYDNEY

INDEX
Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [1]
Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [4]
APIR Executive Directors’ Remuneration: The First Heads of Agreement........ ........ ........ ........ . [10]
Mr Charles Gibbon and Mr David Adams........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [14]
The Advent of Mr Sharp........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [26]
The Communications and Meetings over the November 2003 – January 2004 Period Between Mr Sharp and Mr Hutchings Broso and/or Mr Riley........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [30]
APIR Executive Directors’ Remuneration: The Second Heads of Agreement........ ........ ........ .... [64]
The Communications and Meetings Between Mr Sharp and the other Directors of APIR After the Execution of the SSD........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [72]
An Overview of the Respective Cases........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [98]
Common Ground and Issues Not in Dispute........ ........ ........ ........ ........ ........ ........ ........ ........ .. [110]
Impression of Witnesses........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [118]
Mr Sharp........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [121]
Mr Riley........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [122]
Mr Hutchings Broso........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [123]
Ms Cane........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [124]
Messrs Wicks and McGregor........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [126]
The Issues in Dispute........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [127]
Whether the first and second heads of agreement were binding as between APIR and the executive directors?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [127]
Relevant Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [128]
Relevant Circumstances........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [134]

Whether the first heads of agreement as between APIR and the executive directors was terminated prior to the advent of the second heads of agreement?........ ........ ........ ........ ........ ........ ........ ........ ........ . [137]
If the second heads of agreement was binding as between the executive directors and APIR, from what date was it binding?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [141]
Whether either of the executive directors informed Mr Sharp, at the time or times they told him that 50,000 shares in APIR were to be issued between them, that this was to occur in the context of them becoming employees of APIR?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [142]
Whether Mr Sharp was offered the opportunity to scrutinise and review documents in a folder described as a ‘due diligence folder’?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [144]
Whether the executive directors deliberately withheld the existence of the second heads of agreement from Mr Sharp prior to the execution of the SSD on 23 January 2004?........ ........ ........ ........ ........ .... [145]
Whether the executive directors deliberately withheld the planned execution of the executive employment agreements from Mr Sharp prior to the board meeting of 16 April 2004?........ ........ ........ ... [151]
Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the first heads of agreement?........ ........ ........ ........ ........ ........ ........ ........ ........ .... [154]
Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the second heads of agreement?........ ........ ........ ........ ........ ........ ........ ........ ....... [158]
Conclusions on Ultimate Issues........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [165]
Conclusion on Misleading or Deceptive Conduct........ ........ ........ ........ ........ ........ ........ ....... [170]
The Non-Executive Directors and Accessorial Liability........ ........ ........ ........ ........ ........ ...... [171]
The Applicable Statutory Regime........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [174]
Remedies under the Corporations Act 2001........ ........ ........ ........ ........ ........ ........ ........ ........ . [177]
Relief Sought........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [180]
Argument and Reasoning on Remedies and Relief........ ........ ........ ........ ........ ........ ........ ........ .. [181]
The Cross-Claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [193]
REASONS FOR JUDGMENT
INTRODUCTION

By its further amended application dated 30 January 2008 (‘the FAA’), leave for the filing of which I granted on the same date, the applicant, Donald Financial Enterprises Pty Limited (‘DFE’), as trustee of a trust fund known as ‘The Elysum Trust’, claims relief in respect of DFE’s subscription for 200,000 shares in the first respondent, APIR Systems Limited (‘APIR’), and in respect of DFE’s purchase of 81,904 shares in APIR from existing shareholders. The FAA is stated to be made under ss 1041E, 1041H, 1041I, 1325(1) and (5) of the Corporations Act 2001 (Cth); ss 12DA and 12GM of the Australian Securities and Investment Commission Act 2001 (Cth) (‘the ASIC Act’); and ss 82 and 87 of the Trade Practices Act 1974 (Cth) (‘the TP Act’).
The bases for DFE’s claims for relief, set out in DFE’s Second Further Amended Statement of Claim dated 16 March 2006 (‘the SFASC’), are that the respondents jointly and each of them severally:
(1)engaged in conduct that was misleading or deceptive or likely to mislead or deceive contrary to s 52 of the TP Act, s 12 of the Fair Trading Act 1992 (ACT) (‘the ACT Act’) and/or engaged in conduct in relation to a financial product or a financial service that was misleading or deceptive or was likely to mislead or deceive contrary to s 1041H of the Corporations Act 2001 and/or subs 12DA(1) of the ASIC Act;
(2)engaged in conduct in contravention of s 1041E of the Corporations Act 2001; and
that by engaging in such conduct, the second to sixth respondents, jointly and each of them severally:
(3)(i) aided, abetted, counselled or procured the contraventions of s 52 of the TP Act and/or s 12 of the ACT Act by APIR; and
(ii)have been directly or indirectly, knowingly concerned in or party to the aforesaid contravention; and
(iii)have conspired to effect the contraventions as contemplated by s 75B of the TP Act and s 40 of the ACT Act respectively, together with s 12GB of the ASIC Act in relation to contraventions to s 12DA of that Act.
(4)was involved in the contravention of the aforesaid Acts (namely the TP Act, the ACT Act, the Corporations Act 2001 and the ASIC Act), as contemplated and referred to in s 82 and s 87 of the TP Act and s 46 of the ACT Act and further was engaged in the aforesaid contraventions as contemplated in s 1041I, s 1324, subs 1325(1) and subs 1325(5) of the Corporations Act2001 together with s 12GH and s 12GM of the ASIC Act.
(5) both directed and/or procured the aforesaid contraventions of the statutory obligations of APIR and/or engaged in the deliberate wilful and knowing pursuit of a course of conduct that was likely to constitute infringement and/or reflected an indifference to the risk of infringements of the aforesaid statutory obligations.
By an amended cross-claim dated 21 August 2006 and filed on 4 September 2006 (‘the ACC’), APIR claims various forms of relief against Mr Donald Sharp (‘Mr Sharp’), the sole director of DFE, and DFE, as trustee of The Elysum Trust, on the following bases:
(1)During negotiations leading up to the transactions described in [1] above, Mr Sharp and DFE engaged in conduct that was misleading or deceptive or likely to mislead APIR within the meaning of s 12DA of the ASIC Act and/or s 12 of the ACT Act and/or s 42 of the Fair Trading Act 1987 (NSW) (‘the NSW Act’) and/or s 1041H of the Corporations Act 2001; and such conduct constituted representations as to a future matter within the meaning of s 12BB of the ASIC Act, s 41 of the NSW Act, s 11 of the ACT Act, which Mr Sharp and DFE had no reasonable grounds to make.
(2)that the conduct of Mr Sharp and/or DFE was unconscionable conduct in trade and commerce within the meaning of s 12CA of the ASIC Act and/or s 13 of the ACT Act; and/or s 43 of the NSW Act;
(3)that Mr Sharp in his capacity as the sole director of DFE:
(a)aided counselled and/or abetted; and/or
(b)induced; and/or
(c)conspired with DFE
to contravene ss 12DA, 12BB and 12CA of the ASIC Act within the meaning of subs 12GB(1) of the ASIC Act; s 61 of the NSW Act; and/or s 40 of the ACT Act;
(4)in the alternative, for breach of clause 6.1 and clause 6.2 of a Share Subscription Deed between APIR, DFE and Mr Sharp dated 23 January 2004 (‘the SSD’).
BACKGROUND
APIR was incorporated on 15 December 1997 as a proprietary company and on 7 February 2003 converted to a public company. Its first directors were the second respondent, Mr Andrew Hutchings Broso (‘Mr Hutchings Broso’), the third respondent, Mr Andrew Riley (‘Mr Riley’), the fifth respondent, Mr David McGregor (‘Mr McGregor’) and the sixth respondent, Mr Noel Wicks (‘Mr Wicks’). The fourth respondent, Ms Maureen Cane (‘Ms Cane’) joined the Board on 8 April 2000. At all relevant times:
(1)Mr Hutchings Broso was the Managing Director of APIR;
(2)Mr Riley was the Technical Director and Company Secretary of APIR; and
(3)Mr Hutchings Broso and Mr Riley were the only executive directors of APIR, all other directors being non-executive directors. Mr Hutchings Broso and Mr Riley are sometimes hereinafter together referred to as ‘the executive directors’ or ‘EDs’.
Initially, Mr Hutchings Broso was the Chairman but was replaced as Chairman by Ms Cane on 27 February 2004.
According to its financial statements for the year ended 30 June 2003, APIR had a paid-up capital at that date of $1,118,000 comprising 763,982 fully paid ordinary shares (compared to $939,200 as at 30 June 2002 comprising 686,535 fully paid ordinary shares). Accumulated trading losses as at 30 June 2003 reduced total equity to $56,439 (compared to $665,399 as at 30 June 2002). According to the Directors’ Report for the year ended 30 June 2003, the principal activity of APIR during that year ‘… was the development and implementation of electronic commerce infrastructure for the financial services industry’.
In this latter respect, the background evidence of its executive directors was not in dispute.
Mr Hutchings Broso deposed:
‘3.… Following my retirement [from the Army] in 1993 I provided consultancy services to the government and private enterprise in the Canberra region, relating to communication, particularly in the financial services industry.
4.As a part of the consultancy services I was engaged in advising a company that was developing a coding system for participants in the finance industry and the products which they manufacture and sell. That company went into liquidation in 1997 but as a result of that consultancy I developed specialist knowledge of the company and financial products coding system. This knowledge combined with my military training meant I had specialist experience on how that coding system was to be used in the market and how information could be formatted, categorised, applied and communicated. I identified that the business of the company that had gone into liquidation had significant potential value and that a properly funded and well run business utilising the intellectual property of that company would have significant capacity to make substantial in-roads into the industry. As a result of my opinion I formed a consortium of people who were creditors of the failed company and had a substantial investment in that company by way of unpaid consultancy fees and investment funds and I negotiated with the liquidator of the failed company, Mr Rangott, to purchase the intellectual property of the Asia Pacific Investment Register. I invested $20,000 and the other investors invested $100,000. I then formed the company to be known as APIR Systems Pty Ltd.
5.… As the managing director and chairman of APIR, along with Andrew Riley I set about creating a new software program based on intellectual property of the earlier company and in April 1998, with the support of the Investment and Financial Services Association (‘IFSA’) APIR became the industry standard coding for products and participants in the financial services industry. That coding provides a unique identifier and is used throughout the industry in reporting and identifying participants and products. Any analysis in the public media includes the coding system developed by APIR.
7.The initial coding purchased from Asia Pacific Investment Register involved 3,000 products that had been transferred as part of the purchase price from the liquidator. This coding utilised a software approach, APIR quickly developed new software and with the support of IFSA, obtained substantial industry coverage of approximately 7,000 products and participants by the year 2000, and now over 14,000. The approach of APIR was completely different from the failed company in that the revenue of APIR was derived from a fee for service, rather than an advertising revenue model. This has resulted in considerable growth in the company revenues, particularly in the last couple of years. There is considerable scope to market this coding business into emerging economies.
8. …
9.In late 1999 [I] was approached by a group of large financial institutions asking whether APIR could build a system to identify financial advisors and check whether they were compliant with the incoming regulatory regime (the Financial Services Reform Act). I identified that APIR had the technical expertise and capacity to meet the request but insufficient capital to fund the research and development required to deliver the hardware and software necessary. I approached AusIndustry on behalf of APIR and sought a grant to enable the development of the solution sought by major industry players. APIR was successful in obtaining a grant for nearly one million dollars, which was required to be matched dollar for dollar by APIR. APIR therefore needed to access nearly one million dollars to meet its obligations to AusIndustry. As a result of this imperative, I began to look around for methods of raising that money.
10.I approached a number of potential lenders and investors and whilst those discussions were ongoing, APIR provided its contribution as required by the AusIndustry “R & D Start Grant” from existing working capital and some small loans from existing shareholders and some capital injection. This process put strain on APIR’s cash flow position and there was a need to find a substantial investor. As a result by mid 2003 I had entered into discussion with 2 potential investors, Mr Charles Gibbon and some time later, Mr David Adams. …’

