Duke Group Ltd (in Liq) v MTC Corp & Anor No. Scgrg-99-1229
[2001] SASC 84
•30 March 2001
DUKE GROUP LTD (IN LIQ) v MTC CORPORATION PTY LTD & SCHNEIDER-PAAS
[2001] SASC 84
Introduction
This is an assessment of damages arising out of judgments being entered against both the first and second defendants. An interlocutory judgment in default of appearance or defence was entered against the second defendant on 9 August 2000. The Court thereby ordered that the plaintiff recover from the second defendant damages to be assessed. Judgment was entered against the first defendant on 5 October 2000 pursuant to a notice of consent to judgment filed by the plaintiff and first defendant on 28 September 2000, again with damages to be assessed. The plaintiff now asks that I assess damages in the amount of $214,355,935.01.
The present assessment of damages is closely related to the long running Duke Group litigation (hereinafter referred to as the “Nelson Wheeler proceedings”) which was heard by Justice Mullighan (see Duke Group Ltd (In Liq) v Pilmer & Ors (1998) 27 ACSR 1) and subsequently the Full Court. The most recent judgment on damages was delivered by the Full Court on 8 December 2000 ([2000] SASC 418, unreported). In order to place the present matter in context, it is necessary to briefly set out some of the background of the Duke Group litigation and the relationship of the first and second defendants to it.
The Nelson Wheeler Proceedings
Summary
The Nelson Wheeler litigation essentially relates to the takeover of a company Western United Limited (“Western United”) by another company, Kia Ora Gold Corporation NL. (Following another takeover, Kia Ora came to be named The Duke Group Ltd but I propose hereinafter to refer to it as “Kia Ora”.) Kia Ora completed the successful takeover bid in early 1988, by which time it had acquired all of the issued capital of the target company.
Prior to the takeover, the two companies were substantially intertwined, most notably by reason of some common directors who held shares in both companies. The directors of the purchasing company were, therefore, “associated persons” for the purposes of s 9 of the Companies South Australia Code. Accordingly, Listing Rule 3J(3) applied and provided that the proposed takeover could not proceed without the approval of the shareholders of Kia Ora in general meeting and that notice of that meeting must be accompanied by material from an independent qualified person sufficient to establish that the price offered was “fair”.
Kia Ora retained a firm of practising accountants, Nelson Wheeler in Perth (“NWP”), to prepare a report so that the company might comply with the Listing Rules, particularly r 3J(3). The report was prepared by NWP (just prior to the share market crash of 1987) and provided to Kia Ora, which distributed it to its shareholders with notice of a meeting to consider the takeover proposal. The report advised that the proposed takeover price was “fair and reasonable”. The meeting of shareholders was conducted shortly after the share market crash and, despite this event, the shareholders approved the offer and the directors decided to proceed with the takeover.
According to the case presented by Kia Ora at trial, and on appeal, the directors of Kia Ora used the takeover as a device to enrich themselves at the expense of Kia Ora. The scheme was carried out at a time when the company had a significant amount of cash on hand by reason of the sale of its 60% interest in the Marvel Loch Gold Mine (the remaining 40% interest being owned by Western United). It was argued that the directors used their control over the two companies to engineer a takeover of Western United, a company in which they were substantial shareholders, at a grossly inflated price. The claim against the directors was, therefore, that they had breached their duties as directors in relation to the takeover.
It was further alleged that NWP were far from independent advisers, in that they had been previously associated with the directors and stood to gain financially from the takeover. The report provided by NWP, which said that the takeover offer was “fair and reasonable”, seriously misstated the position. Kia Ora alleged in its statement of claim that the report was prepared incompetently and in breach of its duty under the contract of retainer. The statement of claim also alleged breach of duty of care in tort, as well as breach of fiduciary duty, on the part of NWP.
