Duke Group Ltd (in liq) v Pilmer

[1998] SASC 6529

DUKE  v  PILMER & ORS

Mullighan J

1. PRELIMINARY

In this action, commenced on the 19th August 1992, the plaintiff claims damages against the defendants for the losses allegedly sustained in consequence of the acquisition of the shares in a company in late 1987 and early 1988.

The plaintiff is The Duke Group Limited (In Liquidation), formerly known as Kia Ora Gold Corporation NL (“Kia Ora”).  The name of the company was changed on 26th July 1988.  Kia Ora was incorporated in South Australia on 13th September 1954 and, at all material times, listed on the Australian Stock Exchange.  It carried on business principally as a gold mining company in Western Australia, in mineral, oil and gas exploration and as an investor.  Eventually it became insolvent and on 11th July 1989 it was placed in liquidation by order of this Court.

The first defendants are Angus Claymore Pilmer, Alan Robert Crawford, Dominic Vincent Martino, Peter John Messer, Peter Lawson Munachen, Geoffrey James Stokes and Robert John Gray.  They were, at all material times, practising accountants and it is alleged that all of them carried on practice in partnership, with others, under the style or firm name of Nelson Wheeler in Perth.  I shall refer to them as the first defendants and to the firm as “Nelson Wheeler Perth”.  As will be seen later, it is asserted by the first defendants that Munachen and Stokes were not partners at material times having earlier retired from the partnership.

Kia Ora made a successful takeover bid for Western United Limited (“Western United”) in late 1987 and by early 1988 had acquired all of the issued capital of that company.  Prior to commencing the takeover procedure, there were four directors of Kia Ora, Alfred Carl Schneider-Paas, who died in May 1988 well before this action commenced, the third defendant Harold Abbott, the fourth defendants Sir Ernest Henry Lee-Steere and Kevin Clarence Somes and one alternate director Gary Ross Abbott who is not a party to these proceedings.  All of these men were also directors of Western United.  They owned or controlled substantial parcels of shares in Western United.  For the purpose of the takeover, two other directors of Kia Ora were appointed.  They are the second defendants Francis Anthony Quilty and Keith David Singleton.  They remained as directors for a time after the takeover was completed.

Kia Ora was obliged to comply with the main board listing rules of the Australian Stock Exchange Limited (“the Listing Rules”) by reason of s42(2) of the Securities Industries Code. Rule 3J(3) of the Listing Rules provided, inter alia, that the proposed takeover could not take place without the prior approval of the shareholders of Kia Ora in general meeting and that notice of the meeting had to be accompanied by a report from an independent qualified person sufficient to establish that the takeover price of Western United shares to be paid by Kia Ora was a fair price. Kia Ora retained Nelson Wheeler Perth for that purpose. A report was provided pursuant to the retainer under the hand of Pilmer advising that the takeover price was “fair and reasonable” and was sent to the shareholders of Kia Ora and to the Australian Stock Exchange in Adelaide which was the home exchange of both Kia Ora and Western United. The necessary approval was purportedly given at a general meeting of shareholders of Kia Ora on 26th October 1987 called for that purpose. The plaintiff alleges that the report was prepared incompetently and in breach of duty pursuant to the contract of retainer and in tort and in breach of fiduciary duty which it is alleged the first defendants owed to Kia Ora.

The plaintiff also alleges that, at relevant times, there were other accountants in each of the mainland States of Australia who practised in partnership under the style or firm name of Nelson Wheeler and that all of them or their firms, including Nelson Wheeler Perth, were members of a national partnership known as Nelson Wheeler.  The members of these other firms are the fifth defendants and there are forty-five of them in all.  The plaintiff commenced a separate action against the fifth defendants which was consolidated with the action against the first, second, third and fourth defendants. Each of the fifth defendants is alleged to be liable to the plaintiff in damages on the same basis as the first defendants by reason of the law of partnership.

Before that consolidation, the first defendants issued third party proceedings against the second, third and fourth defendants, none of whom were then parties to the action.  It is alleged that each of them was in breach of his duties as a director of Kia Ora in various ways which caused or contributed to the loss which it is alleged Kia Ora sustained by reason of the takeover.  The first defendants seek indemnity or contribution from each of these directors.

The plaintiff, in large measure, adopted the allegations against the directors and during the course of the trial amended the statement of claim to also seek damages from them.  In the end result the plaintiff claims the same damages against all of the defendants.

The first defendants and the fifth defendants (who are together referred to as “the Nelson Wheeler defendants”) deny liability to the plaintiff on any basis and also allege that if Nelson Wheeler Perth was in breach of any duty to Kia Ora which was causative of loss, Kia Ora caused or contributed to that loss, and in the event of the latter, seek apportionment of responsibility between Kia Ora and themselves pursuant to s27A of the Wrongs Act 1936 as well as indemnity or contribution from  the director defendants.

APPROACH

The trial commenced on 15th June 1994 and continued with some interruptions.  The many issues raised by the pleadings and the evidence are complex.  The plaintiff pleaded its case in considerable detail and adopted the technique of seeking admissions from the first defendants as to many of the matters constituting the factual basis of its case.  The first defendants responded in a manner which shortened the trial.

The plaintiff sought to prove matters in issue by the use of documentary and expert evidence given by Mr Easton and Mr Hall to whom reference is made later.  It chose not to call any of the former employees of Kia Ora or Western United or the directors of the latter who are not parties and who could have given relevant evidence about matters in issue.  The plaintiff used statutory aids to admissibility of documents and relied upon the use which could properly be made of the facts contained in those documents. The effectiveness of this technique has been considered in the context of all of the evidence when deciding each matter in issue, including the absence from the witness box of persons who kept records and prepared documents.  However, in most instances, their absence has not been of importance because there has been no reason to doubt the reliability or accuracy of the matters contained in the documents.  Where such doubt exists and has not been resolved by other acceptable evidence, the documents have not been relied upon.

There is another matter in the fact finding process of some importance.  Some defendants chose not to give evidence.  The plaintiff, as has been mentioned, and the Nelson Wheeler defendants, chose not to call persons who could have given relevant evidence on crucial matters in issue.  The absence of particular persons from the witness box must not be used impermissibly. 

Having considered all of the evidence and considered the issues in these proceedings, I do not think any adverse conclusion should be made against the plaintiff or any unfavourable inference drawn by reason of the plaintiff not calling former employees and the directors of Western United who are not parties. The evidence adduced in many documents admitted into evidence suggests that those persons most intimately involved would not have been likely to support the case for the plaintiff. The principle is summarised by Cox J in Spence v Demasi (1988) 48 SASR 536 at p547-548:

“The general rule is that ‘the unexplained failure by a party to give evidence, to call witnesses, or to tender documents or other evidence may, not must, in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party’s case’: Cross on Evidence (3rd Aust ed, 1986), par 1.43. The circumstances must be such as to make it natural for the particular party to call the witness in question: see generally the judgments of the High Court in Insurance Commissioner v Joyce (1948) 77 CLR 39; Jones v Dunkel (1959) 101 CLR 298 and Brandi v Mingot (1976) 51 ALJR 207 and the discussion by Glass JA in Payne v Parker [1976] 1 NSWLR 191. The joint judgment in Brandi v Mingot established the rule for Australian courts in the moderate form repeated in Cross on Evidence (3rd Aust ed, 1986). The rule is frequently applied, in both criminal and civil jurisdictions, with respect to material witnesses as well as to the parties themselves. It is a specific application of the well-established principle that a party is expected, within reasonable limits, to produce at the trial all the evidence that is fairly available to him. The classical statements of that principle are to be found in the judgments of Lord Mansfield CJ in Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970, and of Best J in R v Burdett (1820) 4 B & Ald 95 at 122; 106 ER 873 at 883. The rule is often applied in running down cases where the defendant chooses not to give evidence - or, to put it more realistically, where the insurer prefers to keep its driver out of the witness box: see, for example, Lopes v Taylor.

So far as a potential supporting witness is concerned, the court will first have to decide whether his absence should be regarded as telling against one party rather than the other - whether, in the nature of things, he should be put in a particular camp or simply seen as available equally to both sides. Even where that test is satisfied, an adverse inference cannot be drawn if there is an obvious or proved, and satisfactory, explanation for the failure to call the witness. That will depend upon the facts of the particular case. A reasonable apprehension of bias in favour of one party, notwithstanding an apparently close relationship with the other, will make an adverse inference against the latter inappropriate: cf Payne v Parker [1976] 1 NSWLR 191 at 197. It may be clear, in an industrial accident case, that the plaintiff’s fellow employees are unlikely to be willing and co-operative witnesses for the defendant, although this may depend upon their seniority and other circumstances: cf Earle v Castlemaine District Community Hospital [1974] VR 722 at 734.”

It could not be said that the circumstances make it natural for the plaintiff to have called any of those persons.  It is likely that each of them would have sought to justify their conduct in a manner contrary to the plaintiff’s case and it is entirely inappropriate to draw any inferences adverse to the plaintiff by reason of the plaintiff not calling them.  The same must be said about the Nelson Wheeler defendants so far as those persons are concerned.  They also could not be expected to call them for much the same reasons.  Furthermore, I do not think their absence from the witness box is relevant to the conclusions which may be reached about the facts contained in the many business records and other apparently genuine documents admitted into evidence.

However, it is appropriate to draw inferences against the Nelson Wheeler defendants by reason of some of them not giving evidence.  As will be seen, Pilmer and Munachen played a crucial role in various matters and could have given evidence of considerable importance.  The Nelson Wheeler defendants opened that they would be called to give evidence.  Also Mr J Langford, a partner of Nelson Wheeler Perth at relevant times who is not a party to these proceedings, could have given evidence about important matters.  Counsel for the Nelson Wheeler defendants also opened that Mr Paul Thomas Cambage Wenham and Mr Bruce Kenneth Simmons, two of the fifth defendants, would be called and they were not.  They were both intimately involved with the national association of Nelson Wheeler which the plaintiff alleges was a partnership.  The absence of these men from the witness box was not explained.

It is abundantly clear from the cases, what use can be made of the unexplained absence of a party or witness from the witness box. In addition to the observations made by Cox J in Spence v Demasi (supra), the following is also clear. Evidence given might be more readily accepted because it is uncontradicted but the absence of a party or a witness cannot supply any gap in the evidence: Jones v Dunkel (1959) 101 CLR 298 per Kitto J at p308. Once there is a proven factual basis from which an inference may be drawn, that inference may be more confidently drawn “when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called: per Kitto J at p308: see also Menzies J at p312 and Windeyer J at pp320-321, West v Government Insurance Office of New South Wales (1981) 148 CLR 62 at p69; Clayton Robard Management v Siu (1988) 6 ACLC 57 per Kirby P at p64 and ASC v AS Nominees Limited (1995) 18 ACSR 459. However, in applying those principles it must be remembered that the burden of proving its case rests upon the plaintiff and that burden is not discharged because critical evidence is peculiarly within the knowledge of a defendant who is not called: Clayton Robard Management v Siu (supra) per Kirby J at p64. Furthermore, as Menzies J pointed out in Jones v Dunkel (supra) at p313 the failure to give evidence may not be used to “convert suspicion to inference”.

