FAI General Insurance Co Ltd v McSweeney, Brian Albert and Ors Travel Compensation Fund v FAI General Insurance Co Ltd (Part Ii)

[1998] FCA 356

FEDERAL COURT OF AUSTRALIA

INSURANCE - claims made and notified policy - insured, a firm of accountants - “dishonesty extension” covering dishonest or fraudulent conduct, but not that of any person committing or condoning fraudulent act - acquisition of interest in business of a client of the firm - firm providing set of preliminary accounts to acquirer - preliminary accounts showing state of affairs in bank accounts as at 30 June which accountants knew to be false - accountants assured by client that he would cause cheques to be drawn and presented to “cure” situation “retrospectively” - failure of client to do so - accountants’ belief that no harm would come of false representation in preliminary accounts because client would ensure position rectified - whether all elements of fraud made out - whether accountants intended acquirer to rely on preliminary accounts - relevance of accountants’ belief and intention that no harm would come of falsity - relevance of accountants’ lack of intention to cause loss - elements of fraud.

Briginshaw v Briginshaw (1938) 60 CLR 336 - appl.
Helton v Allen (1940) 63 CLR 691 At 701 - appl.
Rejfek v McElroy (1965) 112 CLR 517 - appl.
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 - appl.
Polhill v Walter (1832) 3 B & Ad 114 (110 ER 43) - appl.
Edginton v Fitzmaurice (1885) 29 Ch D 459 - appl.
Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd [1957] 2 QB 621 - appl.

FAI GENERAL INSURANCE CO LIMITED v BRIAN ALBERT McSWEENEY & ORS

NG 312 of 1992

TRAVEL COMPENSATION FUND v FAI GENERAL INSURANCE CO LIMITED

NG 948 of 1992

REASONS FOR JUDGMENT (PART II)

LINDGREN J
SYDNEY
9 APRIL 1998

TABLE OF CONTENTS
REASONS FOR JUDGMENT (PART III)

INTRODUCTION ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	2
General ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	2
FAI’s claims against PMS ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	4
Proof by FAI of dishonesty and fraud ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	6
DRAMATIS PERSONAE ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	8
FRAUD AND THE TAG FACTS ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	9
Webber ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	9
Elaboration of underlying facts of the TAG transaction ........ ........ ........ ........ ........ .....	14
“Pooling” ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	14
Structure of the TAG transaction ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	14
Supply of financial statements by PMS to TAG ........ ........ ........ ........ ........ ........ ........ ........	16
The inter-company debts and cheques ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	16
Pro forma balance sheets ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	20
Awareness of McS subsequent to 29 July 1987, that cheques not presented ........ ........ ...	21
Issue of audited accounts on 30 November 1987 ........ ........ ........ ........ ........ ........ ........ .....	22
McS’s own account of the TAG facts ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	25
Background matters ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	25
Background ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	25
Early negotiation of the TAG transaction: Wu’s fax of 24 April and Wise’s letter of 12 May ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	28
Further negotiations including requests for PMS to provide sets of accounts ........ ........ ..	31
Monday 22 July ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	35
Work on the preliminary accounts ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	36
Monday 27 July ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	36
Tuesday 28 July ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	41
Delivery to TAG of the first batch of preliminary accounts on Wednesday 29 July ........ ..	44
Events between Wednesday 29 July and execution of Acquisition Deed on Monday 1 October ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	45
1 October 1987 - execution of Acquisition Deed ........ ........ ........ ........ ........ ........ ........ ......	48
19 October 1987 - discovery that the cheques had not been presented ........ ........ ........ .....	49
Events between 19 October and 2 November ........ ........ ........ ........ ........ ........ ........ ........ ...	51
2 November 1987 - settlement of TAG transaction ........ ........ ........ ........ ........ ........ ........ ..	52
Audit ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	53
Events of December 1987 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	55
1988 ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	56
FINDINGS OF FACT OF OLNEY J IN THE TAG JUDGMENT ........ ........ ........ .....	59
REASONING IN RELATION TO FRAUD AND THE TAG FACTS ........ ........ ........ ...	66
1.   A representation of fact, however made ........ ........ ........ ........ ........ ........ ........ ........ .....	66
2.   Falsity of the representation ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	69
3.   That the maker of the representation does not believe that it is true in the sense in which the maker intends it to be understood ........ ........ ........ ........ ........ ........ ........ ........ ....	69
4.   That the maker of the representation intends a person or class of persons to act in reliance on it ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	70
5.   That the person, or a person belonging to the class of persons, acts in reliance on the representation ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	76
6.   That loss or damage is suffered as a result of the reliance ........ ........ ........ ........ ........ .	76
RESULT IN RELATION TO FRAUD AND THE TAG FACTS ........ ........ ........ ........ ...	77