The learned trial judge made extensive findings in relation to the great range of issues which were ventilated at trial. In short, the trial judge found that NWP were negligent in the production of their report and were liable to the plaintiff company in contract and in tort. The director defendants were all found to be in breach of their fiduciary duty, as well as certain statutory duties in relation to the takeover. Damages and interest to the date of judgment were assessed at $93,863,796.81 and judgment in that amount was entered against each of the Nelson Wheeler defendants (with three exceptions) and each of the director defendants. After judgment, appeals were lodged by the plaintiff and all defendants against whom judgment had been entered. The appeal was heard by the Full Court in November 1998. The hearing occupied many days and very few of the issues raised at first instance remained unchallenged.
The findings of the Full Court following that hearing are conveniently summarised in a further judgment of the Full Court, Duke Group Ltd (In Liq) v Pilmer & Ors (No 2) [2000] SASC 418, unreported, which deals with damages arising out of the first Full Court decision, and in particular, claims for contribution between defendants. Doyle CJ and Duggan J (who delivered a joint judgment) summarised the Full Court’s first judgment as follows (at para [2]):
“2.... The Court found that the partners of Nelson Wheeler in Perth ("NWP") were liable to the plaintiff for breach of a contractual obligation to exercise reasonable care and skill in the preparation of certain reports. The Court also found that NWP was liable to the plaintiff in tort for breach of a duty of care relating to the same matter. The Court found that the loss in each case was the same, and the damages in each case should be assessed at the same amount: see [1999] SASC 97 at [1071] - [1078], (1999) 73 SASR 64 at 298-300.
3..... The Court found that the plaintiff was entitled to judgment against NWP for the full amount of its claim. It so found because the plaintiff was entitled to rest its claim upon the claim in contract, and the amount of damages recoverable in contract was not subject to reduction for contributory negligence on the part of the plaintiff. Had it been open to the Court to reduce the amount claimed by the plaintiff on account of contributory negligence, the Court would have reduced the amount of the judgment by 35 per cent on account of the conduct of the plaintiff by its directors: see [1999] SASC 97 at [653] - [658], (1999) 73 SASR 64 at 199.
4..... The Court also found that NWP was liable for breach of a fiduciary duty owed to the plaintiff. The Court found that the amount recoverable under that head was the same amount as was recoverable in contract and in tort. A judgment being entered on that basis, the Court would have reduced the amount awarded by 35 per cent on account of the fault of the plaintiff: see [1999] SASC 97 at [1082], (1999) 73 SASR 64 at 300-301.
5..... The Court upheld a finding by the trial Judge that the directors were liable to the plaintiff for breach of fiduciary duty and breach of statutory duty: see [1999] SASC 97 at [1081], (1999) 73 SASR 64 at 300.
6..... The trial Judge took the view that the conduct of the directors was tortious as well, presumably meaning by that that the directors were in breach of a duty of care owed by them to the plaintiff: Duke Group Ltd (In Liquidation) v Pilmer & Ors (No 7) (Mullighan J, S6529, 30 January 1998), (1998) 27 ACSR 1 at 381-383. We are prepared to accept that finding for present purposes. The view that a director of a company owes a duty of care to the company is supported by the majority of the Court of Appeal of New South Wales in Daniels v Anderson (1995) 37 NSWLR 438 at 505.”
Based on these findings, the final liabilities of both NWP and the directors were eventually quantified as at 30 January 1998, the date of delivery of the original judgment by Mullighan J.
Involvement of The First and Second Defendants
The second defendant in the present matter is Lawrence Robert Schneider-Paas as executor of the estate of Alfred Carl Schneider-Paas, who died on or about 1 June 1988. Alfred Schneider-Paas (“Schneider-Paas”) was appointed a director of Kia Ora on 28 March 1972 and was also appointed a director of Western United on 9 August 1979. He and Harold Abbott (also a director of both Kia Ora and Western United) were the individuals who were largely responsible for reviving Kia Ora and Western United during the early 1980s by bringing the Marvel Loch mine back into production. By 1985, the mine had started generating a modest annual operating profit.