The conclusion to be drawn upon the application of these basic principles may vary according to which party or person was not called, the particular issue or issues about which that person could have given relevant evidence and whether there is other reliable evidence from which conclusions could safely be made.  No party is obliged to call witness after witness to establish the same fact merely to avoid some suggestion that an adverse inference may be drawn due to the absence of one person.  The particular circumstances will determine whether the absence from the witness box of any person is significant.

In respect of some parties and persons, their absence from the trial is significant and permits adverse inferences to be drawn against the Nelson Wheeler defendants.  With respect to others, no such inference should be drawn.  In reaching conclusions about the absence of particular persons, I have applied those principles.

It is necessary to make specific mention of Stokes.  He was unable to complete evidence-in-chief due to serious illness and died without returning to the witness box.  Consequently he did not give any evidence about some matters and was not cross-examined at all.  As his evidence has not been tested and the plaintiff has not been able to put various matters to him, I am unable to accept his evidence about any matters in issue.  Some of his evidence was about matters not in dispute and is helpful to complete the picture.  I accept his evidence of that nature but not otherwise.

A mass of documentary evidence was adduced by the parties at the trial, the extent of which is inadequately described by merely mentioning the number of exhibits, about 7,000 tendered by the plaintiff, about 3,000 by the Nelson Wheeler defendants and some others by the director defendants.  All of the first defendants except, as has been mentioned, Pilmer and Munachen and some of the fifth defendants gave evidence.

The director defendants except Harold Abbott participated in the trial in only a limited way by giving oral evidence and adducing some documentary evidence in their own respective cases, although Mr Evans, for Lee-Steere and Somes, did cross-examine Quilty and Singleton.  Also their counsel made final submissions.  Harold Abbott did not participate in any manner until the very last sitting day when his counsel, Mr Lever, appeared and successfully opposed the admission into evidence on the tender of the plaintiff of a document upon which the plaintiff wanted to rely.  These defendants did not cross-examine any of the other witnesses and were not heard on questions of admissibility of oral and documentary evidence during the presentation of the cases of the plaintiff and the Nelson Wheeler defendants.

I have been greatly assisted by all counsel:  Mr Gray QC, Mr Lipman and, at an early stage, Mr Whitington QC for the plaintiff, Mr Mansfield QC and Mr Lane and later Mr Myers QC and Mr Zappia for the Nelson Wheeler defendants, Mr Evans, for Lee-Steere and Somes, Mr Heywood-Smith and Mr Rydon for Quilty and Singleton, and Mr Sulan QC and Ms Vanstone QC who appeared for some of the fifth defendants for limited purposes.

The critical events which are relevant to the issues occurred about ten years ago and in some instances much earlier.  When making judgments about the credibility of the various witnesses, apart from the experts, and as to whether their versions of events are accurate and reliable, it has been necessary to keep in mind that they have been required to recall events which occurred such a long time ago and which they would not, at the time they occurred, have anticipated they would have to remember at all, let alone many years later and in a forensic context.  Actual memory and reconstruction can be interchanged.  Memory may be genuinely inaccurate.  Some witnesses were in the witness box for a very long time and under pressure to recall these events.  The evidence of all of these witnesses must be approached with caution.  Inaccurate memory must not be equated with lack of credibility, let alone dishonesty, unless there is more.  I have exercised such caution and reached conclusions about each witness making allowance for these matters and after considering their evidence in the context of all of the evidence, both oral and documentary.  In the end I am satisfied that a reasonably clear picture of what happened has emerged, except with respect to some matters of which specific mention is made.

During the course of this very long trial many objections to evidence were made and arguments put on the basis that the very substantial pleadings of the parties did not raise a particular matter or, if so, with clarity. I gave rulings from time to time but similar points were made at stages during the lengthy final addresses. It is not my intention to make separated rulings about each of those matters at this stage. I have regard to the true purpose of pleadings under the Supreme Court Rules as discussed by Cox J in Rupucic v AW Baulderstone Pty Ltd & Ors (1987) 46 SASR 99 and by King CJ in Williams v Australian Telecommunications Commission (1988) 52 SASR 213 at p216 to which I referred in The Duke Group Ltd (In Liquidation) v Pilmer & Ors (unreported 20.12.94, Jd No S4905) and to my own observations about obligations in pleading and which need not now be repeated. Parties are not to be taken by surprise and care must be taken to ensure procedural fairness. However, as the Full Court observed in Southern Resources Ltd & Ors v Residues Treatment & Trading Co Ltd & Ors (1991) 56 SASR 455, at p465:

“It is common experience that evidence given in the course of a long and complex trial will raise issues of fact that are not precisely covered by the pleadings; it would have been open to the plaintiffs to seek amendment pursuant to the Supreme Court Rules 1947, r53.09, a rule which in terms speaks of determining the real question in controversy between the parties, and in the circumstances a failure to apply for amendment cannot be fatal: cf Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666 at 668.”

As Dawson J pointed out in Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279, at p293, pleadings are but a means to an end and not an end in themselves.

In the resolution of the issues, the arguments on the pleadings have been helpful but not decisive.  In no instance has a pleading, or lack of it, stood in the way of a decision on the merits.  In this very long trial evidence has emerged which was not available to the parties before the trial began and justice has not demanded detailed amendment of pleadings each time that has occurred and a new factual issue has arisen.  The parties have been aware of the issues as the trial proceeded and in only a few instances has procedural fairness required amendments to the pleadings.

I have had to resolve many issues and reach conclusions about each of the many witnesses who gave evidence in order to find the true factual basis for the resolution of the issues of law necessary to reach a judgment about the fundamental questions relevant to liability and damages.  If I was to set out my reasons for each conclusion I have reached about matters of fact and the witnesses, these reasons would be even more inordinately lengthy, than is already the case.  Instead I have chosen, in the main, to set down my conclusions, including in the narrative aspects of these reasons, without mentioning the reasons for many of them.  In most instances the reasons for the conclusion will be obvious enough but in respect of all of them I have considered all of the evidence and the submissions of counsel.  With respect to some issues, it has been appropriate to briefly relate my reasons and my conclusions about particular witnesses.

1. BACKGROUND

In view of the nature of the plaintiff’s case against each of the defendants, and issues raised by the Nelson Wheeler defendants, it is necessary to consider the history of Kia Ora and Western United since 1979, the relationship between Schneider-Paas, the director defendants, others involved in the management and control of the two companies and some of the first defendants and certain other men who were involved with some of them in various activities.  It is also necessary to consider the establishment, over a period of time, of the substantial shareholding of some of these men in Western United, with the consequence of personal enrichment in consequence of the takeover.

3.1    KIA ORA AND WESTERN UNITED

Western United was incorporated in South Australia on 4th October 1953 as Weaber’s Rising Sun NL.  On 26th March 1968 it changed its name to Uranium and Nickel Exploration NL (“Uranium and Nickel”) and on 30th June 1982 to Western United Holdings Limited and its status to a public company limited by shares.  On 26th September 1986 the name was changed to Western United Limited.  I shall refer to this company by its various names at particular times after 1979 so as to avoid confusion about certain matters.

Schneider-Paas became a director of Kia Ora on 28th March 1972 and of Uranium and Nickel on 9th August 1979.  He had substantial interests in four companies at this latter time;  Kia Ora, Uranium and Nickel, United Nickel NL and Inter Copper NL, all of which were virtually dormant.  They were all public companies listed on the Australian Stock Exchange except Inter Copper which had been de-listed.  Harold Abbott became a director of all of these companies.  Inter Copper, which later changed its name to Kia Pacific Gold Limited (“Kia Pacific”), played a role in important matters which is discussed later.  United Nickel was also involved in transactions of importance to matters in issue which are discussed later.  Schneider-Paas was a director and substantial shareholder of all of these companies.  He has been described as a wealthy industrialist who operated mainly out of West Germany.

Until mid 1979 both Kia Ora and Uranium and Nickel were essentially speculative mining companies in a small way.  Their major asset was a gold mine known as the Marvel Loch mine which is situated about 30 kilometres south of the Southern Cross in the Yilgarn Goldfields Western Australia.  Kia Ora owned 60 percent and Uranium and Nickel 40 percent of the mine. Kia Ora also owned some mining tenements and investments.  Uranium and Nickel had few other assets of little value.  Apart from Schneider-Paas, management of the companies was located in South Australia.

In 1979 it was decided to reactivate Kia Ora and Uranium and Nickel.  In the middle of 1979 Kia Ora began negotiations with Mr Peter Briggs of the Hampton Group of Companies which was said to be considering the development of an open cut mine in the Southern Cross area and the milling of ore at Kalgoorlie.  Briggs sought and obtained equity participation in Marvel Loch.  It was at this time Harold Abbott, an associate of Briggs, became involved with Kia Ora and Western United.  He had a background in merchant banking and business and developed proposals for the re-activation of the companies, including development of the Marvel Loch mine.  He became a director of both companies on 12th August 1980.  At all relevant times thereafter he was, in name or effect, the chief executive of both companies.  Briggs was appointed a director of both companies but resigned during the next year.  He was involved in the management of Uranium and Nickel.

The involvement of Briggs in the two companies is of little consequence except that it affords the reason for the introduction of Harold Abbott to the companies and, the plaintiff asserts, establishes a link between Nelson Wheeler Perth and Harold Abbott because of an association between Stokes, and to a lesser extent Munachen, and Briggs.

Mr Lionel James Milligan, a stockbroker and geologist, was a long-standing business associate of Harold Abbott, and probably of Schneider-Paas, and played a part in the re-activation of both companies.  He later became a director of Kia Ora for a brief time in October and November 1981.  Milligan played an important role in some significant events of reference in these proceedings which is discussed later.  His principal place of business was in Sydney where he carried on business in association with a Mr Dowling.

In September 1979 Harold Abbott approached Milligan to assist in the re‑activation of the two companies and provided him with a detailed report about the future of Kia Ora and Uranium and Nickel, the Marvel Loch mine and the raising of capital in the context of a proposed rights issue.  It seems that Milligan assisted in the placement of the rights issue and the re-activation of the two companies proceeded promptly.  At the request of Schneider Pass, Sir Ernest Lee-Steere, became a non-executive director and chairman of both companies on 30th November 1979.  Somes, was appointed a non-executive director of Uranium and Nickel on 26th August 1980 and of Kia Ora on 20th October 1981.  Initially as an alternate for Schneider-Paas but subsequently in his own right in addition to Schneider-Paas.  By this time, management of the companies had moved from Adelaide to Perth.

Lee-Steere had considerable experience as a director, including of public companies.  Somes was, at all relevant times, a practising chartered accountant in the firm of Somes and Cooke in suburban Perth and also had considerable experience in business and as a company director.

On 24th August 1980 the Marvel Loch mine was officially re-opened and brought back into production.  Kia Ora purchased the interest of Uranium and Nickel in the mine by the issue of shares and options in Kia Ora which were allocated to shareholders in Uranium and Nickel.