Mr Riley deposed:
‘7.APIR is a technology based company and produces a unique identifier code which enables operators within the financial services industry to enable the recognition of information about a particular financial product or participant. That code is recognized as the industry standard code. I was a member of the team that helped develop this coding system and I brought that specialised knowledge to APIR when it was set up. The importance of the APIR coding system to the financial services industry is such that the company must be regarded as being beyond reproach and can’t be aligned with any financial service participant. Because of the industry standard coding system, APIR is privy to Market sensitive information so that APIR can code appropriately a product and issue a code to be used in an information statement or prospectus. Participants must be assured that the information will be held in confidence and not made available to other participants in the industry.
8.As the technical director of APIR, I supervise the smooth running of APIR’s computer system technology, software development, for the issuing, storing and publishing of code data. Because the market for financial products is growing, and APIR is increasing its penetration of that market the hardware and software used to develop unique codes is constantly under development. This development is set against the background of the use of a diverse range of computer systems operated by participants in the Financial Services Industry. APIR’s coding system enables computer systems to recognise the participant and its financial products.
9.It was apparent to me in October 2002 that APIR needed more capital to enable it to keep abreast of developments and maintain its position as industry standard provider. I had informal discussions with other directors about the need I perceived for greater investment and the need to raise more working capital. As a result of those conversations, I, in my role as executive director was asked by the directors to assist in seeking to source more working capital. Andrew Hutchings Broso was with me whilst those conversations took place. The directors wanted us both to raise money.’
In early 2003, APIR engaged Newport Capital Group Pty Ltd (‘Newport Capital’) to provide services directed to raising funds for APIR through various financing strategies, including evaluation of such strategies and advice as to the manner in which to structure and implement such financing transactions.
APIR EXECUTIVE DIRECTORS’ REMUNERATION: THE FIRST HEADS OF AGREEMENT
The minutes of a meeting of directors of APIR held on 7 March 2003 record the following:
‘EXECUTIVE DIRECTOR’S REMUNERATION
The proposed Heads of Agreement (see Minutes 29/11/02 and 31/1/03) for future remuneration of the Executive Directors was discussed in detail in the context of the progress with Newport Capital Group and consequently to ensure that agreements were in place for continuing management.
The interests of A Hutchings Broso and A Riley as the Executive Directors were noted.
It was AGREED to circulate the proposed Heads of Agreement with amendments to be signed off as agreement is reached.
It was subsequently RESOLVED by separately executed Resolution last date 4 May 2003 that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement now attached. The commencement date of the Agreements will not be until the receipt of at least $1,000,000.00 from new investors.’
Mr Riley agreed in cross-examination that this minute was prepared shortly after 4 May 2003.
The heads of agreement referred to in the minute was embodied in a separate resolution sent to each of the non-executive directors by Mr Riley under cover of a letter bearing date 24 April 2003. The separate resolution was signed by all directors of APIR, including Mr Hutchings Broso and Mr Riley, between 24 April and 4 May 2003 and is hereafter referred to as ‘the first heads of agreement’.
The separate resolution provided:
‘EXECUTIVE REMUNERATION
It was RESOLVED that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement attached: The commencement date of the Agreements will be that of the receipt of at least $1,000,000.00 from new investors.
HEADS OF AGREEMENT
Subject to shareholder approval where required, this Agreement will apply for the Managing Director, Andrew Hutchings Broso, and Andrew Riley as the Executive Directors (each an ED). The company, “APIR”, includes associated companies.
The ED will initially provide his services as defined in the Schedule for a period of two years from the Commencement Date. The cost of employment of the ED will be in three increments. From the Commencement Date until the receipt of a further $1M from the capital raising program, the cost of employment will be $120/100 pa. From that date until the receipt of a further $1 M from the capital raising program the cost of employment will be $1 60/140K per annum. From that date the cost of employment will be $210/175K pa. In the event that the Board decides not to proceed to raise this further $IM, then the cost of employment will increase to $210/175K on the achievement of revenue from operations of $2M pa.
The Agreement will include a Completion Payment which becomes due at the end of the two year commitment if the company chooses not to continue the EDs. The Completion Payment will be the greater of $350K or 100,000 times the share price on completion, but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them. If APIR chooses to terminate the Agreement before the end of the two year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the EDs.
The Continuing Agreement would be for an indefinite period, terminable on 6 months Notice or payment in lieu. A Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares.
APIR would have the right of termination for any reason justifying summary dismissal at law.
Each ED will have the choice of providing their services as an employee or as a consultant and of arranging their remuneration packages as they choose, except that the Board may, not acting unreasonably, not approve a proposed arrangement on the grounds of prejudice to the company.
The EDs will be directors of APR but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company.
The EDs will agree to appropriate clauses on deeding Intellectual Property, on the protection of Confidential Information and for the Restraint of activities to the detriment of APIR both during and after the term of the Agreement.
The EDs will be entitled to reimbursement of expenses, and to take annual leave, sick leave, and parental leave as agreed. There is no entitlement to be paid out for accumulated sick leave on termination.
In addition to the cost of employment, the EDs will be offered a performance incentive by way of options to purchase shares in the same class as those held by the “foundation shareholder group” (i.e. the current shareholders on the members register not including those issued $3.50 shares).
The initial opportunity will be on reaching revenue from operations of $2M per annum. The number of shares will be that required to bring the shareholdings of the EDs in aggregate to 25% of the number of shares held by the “foundation group shareholders”. The shares will be offered to the two EDs on the ratio of .1.2/1.0. A second opportunity will be on the achievement of an annual net profit of $500,000. The number of shares will be negotiated.
The exercise price of the Options will be negotiated in good faith.
APIR will arrange finance for the EDs to exercise the options with interest and principle repayment tied to dividend rates and franking credits paid. The exercise period for taking up the Options will be three years.
There will be allowance for trigger events ie takeover, change of control, joint ventures and splits.
AGREED by:
M Cane  ……………………………
A Hutchings Broso  ……………………………
D McGregor  ……………………………
A Riley  ……………………………
N Wicks  ……………………………’
The covering letter provided:
‘COVERING LETTER
Attached to this letter is a proposed Heads of Agreement covering a remuneration package to be offered to our executive directors, Managing Director Andy Hutchings Broso and Andrew Riley.
The package provides for incentives tied to the key performance needs of the company as it moves forward and grows:
·        Capital raising
·        Establishment of Revenue
·        Delivery of Operating Profit
The terms of the Agreement are such as to protect the company from liability in the case that success is not achieved i.e. payments are tied to performance events that ensure that funds are available.
Commencement of Agreement
The Agreement does not come into effect until $1M of new investment has been received i. e. there is no obligation or commitment whatsoever until there is funding from new equity to cover it.
Capital Raising
Three pay increments are defined against levels of capital raised. These are quoted in terms of cost of employment (COE) to allow for packaging or fees, followed by an equivalent in salary in $000s. (AHB/AJR)
Current COE  $77/73 (approx salary equivalent $59/56
New investment of $1M, increase to $120/100  $90/75)
Further $1M (i.e. total $2M)             $160/140  $125/105
Further $1M (i.e. total $3M)             $210/175  $160/135
Establishment of Revenue
A share based incentive will be offered on reaching a per annum revenue from operations of $2M. This incentive takes account of the dilution of the EDs over time and allows them to purchase shares to recover a position of 25% of the foundation group holding. The option to purchase will be offered on a ratio of 1.2/1.0 between AHB/AJR
This means AHB will have the option to purchase 40,932 shares, AJR 34,110.
The price of the shares and company financing assistance is to be negotiated in good faith at the time.
Operating Profit
A second trigger for a share-based incentive will be on the achievement of a net profit from operations of $500K per annum. This incentive is not defined at all, and will be negotiated at the time and in the context of the prospects for the company.
Management Continuity
A key element of investor confidence for the new capital raising is that there be confidence in the continuity of management. The arrangement offered is in terms of a Completion Payment which comes into play on satisfactory completion of two years of service. If the company chooses to offer a continuing agreement for continuing services, then the payment is spread forward. To balance the company’s opportunity to get rid of the management early to avoid the Completion Payment, that same payment would be due as a Termination Payment. This arrangement offers a new investor the opportunity to either put in his “own men” at a known cost and with no legal issues, or to continue the current management with a pre-agreed performance incentive at an effectively discounted rate.
The Completion Payment is set at the greater of $350K or 100,000 times the then current share price.
Assessment of Completion Payment