At that time, the issued capital of Kia Ora was nearly 261 million ordinary shares of 25 cents each. The Kia Ora 1985 Annual Report reveals that, as at 14 October 1985, Schneider-Paas directly held 2,839,260 shares in Kia Ora together with another 300,000 options. He also held a further 20,958,012 shares in companies in which he had a beneficial interest. One of these companies was the first defendant in the present matter, MTC Corporation. The affairs of MTC Corporation were conducted entirely at the direction of Schneider-Paas. In short, Schneider-Paas, both personally and through his companies, was a major shareholder in Kia Ora.
Schneider-Paas and his interests (including MTC Corporation) also came to own large share holdings in Western United. The result of this was that, following the takeover by Kia Ora, Schneider-Paas and his interests were enriched to the extent of $2,103,118.80 and 4,381,497 shares in Kia Ora.
Despite his prominent position within the two companies and benefit from the takeover, Mr Schneider-Paas was not a party to the Nelson Wheeler proceedings. Initially. Kia Ora commenced proceedings against NWP alone. NWP subsequently joined all of the directors of Kia Ora as third parties, with the exception of Schneider-Paas. I am unclear as to why he was not joined. Obviously it is significant that Schneider-Paas died in 1988, prior to the commencement of the proceedings. The plaintiff could, however, have proceeded against his estate.
Following NWP’s joining of the directors as defendants, Kia Ora itself amended its claim to include a claim for damages against the directors, but this claim again excluded Schneider-Paas. In the course of hearing the within matter, Mr Lipman, who appeared as counsel for the plaintiff said this had occurred because Kia Ora was essentially mirroring NWP’s third party pleadings. In addition, Kia Ora did not have sufficient information at the relevant time to make the allegations which are now made against Schneider-Paas in these present proceedings.
Notwithstanding Schneider-Paas’ absence as a party, throughout the Nelson Wheeler proceedings it was maintained by Kia Ora that Schneider-Paas was one of driving forces behind the fraudulent takeover scheme which was designed to enrich the directors, including himself. It is unnecessary in the present matter to make any factual findings with respect to the conduct of Schneider-Paas during the takeover, given that his estate and MTC corporation have already had judgment entered against them. However, before proceeding to an assessment of damages, it is useful to note that the trial judge in the Nelson Wheeler proceedings appeared to view Schneider-Paas as being at least equal to the other directors in the breaches of duty he owed to Kia Ora. While this view is apparent throughout the judgment, it can easily be gleaned from the following extract from the trial judge’s factual summary (Duke Group Ltd (In Liq) v Pilmer & Ors (1998) 27 ACSR 1 at 120-1):
“The takeover by Kia Ora of Western United was orchestrated by Harold Abbott with the assistance of Gary Abbott and Gardiner. It had proceeded a significant way before the other directors became aware of what was happening. The various incidents in the process clearly establish that Harold Abbott, Gary Abbott and Schneider-Paas were determined to proceed with the takeover regardless of any opposition or reliable indication to the contrary. During the trial their determination was described as their being “hell bent” on the success of the takeover and that is an appropriate description. The extent of personal profit was hidden and kept secret as is evidenced by the acquisition of shares in Western United owned by Parry Corporation. The determination to proceed with the takeover for personal gain, regardless of the interests of Kia Ora, is established by the Autocure transaction which occurred after the share market crash and at enormous cost to Kia Pacific.
It seems that they gave no consideration to the interests of Kia Ora. They stood to gain handsomely and they did. There was a history of the preferment of self interest to that of Kia Ora and the takeover is no exception. No one gave proper consideration to the interests of Kia Ora, including Lee-Steere, Somes, Quilty and Singleton.