After the sale by Uranium and Nickel of its interest in the mine, the direction of that company shifted from mining and prospecting to the provision of financial and mining services.  Over the ensuing years the company acquired other companies and businesses with the consequence that it operated the businesses of merchant banking, stockbroking, corporate management and advisory services, mining assay services and insurance broking and provided the services of a nominee company for associated companies and customers.  Kia Ora operated the Marvel Loch mine and acquired and developed interests in the other companies mainly involved in mining and mineral and gas exploration and acquired mining tenements.  Aspects of the history of the development of those two companies and ownership of issued capital of both of them are relevant to issues in these proceedings.

3.2    KIA ORA

I mention first Kia Ora.

When the mining commenced and gold was produced, the mill at Marvel Loch was also brought back into production.  Mr RM Harken was the mine manager.  However, in 1980 Kia Ora made an operating loss of $832,079 and a total loss of $1,028,736.  Accumulated losses amounted to nearly $3m.  Total net assets amounted to about $2.4m.  Despite those results employee incentive options were issued and allocated to various employees including 200,000 which were issued to Harold Abbott. 

In the 1981 year Kia Ora acquired a 40 percent interest in Western Drilling Services Pty Ltd (“Western Drilling”) which operated a multi-purpose drilling rig, a 20 percent interest in Kalgoorlie Assay Laboratory Pty Ltd which conducted a mineral assaying business and was to be used to process Kia Ora’s ore samples, a 20 percent interest in Palmerston Corporation Ltd, a newly established merchant bank in Darwin and a 25 percent interest in Dingup Bricks Ltd.  The merchant bank was said to have connections in South East Asia and Dingup Bricks manufactured bricks for the building market.  During this year Ogram Nominees Pty Ltd (“Ogram”), a company in which Harold Abbott had an interest and which provided management services and office accommodation and facilities contracted with Kia Ora to provide such services and facilities at a cost of $200,000 per annum.  At 30th June 1981 Kia Ora had net assets of $2.1m and during the year recorded an operating loss of $1.4m excluding extraordinary items.  The shareholding of Schneider-Paas and companies associated with him amounted to about 18m shares.  By this time Lee-Steere had acquired 20,000 shares, Harold Abbott 129,000 shares in his own name and 5,810 in the name of an associated company.  The annual address of Lee-Steere as chairman contains the following:

“....the management of the company is in the hands of Mr Harold Abbott, as General Manager, and a highly professional team which he has built up around him.  In fact, Mr Abbott has established around Kia Ora the base of a mining house and we have as part of our management team our mining specialists, under the direction of Mr Ron Harken, A.W.A.S.M., and senior geologists under the auspices of Aurex Pty Ltd of whom Mr Guy Travis, A.W.A.S.M., D.I.C., M.Sc. (London), is the senior partner.  It is worthy of note that both Messrs Harken and Travis were, for many years, in senior positions with Western Mining Corporation.”

During this year 1 million options were issued to Eltin Pty Ltd, a company in which Harken had an interest and to which reference is made later and employee incentive options were issued to employees including Travis who received 30,000.

During the 1982 year Kia Ora acquired the balance of the issued capital in Western Drilling Pty Ltd which became a wholly owned subsidiary and sold its interest in Palmerston Corporation and Kalgoorlie Assay Laboratory to Uranium and Nickel, which had changed its name to Western United Holdings Ltd.  The principal operation of Kia Ora continued to be the operation of the Marvel Loch mine which by now was in continuous production.  Harken was replaced by Mr T.S. Potts as manager of the mine.  The net assets of the company increased to $2.9m and the operating loss to $1.9m.  The issued capital doubled and at the next annual general meeting the authorised capital was increased to 200m.  Accumulated losses amounted to $11.2m.  The shareholding of some directors increased:  that of Lee-Steere to 50,000, Harold Abbott to 194,000 and Schneider-Paas to nearly 24m, the issued capital having increased to 69.5m shares.  Harold Abbott and Schneider-Paas held most of their shares through associated companies.  During this year Kia Ora appointed Talbot and Olivier of Perth as its solicitors.  In his annual address Lee-Steere described this time as “a very difficult financial period” for Kia Ora.

In the financial year 1983 Kia Ora again made a loss.  The operation of the Marvel Loch mine remained the major activity of the company.  It was proposed to improve the mining operations by commencing open cut mining and new recovery techniques.  Kia Ora acquired all of the issued capital in Central Victorian Gold Mines NL for $625,000 which was floated as a separate public company to raise $5m with the consequence that Kia Ora owned 38 percent of the issued capital.  Kia Ora sold to Western United Holdings all its shares in Dingup Bricks for $160,000.  It also sold its interest in Palmerston Corporation to Western United Holdings.  Net assets increased to $4.7m and the operating loss excluding extraordinary items was $2.435m with total accumulated losses of $13.9m.  The issued capital increased to 144m shares.  The shareholding of directors increased; Lee-Steere to 190,000 and Harold Abbott to 731,000.  The shareholding of Schneider-Paas remained much the same.

During the 1984 financial year Kia Ora made a small profit, about $474,000, for the first time since the Marvel Loch mine had been re-opened.  Net assets rose to about $14.4m.  The shareholding of Lee-Steere and Harold Abbott decreased marginally and that of Schneider-Paas remained the same.

The fortunes of Kia Ora continued to improve steadily during the 1985 financial year.  In April 1985 open pit mining commenced at the Marvel Loch mine and a new mill was brought into production to expand milling capacity.  The company had an operating profit of about $500,000.  Net assets remained about the same and the issue capital increased to about 20m shares.  The annual financial statements do not show any shares owned by Harold Abbott or any associated company.  Lee-Steere held 140,000 shares and the shareholding of Schneider-Paas remained about the same.  For the first time Kia Ora paid a dividend to the shareholders of one-quarter of a cent per share.

After the establishment of open pit mining, the fortunes of Kia Ora improved substantially.  In the 1986 financial year the amount of ore processed almost trebled.  Gold produced and revenue earned doubled.  Net assets increased to about $25m and operating profit to about $2.7m.  The issued capital was nearly 261m ordinary shares of 25 cents each, Lee-Steere held 140,000 shares and 300,000 options in his own name.  The shareholding of Harold Abbott, through companies with which he was associated or controlled, increased to 4,750,259 shares and 1,350,000 options which he held personally and 200,000 which he held through companies.  Schneider-Paas, and the companies in which he had a beneficial interest, held about 47m shares and 300,000 options.  During this year Somes took an interest in the company for the first time by accepting 300,000 options.  2.5m options were issued by the company on 27th June 1986 and it appears that 300,000 were issued to each of the directors.  Whilst it is fair to say that Kia Ora had become a significant gold producer during this year, it was not a major producer in Australia as it produced about 1 percent of the total of Australia’s gold production.  By this time the number of shareholders in Kia Ora had increased to 20,490.

3.3    KIA PACIFIC

I mention a transaction involving Kia Pacific and Kia Ora.  Kia Pacific was incorporated on 13th October 1970.  On 4th December 1973 it converted its status to a company limited by shares.  The change of name to Kia Pacific Gold Limited occurred on 31st October 1986.

The company had been dormant for many years.  Harold Abbott was appointed as a director on 30th May 1983.  At a meeting of directors on 15th September 1983 the re-activation of the company was discussed, Schneider-Paas and Harold Abbott were two of the four directors.  The company had no assets and some debts.  The re-activation occurred in early 1985.  The principal activity of Kia Pacific was to be mineral exploration and the holding of investments in subsidiaries.  The company’s shares were re-listed on the Australian Stock Exchange on 26th April 1985.  At 30th June 1985 there were 23.6m issued shares, rights and some options.

Mineral Estates NL was incorporated on 9th March 1984.  The principal activity of the company was mineral exploration.  Harold Abbott was appointed as a director on 1st November 1984.  At 30th June 1985 the issued capital was six shares of 25 cents each.  The principal asset of the company at that time was exploration expenditure which had been capitalised at $400,000 and some mining tenements which it had acquired from former directors for $50,000.  At this time the directors of the company were Harold Abbott, Mr Brian Gardiner and Dr John Chisholm.  Gardiner and Chisholm were appointed on 4th October 1985.  Gardiner was at all material times a solicitor in Perth and had been a member of the firm of Talbot and Olivier.  He became a full time employee of Kia Ora and Western United Holdings probably sometime during 1984.  Chisholm is a geologist with considerable experience in mineral exploration.  He had been employed by Getty Oil Development Company Limited which undertook work in joint venture arrangements with Kia Ora during the 1985 financial year.  He was the manager of Western United Mining Services and worked closely with the management of Kia Ora.  By late 1986 Chisholm was described as the exploration manager of Kia Ora.  The exploration had been carried out in the Wiluna, Forrestania and Nullagine regions of Western Australia.  During the period from incorporation until 30th June 1985, Mineral Estates was not profitable and had an operating loss of about $152,000.

Kia Pacific had acquired all of the issued capital in Mineral Estates at a cost of $600,000 by the issue and allocation of 6m shares at 10 cents each.  The company had little else by way of assets. In this way Kia Pacific acquired various mining tenements from Mineral Estates.  At 30th June 1985 the liabilities of the company exceeded the assets and during that financial year the company made a loss.  Obviously the mining tenements had been acquired after Mineral Estates was incorporated.

On 23rd August 1985 Kia Ora made an offer to the shareholders of Kia Pacific to acquire all of the issued capital it did not already own.  The offer was accepted and Kia Pacific became a subsidiary of Kia Ora in October 1985.  Kia Ora issued 41m shares in the takeover of Kia Pacific.  The purpose of the takeover of Kia Pacific was stated by Lee-Steere in his 1985 annual report of Kia Ora as “... [it] will increase our holdings in the Yilgarn gold field and other mineral areas in Western Australia”.

This takeover was a very elaborate, and presumably expensive, method of Kia Ora acquiring the mining tenements and interests held by Kia Pacific and through Mineral Estates.  There does not seem to be any reason why they could not simply have been transferred to Kia Ora for appropriate consideration.  All of these companies were in the same stable.  It seems that Mineral Estates was established and Kia Pacific re-activated, at least at this stage, for this purpose although Kia Pacific and Mineral Estates fulfilled other roles at a later time.  The consequence of the takeover was the substantial increase in the shareholding of Schneider-Paas in Kia Ora through companies which he controlled.  He had owned shares in Kia Pacific and in consequence of the takeover his shareholding, and that of associated companies, in Kia Ora increased from 24m shares to a little over 44m shares.

Somes and Lee-Steere as directors of Kia Ora supported the takeover and assisted in its implementation.  It was initiated by Harold Abbott and Schneider-Paas.  Somes was unable to see any conflict of interest on the part of Schneider-Paas, although that was clearly the case as he was selling his shares in Kia Pacific to Kia Ora.  According to Somes, the takeover was in the interests of Kia Ora but on the evidence it is not possible to see how that assertion could be justified.  It would have been a simple matter for Kia Ora to have directly acquired the mining interests of Mineral Estates at a much more modest price.  Indeed it could reasonably have acquired them at an earlier stage from the director who sold them to Mineral Estates.  In my view the evidence establishes that these transactions were undertaken to enhance the shareholding of Schneider-Paas in Kia Ora and with the knowledge and assistance of Harold Abbott, Lee-Steere, Somes and Gardiner.  At the least, that was one of the reasons.