In the last five years, APIR has grown from its origins to a company with intellectual property, technology and an industry presence that could be sold for a multiple of shareholder value. In 1997 the company was a beach shack, through profitable trading, government grants and shareholder injections the company is looking more like a quality beachside property. The recent cash flow issues surrounding the final stage of the investment phase should not be seen to diminish this achievement.
The non-executive directors believe that the experience and domain knowledge of the current management team are absolutely essential to the short to medium term success of the company. If they meet the performance criteria they will have demonstrated their suitability to continue to grow the company. The Executive Directors have stated that they are willing to commit to the terms of the suggested Agreement. They have also pointed out that due to the uncertainty surrounding future direction and control of the company, that without an Agreement, they would be put in a position of having no sensible choice but to accept other offers of employment.
At the time the Completion Payment first becomes payable, at Commencement plus two years, the Executive Directors will have worked for APIR for more than seven years and four months at a salary that will have been at less than half their reasonable expectations for at least six of those years.
Recommendation
The non-executive directors recommend that members approve the Heads of Agreement.’
MR CHARLES GIBBON AND MR DAVID ADAMS
From around mid-2003 until towards the end of that calendar year Mr Hutchings Broso, on behalf of APIR, had numerous communications, both oral and written, with Mr Charles Gibbon (‘Mr Gibbon’) and Mr David Adams (‘Mr Adams’) concerning the possibility of their making a substantial investment in APIR. Messrs Gibbon and Adams had been introduced to APIR through Mr Jay Hennock (‘Mr Hennock’) of Newport Capital. The terms upon which they might invest remained fairly fluid right up until the time that Mr Sharp came on the scene in October/November 2003. Apparently, a Term Sheet for what was described as a ‘Round 1 Investment and Instrument’ was agreed on or about 15 September 2003. It provided, inter alia:
‘1.1 Subscribe for $350,000 (of a maximum of $600,000 to be known as “Round 1”) of 1 year Convertible Notes having the following features:
·converts at a price of $2.65 per share at time of conversion (Conversion Price),
·interest rate of 12% pa paid at end of 12 months or convertible into equity
·(at $2.65 per share) at option of Noteholder,
·first charge over the assets of company similar to existing Promissory Notes (it is assumed that the company assets have no prior charge).’
Towards the end of October 2003, Mr Gibbon put forward a Revised Term Sheet which provided, inter alia:
‘Under the Term Sheet of 15 September 2003 it was agreed that Round 1 investors would subscribe for $350,000 out of a maximum raising of $600,000. It was intended that David Adams would subscribe for the remaining $250,000. The conversion price was $2.65. The Term Sheet was silent on exact payment although it was reasonably assumed that the whole $350,000 would have been paid on normal settlement.
In light of recent events (see below) it is now proposed that Round 1 be raised to $500,000 due to David Adams’ unwillingness to accept the risk that he sees in the stock at present. David wants to stay close to APIR and has indicated that he would invest subject to the meeting of certain milestones. It is understood that David will be offered an option to purchase subject to specific terms.
It is now proposed that the payment of $500,000 be subject to two equal tranches; the first on normal document completion and second on the meeting of the David Adams related milestones.
In other respects the Term Sheet remains unchanged.’
Mr Hutchings Broso responded by email to Mr Gibbon on 30 October 2003 making a number of points, the second one of which read:
‘b. I am most definite that the salary arrangements for the executive directors be put to bed as part of Tranche 1. I have no concern with benefits not being triggered until the milestones for Tranche 2 are achieved, but am most concerned at the prospect of progressing without the surety of a Management Agreement.’
Mr Gibbon addressed a meeting of the APIR board on 5 November 2003. The minutes of that meeting record the following:
‘EQUITY RAISING
Charles Gibbon was invited to address the Directors concerning the proposal to invest in the company by the group of which he is spokesman. Correspondence and amendments to the Terms Sheet executed on 15 September 2003 and previously circulated were discussed.
C Gibbon tabled notes on an Executive Remuneration Plan for consideration. It was noted that there was an existing Resolution (6 May 2003) detailing a Heads of Agreement for an Executive Remuneration Plan. There was discussion on merging the provisions and principles of the two documents.
It was noted that finalisation of the Plan is a Condition precedent of the Terms Sheet.
Progress with the investment documents (Convertible Note Deed, Shareholders Agreement) was discussed.
C. Gibbon queried arrangements for selection of the Chairman of the Directors.’
The notes on an Executive Remuneration Plan which Mr Gibbon tabled at the meeting were not in evidence, but the following day, 6 November 2003, Mr Hutchings Broso emailed Mr Gibbon in the following terms:
‘Subject: Executive Remuneration
Charles,
I have drafted a proposed amendment to the original Board Resolution on Exec Remuneration in response to yesterday’s meeting. The attachment attempts to take account of the original issues and accept the methodology you proposed, while rejecting both my and Andrew’s position. I am passing this to the Board for their response but consider that as it impacts on the Conditions Precedent you should remain in the loop.
Would appreciate your input.’
The proposed amended resolution on Executive Remuneration read:
‘EXECUTIVE REMUNERATION
It was RESOLVED that the two Executive Directors each be offered an Agreement for the ongoing provision of their services in accordance with the Heads of Agreement attached. The Commencement Date of the Agreements will be the signing of the Convertible Note Deeds with new investors sourced by Newport Capital, probably Charles Gibbon and associates.
HEADS OF AGREEMENT
Subject to shareholder approval where required, this Agreement will apply for the Managing Director, Andrew Hutchings Broso, and Andrew Riley as the Executive Directors (each an ED). The company, “APIR”, includes associated companies.
The ED will initially provide his services as defined in the Schedule for a period of two years from 1 July 2004.
The cost of employment of the ED will be in three increments.
1.From the Commencement Date until whichever is first of either the receipt of the second tranche of the Convertible Note or the achievement of the milestone upon which the payment is predicated, the cost of employment continues at its current level. That is $72,000/81,000 pa (not including GST) with AHB also provided with a vehicle and mobile phone expenses.
2. On achievement of the above milestone or payment of the second tranche the ED will receive:
2.1. A one off issue of 50,000 shares at no cost to them, split AHB 27,500 and AJR 22,500 as compensation for salary and conditions foregone over six years.
2.2. A bonus to AHB of $50,000 and AJR $40,000 to be paid 50% in shares at $2.65 and 50% either in cash or shares at $3.25 at the discretion of the ED.
2.3. A new cost of employment figure for AHB of $111,000 (approx salary equivalent $100,000) and AJR $100,000 (approx salary equivalent $90,000). Existing benefits to be maintained until appropriate to be converted to cash.
2.4. This new cost of employment will remain in place until 30 June 2004.
3. From 1 July 2004 the total cost of employment will be based on a package comprising cost of employment, bonus and option components to be determined by the Remuneration Committee (comprised of non executive directors with the CEO there by invitation). The dollar quantum of the all up package is to be called the “On Target Earnings” or OTE.
Remuneration Methodology
The Remuneration Committee (RC) will use the following principles in developing the OTE for the post 30 June 2004 period.
1.Cost of Employment Component. The RC will use both internal and external benchmarks, the relative stage of maturity of the company and the roles of the ED to provide a basis for cost of employment discussions with the ED. Until an actual OTE of $175,000 is achieved in a financial year for AJR, the differential ratio for AHB and AJR is to be 1.2/1.00, after which time it is to move to 1.24/1.00.
2. Bonuses. Both ED are to have ongoing incentive plans which will be subject to bonus payments. Bonuses will normally be reset every 12 months and may take the form of a fixed amount or some other form as deemed appropriate. They will be target or milestone related and based on company goals, typically 30%, individual goals, 40%, and “soft goals”, 30%.
3. Options. Option schemes are to be considered primarily as a “retention mechanism” rather than a “remuneration” mechanism.
3.1. An annual pool of options is to be made available to the ED and for senior management where deemed appropriate by the Board.
3.2. The maximum allocation to the ED is AHB 40% and AJR 35%, leaving a minimum of 25% for staff.
3.3. The options are to be exercisable at a deemed market price as at 1 July in the financial year in which they are allocated.
3.4. Options will be exercisable over a three year period at 1/3 per year.
3.5. The options will be exercisable in the event of the sale of the Company or within six months of leaving if the ED’s contract is terminated or not renewed.
The Agreement will include a Completion Payment which becomes due at the end of the two year commitment if the company chooses not to continue the EDs. The Completion Payment will be the greater of $325K or 100,000 times the share price on completion, but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them. If APIR chooses to terminate the Agreement before the end of the two year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the EDs.
The Continuing Agreement would be for an indefinite period, terminable on 6 months Notice or payment in lieu. A Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares
APIR would have the right of termination for any reason justifying summary dismissal at law. Each ED will have the choice of providing their services as an employee or as a consultant and of arranging their remuneration packages as they choose, except that the Board may, not acting unreasonably, not approve a proposed arrangement on the grounds of prejudice to the company. The EDs will be directors of APIR, but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company.
The EDs will agree to appropriate clauses on deeding Intellectual Property, on the protection of Confidential Information and for the Restraint of activities to the detriment of APIR both during and after the term of the Agreement.
The EDs will be entitled to reimbursement of expenses, and to take annual leave, and sick leave.. There is no entitlement to be paid out for accumulated sick leave on termination.
AGREED by:
M Cane   …………………………………………
A Hutchings Broso   ……………………………
D McGregor ……………………………………
A Riley   …………………………………………’