Those controlling Kia Ora well knew that the valuation by Nelson Wheeler Perth of Western United and its subsidiaries was totally unrealistic and yet they promoted the takeover to the shareholders and, through the medium of the letter signed by Quilty, by misleading and inaccurate information. The same conclusion must be reached about Lee-Steere, Somes, Quilty and Singleton. The motive for the takeover was for personal gain for Harold Abbott, Gary Abbott, Schneider-Paas, Gardiner and, to a lesser extent, Lee-Steere and Somes. The directors of Kia Ora all went along with the takeover without due consideration of the interests of the company.”
In view of the involvement of Schneider-Paas in the impugned takeover transactions, an involvement which can generally be equated to that of the other directors, Kia Ora by these proceedings seeks to rectify its omission and obtain a similar judgment against Schneider-Paas and his company, MTC Corporation, as was obtained against the other directors.
The Present Proceedings
The present proceedings were instituted on 19 October 1999. The statement of claim, which was filed at that time, makes allegations against Schneider-Paas which are analogous to those made in the Nelson Wheeler proceedings against the other directors, particularly Harold Abbott. The statement of claim alleges (paragraphs 49-59) that Schneider-Paas and Abbott entered a common agreement to increase their share holding in Western United to artificially inflate that company’s value and then formulate a transaction whereby the company would be sold to their financial gain. This “common agreement constituted a fraudulent and dishonest design ... and hence numerous and gross breaches of trust and fiduciary obligations by the directors of Kia Ora, including Abbott and Schneider-Paas” (paragraph 89).
The statement of claim also seeks damages from MTC Corporation, being one of the companies which was controlled by Schneider-Paas and which purchased shares in Western United. Paragraph 90 states that the Schneider-Paas interests (which include MTC Corporation) “are to be attributed with the knowledge and conduct of Schneider-Paas ... and thus had actual knowledge, and assisted in, the implementation of these breaches of trust”.
Finally, in paragraphs 101-104, the plaintiff claims common law damages (compensatory and restitutionary), including damages for loss of use of money and assets; equitable compensation including compensation for loss of use of money and available assets; an account of profits; and interest.
The first defendant, MTC Corporation, entered an appearance on 25 November 1999. A defence was filed on 9 February 2000. However, in September 2000, a deed of settlement was entered into by the plaintiff and MTC Corporation. Pursuant to this agreement, MTC Corporation withdrew its defence and consented to an order for damages to be assessed in the same manner as damages to be found against the second defendant. The consent to judgment was filed on 20 September 2000.
The second defendant, Lawrence Robert Schneider-Paas, is a resident of Dortmund, Germany. As a result, the plaintiff had some difficulty in serving him with the summons and statement of claim. Mr Schneider-Paas was, however, eventually served in Germany on 4 April 2000. The circumstances of such service, including a certificate of service from the Clerk of Court in Dortmund, are set out in the affidavit of Polly Sarah Nicholas, sworn 8 August 2000.
Despite having been properly served, the second defendant failed to enter an appearance. On 9 August 2000 a Master of this court gave leave to the plaintiff to enter judgment in default of appearance against the second defendant. It was ordered that a copy of the orders and an affidavit sworn by Samuel John Doyle (which sets out the amount of damages claimed) be served on the second defendant within seven days. An affidavit of Bronwyn Kaye Gascoigne, sworn 25 August 2000, established that on 10 August 2000 these documents were sent by TNT Courier to Mr Schneider-Paas. It is apparent from the TNT records and consignment notes that service upon Mr Schneider-Paas occurred on 14 August 2000 at 8.59am.
The Master further ordered that the assessment of damages proceed before him on 15 September 2000 on the basis of affidavit evidence. The matter was subsequently adjourned to 20 September 2000, when oral submissions were made. The Master subsequently declined to assess damages as he was concerned that the appeal to the High Court had not been concluded and he also wished to hear further submissions as to any statutory limitation which might affect the plaintiff’s claim.
In due course the matter was listed for hearing before me on 13 November 2000. Mr Lipman then made submissions in support of the assessment of damages. There was no appearance by either of the defendants. Before reaching a final conclusion in this matter, I believe it is appropriate to address the two matters of concern to the Master.