Kia Pacific was to play a role in important events relevant to issues in these proceedings.  As at 30th September 1987, the directors of the company were Milligan, Harold Abbott, Schneider-Pass, his alternate Mr JF Kay, and Gardiner.

3.4    WESTERN UNITED

I turn to Uranium and Nickel.

To understand the significance of the development of the company and its subsidiaries, it is necessary to also consider certain activities of Harold Abbott which appear to have been in his own interest.  Within a short time after taking up his positions with the two companies he established personal interests in various companies which he subsequently sold to Kia Ora or Uranium and Nickel at considerable advantage to himself.  This is a matter of considerable importance in the resolution of certain issues concerning the takeover which is the subject of this action.  These activities involved four companies.

Ogram, to which reference has already been made, was incorporated on 21st February 1980 and on that date Harold Abbott and Mr John Stringfellow, then a secretary of Kia Ora and of Uranium and Nickel, acquired one each of the two issued shares.  They remained the only shareholders until Uranium and Nickel purchased the shares on 31st May 1982.  Ogram provided office accommodation and equipment and management services to Kia Ora and Uranium and Nickel and charged not only for those facilities and services but also for services provided by Harold Abbott and for other services. 

Aurex Pty Ltd was incorporated on 31st October 1980 and initially the directors were Harold Abbott and Travis.  Stringfellow was the secretary.  Harold Abbott was the beneficial owner of shares in this company but the evidence does not disclose the extent of that shareholding.  Aurex was appointed as the exploration consultant to Uranium and Nickel.  Travis was a geologist and Aurex was also engaged by Kia Ora to provide geology services.  It owned a mining tenement called the Puzzle Prospect and had premises in the same office as Kia Ora.

Western Drilling was incorporated on 3rd March 1981 with 800 subscriber shares, 400 to each of Ogram and Aurex.  Shortly thereafter a further 1200 shares of $1 each were issued and allotted as follows Ogram 300, United Nickel Limited 250, Kia Ora 400 and Uranium and Nickel 250.  All of these shares, apart from those allotted to Ogram, were allotted at $119 per share.  There was no premium for those allotted to Ogram.  Western Drilling owned and operated a drilling rig which was used mainly for Kia Ora.

Kalgoorlie Assay Laboratory Pty Ltd was incorporated on about 10th March 1981.  Ogram Pty Ltd held 800 subscriber shares of a total of 1,000.  Aurex and Eltin Pty Ltd (“Eltin”) each held 100 shares.  Eltin was a company associated with Harken, Travis and three other men, Messrs Patterson, Smith and Botica.  Kia Ora and United Nickel provided loan funds for the company.  Harold Abbott and a Mr J Stringfellow were the directors.  Stringfellow was a secretary of Kia Ora.  On 4th May 1981 the directors of Uranium and Nickel resolved to approve the company acquiring 200 shares in Kalgoorlie Assay Laboratories Pty Ltd at a cost of $35,000 and subscribing for 400 shares in Western Drilling at a cost of $48,000.  The acquisition of the shares in Kalgoorlie Assay Laboratory Pty Ltd was at $175 per share.  These shares were allocated at par of $1.00 a little over a month before.  Uranium and Nickel paid $120 per share for the shares in Western Drilling which also had been allocated at par of $1.00 about a month before.

On 20th May 1982 Kalgoorlie Assay Laboratory Pty Ltd issued 1000 new shares and allotted them as follows:  Aurex 100, Kia Ora 200, Uranium and Nickel 600 shares, Northlands Minerals Ltd 50 and Australis Mining NL 50.  On 10th June 1983, Uranium and Nickel, which by that time had changed its name to Western United Holdings Ltd, acquired 200 of the shares owned by Aurex for $17,500.  On 9th September 1983 Western United Holdings acquired the 100 shares owned by Northlands Minerals and Australis Mining NL for $26,000.  During the 1983 financial year Western United Holdings also acquired Kia Ora’s shares in Kalgoorlie Assay Laboratory Pty Ltd.

Aurex owned an option over various mining tenements in Western Australia together known as “Puzzle Prospect”.  In November 1981 Uranium and Nickel acquired that option from Aurex for a consideration of 500,000 fully paid shares in Uranium and Nickel and $50,000 for reimbursement of exploration expenditure and should the option over the Puzzle Prospect be exercised, a further 4.5m shares in Uranium and Nickel and a royalty of 1 percent of the value of all gold won from the tenements.  On 10th March 1982 the directors resolved to ratify the allotment of 200,000 fully paid shares to Aurex pursuant to the agreement to acquire the option over the Puzzle Prospect.

On 18th April 1982 the directors of Uranium and Nickel resolved to sell the interests in various mining tenements including the Puzzle Prospect, to Kia Ora.  On 18th June 1982 a general meeting of shareholders of Kia Ora approved that purchase in consideration of 4.5m fully paid shares in Kia Ora of 25 cents each to be issued and allocated together with $50,000 to be paid to Uranium and Nickel.  In July 1982 Kia Ora acquired Western Drilling from Western United Holdings which acquired from Kia Ora its interests in other companies, including Kalgoorlie Assay Laboratories Pty Ltd.  Neither Lee-Steere nor Somes could offer any satisfactory explanation as to why Uranium and Nickel stood in this transaction between Aurex and Kia Ora.  The most likely explanation is that by doing so Aurex obtained shares in Western United Holdings  rather than shares in Kia Ora which increased Harold Abbott’s shareholding in Western United Holdings and enhanced his control of that company.

On 31st May 1982 Uranium and Nickel acquired all of the issued capital in Ogram for $100,000 and the allotment of 1.5m shares of 25 cents in Uranium and Nickel to a company which subsequently changed its name to Katinka Pty Ltd (“Katinka”) at a deemed price of five cents.  The name of Ogram was changed to Western United Management Pty Ltd on 23rd August 1983.  The company continued to provide management services to Kia Ora and Uranium and Nickel and all of the companies in the Western United Group.  Harold Abbott had the major beneficial interest in Katinka and later his brother Gary Abbott also had a beneficial interest in that company.  The fact that the consideration for the acquisition of the issued capital in Ogram found its way into Harold Abbott’s company suggests that Stringfellow did not have any beneficial interest in the subscriber’s share which he had held in that company.

On 30th June 1982 Uranium and Nickel changed its name to Western United Holdings Pty Ltd and changed its status to a public company limited by shares.

Cooparoo was incorporated on 18th May 1981.  The directors were Harold Abbott, his wife Jennifer Abbott and his brother Gary Abbott.  On 18th March 1983 the directors of Western United Holdings resolved to pay a fee of $40,000 per annum to Cooparoo for the provision of a general manager and as has been seen Harold Abbott was the general manager at that time.  The shareholders of Cooparoo are not disclosed in the evidence but Harold Abbott did inform the meeting on 18th March 1983 that he had an interest in that company.  According to Lee-Steere, this arrangement was made at the request of Schneider-Paas but he could not recall or explain the purpose of the arrangement given that management and administration services were being provided to the company by Ogram which had recently been acquired by the company from Harold Abbott.  According to Lee-Steere, there was no lasting benefit to Western United Holdings by this arrangement.  It was less than a year earlier that Western United Holdings had acquired Ogram which had provided administration as well as other services.  Perhaps the arrangement with Cooparoo was for different services than as provided by Ogram but it does demonstrate yet another benefit, albeit indirectly, to Harold Abbott.  Somes expressed the view that this type of management arrangement was very common in the 1980’s.  The effect of his evidence is that he saw nothing wrong or unusual about this arrangement.

It may be seen that thus far Harold Abbott had benefited substantially from his association with Kia Ora and Western United Holdings.  He had established businesses conducted only briefly by companies in which he was involved and he sold his interests in them to Western United Holdings at, apparently, substantial profit.  Part of the consideration was the acquisition of a substantial shareholding in Western United Holdings.  The evidence does not disclose the full extent of this shareholding as there is no evidence of his precise shareholding in various companies.  However, it was disclosed in the 1985 annual report of Western United that at 2nd October 1985 Harold Abbott and Gary Abbott had a beneficial interest in companies which held 3,925,098 shares in Western United.  That shareholding had been obtained since 1981.  The issued capital at that time was 10,917,139 shares.

It may be seen from those transactions that Harold Abbott, although a director of Kia Ora and Western United Holdings, benefited personally and to a substantial extent.  At the time each of Lee-Steere, Somes and Schneider-Paas were directors of both companies, and consequently were aware of these benefits.  Somes saw nothing wrong with these transactions and indeed did not even acknowledge that Harold Abbott had a conflict of interest which could compromise his duty to Kia Ora and Western United Holdings.  Lee-Steere, however, did notice that these transactions represented a drift of assets of Kia Ora to Western United Holdings and then to Harold Abbott through the monies paid and shares in that company issued to companies in which Harold Abbott had a beneficial interest.  He also recognised that Harold Abbott did have a conflict of interest.  He accepted that the other shareholders could have been adversely affected by these transactions.  Of course, the shareholders suffered in a derivative way, but so did the companies.  Harold Abbott had an obvious conflict of interest and he preferred his own interests to those of the companies.  Also it may be seen that these activities occurred relatively soon after the two companies were re‑activated and, as will be seen, before Western United gave the appearance of being very successful.  Lee-Steere said that he did view those matters with concern and that with hindsight the transactions adversely affected the shareholders of the two companies.  Of course, hindsight was not required to reach that conclusion.  It must have been obvious to all involved, including Lee-Steere, Somes, Harold Abbott, himself and senior management that Harold Abbott was increasing his shareholding in Western United Holdings and obtaining other substantial benefits to the detriment of the two companies.

Gardiner and Gary Abbott

Before proceeding further it is an appropriate stage to say a little more about Gardiner and Mr Gary Abbott.  It is plain from many documents admitted into evidence that Gardiner played an important part in the management and control of Kia Ora and Western United and many of their respective subsidiaries and was intimately involved in their affairs.  As will be seen he played an important role in the takeover of Western United by Kia Ora and in other significant transactions.  He is not party to these proceedings and was not called to give evidence.  Because of his absence from the trial care must be taken to ensure that any adverse conclusions about him are made only when necessary and on the clearest evidence as he has not been called upon to explain his actions and has not had the opportunity to do so.  His role in relevant events can be ascertained from documents admitted into evidence and from the evidence of those witnesses who had dealings with him or who made observations of him.  He was described by others and himself at times as the company solicitor of Kia Ora and Western United, as an executive of the two companies and in late 1987, as the chief executive of Kia Ora although that was the role of Harold Abbott.  In the latter part of 1987 he was a member of the finance committee of the merchant bank of Western United, along with the directors and senior management of that company which had the responsibility for the approval of loans.  In the absence of Gary Abbott, he was one of the staff who had to approve capital and other expenditure of Western United and he played a very active role in the administration and management of Kia Ora and Western United.

Gardiner also had a close relationship with the directors of the two companies.  He was a director of various companies which were subsidiaries of Kia Ora and Western United as were some or all of Harold Abbott, Schneider Pass, Lee Steere and Somes.