On 12 November 2003, Mr Gibbon sent Mr Hutchings Broso an email making suggested changes to the proposed amended resolution on Executive Remuneration so that it read:
‘EXECUTIVE REMUNERATION
It was RESOLVED that the two Executive Directors each be offered an Agreement for the ongoing provision of their services in accordance with the Heads of Agreement attached. The Commencement Date of the Agreements will be the signing of the Convertible Note Deeds with new investors sourced by Newport Capital, probably Charles Gibbon and associates.
HEADS OF AGREEMENT
Subject to shareholder approval where required, this Agreement will apply for the Managing Director, Andrew Hutchings Broso, and Andrew Riley as the Executive Directors (each an ED). The company, “APIR”, includes associated companies.
The ED will initially provide his services as defined in the Schedule for a period of two and a half years from 1 January 2004.
The cost of employment of the ED will be in three increments.
1.Until the meeting o the second tranche of the Convertible Note and the achievement of other milestones agreed to by the Remuneration Committee (performance hurdles), the cost of employment continues at its current level. That is $72,000/81,000 pa (not including GST) with AHB also provided with a vehicle and mobile phone expenses.
2.On achievement of the above performance hurdles (assumed to be around Feb/March 2004) the ED will receive:
2.1A one off issue adjustment to be agreed split AHB 55% and AJR 45% as compensation for salary and conditions foregone over six years. (There appears to be acknowledgement that a legacy issue exists ie outstanding payment for services already provided. The Completion Payment as far as it relates to legacy issues should be addressed here also. It is noted that a Completion Payment was to be made on ED leaving subject to the company being profitable and being able to make a payment to shareholders. CLG is happy to assist in structuring a mutually acceptable solution between existing shareholders and the EDs. We should attempt to make this tax and cash flow efficient.
2.2A bonus to AHB of $50,000 and AJR $40,000 to be paid either in cash or in shares (with a minimum of 50% in shares) at $3.25 with the election to be made at time of signing of Round 1 Convertible Notes documentation.
2.3A new cost of employment figure for AHB of $111,000 (approx salary equivalent $100,000) and AJR $100,000 (approx salary equivalent $90,000). Existing benefits to be maintained until appropriate to be converted to cash.
2.4This new cost of employment in 2.3 will be subject to review 30 September 2004 and thereafter annually at 30 June each year (the first after 30 September 2004 being 30 June 2005).
3.From 1 July 2004 the total, cost of employment will be based on a package comprising cost of employment, bonus and option components to be determined by the Remuneration Committee (comprised of non executive directors with the CEO there by invitation). The dollar quantum of the all up package is to be called the “On Target Earnings” or OTE.
Remuneration Methodology
The Remuneration Committee (RC) will use the following principles in developing the OTE for the post 30 June 2004 period.
1. Cost of Employment Component. The RC will use both internal and external benchmarks, the relative stage of maturity of the company and the roles of the ED to provide a basis for cost of employment discussions with the ED. Until an actual OTE of $175,000 is achieved in a financial year for AJR, the differential ratio for AHB and AJR is to be 1.2/1.00, after which time it is to move to 1.24/1.00.
2. Bonuses. Both ED are to have ongoing incentive plans which will be subject to bonus payments. Bonuses will normally be reset every 12 months and may take the form of a fixed amount or some other form as deemed appropriate. The next reset will be after the performance hurdles have been attained and run through to 30 September 2004. This process will become an annual review effective 1 July each year (ie commencing 2005). Bonuses will be target or milestone related and based on company goals, typically 30%, individual goals, 40%, and “soft goals”, 30%.
3. Options. Option schemes are to be considered primarily as a “retention” mechanism rather than a “remuneration” mechanism. The terms and conditions for the scheme shall reflect industry practices and trends.
3.1. An annual pool of options is to be made available to the ED and for senior management where deemed appropriate by the Board.
3.2. The maximum allocation to the ED is AHB 37.5% and AJR 27.5%, leaving a minimum of 35% for staff/ unallocated.
3.3. The exercise price of the options will be based on the deemed market price at the time of allocation..
3.4. Options will be exercisable over a three year period at 1/3 per year.
3.5. The options will be exercisable in the event of the sale of the Company or within six months of leaving if the ED’s contract is terminated without cause or not renewed.
If APIR chooses to terminate the Agreement before the end of the two and a half year period (ie prior to 30 June 206), a Completion Payment will be payable based on the then current OTE remuneration calculated for the duration of the remainder of the remuneration contract period. This does not apply where termination is for cause or where the AMC performance hurdle relating to the second tranche payment is not met.
The Agreement would continue after 30 June 2006 (the 2.5 year period) unless notice of termination/ renegotiation was provided by either prior to 30 December 2005. Thereafter termination would be by 6 month written notice by the other party. The Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares.
APIR would have the right of termination for any reason justifying summary dismissal at law. Each ED will have the choice of providing their services as an employee or as a consultant and of arranging their remuneration packages as they choose, except that the Board may, not acting unreasonably, not approve a proposed arrangement on the grounds of prejudice to the company. The EDs will be directors of APIR, but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company and its ability to obtain such cover at reasonable rates.
The EDs will agree to appropriate clauses on deeding Intellectual Property, on the protection of Confidential Information and for the Restraint of activities to the detriment of APIR both during and after the term of the Agreement. There will be a Non-Compete provision to cover a period of 2 years from the date of departure or from 30 June 2006 whichever is the later.
The EDs will be entitled to reimbursement of properly incurred expenses, and to take annual leave, and sick leave. There is no entitlement to be paid out for accumulated sick leave on termination.
AGREED by:
M Cane …………………………………
A Hutchings Broso ……………………
D McGregor ……………………………
A Riley …………………………………
N Wicks ………………………………’
This evoked the following email response from Mr Hutchings Broso the following day:
‘Dear Charles,
Not unexpectedly I was upset by my reading of your position.
In drafting the replacement Resolution I attempted to meld both the historical or legacy issues around Exec Remuneration as contained in the original Resolution agreed by the Board on 4 May 2003, as well as take account of the methodology you proposed as an appropriate way forward.
Both Andrew and I felt that while the shareholders have borne a considerable part of the investment risk, a firm share price of $3.25 after such a process as we have been through, with the potential of further increases will ensure a strong return and reward for their patience. On the other hand the Exec Directors have borne ongoing reduced income and considerable personal risk without the reward mechanisms being formalised. The previous Board Resolution went some way towards establishing such a mechanism.
In addition, the proposal replaces capital raising milestones with ones that will positively impact the value of the shareholders’ investment. The “reward”, while restructured is probably marginally reduced from the May agreement.
Being sympathetic to the impact on the company of a limited capital injection and the obvious reluctance of a new investor to see his $s going straight out the door in salary, we offered the alternative of a “wage” at the subsistence level, well below going rate, but with the promise of a cash payment down the track. The payment has a performance component but a minimum level to compensate for the sacrifice made earlier. Note that in the agreed Resolution, the Completion Payment is carried forward indefinitely as long as the service continues to be provided with a settlement to be negotiated at that time. Perhaps this was not apparent.
My reading is that within the 21/2 year period there is only the one bonus and pay rise being offered, in March 2004, with no compensation for termination. A cynic could say that it overcomes the risk period for little cost and provides for a cheap off-load. The salary level offered is equivalent to a medium-experience programmer or salesman, and while acceptable in an environment where efforts are recognised and gains are shared, without the Completion Payment, the salary is derisory.
While we have accepted low salaries in the establishement [sic] phase of the company in the interests of all shareholders we have never valued ourselves or our contribution at such a level. We therefore expect to be adequately rewarded in step with the company’s progress. We have already met the first hurdle of the agreed Resolution in spirit so signing of the Convertible Note Deed should cover the first pay rise.
The legacy issue around ED remuneration were well known to all of us from the first and to use this as an opportunity to game the share price after the two tranche adjustment would I feel test the Board.
In summary, I feel that your proposals meet neither the needs of the EDs, the thrust of the existing resolution or the spirit of our earlier discussions.
I trust this adds clarity to enable us to move forward.’
By a further email on the same day, 13 November 2003, Mr Hutchings Broso informed Mr Gibbon of Mr Sharp’s visit to APIR’s office the previous day and his interest in taking up a 20% investment in APIR at the $2.65 price Mr Gibbon would be paying.
Mr Hutchings Broso sent an email to Mr Gibbon on 2 December 2003 which relevantly provided:
‘Charles
The Board has been pleased with the general thrust of our engagement to date, however believes that it is now appropriate to raise some issues before progressing further.
Our level of discomfort over the increasing gap between the perceived thrust and spirit of our early discussions and Term Sheet and the subsequent evolution of the deal has been crystallised by the current iteration of the Convertible Note Deed. We discussed these amendments in a long meeting with our company solicitor who has subsequently given us his detailed comments. These comments are quite robust and because they reinforced and extended our initial concerns have been discussed by the Board. To our minds the progressive changes have taken the deal as represented by the Deed to a point that is distant from the original start point and no longer considered to be fully in the Company’s best interest. Accordingly, it is our belief that it is time to review the deal in its totality in order to put it back on what the Company would consider to be an equitable win-win basis. …’
Under the heading ‘Conditions Precedent’, it provided, inter alia:
‘The issue of Executive Remuneration has now been going on for some time. The proposed amendment essentially asks the EDs to sign up for two and a half years on the basis of a small initial pay rise and the opportunity to negotiate further. Given the current state of discussions and the continuing divergence of views, the EDs consider it in their best interests that the framework for these discussions and minimum outcomes be agreed before they step away from the package offered by the existing Board Resolution. From the Board’s perspective it is felt that any reduction in the capacity of executive management at this time would generate unacceptable commercial risk for the Company at a critical time in its development.’
By letter dated 11 December 2003, Mr Gibbon wrote to the Board of APIR:
‘I write with regard to the intended fund raising, the agreement (the Agreement) dated 15 September 2003 and the email (the Email) from Andy Hutchings Broso of 2 December 2003. I understand form Andy that the Board and its advisors are meeting Friday 12 December to consider the fund raising and accordingly I would appreciate if this correspondence could form part o the input to the Board’s deliberations.
…
Executive Remuneration
I discussed at the Board meeting 5 November a possible structure for executive director remuneration going forward. I have said to Andy on a number of occasions that it is not in the interests of any stakeholder to underpay key staff. I outlined a package comprising options, bonuses and base salary which would allow the build up of equity in the company.
What remains as an issue however is in essence an “ex gracia” [sic] payment for services rendered and promises made over the last 5 years or so. It is difficult for me to address this as I have no meaningful knowledge of the issues. I can however provide advice as to structures for making the payment.
It appears that there is further need for discussion regarding the legacy issue. For this reason I suggested to Andy (and had reflected in the last version of the Deed) that the remuneration package agreed mid year by the Board be accepted as basis for going forward. It is important to recognise that the co-mingling of executive remuneration negotiations with fund raising can prove very difficult and also throw up conflicts. …’
On 16 December 2003, Mr Hutchings Broso sent an email to Mr Gibbon in the following terms:
‘Charles
The Board did meet on Friday 12 December 2003 and undertook the proposed review of the progress of our negotiations. For your information, the letter and revised terms attached to your email of Thursday 11 December were tabled and discussed at great length. As a consequence it was felt appropriate that the Board should respond formally to that letter and will do so in due time.
As you are most likely aware from your discussions with Jay, the Board considered the whole situation in some depth, eventually concluding that the Company continued to require as much capital as it can use in launching the register and compliance services. At the same time the Board considered that the Company’s position was somewhat changed from that which existed earlier this year. Therefore, while the Board considered it desirable to continue an association with you it did not believe that your current position, as represented by your proposed changes to the draft Convertible Note Deed, was in the best interests of the Company. Accordingly, the Board directed these negotiations to be terminated and directed Andrew and I, in consultation with Jay, to find some way of restarting discussions based on the Company’s current risk profile.
We look forward to continuing our discussions once we have had time to go through these issues with Jay.’
THE ADVENT OF MR SHARP
Mr Sharp first met Messrs Hutchings Broso and Riley at the Financial Planning Association Conference held in Adelaide from 7 to 9 October 2003. At that time, Mr Sharp expressed interest in learning more about APIR’s business.
Mr Sharp followed up this contact by telephoning Mr Hutchings Broso and meeting with him on 13 or 14 October 2003 and again on 21 October 2003 at the offices of Investors Mutual Ltd in Sydney.
In the months of November and December 2003 and January 2004, there followed a number of communications and meetings between Mr Sharp on the one hand, and Mr Hutchings Broso and/or Mr Riley on the other, leading up to the execution of the SSD on 23 January 2004 whereby DFE applied for 200,000 ordinary shares in the capital of APIR at $2.65 per share for a total consideration of $530,000, on payment of which APIR agreed to issue such shares to DFE, as trustee of The Elysum Trust. The date and place of these communications and meetings, the persons present and the subjects discussed are largely not in dispute, particularly where they are supported by contemporary documentation. There are, however, a number of factual issues arising out of these communications and meetings which are in dispute between the parties. In the main, these relate to what was said and, as importantly, what was not said in these communications and at these meetings and were the subject of fairly intensive cross-examination of Mr Sharp who gave evidence on behalf of DFE and Mr Hutchings Broso, Mr Riley and Ms Cane who gave evidence on behalf of APIR, as well as themselves. Mr McGregor and Mr Wicks also gave evidence on behalf of APIR and themselves.
I propose to deal with these factual issues which are in dispute between the parties, and my findings in relation to them, later in these reasons (see [127] to [164] below) but it is important to understand the context in which they arose. For that reason, I propose to recount these communications and meetings in the order in which they occurred but, to the extent it is possible to do so, without reference at this stage to the factual issues in dispute. In this regard, I have relied on the affidavit evidence of Mr Sharp which, according to the affidavit evidence of Mr Hutchings Broso and Mr Riley, is substantially agreed. On the other hand, I have also relied on the affidavit evidence of Mr Hutchings Broso where there is an obvious conflict.
THE COMMUNICATIONS AND MEETINGS OVER THE NOVEMBER 2003 – JANUARY 2004 PERIOD BETWEEN MR SHARP AND MR HUTCHINGS BROSO AND/OR MR RILEY
Mr Sharp visited Mr Hutchings Broso and Mr Riley in the Canberra offices of APIR on 12 November 2003. They discussed details of the various registers that APIR maintained on behalf of the industry, including a relatively new product called SPIN, which registered superannuation funds including industry, government and private funds. The SPIN registration details were more extensive than the current registration of products and included the registration of the bank account. Mr Sharp thought there was a commercial application for the industry and was interested in this opportunity.
At that meeting, Mr Sharp also learnt that APIR was finalising a new system called Advisor Management Centre (‘AMC’). He was shown the system including the rule-based software by one of their developers. During the course of the meeting Mr Sharp was advised that the AMC system was funded by a loan of approximately $1 million from a government body that he came to know to be the Industry Research and Development Board (‘IRDB’).
During the course of the 12 November 2003 meeting, Mr Sharp was advised by either Mr Hutchings Broso or Mr Riley, or both of them, that APIR had engaged a company called Newport Capital to raise capital for APIR and that they had introduced a man named Charles Gibbon to the company as an investor. They advised Mr Sharp that APIR had entered into a Term Sheet with Mr Gibbon and another investor to invest in convertible notes.
On 24 November 2003, Mr Sharp had a further meeting with Mr Hutchings Broso in Sydney. They discussed the intention of APIR to be an independent organisation within the industry that is not tied to any fund manager or tied to any financial products or systems. During the course of the 24 November 2003 meeting, they had a discussion about the capital raising objectives of APIR and the possibility of Mr Sharp becoming involved as an investor in APIR.