Appeal to the High Court
Following the judgment of the Full Court, NWP and one of the director defendants (Mr Somes) sought special leave to appeal to the High Court. These applications were heard and determined by the High Court on 30 November 1999. The Court granted NWP leave to appeal in relation to a limited aspect of the Full Court’s assessment of damages at common law, namely whether the plaintiff suffered loss by the issue and allotment of its shares to Western United shareholders as part of the consideration for the takeover of Western United. Mr Somes was also given leave to appeal. I understand, however, that he has not taken any steps to prosecute his appeal.
NWP made oral submissions before the High Court on 7 April 2000, at which time the Court reserved its decision. On 8 August 2000, a directions hearing took place in the High Court in which the parties were informed that the court had decided to hear submissions as to whether the grounds of appeal should be extended to include the following:
“(a)... Did the Full Court err in finding that the appellants breached a fiduciary duty which they owed to the first respondent?
(b)If no to (a), did the Full Court err in assessing the amount of equitable compensation to be allowed (before any reduction for contributing fault) as it did?
(c).... If no to (a), did the Full Court err in holding that the equitable compensation to be allowed to the first respondent is to be reduced on account of that respondents contributing fault?”
Oral argument was heard in relation to these further issues on 23 November 2000. The High Court is yet to hand down judgment.
All of the grounds of appeal being considered by the High Court relate, however, to the findings made by the Full Court as against NWP. There are no grounds relating to the findings made against the directors. Hence, there is some force in Mr Lipman’s submission that the outcome of the High Court appeal is unlikely to have any direct relevance to the position of the director defendants. In addition, given the complexity of the matter, there is likely to be further considerable delay before judgment is delivered. In these circumstances I believe it is appropriate to proceed with the assessment of damages. Default judgment has already been entered and the plaintiff obviously has an interest in executing judgment so that it may attempt to recover assets from the Schneider-Paas estate. If it is possible to conclude the present matter in accordance with the reasoning of the Full Court, then I am satisfied that I should do so, and the present defendants will then stand in the same position as the other director defendants.
Statutory Limitations
I am satisfied that there are no relevant statutory limitations which prevent the plaintiff from proceeding to obtain an assessment of damages in this matter. The causes of action which were pleaded against the defendants in these proceedings are equitable causes of action, namely the breach of fiduciary obligations and knowing assistance in a fraudulent scheme. Such causes of action generally are not subject to time limitations. One possible exception is the doctrine of laches, which is a defence based on the unreasonable delay of a plaintiff. I do not think that defence arises in this matter to prevent an assessment of damages. Judgment has already been entered against the defendants, ie against the first defendant by consent and against the second by default. As the plaintiff put in written submissions “[i]f the defence of laches were available it would operate as a complete defence denying the plaintiff’s entitlement to a judgment rather than being relevant to the assessment of damages. It was for the defendant to raise this issue through pleadings which it did not do.”
I consider therefore that I am able to assess damages in the present matter based upon the material which has been presented by the plaintiff.
Assessment of Damages
The plaintiff submits that damages should be assessed in precisely the same manner as damages were assessed by the Full Court against the directors in the Nelson Wheeler proceedings. In support of this submission, the plaintiff has tendered a number of affidavits which outline the manner in which damages were assessed by the Full Court and how the process is applicable in the present proceedings. The affidavits are as follows:
1....... Affidavit of Samuel John Doyle, sworn 9 August 2000. This affidavit outlines the interest rates which were deemed by the Full Court to apply to the damages calculation in Nelson Wheeler proceedings, and also comments on the status of the Schneider-Paas estate and its assets.
2.Affidavit of John Sheahan (the liquidator of Duke Group Ltd), sworn 14 September 2000. This affidavit outlines the Nelson Wheeler proceedings, of which he has substantial knowledge, and the damages which were awarded against the directors.