Gary Abbott is the brother of Harold Abbott.  He had considerable experience in business involving financial affairs and had been employed by a large national corporation.  He joined the Western United group in early 1984 and became a director of various subsidiaries of Western United and a senior member of the administration.  He was appointed a director and principal executive officer of Western United Holdings on 13th August 1984 and as an alternate director to Harold Abbott of Kia Ora on 7th April 1986.  At all material times after 13th August 1984 he acted as the managing director of Western United.  Like Gardiner, he was also intimately involved in the affairs of the two companies and their respective subsidiaries and in the takeover of Western United by Kia Ora and had a close association with the other directors of Kia Ora and Western United.  He was a director of various subsidiaries with some of the director defendants from time to time.  He attended board meetings of both Kia Ora and Western United and was a member of the finance committee.  He was not called to give evidence and the observations which I have made about making findings adverse to Gardiner apply equally to him.

The Development of Western United

Western United Holdings had, by 1983, moved away from being a mining company and was developing financial management and mining services.  It is appropriate to mention the establishment and development of each of those activities.  Mention has already been made of Ogram which was renamed Western United Management, and Kalgoorlie Assay Laboratories, Dingup Bricks and Palmerston Corporation which owned the merchant bank in Darwin.

Western United Finance

Western United Finance Ltd (“Western United Finance”) was incorporated on 30th June 1983.  On 16th July 1983 49,995 ordinary shares of $1 each were allotted to Western United Holdings and a further 30,000 shares on 18th November 1983.  The company was, in effect, a wholly owned subsidiary of Western United Holdings and was to provide investment advice and financial services.  Mr J Wells was appointed general manager.  In January 1984 Western United Finance obtained the necessary licences and approvals to operate as a merchant bank.  At that time Kia Ora advanced $125,000 to the company in return for 125,000 convertible redeemable preferred shares in Western United Finance, thereby providing capital for the merchant banking business.  Gary Abbott and Gardiner were appointed as directors on 16th March 1984.  Somes was appointed a director on 16th July 1984.  Kia Ora advanced a further $350,000 to Western United Finance and on 7th September 1974 350,000 additional convertible redeemable preference shares were allotted to Kia Ora.  In 1984 375,000 ordinary shares were allotted to Western United Holdings.

As a result Kia Ora held 475,000 convertible redeemable preference shares and Western United Holdings held 454,999 ordinary shares.  The shares of Kia Ora had to be converted to ordinary shares or redeemed by 23rd January 1987.

The purpose of the further monies advanced by Kia Ora to Western United Finance was to provide the capital for the establishment of the sharebroker Ray Porter and Partners Pty Ltd on 8th August 1984.  Mr Ray Porter was an experienced stockbroker and soon after the company was established he was joined by other executives who were given equity in the company.  Porter and Gary Abbott were the directors of the company.  The shareholding was structured in such a way that Western United Finance owned 35 percent of the issued capital and the executives owned the balance.  It is unnecessary to set out the details but the effect was that Western United Finance and Porter had equal voting rights and the other shareholders had no such rights.  Western United Finance was entitled to 35 percent of the profits and Porter and the other executives were entitled to 65 percent of the profits.  This share structure provided incentive to the executives.  During this year Ray Porter and Partners Pty Ltd made a small loss of about $3,000 and at the end of the financial year had net assets of about $450,000.  Western United Holdings also earned income from the new merchant banking business by acting as a consultant and from share trading and by the end of the 1984 financial year had net assets of $971,727 and had made a small profit of $36,791 after income tax.

Western United Insurance Brokers

During this year Western United Finance established an insurance broking business through Western United Insurance Brokers Pty Ltd.  This company was incorporated on 4th February 1970 as Kia Ora Management Pty Ltd and initially was a wholly owned subsidiary of Kia Ora which sold the company to Uranium and Nickel during the year ending 30th June 1981 for $6,191, being the value of the net tangible assets.  The name of the company was changed to Western United Commodities Pty Ltd on 29th June 1984 and to Western United Insurance Brokers On 22nd January 1985.

Western United Insurance Brokers became essentially a subsidiary of Western United Finance.  Gary Abbott and Gardiner were appointed directors on 16th March 1984 and 7th December 1984 respectively.  In December 1984 the company commenced business as an insurance broker having acquired 60 percent of an established insurance broking business from a Mr Patterson for the sum of $31,260 plus goodwill of $48,000.  The company had offices in Bunbury and Kalgoorlie.  In December 1985 Kia Ora appointed the company as its insurance broker.  Nevertheless, the insurance broking business was not profitable at any relevant time and it made losses each year except in 1987 when a small profit was made.  In that year it was decided to change staff and an experienced and reputable broker, Mr Peter Thompson, was brought in to improve the fortunes of the company.  He was given 50 percent of the issued capital of Western United Insurance Brokers.  Gary Abbott, Gardiner and Paterson were then the directors of the company.

200,000 share options were issued to Gary Abbott and 50,000 to Gardiner which had to be exercised on or before 30th September 1987.

Western United Assay Laboratories

After Dingup Bricks Limited was acquired by Western United Holdings from Kia Ora in the 1983 financial year, there was a series of changes of name and eventually to Western United Assay Laboratories Limited during the financial year 1985.  This company commenced business as metallurgical assayers to the gold mining industry in the Kalgoorlie, Yilgarn and Southern Cross regions during that year.  It also continued the business of making clay bricks.  The assay business was managed by Mr G Woolhouse, an experienced professional in mineral assaying.  Western United Assay Laboratories was owned by Western United Holdings as to 72.5 percent of the issued capital and Western United Management as to 27.5 percent.  The directors at relevant times and the dates of their respective appointments were Harold Abbott, 9th July 1981, Gary Abbott, 23rd October 1984, and Mr G Woolhouse, sometime between 14th November 1984 and 28th November 1984.  Woolhouse was the managing director of the company.

Later, in July 1987, another company, Kal Assay Southern Cross Pty Ltd, was established to operate a similar business in the Southern Cross region to service major customers in that area more efficiently.

Western United Assay Equipment Pty Ltd

The name of Kalgoorlie Assay Laboratory was changed to Western United Assay Equipment on 12th September 1984.  The principal business of this company commenced in the financial year 1985 and was the ownership and leasing of property and laboratory equipment to another company within the group, probably Western United Assay Laboratories.  The directors and their dates of appointment were Harold Abbott, 9th April 1981, Gary Abbott, 16th March 1984, and Woolhouse, 16th April 1984.  The company was a wholly owned subsidiary of Western United Holdings after November 1983 and made modest profits but was dormant by 30 September 1987.

Western United Services

Western United Services Pty Ltd was incorporated on 27th February 1986 in Singapore.  Gary Abbott and Gardiner were the Australian directors.  The company did not carry on any business and was inactive.

Alecdor Nominees

Western United Finance, during the 1985 year, established a nominee company.  It was incorporated on 24th January 1985 as Alecdor Pty Ltd and changed its name on 25th July 1985 to Alecdor Nominees Pty Ltd.  It acted as a nominee for other companies in their share trading activities.  The directors were appointed during the course of 1985 and were Gardiner, Harold Abbott and Gary Abbott.  Mr JO Roberts was secretary having been appointed on 14th February 1986.  He became a secretary of Western United.  Western United Finance acquired all of the issued capital in Alecdor in 1985.  At all relevant times Alecdor was a wholly owned subsidiary of Western United Finance and later Western United.

WUF (Hong Kong)

WUF (Hong Kong) Pty Ltd was incorporated on 11th February 1986 and the subscriber shareholders were Gardiner and Western United Finance Ltd.  The directors were Gardiner and Gary Abbott.  There was no evidence to establish any activity on the part of this company.  The directors’ report in 1986 reveals that the principal activity of the company was to act as a nominee for other companies in respect of their share trading activities but there is no evidence that it did so.  In the 1986 Annual Report, Lee-Steere, in his message, referred to representative offices in Singapore and Hong Kong but acknowledged in his evidence that such offices were not established before he left the company in 1988, although it was intended to do so.

Western United Mining Services

In July 1984 Western United Mining Services Pty Ltd was established.  The company had been incorporated on 8th March 1983 under another name and changed its name on 27th August 1984.  Gardiner was one of the subscribing shareholders.  At all times the company was a wholly owned subsidiary of Western United Holdings.  The directors were Gary Abbott appointed on 16th March 1984, Gardiner appointed on 1st October 1985 and Chisholm appointed on 16th September 1987.  The purpose for establishing this company, as stated by Lee-Steere in the 1984 annual report, was to provide geological and mining expertise on a consulting basis.  Somes was appointed a director on 16th July 1984 and Harold Abbott on 19th December 1985.

Western United Mining Services provided geological mining, engineering and general consulting services to Kia Ora, Kia Pacific, United Nickel and Central Victorian Gold Mines, all companies closely associated with Kia Ora, commencing no later than the 1983 financial year.

Western United Mining Services provided services almost exclusively for Kia Ora and Kia Pacific for the twelve months ending on 31st March 1986.  Kia Ora provided 78 percent of its income.

The financial circumstances of the company were at all times modest and it was largely dependant upon Kia Ora.  Net assets grew from about $30,000 to a little over $50,000 during the financial years 1985, 1986 and 1987.  In the 1985 and 1987 years losses were made and there was a profit of nearly $5,000 in the 1986 year.

the separation of the interests of kia ora and western united

By the end of the year ending 30th June 1985 Kia Ora and Western United Holdings had completed the separation of the various businesses into mining and investments undertaken by Kia Ora and the financial and other services undertaken by Western United Holdings and its subsidiaries.  Kia Ora was listed on the mining board of the Australian Stock Exchange and Western United Holdings on the industrial board. The two companies were separate and distinct but they shared common directors and, in the main, management, office accommodation and facilities.

Directors’ meetings for both companies were held separately but usually consecutively on the same day and in the same premises.  Minutes of these meetings were kept and confirmed at the next meeting, although there is reason to doubt the accuracy and reliability of some of the minutes.  The directors were given papers for each meeting which included an agenda, minutes of the previous meeting, management reports and monthly financial statements which included a balance sheet with explanatory notes when appropriate and a profit and loss statement.  These accounts for both Kia Ora and Western United were in some detail and enabled the directors to understand the financial state of the companies, at the least in a general way, at a glance.  This position continued until the takeover of Western United by Kia Ora.

transactions for the benefit of directors & associates

Before mentioning important events in 1986 and 1987, I mention four transactions which further enhanced the shareholding of the common directors in one or other of the companies.

Western United Options

On 23rd November 1984 at the annual general meeting the shareholders of Western United Holdings resolved that the directors be authorised to grant free options over 1m unissued shares of 25 cents each to employees and consultants of the company during the year ending 30th June 1985 to be valid until 30th September 1987 and to be exercised upon payment of 25 cents.  At a meeting of directors on 27th June 1985 attended by Lee-Steere, Harold Abbott and Somes, it was resolved, at the suggestion of Harold Abbott, that these options be allocated to Harold Abbott 400,000, Gary Abbott 200,000, Lee-Steere 100,000, Somes 100,000, Gardiner 50,000, Wells 50,000, Edwards, then secretary of the company, 50,000 and Woolhouse 50,000.

Neither Lee-Steere nor Somes could offer any satisfactory explanation for this potentially valuable benefit to themselves and the others.  They were neither employees nor consultants.  The others were employees, but these options were never offered to the rank and file of the company which may have been expected by the shareholders at the annual general meeting. These options were exercised by those men between approximately 1986 and April 1987.  As will be seen, this allocation enabled them to profit very handsomely upon the takeover of Western United by Kia Ora.