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 312 of 1992

BETWEEN:

FAI GENERAL INSURANCE CO LIMITED
APPLICANT

AND:

BRIAN ALBERT McSWEENEY
FIRST RESPONDENT

BRUCE WILLIAM PHILLIPS
SECOND RESPONDENT

JOHN WILLIAM BEALE
THIRD RESPONDENT

PAUL FREDERICK TURNER
FOURTH RESPONDENT

TIMOTHY PATRICK CULLEN
FIFTH RESPONDENT

MICHAEL JOHN GAERTNER
SIXTH RESPONDENT

TAG PACIFIC LIMITED
SEVENTH RESPONDENT

TOIKAN HOLDINGS PTY LIMITED
EIGHTH RESPONDENT

BETWEEN:	TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY  LIMITED FIRST CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-RESPONDENT
BETWEEN:	BRIAN ALBERT McSWEENEY AND BRUCE WILLIAM PHILLIPS SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 948 of 1992

BETWEEN:	TRAVEL COMPENSATION FUND APPLICANT
AND:	FAI GENERAL INSURANCE CO LIMITED RESPONDENT
BETWEEN:	FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-CLAIMANT
AND:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN FIRST CROSS-RESPONDENTS

BETWEEN:	BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN SECOND CROSS-CLAIMANTS
AND:	FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT
JUDGE:		LINDGREN J
DATE:		9 APRIL 1998
PLACE:		SYDNEY

REASONS FOR JUDGMENT - PART II
FRAUD AND THE TAG FACTS

INTRODUCTION
General
Part I of my Reasons for Judgment, comprising 127 pages and annexures A, B and C, was delivered on 12 March 1997 (Part I is now reported at (1997) 73 FCR 379). No orders were made at that time.

The issues debated on the hearing were numerous and complex. The thirty-two days and 2,079 pages of transcript of the hearing before me are an inadequate measure of the dimension of the proceeding, because substantial parts of the transcript of, and evidence in, the TAG proceeding and the TCF proceeding were also in evidence before me. So were substantial extracts from the transcripts of the examinations under s 541 of the Companies Code of McS, Cullen and Beale, in connection with the liquidations of Travel Abroad and Wheels Abroad. The affidavit evidence and exhibits before me were voluminous, occupying some forty lever arch binders.

The thirty-two days of hearing were not continuous. Apparently due to an unrealistic original estimate by someone of the time required, the hearing occurred intermittently over a period of some nine months. With only one day of further hearing time in the foreseeable future available after the end of the evidence, I directed that submissions be put fully in writing, with the one day available fixed for oral elaboration. In consequence, submissions have been voluminous and detailed, and, I should add, helpful. The submissions for all three parties (FAI, PMS and TCF) occupy 1,246 pages. They are, throughout, cross-referenced to the evidence.

A question arises, with the benefit of hindsight, whether the course taken was the preferable one for the expeditious finalisation of the matter. One lesson learned is that, at least in a complex case like the present one, there must be, notwithstanding the difficulties of the task, a realistic estimate by the parties of the time which will be required for the various elements of the hearing to which the parties will be, with some flexibility, held. Time is allocated for the performance of the Court’s work on the basis of such assessments by parties.