3....... Affidavit of Samuel John Doyle, sworn 19 September 2000. This affidavit contains the updated Reserve Bank interest rates which might apply to a damages calculation in the present matter.
4.Affidavit of John Sheahan, sworn 27 September 2000. This affidavit outlines the current High Court proceedings and the possibility of statutory limitations. These issues have been discussed above.
Each of these affidavits contain a number of exhibits which help to substantiate the information sworn therein. In particular, the affidavit of the liquidator, John Sheahan, sworn 14 September 2000, exhibits a substantial number of documents which were used in, or arise from, the Nelson Wheeler proceedings. These documents include receipts of payments made during the takeover process; the valuation reports of the expert witness, Mr Easton, in the Nelson Wheeler proceedings and; various extracts of the evidence given in those proceedings. All of this pertinent information, along with the other supporting affidavits, provides the basis for the assessment of damages which now must be undertaken.
There are several reasons why I am prepared to proceed in this matter on the basis of the information provided by the plaintiff and in accordance with the assessment carried out by the Full Court in the Nelson Wheeler proceedings. I recognise that some caution needs to be exercised on account of (a) the ex parte nature of this application, and (b) the highly complex nature of the takeover transaction which gives rise to the damages claimed. However, while the application may be considered ex parte in the sense that submissions were only received from the plaintiff, the defendants were given notice of these proceedings and ample opportunity to give submissions. The first defendant consented to judgment being entered against it, and has also consented to an order for damages to be assessed in the same manner as damages to be found against the second defendant. As I have outlined above, the second defendant was served in Germany but failed to enter an appearance. Following the order for judgment in default of appearance the second defendant was again served in Germany with a copy of the order and the affidavit of S J Doyle, sworn on 9 August 2000, which outlines the damages claimed by the plaintiff. Despite this notice, however, the second defendant did not appear to make submissions.
In considering this matter I bear in mind that the current assessment of damages is virtually identical to the exercise carried out in the Nelson Wheeler proceedings as the loss suffered by Kia Ora is an amount for which each of the guilty directors is jointly and severally liable. The damages to be assessed are not dependant upon the respective involvements of the directors. Having established that Schneider-Paas is liable as one of the directors for Kia Ora’s loss, he is, therefore, liable for the same amount as the other directors, an amount which was determined in the Nelson Wheeler proceedings. Finally, there is no question as to the apportionment of liability, for example as a joint tortfeasor, because the action against the directors is founded in equity.
The calculation of the amount of damages was thoroughly tested in the Nelson Wheeler proceedings. In the first instance, the trial before Mullighan J took place over a long period and canvassed a great amount of evidence which His Honour examined in his detailed assessment of damages (see Duke Group Ltd (In Liq) v Pilmer & Ors (1998) 27 ACSR 1 at p384-420). The judgment was then appealed to the Full Court. As the Full Court stated in its judgment (at 77), “[v]ery few of the principal issues decided against any of the parties to the appeals remain unchallenged.” This includes the issue of damages which was again thoroughly tested and was subject to alteration in the judgment of the Full Court. As a result of this extensive litigation, I am satisfied that there would be very few, if any, new issues relating to damages which could have been raised by the defendants in this matter had they decided to appear and make submissions.
Calculation of Damages by the Full Court
Put simply, the loss suffered by Kia Ora is the difference between the price paid for the Western United shares and the value of those shares. The consideration paid by Kia Ora for the Western United shares comprised of a cash component along with the allotment of a number of Kia Ora shares. It was never disputed on appeal that the cash payments made to Western United amounted to $26,178,135.81. Exhibit JS4 to the affidavit of John Sheahan, sworn 14 September 2000, which was admitted in evidence before me, attaches copies of all the receipts and other documentation which substantiates those cash payments. I accept that amount for the purposes of the present assessment.