Rotair Limited

The next transaction of importance involved Rotair Limited (“Rotair”) which was originally Carama Pty Ltd and

was incorporated on 23rd January 1981.  The company passed through changes of name to Rotair Technologies Pty Ltd on 5th August 1985 to Rotair Limited on 19th November 1987.  I shall refer to it as “Rotair”.  It is a different company from Rotair Pty Ltd.  Shortly after incorporation ninety-eight shares were issued in addition to the two subscriber shares and allocated so that Harold Abbott held sixty-four, Mr J Sanderson four, Kia Ora twenty, Stringfellow five and Harken five shares.  Harold Abbott and Sanderson were the directors of the company.  It appears that all of these shares were issued and allocated without a premium at the par value of $1.

The principle businesses of this company were investment, development engineering of air motors and manufacturing of steam cleaners.

Rotair Pty Ltd owned the patent for a pneumatic motor, said by some to have considerable potential for operation in confined spaces such as in underground mining.  It appears that Sanderson had provided capital for the development of the motor.  Rotair owned fifty per cent of the issued capital in Rotair Pty Ltd.  By about September 1983 it was decided to change the corporate arrangements with respect to this project.

On 9th September 1983 the directors of Western United Holdings resolved to purchase from Kia Ora its shares in Rotair for $50,000 and to provide financial support to Rotair Pty Ltd for the project.  Lee-Steere acknowledged that it was through Rotair that Harold Abbott had his interest in Rotair Pty Ltd and project involving the pneumatic motor.  This acquisition and the provision of financial support to Rotair Pty Ltd was of benefit to Harold Abbott.

The defendant Quilty was the managing director of George Moss Pty Ltd (“George Moss”) the business of which was the manufacture and sale of mining and general machinery.  On 18th November 1983, at the request of Western United Holdings he expressed the opinion that the current value of the project of developing the pneumatic motor was $400,000 to $450,000.

According to documents admitted into evidence, Sanderson lived in Cyprus.  He had advanced $244,800 to the project.  Kia Ora had advanced $140,000.  On 28th December 1983 Gary Abbott, for Rotair, wrote to Sanderson and informed him that the workshop involved with the project would close in January 1984 and that Kia Ora was not prepared to continue under the present arrangements with the consequences that his loan could not be repaid.  He was informed that Kia Ora and Western United Holdings would advance additional funds in a joint venture for the marketing and development of another prototype to be built by George Moss on the proviso that all existing indebtedness due by Rotair be capitalised by the issue of additional shares.  Kia Ora was to have an additional 60 shares in capitalising its loan of $140,000, Western United would purchase all other existing shares and Sanderson would have only 10 shares.  Rotair had already acquired the other interests.  Sanderson accepted this proposal and Keiley Investments Pty Ltd, a company in which he was involved, was issued with the 10 shares.

At some time prior to 15th March 1984 Harold Abbott acquired all of the shares in Rotair held by Sanderson, Stringfellow and Harken.  It appears that he already held the two subscribers shares as after these transactions he owned 80 shares.  On this date he sold these shares to Western United Holdings in consideration of 1,375,000 ordinary shares and 2m options in that company.  This consideration was valued at $185,000.  Harold Abbott directed Western United Holdings to issue the shares and options to Katinka which was approved by a meeting of shareholders on 4th May 1984.

On 19th June 1984 the sixty shares were allotted to Kia Ora at a premium of $2,549.44 per share making a total of $153,026.40.  On 29th June 1984 the 10 shares were allotted to Keiley Investments Pty Ltd at a premium of $24,480.90 per share.  As a result Kia Ora held 80 shares in Rotair out of the issued capital of 170 fully paid shares, Western United Holdings held 80 shares and Keiley Investments the balance.

The further significance of Rotair is discussed later.  At this stage it may be seen that through Rotair, Harold Abbott substantially increased his shareholding in Western United Holdings.

Western United Finance

Schneider-Paas took a substantial shareholding in Western United through the medium of Western United Finance.  Mention has been made of the shares held by Kia Ora and Western United Holdings in Western United Finance in 1984 when the merchant banking business was established and the interest in the sharebroking business was acquired.  As has been mentioned, Kia Ora held 475,000 convertible redeemable preference shares and Western United held 455,000 ordinary shares which was the only issued capital until the end of the financial year 1985.

On the 28th June 1985 Kia Ora’s shares were converted into ordinary shares so that it held a little over half of the issued capital.  This is a matter of considerable importance.  At that time Western United Finance held the interest in the sharebroking business, all of the merchant banking business, the interest in the insurance broking business and the service company.  At that time the net assets of Western United Finance were $971,727 as disclosed in the balance sheet.  During the trial, Lee-Steere and Quilty related the great plan of Harold Abbott’s to establish a mining-finance house in Western Australia.  Indeed that very expression was to be mentioned in the letter by Quilty to shareholders of Kia Ora dated 9th October 1987 advocating the takeover of Western United.  He wrote, “Kia Ora shareholders will have the opportunity to participate in the future growth of a dynamic Mining-Finance House should they agree to the takeover of the Western United Group”. 

If that was the goal, it is difficult to understand what occurred after the conversion of Kia Ora’s shares in Western United Finance.  Rather than proceed along the path of a mining-finance house, on 28th June 1985 Kia Ora transferred its shares in Western United Finance to Western United Holdings in return for that company transferring to it the 80 shares it held in Rotair as has been mentioned.  It is fair to say that the true value of the shares in Rotair by this time was very little.  The motor had not been developed successfully.  These matters were well known to Harold Abbott and to the other common directors.  On the other hand, Kia Ora had a substantial interest in Western United Finance of considerable value.  It owned over half of the issued capital at that time and the total shareholders’ equity as revealed in the balance sheet of Western United Finance was over $970,000.  This transaction could not possibly have been in the interests of Kia Ora but was of substantial benefit to Western United Holdings and ultimately to Harold Abbott and his associates.

On 1st October 1985 Kia Ora entered into an agreement with Western United Finance to employ that company as its merchant banker for a period of five years.  The duties of Western United Finance, under the agreement, included management of Kia Ora’s funds, the provision of merchant banking advice, reporting to Kia Ora’s directors as to the management of Kia Ora’s funds and the provision of insurance broking services.  Why Kia Ora would require those services, given the composition of its own board of directors, and the management services provided by Western United Management is difficult to understand.  Pursuant to the agreement, Kia Ora agreed to pay fees for these services at the following rates:  for senior executives $400 per day, for senior consultants at $340 per day and for secretarial and clerical staff at $18 per hour.  Of course, such an arrangement would provide income for Western United Finance and bolster its financial position if utilised by Kia Ora.

On 10th October 1985 Western United Finance allotted 200,000 shares to Western United Holdings and on 24th December 1985 it allotted a further 720,000 shares to Western United Holdings.  Schneider-Paas advanced $250,000 to Western United Finance as capital for the company which allotted 250,000 shares to Mining Technology Limited, a company controlled by him.  Harold Abbott had been appointed a director on 19th December 1985.  Milligan was also appointed a director before 31st March 1986 on a date not disclosed in the evidence.

It was then resolved to float Western United Finance as a public company.  The undertaking of the float proceeded a considerable way.  By 7th April 1986 the prospectus had been prepared and approved by the Corporate Affairs Commission and the Adelaide Stock Exchange.  An outside sharebroker had agreed to underwrite the float.  By the beginning of May 1986 it was anticipated that the float would occur within six weeks.

Matters changed quickly.  On 3rd June 1986 the directors of Western United Holdings were informed that Western United Finance had withdrawn its application to the Commission and to the Australian Stock Exchange for the listing of the company.  The directors of Western United Finance at the time were Harold Abbott, Gary Abbott, Somes, Gardiner and Milligan.  At that meeting the directors of Western United Holdings resolved to transfer the merchant banking licence held by Western United Finance to Western United Holdings.  The date set for the transfer was 28th July 1986, the date of the next annual general meeting of Western United Holdings.  Harold Abbott wrote to Schneider-Paas informing him that the float had been abandoned and that it had been decided to amalgamate all of the activities into Western United Holdings which would change its name to Western United Limited.  He proposed that Western United Holdings purchase the 250,000 shares held by Mining Technology in consideration for 500,000 shares at 50 cents each in Western United Holdings.  During the financial year 1986, there was a bonus issue of shares in that company so that Mining Technology in fact owned 1m shares.  Gardiner wrote to the Stock Exchange of Adelaide advising of the proposal to make Western United Finance a wholly owned subsidiary of Western United Holdings and of that company acquiring the shares owned by Mining Technologies.  Whatever was the number of shares owned by Mining Technologies in Western United Finance at the time, they were acquired by Western United Holdings in consideration of the allotment to Mining Technologies of 500,000 shares in Western United Holdings.

A consequence of these arrangements is that Kia Ora had sold its interest in Western United Finance for shares in Rotair which were of little value and Schneider-Paas, through Mining Technologies, acquired a substantial shareholding in Western United Holdings.  If the genuine desire was to make Western United Finance a wholly owned subsidiary of Western United Holdings in the interests of all of the shareholders of Western United Holdings, it would have been a simple matter to redeem Kia Ora’s shares at an earlier time.

Somes saw nothing wrong with those transactions.  He did not see that the position of Schneider-Paas was being preferred to other shareholders in Western United Holdings even though that was clearly the case.

According to Somes, this proposal was adopted because having another public company to run the merchant banking business was not desirable and, it was in the interests of the shareholders in Western United Holdings that Western United Finance became a wholly owned subsidiary and that the businesses conducted by that company be conducted for their benefit.  It was his view that a public float was not in their personal interests as the wholly owned subsidiary proposal would not require them to purchase shares on the float.

According to Lee-Steere, the float was abandoned because Harold Abbott persuaded the directors that it was in the interests of the Group to promote and develop the merchant bank by obtaining more depositors and acquiring the balance of the stockbroking business.  Lee-Steere understood that Schneider-Paas was obtaining the shares in Western United Holdings at 25 cents per share less than the market value and consequently that his position was being preferred.  He said he was very disturbed about Schneider-Paas.

There is another aspect of this transaction which is of considerable importance.  If the value of Kia Ora’s shareholding in Western United Finance is taken to be $600,000 or thereabouts, being the amount of the monies advanced by Kia Ora about a year earlier and its share of the net profit, it is in sharp contrast with the amount paid by Kia Ora for these very same businesses in the takeover of Western United a little over two years later.

The Brisbane defendants made full disclosure of documents which were the subject of legal professional privilege and I am satisfied that they made available all documents relevant to the  issue of the instructions which they gave to their solicitors.

I am satisfied that the Brisbane defendants did not give instructions to their solicitors in accordance with the admissions that were made.  Those admissions having been made without instructions should not now be used against them.