FAI alleges fraudulent behaviour by McS. The parties have sought to address in detail every conceivable aspect of the evidence for the purpose of supporting, or negating, an inference that McS was fraudulent. It is impracticable, and not my duty, to address every submission and counter-submission made.

FAI’s claims against PMS
           FAI has three claims against PMS:

(a)a claim that it is entitled to recover its costs of $439,145.67 of defending the TAG proceeding (FAI does not, however, seek to recover the amount of $2,900,000 which it paid to TAG by way of settlement of the TAG proceeding);

(b)a claim that it is entitled to recover its settlement payment to IPG of $245,000 ($250,000 less excess of $5,000 payable by insured) plus its costs of $55,538.68 in defending the IPG claim;

(c)a claim that it is not liable to indemnify PMS against the TCF judgment against McS and Phillips for $626,586 nor their costs, if any, of defending the TCF proceeding (McS and Phillips represented themselves on the hearing of the TCF proceeding before Wilcox J).

It is common ground that the PMS policy for 1989-1990 applied to the TAG and IPG claims and the Chatswood and Gosford policies for 1991-1992 to the TCF claim.

Issues of fraud arise in two contexts: first, that of underlying facts, that is, the facts underlying each of the TAG claim and the TCF claim; and, second, that of the issue of the relevant policies, that is, the PMS policy for 1989-1990 and the Chatswood and Gosford policies for 1991-1992. Fraud in the context of the underlying facts arises because standard exclusion (b) of all policies excluded claims against the insured:

“(b)For alleged or actual dishonest, fraudulent (both legal and equitable), criminal or malicious acts or omissions of the Insured or any of the Insured’s partners, co-directors or employees (including directors in the case of companies) or predecessors in business; ...”

However, in the case of all policies, this standard exclusion was subject to “Extension 4: Dishonesty” which was as follows:

“If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act. ...”

By the schedule to the PMS policy it was declared and agreed that the policy was extended to include the dishonesty extension subject to a “dishonesty limit” of $500,000. In the result, if the claim by McS and Phillips to be indemnified by FAI in respect of their liability to TAG established by the TAG judgment arose out of, or was contributed to, by, relevantly, the dishonest or fraudulent conduct of McS, FAI was not liable to indemnify McS at all, and was liable to indemnify Phillips up to an amount of only $500,000.

Dishonest or fraudulent conduct by McS as part of the TAG facts may also conceivably be relevant to the question whether he was fraudulent later in connection with the issue of the PMS policy for 1989-1990 and the Chatswood policy for 1991-1992.

The schedule to the Chatswood policy for 1991-1992 also stated a limit in respect of the dishonesty extension of $500,000. However, TCF has no judgment against Turner. If McS’s conduct as part of the TCF facts was dishonest or fraudulent, he is not entitled to indemnity under the Chatswood policy for 1991-1992.

In the case of the Gosford policy for 1991-1992, the dishonesty extension was subject to a limit of $100,000. Phillips was, with Cullen, insured under that policy. The TCF judgment is against Phillips as well as against McS. Accordingly, if McS engaged in fraudulent or dishonest conduct as part of the TCF facts, Phillips is entitled to be indemnified in respect of his resultant liability to TCF up to a limit of $100,000.

Dishonesty or fraudulent conduct by McS as part of the TCF facts may also conceivably be relevant to the question whether he was fraudulent later in connection with the issue of the PMS policy for 1989-1990 and the Chatswood policy for 1991-1992.

I turn next to the issue of the various policies. Fraud by McS arises as an issue under s 28 (2) of the Insurance Contracts Act 1984 (Cth) (“the IC Act”). If the alleged failure to comply with the duty of disclosure imposed by s 21 of the IC Act when the PMS insurance contract was entered into in June 1989 was fraudulent, or the misrepresentations allegedly made in the proposal at that time were made fraudulently, FAI is entitled to avoid that contract under s 28 (2) of the IC Act. Similar observations apply in relation to the Chatswood and Gosford insurance contracts for 1991-1992. FAI claims that by its letter dated 11 June 1992 to M & M, it avoided for fraudulent non-disclosure and misrepresentation the PMS policy for the three insurance periods within the period 23 May 1988 to 24 October 1990, and the Chatswood policy for the two insurance periods within the period 24 October 1990 to 23 May 1992, that is, all policies in which McS was an insured.