There was much greater dispute, both at trial and on appeal, about the value which should be attributed to the share component of the consideration. The share component consisted of the allotment of 67,951,754 Kia Ora shares. The trial judge valued each share in Kia Ora at 45 cents, which represented the value of those shares as at 31 December 1987. There was an argument put forward on appeal that the value of these shares should not be taken into account in the assessment of damages because an unissued share is not an asset of a company and therefore has no value. The Court, in upholding the trial judge’s finding on this point in Duke Group Ltd (In Liq) v Pilmer & Ors (1999) 73 SASR 64 said (at 159):
“Once Kia Ora agreed to allot share in itself, those shares acquired a value that could be exploited by Kia Ora. That is so even though prior to the allotment there was no matching asset, and even though the issue and allotment of the shares did not involve Kia Ora parting with an asset. What we have said is true even though the acquisition of value by the allotted share does not involve Kia Ora in incurring an expense, other than the administrative expenses involved. In our opinion it cannot be said that Kia Ora has lost nothing. In our opinion it has lost the value that the relevant shares acquired upon their issue.”
Having accepted that the Kia Ora shares did have a monetary value, the Full Court also accepted (at 164) the date which the trial judge chose for the assessment of the value of the Kia Ora shares, ie 31 December 1987. Further, the Full Court upheld the trial judge’s decision to prefer the evidence of the expert witness, Mr Easton, as to the value of those shares (at 166). However, the Court held that the trial judge erred in applying the value of those shares after the allocation of shares used in the takeover of Western United. That further allotment of shares used in the takeover had a negative impact on the value of Kia Ora shares globally because it was such a poor commercial transaction. The Full Court held (at 166-7) that, in order to return Kia Ora to the position it was in prior to the breaches by NWP, the value of its shares should be calculated prior to the further allotment of shares. On the basis of Mr Easton’s valuation report (which is currently before me as Exhibit JS5 to Mr Sheahan’s affidavit), the trial judge found that the value of Kia Ora’s shares, prior to the further allotment, was 82 cents. In accordance with all of the above reasoning, the Full Court used this value in its assessment of damages and I intend to do the same.
To summarise, the consideration provided by Kia Ora in the takeover was:
Cash paid $26,178,135.81
Value of shares issued
(ie 67,951,754 shares at 82c each) $55,720,438.28
$81,898,574.09
The next step is to determine the value of the shares acquired in Western United. Mr Easton, the expert witness, valued Western United as at 9 October 1987 (prior to the stock market crash) at between $14,198,819 and $15,545,728. As at 31 December 1987 (following the stock market crash) Mr Easton valued Western United at between $4,649,293 and $6,439,339. The report of Mr Easton which contains these valuations is currently before the Court as Exhibit JS5 to the affidavit of Mr Sheahan. There was argument on appeal concerning the appropriate date at which to value Western United. Kia Ora argued that the share market crash of 1987 was a foreseeable event and that, therefore, the assessment of damages should include the loss suffered by Western United as a result of that crash. The Full Court agreed (at 153) that this loss was not too remote and could be recovered by Kia Ora. The Court held that it was appropriate to use the same date for the assessment of the value of Western United and Kia Ora, ie 31 December 1987 (at 164). The selection of this date means that the impact of the share market crash was reflected in the amount of damages awarded. Thus, the value attributed to the Western United shares by the Full Court was the value selected by the learned trial judge, namely $6,439,339. I also adopt this value in the present assessment of damages.
Damages for Loss of Use of Money
The Full Court also considered the award for damages for loss of use of money. Kia Ora claimed that the trial judge should have awarded damages for the loss that it claimed it suffered as a result of not having the use of the money and of the other valuable consideration that it provided the shareholders of WUL. Kia Ora claimed interest at commercial rates on the whole amount of the cash paid out in the course of the takeover and on the value of the shares allotted. The judge awarded interest on the cash component of the purchase price for the period from 1 January 1988 to 30 June 1988. The Full Court found that the findings made by the judge in this matter were open to him but made some adjustments to the calculation of interest. The Court held (at 174) that the cash amount that attracted compound interest was the amount paid away less the proportion of the value of the shares in WUL attributable to the cash consideration. The amount which attracted compound interest was $24,117,547.33. The court said:
“Compound interest is to be calculated at the rate of 10.25 per cent for the first three months. The amount of interest for that period is $618,012.15.