It will be remembered that the name Nelson Wheeler was registered as a business name in Queensland on the 20th November 1972 and in 1978 Wenham and Arnold became proprietors of that business name.  At that time Lavis, Gay and Taylor also became proprietors of the business name.  I am satisfied that the inclusion of interstate members of the national partnership as proprietors of the business name in Queensland should not in itself be regarded as conclusive evidence that the Brisbane defendants were in partnership with Wenham and Arnold.  Those two men became involved in the registration process so as to protect the “ownership” of the name.  That is the effect of the evidence of Lavis who said that he thought the Sydney office owned the business name.

It is the case of the Brisbane defendants that however the relationship between them and other members of Nelson Wheeler national should be characterised that relationship was effectively terminated by April 1987.  The evidence clearly establishes that there had been a deterioration in the relationship between the Brisbane defendants and certain members of the national executive of Nelson Wheeler national.  As early as 1983 Wenham and Simmons were expressing their wish to Lavis that more work in Brisbane should be done in the name of Nelson Wheeler.  The Brisbane defendants opposed that course and indicated that their clients were personal to them and wanted to retain an affinity with a local firm.

In 1984 the Brisbane defendants rejected the suggestion that Nelson Wheeler national should take over their practice.  The same proposal was made in 1986.

On the 24th June 1986 Wenham wrote to Lavis and his letter included the following:

“As you know, for some time it has been the desire of the Sydney and Melbourne practices to have a more active role played by the Queensland practice not only  in the development of the Brisbane practice but in Queensland generally through its development of associates and consequent development of the firm.

For a number of reasons we also understand that this has been difficult from your point of view.”

Wenham went on to write that it had been proposed by Simmons that he and Wenham make a direct approach to Lavis on the basis that the Sydney and Melbourne practices acquire 50 percent of the practice in Queensland.

Nelson Wheeler had established an office at Surfers Paradise.  The Brisbane defendants had no interest or involvement in that office.  It seems that there was a considerable amount of work undertaken in Queensland on behalf of clients of Nelson Wheeler Melbourne and this was a factor which motivated Simmons to want to develop the Nelson Wheeler office in Brisbane.  These matters were discussed at the National Partners’ Meeting on 24th November 1986 which was attended by Lavis and Simmons.  At this meeting Simmons raised for consideration the appointment of a senior person to be located in Nelson Wheeler Brisbane to assist with the seeking of new work.  That person would have assistance from the staff of that office.  Lavis indicated that he saw some difficulties in that proposal but that he would discuss it with his partners and report back to the next meeting. 

According to Lavis he discussed the matter with Gay and Taylor and they considered whether they should continue their association with Nelson Wheeler.  They took no action and attended no further meetings,  although Lavis did send a report about his firm to the meeting of the national partners held on the 8th April 1987.

On the 16th December 1986 Wenham wrote to Simmons informing him of discussions that he had had with accountants in Queensland and of a suggestion he had made to one firm that it join Nelson Wheeler national.  Simmons wrote to Wenham on the 22nd December 1986 on the same subject matter.  He referred to Lavis “and his operation” as having been negative for ten years.  He mentioned that approaches to Queensland had cost Nelson Wheeler a substantial amount of time and money.  These memoranda reveal the dissatisfaction on the part of Wenham and Simmons with Lavis, Gay and Taylor.

By the 12th March 1987 an accountant by the name of Mr G. Johnstone wrote to Simmons, Mr N. Whiley of Nelson Wheeler Sydney and Mr S. O’Keefe the accountant carrying on the business of Nelson Wheeler at Surfers Paradise and indicated his interest in participating in the establishment of a new Nelson Wheeler office in Brisbane.  He set out a proposal which would involve Johnstone, O’Keefe, Nelson Wheeler Melbourne and Nelson Wheeler Sydney being the owners of the new practice in equal shares.  He made other suggestions and proposals.  This memorandum was written following a meeting between Johnstone and the others on the 25th February 1987.  Clearly by this time plans were underway to set up a new Nelson Wheeler office in Brisbane.  Simmons responded to Johnstone on the 25th March 1987 which was expressed in terms basically favourable to Johnstone’s suggestions.

The matter came to a head.  At the National Partners Meeting on the 8th April 1987 which was attended by Wenham, Simmons, Arnold, Ashby, Pilmer, Crane and Pratt the position in Queensland was discussed.  The minutes of the meeting record:

“The meeting reviewed the situation in respect of our offices in Queensland and after discussion, Paul Wenham was requested to write to Alan Lavis of Brisbane office giving six months’ notice ending on the 31st December 1987 or earlier if desired in respect to the Nelson Wheeler Queensland agreement.”

There is an annexure to these minutes which is marked  “not for circulation to Alan Lavis”.  It is as follows:

“Queensland -

The meeting discussed and reviewed the situation in respect to our office in Brisbane and noted the offer to place staff in the Brisbane office to deal with interstate work and to be paid for by interstate offices.  As this has been rejected and the situation is not improving it was agreed to terminate the agreement with Brisbane by giving six month’s notices (sic) ending 31st December 1987 or earlier if Brisbane agree.  Paul Wenham was requested to convey the information to Alan Lavis. 

Bruce Simmons reported on his recent meeting with Neville Whiley in respect to the setting up of new offices in Brisbane and the involvement if (sic) any of Surfers Paradise office.  Matters to be resolved included a broad strategy involving Sydney and Melbourne, equities in the new practices, a local partner to be selected, as well as placement of staff and the work to be undertaken.  A close co-operation of the new practice will be with the local law firm Hill and Taylor who are prepared to share the premises with us.  It was further suggested and agreed that Paul Wenham speak to ‘Accountancy placements’ and for them to advertise to buy a small practice as a base for the new operation.”.

Wenham wrote to Lavis on the following day.  He referred to the National Partners’ Meeting the previous day and went on:

“The executive committee of the national practice have indicated that they are dissatisfied with the progress being made by the Queensland representative office.  As you know, offers have been made in the past to assist in developing the Queensland office which may well have been unacceptable to you but have, nevertheless, been made in the hope of advancing the Queensland office at a similar rate to that experienced by other offices.  It is, unfortunately, my task to advise you that in view of the fact that the national practice does not seem able to come to a suitable arrangement with you, then the national committee formally gives notice to terminate our arrangements including the use of the Nelson Wheeler name not later than the 31st December 1987 and earlier if you should agree to same.”

Wenham went to extend his personal thanks to Lavis for his contribution over the years.

It will be remembered that the Deed of 14th July 1972 provided for notice of termination of six months.  None of the men who attended the meeting on 8th April 1987 gave evidence and so it is not known why the date of 31st December 1987 was selected.  Lavis did not respond to this letter but he showed it to his partners and I accept his evidence that they were content to have the relationship come to an end.  The Brisbane defendants discussed the professional indemnity insurance and agreed that it was best for them to leave the present arrangements in place.  It will be remembered that they had arranged that insurance through Nelson Wheeler national and it was to expire on 31st January 1988.  Discussions continued between Wenham and Simmons and others with a view to establishing a new office for Nelson Wheeler in Brisbane.

Simmons wrote to Arnold, Wenham and O’Keefe on 25th May 1987 indicating that the new office of Nelson Wheeler Brisbane could commence on 1st June 1987.  The equity of the Brisbane office was to be shared between Nelson Wheeler Melbourne, Nelson Wheeler Sydney and Nelson Wheeler Surfers Paradise on an equal basis.  The Brisbane defendants were not informed about these discussions and proposals. 

On about 2nd June 1987 the Brisbane defendants received documents by way of facsimile transmission which were intended for Pastellas who was to be an associate at the new Nelson Wheeler office in Brisbane.  The documents related to the salary package for Pastellas.  I accept that this was the first indication that any of the Brisbane defendants had of what was happening.  Lavis contacted the national co-ordinator who told him of Pastellas’ appointment and of the new office in Brisbane and that Nelson Wheeler may wish to sever the relationship with the Brisbane defendants earlier than previously indicated.  According to Lavis, he then phoned Grellman and informed him that he was content to sever the relationship and not stand in the way of the new Nelson Wheeler Brisbane arrangements.  According to Lavis, there had not been any referral work for some time and he had no objection to bringing the arrangement to an end.  On 2nd June Lavis wrote to Wenham and suggested that they meet for discussion about his letter of 9th April on 25th June when Lavis proposed to be in Sydney.  That meeting did not occur.  Grellman wrote to Wenham on 11th June and informed him that Lavis had indicated to Grellman that there “is still possible avenue for discussing the matter further”.  According to Lavis, Grellman may have wished to salvage the situation but Lavis had no interest.  Lavis said that he did not want to continue with the arrangement.  There was continual pressure on the Brisbane defendants to get bigger, to get associates and to promote themselves and he was not interested in any such proposals.  According to him, Grellman had regret that Nelson Wheeler national had decided to sever the relationship with the Brisbane defendants and Lavis thought that Grellman might hope that he may be able to mediate in some way.

On 4th June 1987 the National Co-ordinator, Nicholas, wrote a memorandum to Pastellas about the Nelson Wheeler Brisbane office.  By that time the premises for the new office had been selected, it was proposed that Grellman discuss with Lavis the transfer of the registration of the Nelson Wheeler name to Nelson Wheeler national.  Arrangements were in hand for the telephone facilities, furniture and other equipment.  On 9th June 1987 Nicholas wrote to all partners of Nelson Wheeler national.  He informed them of the resolution of the National Executive on 8th April relating to the Brisbane defendants and went on as follows:

“As from Monday last, 1st June 1987, a new office has been opened as part of the Nelson Wheeler network.  While a number of details remain to be organised, the following information is available for circulation.”

He then gave the name of Pastellas, the new address of Nelson Wheeler Brisbane and other directory information.  He completed his memorandum by indicating that Pastellas was available immediately to undertake any new work, referrals, stocktakes or business registrations.  On 12th June 1987 Simmons wrote to Nicholas and asked him to alter his memorandum on 9th June and to recirculate it to the partners of Nelson Wheeler National.  He wrote:

“As determination agreement to Allan Lavis and his other partners require six months’ notice or until otherwise advised, the Nelson Wheeler office at Surfers Paradise has opened an office in Brisbane.

All matters will be conducted under the control of Nelson Wheeler Surfers Paradise.  This covers both the factual situation and the legal situation.”

Both Lavis and Ashby said that they did not see this memorandum.

It is plain from the documents admitted into evidence that the new Nelson Wheeler Brisbane office commenced as from 1st June 1987 and the Brisbane defendants had no association with Nelson Wheeler national after that date.  That is also the effect of the evidence of Pastellas which I accept.  At the meeting of National Partners on 17th July 1987, it was resolved, inter alia, that the new Brisbane practice be a fifty fifty joint venture between Nelson Wheeler Sydney and Nelson Wheeler Melbourne and it was noted that Lavis was to see Wenham to discuss matters in relation to the transfer of the “name rights in Queensland of Nelson Wheeler”.  There were other resolutions about such matters as to whom Pastellas was to be responsible, letterhead, expenditure, signatories on the bank account and reporting requirements by Pastellas.  On 22nd July 1987, Nicholas sent a memorandum to members of Nelson Wheeler Sydney and Nelson Wheeler Brisbane and confirmed those matters which had been discussed at the partners’ meeting. 