By two letters dated 24 August 1993 to Phillips and Cullen respectively, FAI purported to avoid the Gosford policy for the period 23 May 1991 to 23 May 1992 pursuant to s 28 (2) of the IC Act for fraudulent non-disclosure and misrepresentation by Cullen. However, FAI has not purported to avoid the Gosford policy for its initial period, 24 October 1990 to 23 May 1991.

As noted in Part I of these Reasons for Judgment, the pleadings also raise issues not involving fraud.

Proof by FAI of dishonesty and fraud
While the standard of proof by FAI of dishonesty or fraud is the civil standard, commonly referred to as “the balance of probabilities”, I must bear in mind the seriousness of the allegation made, and should not find dishonesty or fraud proved “by inexact proofs, indefinite testimony, or indirect inferences”: Briginshaw v Briginshaw (1938) 60 CLR 336 at 362 (Dixon J); and see Helton v Allen (1940) 63 CLR 691 at 701; Rejfek v McElroy (1965) 112 CLR 517 at 519-521. The most recent High Court pronouncement relating to the issue in the context of a case of fraud is to be found in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170. In their joint judgment, Mason CJ, Brennan, Deane and Gaudron JJ said (omitting references to authorities):

“ ... authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary ‘where so serious a matter as fraud is to be found’. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.” (at 171)

Their Honours went on (at 171) to refer with approval to the following passage from the judgment of Dixon J in Briginshaw v Briginshaw (at 362):

“The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved ...”

The expression “the gravity of the consequences” should not be misunderstood. In the context of a case such as the present, the reference is not to ultimate consequences, that is, the unavailability of indemnity insurance, but to more immediate consequences of the allegedly fraudulent conduct. I should not lightly find that McS engaged in dishonest or fraudulent conduct as part of the TAG facts or that he or Beale did so as part of the TCF facts, and I should not lightly find fraudulent non-disclosure or misrepresentation in connection with the obtaining of the various policies, because it is not ordinarily to be expected that the individuals concerned would fraudulently deceive TAG, TCF or FAI, respectively

The fraud sought to be established in the present case is alleged to have occurred some years ago: in the case of the TAG facts, in 1987; in the case of the TCF facts, in 1988; in respect of the renewal of the PMS policy for 1989-1990, in 1989; and in respect of the renewals of the Chatswood and Gosford policies for 1991-1992, in a period down to May/June 1991. By the time the witnesses gave evidence before me, their recollection of events must have been affected by the passing of the years. I bear this in mind when I consider, in particular, the inability of a witness to recall or explain conversations, thoughts, understandings and courses of conduct. While this consideration must have affected every witness, it is particularly relevant to McS who was the target of FAI’s accusations.

DRAMATIS PERSONAE
Annexed and marked “A” is a “Dramatis Personae - Part I” which lists the individuals and companies involved in the TAG facts, the subject of the present Part II of these Reasons for Judgment. The content of that Dramatis Personae - Part I forms part of these Reasons.

Some explanation is appropriate in relation to the expressions “Webber companies”, “Webber family companies” and “Toikan Group” which are used in the evidence. Prior to the TAG transaction, Webber controlled or had an interest in sixteen relevant companies. All sixteen were “Webber companies”, but it is convenient to think of them as divided into two broad groups. The expression “Toikan Group” seems to have been used to refer to those Webber companies that operated as insurance or finance brokers, from premises at 30-38 Victoria Street, Paddington. The expression “Webber family companies” seems to have been used to refer to the other Webber companies. But the distinction is not clear, and the categorisation of some companies changed with events. Nonetheless, by reference to these two expressions, the positions of the more significant Webber companies can be identified.

Sabada, Dawlarnu, Ligon 125, Shamm Pagny, Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd, were Webber family companies before and after the TAG transaction.