Two days later on 26 November 2003, Mr Sharp sent an email to Mr Hutchings Broso with an investment proposal in relation to APIR. The email read:
‘Subject Equity In APIR
I would like to confirm that interest associated with myself are interested to subscribe up to 200000 shares (or equate to 20% of the new enlarged issue capital of the company) at a price that you are currently negotiating [sic] with another party. We are prepared to subscribe to Ordinary shairs [sic].
In addition we are prepared to offer to existing shareholders the same price for another 30% of the company with the understanding that no individual shareholder will control more than 20%
What we need to complete the transaction is the latest set of Financial accounts, Budgets & pricing strategies. We also need a copy of the existing & proposed Shareholder agreements
We are in a position to settle ASAP’
Mr Hutchings Broso forwarded the email to each of the members of the APIR board.
Between about 28 November 2003 and 5 December 2003, Mr Riley on behalf of APIR sent Mr Sharp a note attaching a profit and loss statement and balance sheet of APIR as at 28 November 2003, a draft audit report for the year ended 30 June 2003, pricing policies for codes and various budgets being for the code business of APIR only for 2003 – 2004, budget for 2003 – 2004 taking into account the code business and AMC, and a budget for 2004 – 2005 taking into account the code business and AMC. Relevantly, the draft audit report for the year ended 30 June 2003 contained, among the notes to and forming part of the financial statements for the year ended 30 June 2003, the following item:
‘NOTE 17 EVENTS SUBSEQUENT TO BALANCE DATE
In September 2003 the Company entered into an arrangement with two external investors whereby $350,000 of 1 year Convertible Notes were issued together with an option to acquire further shares upon the conversion of the notes. The Convertible Notes convert at a price of $2.65 per share at time of conversion, attract an interest rate of 12% pa paid at the end of 12 months or convertible into equity and have first charge over the assets of the Company similar to existing Promissory Notes.’
On 3 December 2003 and prior to receiving the documents from Mr Riley referred to in [35] above, Mr Sharp had a short meeting with Mr Hutchings Broso at 11.30 a.m. followed by lunch on a boat as part of a luncheon meeting with the Financial Managers and Advisors (‘FMAA’). Mr Sharp’s purpose in inviting Mr Hutchings Broso was to enable him to meet other people in the industry. According to Mr Sharp, Mr Hutchings Broso and he did not have any further discussion concerning APIR during that afternoon other than Mr Sharp’s request that Mr Hutchings Broso arrange for a copy of a list of APIR shareholders and the number of shares held by each shareholder to be provided to him.
After receiving the documents from Mr Riley referred to in [35] above, Mr Sharp made notes of the key matters that concerned him. After completing his consideration of the documents and his notes, Mr Sharp contacted Mr Hutchings Broso by telephone and arranged to meet him. To the best of his recollection he met with Mr Hutchings Broso on 8 December 2003 in the coffee shop of a hotel that is now known as the Sydney Harbour Marriott in Pitt Street, Sydney.
According to Mr Sharp, during the meeting they had a conversation in words to the following effect:
‘Hutchings Broso: I have a list of the shareholdings here. There are 11 foundation shareholders and 7 others. There were 478,750 shares issued at $1 each. There are 239,375 shares issued at $2 each and 45,857 shares issued at $3.50 each. That makes the total shares issued 763,982 and the capital value is $1,118,000.
…
Sharp: Who are the likely sellers?’
Mr Hutchings Broso tore a page out of the notebook that he was holding and handed it to Mr Sharp. The initials indicated the shareholders and the percentages indicated the size of their stake in APIR. They had a discussion about the existing shareholders in relation to whether or not they were likely to be interested in selling their shares at the price of $2.65. Mr Sharp noted either ‘no’ or ‘?’ according to what Mr Hutchings Broso told him. The use of ‘no’ indicated that Mr Hutchings Broso had told Mr Sharp that the particular shareholder would not be interested in selling at a price of $2.65 per share and ‘?’ indicated that he was unsure as to whether or not they would be interested in selling at that price. The remaining comments of ‘unlikely’ or ‘not well off’ and ‘unlikely – some’ reflected what Mr Hutchings Broso told Mr Sharp about those shareholders. Mr Hutchings Broso told Mr Sharp that ‘DM’ referred to a syndicate of an accountant, David McGregor, who was also a director of APIR, and that he was not sure if any of the syndicate would be sellers, but that David was not a seller at that price.
Mr Hutchings Broso says he did have the conversations and discussions with Mr Sharp referred to in [38] and [39] above, but that those all occurred at their meeting on 3 December 2003.
According to Mr Sharp, they then discussed the convertible notes investors as reflected in item 17 of the financial statements of APIR. According to Mr Sharp, he was concerned to find out the terms and conditions by which these investors were going to be holding a stake in the company. He cannot recall precisely what was said but the effect of the conversation was as follows:
‘Sharp:  Who are the investors?
Hutchings Broso:       The investors are Charles Gibbon and another investor known to him.
Hutchings Broso:       The conversion price of the convertible notes was dependent on meeting certain milestones and that if they were not met the conversion price would be less than $2.65
Sharp:The offer to invest was made on the assumption that the convertible note offer to Charles Gibbon does not proceed, that if the convertible notes are dependent on meeting milestones this could be highly dilutionary to existing shareholders, particularly if the milestones are not met as more shares could be issued. I don’t want that to happen because I won’t know how many shares will be issued
Hutchings Broso:       The Charles Gibbon deal hasn’t been completed’
Mr Hutchings Broso disputes the terms of this conversation but agrees that it was apparent to him from that conversation that Mr Sharp would not proceed if the deal proceeded with Mr Gibbon on the basis he (Mr Hutchings Broso) had outlined.
Mr Sharp also recalls Mr Hutchings Broso saying:
‘There is an agreement that Andrew and I will be receiving 50,000 shares at no cost’
Mr Hutchings Broso deposes that this was in response to Mr Sharp asking:
‘Are there any other shares on issue?’
To which he, Mr Hutchings Broso, responded:
‘No, but there will probably be about 50,000 shares issued to Andrew and I in our remuneration packages as we are going to become full time employees.’
In cross-examination, Mr Sharp categorically denied that Mr Hutchings Broso’s response included the words ‘as we are going to become full time employees’. It is common ground that Mr Sharp did not respond to whatever Mr Hutchings Broso said. Mr Sharp said that he did not consider it useful to respond because he knew from the disclosure in Note 19 to the financial statements for the year ended 30 June 2003 that Messrs Hutchings Broso and Riley were consultants. Note 19 relevantly provided:
‘EW Systems Pty Limited, of which Mr Andrew Riley is a director, was paid consulting fees of $86,130 from entities in the economic entity during the year (2002 : $84,750).
Gundenham House Pty Limited, of which Mr Andrew Hutchings Broso is a director, was paid consulting fees of $89,349 from entities within the economic entity, during the year (2002 : $78,000).’
After being told by Mr Hutchings Broso that the convertible notes deal had not been concluded, Mr Sharp raised the other matters that he had noted down for consideration with Mr Hutchings Broso. According to Mr Sharp, they had a conversation to the following effect:
‘Sharp:What is the term and interest rate for the promissory notes?
Hutchings Broso:       Between 3 and 6 months and between 12% and 15%.
Sharp:What is the interest rate and the term and the amount of the AusIndustry loan?
Hutchings Broso:       The maximum loan is $982,000. No repayments for 42 months. We have four years to repay. The interest rate is 3.2%. As at 31 November we owe $634,000.’
Their conversation continued to the following effect:
‘Sharp:  Do you have a shareholders agreement?
Hutchings Broso:       No.’
Mr Hutchings Broso’s version of the conversation in relation to the AusIndustry loan was slightly, but not substantively, different.
After the meeting with Mr Hutchings Broso on 8 December 2003, Mr Sharp considered the information that had been given to him and made a decision on behalf of DFE to make an offer to invest in APIR. He reduced that offer to writing and sent it to Mr Hutchings Broso in an email on 9 December 2003. It read:
‘Thanks for your time in the last 24 Hours.
I confirm that my previous offer was on the assumption that the proposed convertible offer did not proceed. As you are aware the offer was debt with an option to convert to Equity. This could put the note holders at a significant advantage to existing shareholders.
My offer is amended to
A)200,000 shares at $2.65 ($530,000)
B)My nominee for one Director
C)The board to be reduced to 5 over the next 12 Months
D)Shareholders agreement to include that existing shareholders can sell to existing Shareholders. If they which [sic] to sell to none Shareholders then they must offer to existing shareholders at the same price
E)I will offer to all existing Shareholder $2.65 to sell up to 50% of the enlarged capital of the company
F)No one shareholder will hold more than 20% If I exceed this level than [sic] I will undertake to sell down to 20% within 6 Months’
A short time after sending his email to Mr Hutchings Broso, Mr Sharp received an acknowledgment advising him that the proposal he had made on behalf of DFE would be discussed with the APIR Board which was to occur that day and that Mr Hutchings Broso would be organising a Board Meeting for Friday at around lunch time if the Board was agreeable to what Mr Sharp had proposed.
On 12 December 2003, Mr Sharp sent a further email to Mr Hutchings Broso noting a need to draft a letter to shareholders for the Board to consider and other points. The email read:
‘We also need to draft a letter to shareholders for the Board to consider today. The following are the points that should be included.
1)Don Sharp or his nominee is prepared to offer to all shareholders, on a first come priority, $2.65 per share.
2)The offer is for approximately 300,000 shares & subject to the number of acceptances.
3)If as a result of this offer his interests exceed 20% he agrees to sell down his interest to 20% within 6 months at the same price offered to shareholders.
4)This offer will allow those shareholder the opportunity of cashing out part or all of their share-holding thus giving liquidity to all shareholders at the same price that the new capital has been issued ie $2.65
5)The directors will shortly be requesting shareholders to sign a Shareholder agreement with the following terms (set out the terms in the Board resolution)’
Later the same day, 12 December 2003, Mr Sharp received an email from Mr Hutchings Broso forwarding an email that had been sent to him by Mr Riley containing the final form of the resolution passed by the Board of APIR that day. It read:
‘RESOLUTION: DON SHARP OFFER
It was RESOLVED that the Executive directors are authorized to implement the following as follows
A. That the Company issue 200,000 new Ordinary shares to “Nominee of Don Sharp” as soon as the following Conditions are met:
1. Receipt of $530,000 in cleared funds by the Company
2. Execution of an Agreement (draft attached) by Don Sharp and “Nominee of Don Sharp” which includes the following agreements:
i.That Don Sharp will use best endeavors to support and enhance the position of APIR Systems Limited in the Financial Services Industry as a neutral and even-handed provider of non competitive infrastructure services.
ii.That Don Sharp will resign from and not occupy positions or roles in the Financial Services Industry which could be perceived as in conflict with APIR’s neutral position as in i. above.
and the Secretary is authorised to take the actions required to implement this decision.
B. On issue of the shares Don Sharp or his nominee will be appointed a Director of the Company to fill a casual vacancy in accordance with the Constitution of the company.
C. On implementation of B. above, the Board of Directors will move to reduce to five members, including Don Sharp or nominee, within twelve months, except that a Chairperson may be an additional member.
D. Other than for remuneration arrangements, no other issue of shares or agreements to issue shares will be authorized for a period of two weeks or until Don Sharp is appointed a Director whichever first occurs.
EOn completion of A. above, The Board will make best endeavors to achieve a binding Agreement by then current Shareholders, and a precedent requirement for future Shareholders, that the following conditions attach to the ownership, sale or transfer of shares in the Company:
a. That existing shareholders may sell shares to existing_. Shareholders.
b. That any shareholder wishing to dispose of shares in the Company must give first right of refusal to the existing shareholders at the same price which that shareholder has been offered by a non-shareholder.
c. That no shareholder may hold more than 20% of the shares of the Company, and that if this situation occurs, they will sell down to 20% as quickly as possible and in any event within 6 months.
d.That a shareholder who controls more than 20% of the shares in the Company will not vote more than 20% of those shares in the period before sell-down.
In particular, the Directors agree to these conditions for the shares they own or control.
F.On completion of B above, the Secretary will notify all existing shareholders that “Nominee of Don Sharp” is offering $2.65 per share for their shares to bring its holding up to a maximum of 50% of the total number of shares on issue including the shares issued in A. above, noting that E.c. and E.d. above will apply.’
According to Mr Sharp, he understood the reference to ‘remuneration arrangements’ in D was a reference to the 50,000 shares that were to be issued between Mr Riley and Mr Hutchings Broso which Mr Hutchings Broso told him about at his meeting with Mr Hutchings Broso on 8 December 2003 (see [42] above). According to Mr Sharp, he was not told of any other proposal to provide anything else by way of remuneration to either Mr Riley or Mr Hutchings Broso.
The minutes of the APIR Board meeting on 12 December 2003 also records the following:
‘EQUITY RAISING Charles Gibbon Offer
The Managing Director briefed the meeting on the progress of the negotiations with Charles Gibbon to invest in the Company via Convertible Note. The correspondence from Charles Gibbon dated 11 December 2003 and sent separately to each Director was discussed.
It was noted that the offer was now for $500,000 by Convertible Note in two tranches of $2.10 and $3.25 with a milestone hurdle for the second tranche. Charles Gibbon also indicated that he was willing to revert to an offer of $350,000. It was noted that the terms offered with the Convertible Note involved significant risks to the existing shareholders of the Company.
The Directors reviewed the advice from the company solicitor (David Toole of Deacons) and from Jay Hennock (Jacanda Capital).
RESOLVED that the offer from Charles Gibbon and associated parties was not acceptable to the Company in its current form and that negotiations on that offer should be terminated.
(Proposed M. Cane, seconded N. Wicks)
It was noted that an association with Charles Gibbon was still considered desirable and that the Executive Directors should continue to strive to arrange an agreement with him that reflected the Directors’ view of the value of the Company.’
On 18 December 2003, Mr Sharp met with Mr Hutchings Broso and Mr Riley at the offices of APIR in Canberra. They had a general discussion about APIR’s business. One of the matters discussed was Note 17 to the financial statements of APIR for the year ended 30 June 2003 (see [35] above). Mr Sharp asked that the terms of the note be changed so that it did not convey the impression that the convertible notes had actually been issued and Mr Riley responded that he would have Duesburys make the change. During the course of that meeting, there was discussion about the letter that was to go out to the shareholders concerning the offer Mr Sharp had made on behalf of DFE to purchase shares in APIR. Mr Sharp subsequently received a copy of the letter, which to his knowledge, was sent to the shareholders dated the next day, 19 December 2003. It read:
‘19 December 2003
«FirstName»«LastName»
«Address 1»
«CITY»«State»«PostalCode»
Dear «FirstName»,
We have received an offer to subscribe to new equity from a new shareholder, Don Sharp. Don is taking 200,000 shares at $2.65 per share for $530,000 and is willing to extend this offer to existing shareholders to purchase all or part of their shares at $2.65 per share.
Don is, as they say, a veteran of the industry who is well known for establishing the very successful Bridges financial planning business and more recently as the Chairman of Investors’ Mutual Limited, a successful wholesale manager. It is proposed that Don will fill a casual vacancy on the Board, bringing considerable drive and experience in the distribution side of the industry. The other Directors look forward to his participation on the Board.
Don’s initial approach was separate from the Newport Capital initiative; he was interested in APIR and enquired as to whether any existing shareholders would be looking to sell down their holdings. As a consequence of those discussions Don will take up the new equity and his holding will equate to approximately 20 percent of the equity.
With such a sizeable shareholding now being held by other than foundation shareholders the Board has decided a formal shareholders’ agreement needs to be put in place. Existing shareholders will be asked to sign one early in the New Year and it will apply to all new shareholders. Conditions will include:
a. That existing shareholders may sell shares to existing shareholders.
b. That any shareholder wishing to dispose of shares in the Company must give first right of refusal to the existing shareholders at the same price which that shareholder has been offered by a non-shareholder.
c. That no shareholder may hold more than 20% of the shares of the Company, and that if this situation occurs, they will sell down to 20% as quickly as possible and in any event within 6 months.
d. That a shareholder who controls more than 20% of the shares in the Company will not vote more than 20% of those shares in the period before sell-down.
The Directors will agree to these conditions for the shares they own or control.
As stated above Don has now reiterated his offer to all existing shareholders and has asked we inform everyone of the terms. They are that:
1. He is willing to purchase any shares you may wish to sell, on a first come first serve basis, at the same price as the new equity, that is $2.65 per share. For your holding of «TotalShares» the purchase price would be «Total Value».
2. The offer is for approximately 300,000 shares & subject to the number of acceptances.
3. If as a result of this offer his interest exceeds 20% he agrees to sell down his interest to 20% within 6 months at the same price offered to shareholders.
The Directors note that the offer does provide shareholders with liquidity at the same price as the new capital has been issued.
If you are interested in the offer please complete, sign and return the attached form to APIR Systems.
Cheers,
Andy Hutchings Broso
Managing Director’