On 17th August there was a meeting between Wenham, Simmons and Arnold which was referred to as the Sydney and Melbourne Executive as part of the National Executive.  They discussed the Brisbane office.  They had before them a profit and loss statement for the Brisbane office which appeared from 1st June 1987 to 31st July 1987 and a report from Pastellas.  It showed that the new Nelson Wheeler Brisbane office commenced business on 1st June 1987 and operated continually.  It ran at a loss during that period as expenditure exceeded fees received.  At the meeting, it was resolved that Pastellas be a principal of the new Nelson Wheeler Brisbane and that signage be erected and be similar to that of Nelson Wheeler Sydney.  It is recorded in the minutes of this meeting that “Allan Lavis to be associated with us until 31st December 1987 and is not concerned about what is being done”.  This record is in the context of signage.  Also it is recorded that the letterhead was to be in the adopted national form and consented to by Lavis.  According to Lavis, he did not recall any conversation about those matters although he had intimated during the month of June that he would not stand in the way of the new office. 

Not only does the evidence clearly establish that the new Nelson Wheeler Brisbane office was operated as from 1st June 1987 and totally independently of the Brisbane defendants, but they undertook no work for any Nelson Wheeler firm and had no involvement with Nelson Wheeler national or any of the participating firms since before that date.  They continued to practice under the name of Peden Lavis & Co.

On 20th November 1987 Lavis attended to the registration of the business name Nelson Wheeler in Queensland.  The renewal of the business name was undertaken in the names of Wenham, Lavis, Gay, Arnold and Taylor and the application was signed by Lavis.  Lavis said that he undertook that task because the registration would have expired on that day and so that it would not lapse.  There is no reason why that explanation should not be accepted.  On 9th December 1987 Grellman wrote to Lavis.  The letter is in the following terms:

“I am currently arranging the quotation of a professional indemnity insurance to run from 31st January 1988 and in view of there being no further progress in our continued relationship, would suggest that you arrange professional indemnity insurance meeting your needs as from the final date of the current policy.

A further ‘loose end’ for tidying up is the business name registration in Queensland for which I would request the signature of the appropriate form indicating the change of ownership of Peden Lavis personnel to ourselves.  I am unaware of the details as to whether any of our own people here are registered proprietors with you in the business name.

I am sorry that the revival of our association has not occurred, however, trust that we might continue the closeness which has existed in the past.”

On 16th December 1987, Lavis wrote to Marsh and McLennan giving instructions for professional indemnity insurance.  The letter includes the following “our present policy is that it is with American Home and expires on 31 January, 1988 through the Nelson Wheeler Association.  We will be withdrawing from that Association within the next few weeks and will be requiring our own independent insurance cover from 31 January, 1988”.  On 16th December 1987 the Brisbane defendants submitted a professional indemnity insurance proposal form to Marsh and McLennan.  That showed the name of their previous firm as Nelson Wheeler and that the date upon which they left (were to leave) that firm was as 31st January 1988.  This information is in the handwriting of Lavis. 

On 17th December 1987, Lavis wrote to Grellman on the subject of the business name registration and professional indemnity insurance.  In that letter he wrote that it might be appropriate for all purposes to use 31st January 1988 “as the effective date of change” even though Wenham’s letter in April had mentioned 31st December.  He then dealt with the registration of various business names and concluded his letter as follows:

“I too am sorry that our association for the second time has been terminated and I hope we may be able to work together on various assignments from time to time.  The partners of this firm have high principles and while we have enjoyed the association with the group, we do not believe the approaches and practices of some of the colleagues of the group are compatible with us.  We have every respect for Sydney and will certainly maintain contact you and Paul.”

On 31st January 1988 Lavis, Taylor, Gay, Wenham and Arnold signed a form indicating the change in particulars for the registration of the business name Nelson Wheeler, indicating that on 31st January 1988 Lavis, Taylor and Gay ceased to carry on business in Queensland under the name Nelson Wheeler. 

It is the plaintiff’s case that these matters relating to the registration of the business name and professional indemnity insurance, together with the correspondence at that time, indicate that the relationship between the Brisbane defendants and Nelson Wheeler was kept on foot and did not end until 31st January 1988 with the consequence that they remain partners of Nelson Wheeler national.

I do not think that is so.  Clearly the arrangements between the Brisbane defendants and Nelson Wheeler which I have found constituted a partnership changed by April 1987 when it was decided by the National Executive to terminate that arrangement.  Obviously it took time to put new arrangements in place.  However, by 1st June 1987 there was a new Nelson Wheeler Brisbane office.  There was no professional association between the Brisbane defendants and Nelson Wheeler of any nature.  There were some outstanding matters.  They included professional indemnity insurance arrangements and the registration of the name Nelson Wheeler and of other business names.  When Wenham gave notice to the Brisbane defendants, he fixed the date of 31st December 1987 or such earlier date as may be agreed but the evidence does not disclose that the Brisbane defendants reached an agreement with Wenham or Nelson Wheeler national about that date.  The fixing of the date was the unilateral act of the National Executive of Nelson Wheeler national and cannot be regarded as the date upon which the parties agreed to terminate the relationship.  I accept the evidence of the Brisbane defendants that they were happy to end the relationship with Nelson Wheeler.  The effect of all of the evidence is that date specified in the notice was varied by mutual arrangement.  As soon as Nelson Wheeler national could establish the new Brisbane office of Nelson Wheeler, the arrangement was at an end.  There was no feature of any relationship between the Brisbane defendants and Nelson Wheeler which was consistent with their membership of the partnership continuing beyond 1st June 1987.  The matters relating to the business names and the professional indemnity insurance were dealt with on a common sense basis and could not effect the substance of the situation which was that the partnership arrangement had come to an end.

The plaintiff draws attention to some other matters.  In 1988 proceedings were instituted in the Queensland Registry of the Federal Court of Australia by a Mr Mackman against Taylor, Wenham, Lavis, Gay and Arnold.  The nature of those proceedings is of no importance for present purposes.  On 24th November 1988 Taylor, Wenham, Lavis, Gay and Arnold filed a defence in which it is admitted that at all material times they had carried on business as chartered accountants under the name of Nelson Wheeler, including as at 30th December 1987.  The Brisbane defendants discussed the Mackman proceedings.  These proceedings had nothing to do with them.  The subject matter of the proceedings arose out of work undertaken by the Surfers Paradise office.  Obviously these five men had been sued following a search of the business name.

According to Lavis, he had no knowledge of the Mackman proceedings.  He said that he had never seen the court documents and he knew nothing about the matter.  Gay remembered the Mackman proceedings.  He saw the statement of claim and realised that it related to the Surfers Paradise office and had nothing to do with the Brisbane defendants.  He said that he discussed the matter with Taylor and that he would have discussed it with Lavis.  He and Taylor attended to the matter but he did not think that Lavis was involved in resolving the matter.  According to Gay, solicitors were instructed but he did not give any instructions. 

It must be accepted that the Brisbane defendants were being asked to recall the matter in which they were not personally involved which occurred many years ago.  It is likely that there would be inaccuracies in their recollection.  However, I do not think any of these matters is significant.  What obviously happened is that the wrong defendants were sued by Mackman.  The matter was passed over to solicitors who were probably instructed through the professional indemnity insurer who then filed a defence without seeking instructions about the particular matter of the composition of the firm at the time.  The Mackman proceedings is of no assistance in resolving matters in issue in these proceedings.

The next matter relates to a service company operated by the Brisbane defendants entitled PL Administration Pty Ltd.  During the years 1980 to 1987 taxation returns were filed by that company.  In those returns there was a note that administrative services were provided to the partnership of Peden Lavis & Co that the practice was a member of the national practice of Nelson Wheeler Chartered Accountants with associations throughout the Pacific area and overseas.  The purpose of this disclosure was to justify travelling expenses.  This disclosure is consistent with the finding that the Brisbane defendants were part of the National Partnership. 

In the 1988 year there is a note that the practice was a member of the National Federation of Nelson Wheeler Chartered Accountants.  The point made by the plaintiff is that if the partnership arrangement ceased as alleged by the Brisbane defendants, there would be no need for such a note and indeed such a disclosure to the Taxation Department would be incorrect.  Lavis accepted responsibility for writing this note in the 1988 taxation return.  He said that the note was inserted without much thought.  Lavis said that he had no recollection as to why he changed the wording from the 1987 year as “a member of a National Practice” to the wording in the following year as “a member of a National Federation”.  He said that the only explanation he could give is that his firm had remained insured under the same policy into the 1988 financial year.  He denied that the reason that he made the change from National Partnership to National Federation was because anticipation of the Mackman legal proceedings.  Gay was aware of the Mackman proceedings but he could not say if that was the reason for the change of description in the taxation return of PL Administration.  He said he did not know why there was any reference to Nelson Wheeler in the 1988 taxation return. 

This evidence of Lavis is unsatisfactory but I do not think it reveals a lack of credit on his part.  He was called upon to explain matters that have occurred eight years previously.  The reference to Nelson Wheeler in the 1988 taxation return is puzzling.  But I do not think it establishes that the partnership arrangement between the Brisbane defendants and Nelson Wheeler continued after June 1987.  The evidence clearly establishes that there was no partnership relationship.  The statement by Lavis in the taxation return of a continuation of the relationship is contrary to the fact of the matter.  I find that the Brisbane defendants were members of the partnership Nelson Wheeler National that they ceased to be so as from no later than 1st June 1987. 

There is no evidence to suggest that the Brisbane defendants were held out as partners of Nelson Wheeler National at any time thereafter.  They practised only under the name Peden Lavis & Co and there was a new Nelson Wheeler Brisbane office.

In view of these findings, the application of the Brisbane defendants to withdraw their admission should be granted and I give leave to them to do so.  As they were not in fact partners, no relevant prejudice to the plaintiff arises.

The action against the Brisbane defendants is dismissed.

form of the judgment

There will be judgment for the plaintiff for $93,863,796.81, including interest, against each of the first defendants, the fifth defendants with the exception of the defendants Lavis, Gay and Taylor and each of the defendants Quilty, and Singleton, Harold Abbott, Lee-Steere and Somes.  On the third party proceedings, there will be judgment for the first defendants for contribution in accordance with the apportionment of responsibility which has been made, that is fifty per cent by the defendant Harold Abbott and five per cent by each of the defendants Lee-Steere, Somes, Quilty and Singleton.  I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on this judgment in circumstances where the defendants, excluding those excepted, acknowledge as constituting a proper defence by the plaintiff on any such claim made against it by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount, together with costs, on a solicitor and client basis.  The plaintiff is required to pay in pursuing or defending any such proceedings in consequence of these defendants not making the acknowledgment referred to.

The action against the defendants Lavis, Gay and Taylor is dismissed.

In reaching my conclusions, I have thought it appropriate to disregard the possibility that all, or some, of the director defendants, or their associates, could be further enriched by a distribution to shareholders of the balance of the judgment sum after all debts of the plaintiff have been paid.  I have only little information about the current financial position of the plaintiff and I do not know if such a distribution is a possibility.  If such a distribution is to be made before the first defendants have enforced judgment on the third party proceedings against the director defendants, it is to be expected that they will seek appropriate protection and relief in independent or supplementary proceedings.  If the first defendants have achieved recovery from the director defendants before any such distribution is made, no injustice should occur.

All of the parties are to have liberty to speak to the minutes of the judgment.