Compound interest is to be calculated for the second three months on the new total of $24,735,559.48. It appears that in his calculations his Honour omitted to compound the amount. The rate is 11.2 per cent. The interest for that period is $692,595.67.
The full amount of interest therefore becomes $1,310,607.82.
The plaintiff’s damages are therefore to be assessed as follows:
Cash paid $26,178,135.81
Share issue $55,720,438.28
Interest $ 1,310,607.82
$83,209,181.91
Less value received $ 6,439,339.00
$76,769,842.91”
The Court then considered the quantum of interest payable on that sum and considered (at 179) that:
“... judgment having been given on 30 January 1998, it is appropriate to award interest for seven-and-a-half years at that rate [7%]. We would round the amount of interest out at $40,304,000. The amount of the judgment therefore should be (subject to the question of a reduction for contributory negligence):
Damages $76,769,842.91
Interest $40,304,000.00
$117,073,842.91”
When the court considered the quantum of damages payable by the directors of Kia Ora, as opposed to NWP, they considered that different considerations applied to their breach of fiduciary duty. They said (at 239):
“The reason why NWP is not responsible for compound interest at commercial rates beyond June 1988 is because of the finding as to the behaviour of the directors themselves. They had an obligation to employ the assets of Kia Ora in the best interests of the company as a whole. In so far as the loss to Kia Ora was caused by their breaches of fiduciary duty, the presumption that, but for their actions, the company would have employed the money in legitimate business activities must apply. It must be presumed that, but for their default, the company would have made the most beneficial use of the money that it could. It would be wrong to allow the director defendants to limit their liability by reference to their own wrong-doing.”
The Full Court eventually held that Kia Ora was entitled to judgment against Quilty, Singleton, Abbott, Lee-Steere and Somes, (the director defendants) in the amount of $76,769,842.91, plus compound interest (with quarterly rests) on that amount at the rates paid by WUL until the date of its liquidation and at equivalent Reserve Bank rates thereafter, from 1 January 1988 until the date of judgment.
Following delivery of their reasons, the Full Court requested supplementary submissions to enable them to calculate the judgment sum inclusive of interest against the directors. The court was then provided with a schedule setting out the appropriate interest rates for the award of compound interest and calculations as to the judgment sum. In accordance with those documents, Kia Ora sought compound interest on the entire loss of $76 million. The Full Court accepted this approach and on the basis of those calculations entered judgment against the director defendants in the amount of $188,662,619.12 inclusive of interest to 30 January 1998 (that being the date of judgment entered by the trial judge).
The Court did not provide any further reasons as to the calculation of the appropriate amount of interest but as I have decided that it is appropriate to adopt the approach taken by the Full Court in NWP proceedings, I will calculate damages in this matter on the same basis. However, consistently with the equitable presumption of commercial use and the prima facie entitlement in equity to have loss assessed as at the date of judgment, Kia Ora seeks in these proceedings to include in the assessment, an award of compound interest until 9 August 2000, that being the date on which the Master entered judgment against the second defendant for damages to be assessed.
Exhibit SJD5 annexed to the affidavit of Samuel John Doyle dated 9 August 2000 is an updated version of the spreadsheet provided to the Full Court, that being exhibit SJD2 to the same affidavit. The spreadsheet has been updated to show a total judgment sum of $214,355,935.01 if compound interest is awarded until 9 August 2000 rather than 30 January 1998. In accordance with those calculations damages are assessed to 9 August 2000 inclusive of interest in the sum of $214,355,935.01.
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