While the extent of knowledge required to determine that a person is ‘knowingly concerned’ in a contravention has not been settled, my findings in [157] and [164] above impel the conclusion that none of the non-executive directors satisfied any of the relevant criteria to sustain a conclusion of being involved in the misleading or deceptive conduct of APIR and the executive directors referred to in [170] above.
THE APPLICABLE STATUTORY REGIME
The pleadings in the SFASC rely on a number of statutory regimes: the regimes under the Corporations Act 2001; the ASIC Act; the TP Act and the ACT Act. Section 51AF of the TP Act provides in subs (1) that Part V (Consumer Protection) does not apply to the supply, or possible supply, of services that are financial services and subs (2) provides, inter alia, in para (a) that, without limiting subs (1), s 52 does not apply to conduct engaged in or in relation to financial services. The term ‘financial services’ is defined in s 4 of the TP Act by reference to the meaning it has in Division 2 of Part 2 of the ASIC Act and includes ‘dealing’ in a ‘financial product’ (subs 12BAB(1)(b)), which is defined to include a security (subs 12BAA(7)). The term ‘dealing’ is defined to include applying for or acquiring, or issuing, a security (subs 12BAB(7)). It is clear from these provisions, in my view, that s 52 of the TP Act does not apply to conduct which consists of DFE’s application for and APIR’s issue of the 200,000 shares at $2.65 per share nor, in my view, to DFE’s acquisition of the 81,904 shares in APIR at $2.65 per share from existing shareholders: see Cleary & Anor v Australian Co-operative Foods Ltd & Ors (Nos. 2 and 3) (1999) 32 ACSR 701 per Austin J at [1-107] – [1-109]; Re NRMA Ltd; Re NRMA Insurance Ltd (2000) 34 ACSR 261 per Santow J at [125] – [129].
Subsection 1041H(1) of the Corporations Act 2001 prohibits conduct in relation to a financial product or a financial service that is misleading or deceptive or is likely to mislead or deceive. The term ‘financial product’ is defined in Part 7.1, Division 3 to include a security (subs 764A(1)) and the term ‘financial service’ is defined in Part 7.1, Division 4, to include a ‘dealing’ in a financial product (security) (subs 766A(1)). The term ‘dealing’ is defined to include applying for or acquiring, or issuing, a security (subs 766C(1)).
Subsection 1041H(2) provides that the reference to engaging in conduct in relation to a financial product (security) includes, but is not limited to, a dealing in a security and, without limitation, the issuing of a security. It is clear, in my view, that s 1041H of the Corporations Act 2001 applies to conduct which consists of DFE’s application for and APIR’s issue of the 200,000 shares at $2.65 per share, as well as to DFE’s acquisition of the 81,904 shares in APIR at $2.65 per share from existing shareholders.
REMEDIES UNDER THE CORPORATIONS ACT 2001
Subsection 1041I(1) is the equivalent of subs 82(1) of the TP Act and provides:
‘A person who suffers loss or damage by conduct of another person that was engaged in in contravention of section 1041E, 1041F, 1041G or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.’
Subsection 1325(1) is the equivalent of subs 87(1) of the TP Act and provides:
‘Where, in a proceeding instituted under, or for a contravention of, Chapter 5C, 6CA or 6D or Part 7.10, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Chapter 5C, 6CA or 6D or Part 7.10, the Court may, whether or not it grants an injunction, or makes an order, under any other provision of this Act, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the first‑mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage.’
Subsection 1325(5) is the equivalent of subs 87(2) of the TP Act and provides:
‘The orders referred to in subsections (1) and (2) are:
(a)an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after a specified day before the order is made; and
(b)an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after a specified day before the order is made; and
(c)an order refusing to enforce any or all of the provisions of such a contract; and
(d)an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to refund money or return property to the person who suffered the loss or damage; and
(e)an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage; and
(f)an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, at the person’s own expense, to supply specified services to the person who suffered, or is likely to suffer, the loss or damage.’
RELIEF SOUGHT
In its FAA, DFE sought the following relief:
‘(1)Declaration that the Share Subscription Deed dated 23 January 2004 entered into between the Applicant and the First Respondent:
(a)is void in whole or alternatively in part;
(b)is void ab initio or alternatively has been void from such date as the Court deems fit; and
(c)has been validly rescinded by the Applicant.
(2)Order that the Applicant receive restitution by payment to it of all monies paid pursuant to the Share Subscription Deed.
(2A)Order that the Applicant receive from the Respondents (or such of them as the Court determines) restitution by payment to it of all monies paid for the additional 81,904 shares purchased by the Applicant from other shareholders of the First Respondent by way of a bank cheque in the sum of $217,045.60 plus interest in exchange for a duly executed transfer of the said shares to the Respondents or their nominees.
(3)Further, and alternatively, order the Respondents and each of them pay to the Applicant damages.
(4)Interest pursuant to Section 51A of the Federal Court of Australia Act 1976.’
ARGUMENT AND REASONING ON REMEDIES AND RELIEF
Subsection 1041I(1) of the Corporations Act 2001 is predicated on a person having suffered loss or damage by the contravening conduct of another person. Subsection 1325(1) is predicated on a person who is a party to the proceeding having suffered, or likely to suffer, loss or damage because of the contravening conduct of another person. Putting aside that the latter provision also applies where a person is likely to suffer loss or damage, and that the nexus in the former provisions is ‘by’, and in the latter is, ‘because of’, there can be no dispute that the loss or damage of which both provisions speak must be an actual loss or damage; risk of loss is not sufficient: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525. The contravening conduct, while concerned with s 82 and s 87 of the TP Act, is equally applicable to s 1041I and s 1325 of the Corporations Act 2001 in this respect. However, it was submitted on behalf of the respondents that, in the present context, actual loss meant realised loss and that DFE would suffer no loss, if any, until its shares in APIR were sold; only then would it be possible to say whether or not there is an actual loss. Reliance for this was placed on Wardley Australia, Commonwealth v Cornwell (2007) 229 CLR 519 and Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, as well as other authorities.
In my opinion, this submission is flawed; it is plainly wrong as a matter of first principle and is contrary to the authorities as properly understood and applied.
In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 the facts are summarised in the headnote. Before purchasing a small shopping arcade, a prospective purchaser obtained advice from a valuer about the local retail tenancy market, but not the value of the arcade itself. The valuer advised that the construction of a new shopping centre nearby was not likely to affect existing retail tenancy levels adversely. Relying on that advice, in April 1997 the purchaser entered into a contract to purchase the arcade. By March 2000, after the opening of the new shopping centre, the arcade had suffered a collapse in gross rental income with a concomitant fall in value. The purchaser tried to sell the arcade without success.
While a central aspect of the decision was the notion that loss was not confined to the loss at the time of acting upon the advice and could include evidence of loss ascertainable later in time but referable to the conduct in issue, the High Court made it clear that if the plaintiff had learned the day after entering into the contract, or the day after completing the contract, that the defendant’s conduct had been misleading as later found, it could have started proceedings then and there: at [25] and [28].
The High Court, in HTW Valuers, distinguished Wardley Australia on the ground that the case was dealing with risk of loss only: at [29]. That reasoning arises from the fact that Wardley Australia was an indemnity case, so that there was no actual loss unless and until a loss was suffered under that indemnity, which was an event that might never occur. Unlike an asset worth less than was paid for it by reason of misleading or deceptive conduct, an indemnity cannot give rise to a loss until the party providing the indemnity is liable to pay.
The High Court also distinguished Murphy v Overton Investments because the contingency upon which the loss was said to arise could never eventuate unless the respondent exercised its discretion to increase the charges above the level disclosed to the applicants, with the undisclosed contingency not having any impact on value such that there was no loss: at [30]. That point of distinction is equally apposite to this case in which any other investor would rationally treat the shares in APIR being worth less with, than without, the binding agreement to issue 20% of its shares to the executive directors.
The remaining case relied upon by the respondents on this issue, Commonwealth v Cornwell, was a limitation case. It turned on when a loss actually took place in respect of the plaintiff having joined the wrong superannuation fund due to being give the wrong information many years earlier, which he only discovered much later. The High Court found that his actual loss matured only at the end of his service and upon the occurrence of one or more of the statutory contingencies which had to be met for him to be entitled to any statutory benefit at all: at [19]. Until he had an entitlement, which might never arise, he could not suffer a loss in respect of that entitlement.
There is no doubt that when DFE entered into the SSD on 23 January 2004 and paid the sum of $530,000 to APIR in subscribing for 200,000 shares in APIR, it suffered a loss measured by reference to the difference between what it paid in ignorance of the existence of the second heads of agreement and what it, as a rational investor, would have paid, if anything, in the knowledge of the existence of the second heads of agreement; or what was described in HTW Valuers, at [36], by reference to authority, as the ‘real value’ or ‘fair value’ or ‘what would have been a fair price to be paid … in the circumstances … at the time of the purchase’. Similarly, for the 81,904 hares in APIR it purchased from existing shareholders for the sum of $217,045.60.
Although the Court is entitled to take into account events after the date of acquisition, when assessing damages by comparing the price and the real value of the asset at the date of the acquisition, in relation to s 82 of the TP Act (see Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281), it must, as the High Court said in HTW Valuers at [40], ‘… distinguish among possible causes of the decline in value of what has been bought’ and, in doing so, embrace the dichotomy of Dixon J in Potts v Miller (1940) 64 CLR 282 at 298.
‘…If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be “dependent,” “extrinsic,” “supervening” or “accidental,” then the additional loss is not the consequence of the inducement …’
In the present case, while the number of shares that might be issued in discharge of the completion payment under the second heads of agreement has a floor – 100,000 for each executive director – it has no ceiling, so that the number of shares that might be issued is potentially unlimited depending on the value of the APIR shares at the relevant time. In context, such an event, post acquisition, is a cause inherent in the thing itself – the second heads of agreement – and not extrinsic or independent of it, and should be taken into account in any assessment of the real value of the shares at the time of acquisition. This makes any assessment of loss or damage, other than for the full subscription/purchase price, exceedingly difficult, if not impossible.
For this reason, I have come to the view that the relief sought is not only appropriate, but the most appropriate remedy in all the circumstances of the case. I have no doubt that Mr Sharp (and through him DFE) would not have even contemplated entering into the relevant transactions, let alone entered into them, had he known of the existence and content of the first heads of agreement or the second heads of agreement prior to doing so. He and DFE were misled and deceived by APIR and the executive directors in this regard. It is only right that they should be restored, or as near as possible, to their pre‑transaction position.
I therefore propose to make the following declaration and orders:
1.A declaration that the SSD is void ab initio.
2.An order that APIR forthwith refund to DFE the subscription price of the 200,000 shares in APIR for which DFE applied and subscribed.
3.If APIR is unable for any reason beyond its control or otherwise fails to comply with order 2 in full, an order that Mr Hutchings Broso and Mr Riley jointly and each of them severally, refund to DFE the subscription price for the shares in order 2 to the extent of the shortfall.
4.An order that upon full payment to DFE of the subscription price for the shares in order 2, DFE deliver to APIR a properly executed instrument or instruments of transfer of such shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as APIR directs.
5.An order that Mr Hutchings Broso and Mr Riley jointly and each of them severally, forthwith refund to DFE the purchase price of the 81,904 shares in APIR purchased by DFE from shareholders in APIR in exchange for a properly executed instrument or instruments of transfer of the shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as APIR directs.
6.An order that APIR, Mr Hutchings Broso and Mr Riley jointly and each of them severally pay interest to DFE pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the sum of the subscription price in order 2 and the purchase price in order 5 from 28 January 2004 to 30 July 2008 at the rate or rates applied by the Supreme Court of New South Wales during this period.
THE CROSS-CLAIM
The statutory and legal bases of the claims for relief in the ACC are set out in [3] above. The factual bases as pleaded may be summarised as follows:
(1)During negotiations leading up to the execution of the SSD, Mr Sharp represented that neither he nor DFE would hold more than a 20% shareholding in APIR. In so doing, Mr Sharp engaged in misleading conduct in that, during that time and at the time of the execution of the SSD, Mr Sharp and DFE intended that DFE hold more than 20% of the shareholding in APIR (‘the first allegation of misleading conduct’).
(2)Prior to, and at the time of, entering into the SSD, Mr Sharp on behalf of DFE represented to APIR that upon the sale of shares in APIR to DFE pursuant to the SSD, Mr Sharp would resign from his positions in the financial services industry that could be perceived as being in conflict with APIR’s neutral position and in future not occupy such positions or roles, specifically those identified in [14] of the ACC. In so doing, Mr Sharp engaged in misleading conduct in that Mr Sharp intended to continue and continues to occupy each of the positions or roles identified in [14] of the ACC (‘the second allegation of misleading conduct’).
The pleaded factual basis of the first allegation of misleading conduct has no substantive foundation. The alleged representation was said to have been made in writing and contained in the email from Mr Sharp to Mr Hutchings Broso of 26 November 2003 (see [34] above). Presumably this is a reference to the second paragraph which reads:
‘In addition we are prepared to offer to existing shareholders the same price for another 30% of the company with the understanding that no individual shareholder will control more than 20%’
This paragraph has to be read and understood in the context of other contemporary material, in particular:
1.Mr Sharp’s email to Mr Hutchings Broso of 9 December 2003 (see [44] above).
2.Mr Sharp’s email to Mr Hutchings Broso of 12 December 2003 (see [46] above).
3.The resolution passed at the APIR board meeting on 12 December 2003 concerning Mr Sharp’s offer (see [47] above).
4.The letter to shareholders of 19 December 2003 concerning Mr Sharp’s offer (see [50] above).
So read and understood, it is extremely difficult, if not impossible, to accept that Mr Sharp made a representation in the terms alleged, namely, that neither he nor DFE would hold more than a 20% shareholding in APIR. On the contrary, it is clear that what he represented from the very outset was that he (and through him, DFE) would be prepared to purchase, in addition to DFE subscribing for 20% of APIR’s enlarged capital, a further 30% of that capital from existing shareholders at the same price of $2.65, but on the understanding that under the terms of a shareholders’ agreement to be entered into, he would be required to sell down to 20% and, moreover, that he would do so within six months at the price of $2.65.
Mr Sharp was cross-examined extensively, and I might say repeatedly, on this issue and the answers he gave in cross-examination were entirely consistent with the contemporary material. The following extracts from the transcript illustrate this observation:
‘You told him on 24 November that it was your intention to hold only 20 per cent in the company?‑‑‑On the 24^th?
Yes?‑‑‑I cant – I don’t think so, because on the 26^th I sent an offer out to buy for 50 per cent of the business.
Yes, but we have seen that offer, Mr Sharp?‑‑‑Sure.
You accept, don’t you, that included in the offer was a statement by you that you sold down to 20 per cent?‑‑‑In the context of a shareholder’s agreement, yes.
You say ‑ ‑ ‑?‑‑‑No investor would hold more than 20 per cent, absolutely.
You say it was your position that the 20 per cent was only good if there was a shareholder’s agreement ‑ ‑ ‑?‑‑‑Absolutely.
‑ ‑ ‑ confining everyone to 20 per cent?‑‑‑Absolutely, that’s why I actually requested 50 per cent because there’s no shareholder’s agreement, it did not protect me in any shape or form, so the way around was to offer for 50 per cent, subject to a shareholder’s agreement.
I suggest to you, Mr Sharp, that you told Mr Hutchings Broso on 24 November and it was always your position so far as your negotiations and relationship with Hutchings Broso and Riley was concerned, that you were not interested in controlling the company?‑‑‑I previously said that to them and I said we usually take up to 40 per cent, 20 per cent for myself, 20 per cent for Colin Scully and do not have management involvement. That was in the context of another deal I did, I changed my mind after talking to these people, I wanted to go to a 50 per cent deal and that’s precisely what I offered them.
And I suggest to you that you maintained, in so far as your dealings with Hutchings Broso and Riley was concerned, a position that you were only ever interested in taking 20 per cent of the company?‑‑‑Certainly not.
…
The explanation for why you sought to – you were seeking to acquire shares beyond 20 per cent was to enable those shareholders which wanted to cash in at the price you were offering, with the price you were purchasing your 20 per cent of shares, could have an opportunity to do so?‑‑‑And I could have obtained up to 50 per cent, correct. That’s the purpose of doing it, getting the 50 per cent, not to help out the existing shareholders themselves, not at all. My offer was very clear, very clear – to purchase up to 50 per cent. That was the offer. It was done in the resolution of the board of 12 December in a share subscription, the letters to the shareholders, so I can’t possibly be more explicit than they did that, not me. It’s not my draft. It’s their draft.
Mr Sharp, the arrangement – the understanding that you and Mr Hutchings Broso had was that any shares above 20 per cent of the total shareholding acquired by you would be sold down to 20 per cent?‑‑‑When there’s as shareholders agreement. You must have understood that – they drafted it.
Well, regardless of who drafted what, what I’m putting to you is that that was the arrangement?‑‑‑The arrangement was as per the draft, as per my email on the 9^th which was then converted into that resolution. That is the arrangement, sir. I didn’t draft it. They did.
…
I will now put my question again. You agreed with Hutchings Broso and Riley that you would be prepared to acquire shares at $2.65 beyond 20 per cent but you would sell them down to 20 per cent?‑‑‑In the context of a shareholders agreement, absolutely.
I am putting to you not in the context of a shareholders ‑ ‑ ‑?‑‑‑Absolutely no way, sir.’

The pleaded factual basis of the second allegation of misleading conduct also fails for different reasons. First, one of the positions identified in [14] of the ACC was denied in the Defence and no attempt was made to challenge that denial. Second, in cross-examination of Mr Sharp, it became apparent that two of the other positions identified in [14] of the ACC were only taken up by him in August 2005, well after the events giving rise to theses proceedings. Only two other positions were identified: his position as a director and chairman of Investors Mutual Limited; and his position as a director of Global Value Investors Limited. In respect of Mr Sharp’s holding of these positions, no evidence was led as to why or how they could be perceived as being in conflict with APIR’s neutral position and indeed so much was denied in the Defence. The matter was particularised in the ACC at [14] in the following terms:
‘Each of the above positions or roles is a position or role associated with a financial services provider. APIR’s business involves collecting data on products and participants in financial services industry and adding value to that information by characterizing and mapping the commercial relationship and then disseminating the data for reward to industry, government and regulatory participants. The nature of its business requires that it not be perceived by its customers as affiliated in any way with one financial services provider. The occupation of these roles or positions by Sharp involves an affiliation with particular financial service providers.’
But no evidence was led in support of the allegation of a conflict with APIR’s position of neutrality. In those circumstances, the allegation cannot be sustained.
Even if the second allegation of misleading conduct could be sustained, there is no evidence of any loss of damage being suffered by APIR by that conduct.
The cross-claim must be dismissed.

I certify that the preceding one hundred and ninety-nine (199) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.
Associate:
Dated: 30 July 2008

Counsel for the Applicant and Cross-Respondents: Mr D J Higgs SC with Mr R J Bromwich

Solicitors for the Applicant and Cross-Respondents: Gambin Legal

Counsel for the Respondents and Cross-Claimant: Mr R E Williams QC with Mr M J Heath

Solicitors for the Respondents and Cross-Claimant: Williams Love & Nicol

Dates of Hearing: 3 – 7, 10 – 13 December 2007, 29, 30 January 2008

Date of Judgment: 30 July 2008

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1200 OF 2004

BETWEEN:	DONALD FINANCIAL ENTERPRISES PTY LIMITED Applicant
AND:	APIR SYSTEMS LIMITED First Respondent ANDREW HUTCHINGS BROSO Second Respondent ANDREW RILEY Third Respondent MAUREEN CANE Fourth Respondent DAVID MCGREGOR Fifth Respondent NOEL WICKS Sixth Respondent
AND BETWEEN:	APIR SYSTEMS LIMITED Cross-Claimant
AND:	DONALD SHARP First Cross-Respondent DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST Second Cross-Respondent

JUDGE:	EDMONDS J
DATE OF ORDER:	30 JULY 2008
WHERE MADE:	SYDNEY

JUDGE:	EDMONDS J
DATE:	30 JULY 2008
PLACE:	SYDNEY

Counsel for the Applicant and Cross-Respondents:	Mr D J Higgs SC with Mr R J Bromwich
Solicitors for the Applicant and Cross-Respondents:	Gambin Legal
Counsel for the Respondents and Cross-Claimant:	Mr R E Williams QC with Mr M J Heath
Solicitors for the Respondents and Cross-Claimant:	Williams Love & Nicol
Dates of Hearing:	3 – 7, 10 – 13 December 2007, 29, 30 January 2008
Date of Judgment:	30 July 2008