TIBG was originally part of the Toikan Group but sold its insurance broking portfolio to TIIB with effect from 1 July 1986, although it continued to manage the portfolio for TIIB for some time afterwards. Accordingly, in substance it had become an ordinary Webber family company well prior to the TAG transaction, was not subject to the TAG/Webber joint venture, and later ceased to have the word “Toikan” as part of its name.

With effect from 1 July 1986, TIIB owned and operated the major insurance broking business within the Toikan Group. Although that business was sold as part of the TAG transaction to the joint venture vehicle, TKN, the shares in TIIB were not. Accordingly, upon settlement of the TAG transaction on 2 November 1987, TIIB ceased to be part of the Toikan Group and became an ordinary Webber family company. Later, it too ceased to have the word “Toikan” as part of its name.

TFS was sui generis. Before and after the TAG transaction, sixty per cent of its issued shares were owned by TKN. To this extent it was a part of the Toikan Group and became part of the joint venture, but it had never functioned as an insurance broker and therefore did not operate a broking account.

Although it had owned the issued share capital of Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd prior to the TAG transaction, TKN had not traded prior to its being called into service as the vehicle to implement the TAG/Webber joint venture. Locna, Vana, CJ & H and C & G operated as insurance brokers and the Webber interests’ shares in them were sold to TKN as part of the TAG transaction (prior to the transaction, C & G was wholly owned, and CJ & H, Locna and Vana were partly owned, by the Webber interests).

FRAUD AND THE TAG FACTS
Webber
Webber was not called as a witness. This is understandable: no one had a good word to say about him. He was the primary cause of the unfortunate sequences of events with which the case is concerned.

Notwithstanding his absence from the witness box, I have been able on two bases, to form an impression of the kind of person that Webber was. First, there is evidence given in response to specific questions on the matter. Secondly, there is evidence of Webber’s conduct. The evidence shows that Webber was a plausible person who created a favourable impression but who deceived, perhaps himself, and certainly others. He seems to have been primarily interested in “doing deals”; to have made unrealistic demands on those about him on whose professional skills he depended; to have been unable to accept constraints on his conduct; and to have left it to others to overcome the chaos which his contempt for detail created. He was dangerous, the more so for his charm and charisma. Any professional person such as an accountant must take care to resist the demands of such a person against the danger of being compromised. Part of McS’s case is that he was taken in by Webber and his assurances.

McS said that he met Webber in about 1974 and that Webber became a client of PMS when the firm was established in 1976. Down to the time of the TAG transaction in the second half of 1987, the story of the Toikan Group had been one of rapid expansion as a result of the purchase of existing businesses, although it is noteworthy that the purchase prices were payable by instalments spread over some years. McS said:

“5At all times until about the beginning of 1989, when Mr Webber failed to honour agreements he and some of his companies had made with Tag in about September 1988, I believed that Mr Webber was a man of substantial financial means. I had by mid-1987, a general awareness of what I understood to be Mr Webber’s financial position from Phillips McSweeney’s preparation of the accounts of Mr Webber and his companies, and comments made by Mr Webber to me from time to time. In 1987 to the best of my recollection, I understood that Mr Webber and his wife had gross assets of around $7,150,000 though I do not recall that I had a precise knowledge of all of Mr Webber’s financial position ... On a number of occasions Mr Webber had made comments to me, which caused me to believe Mr Webber’s wife’s family was very wealthy. Mr Webber had on a number of occasions said words to the effect:

‘Roslyn’s (Mr Webber’s wife) family owns one of the largest car clutch and brake businesses in Australia.’

Mr Webber also said to me on one occasion words to the effect:

‘My wife’s family banks at the same branch at the National Australia Bank [NAB] at Maroubra at which Toikan has its accounts. Roslyn’s family has one of the largest accounts with that branch, and I have the family’s backing and influence at the bank.’

I believed throughout my dealings with Mr Webber that he was a man of his word, and a responsible business man of considerable financial means. I trusted Mr Webber in his dealings with me.”

Beazley, who was, in effect, employed by Webber, described him as “a very smart man” who “could manipulate people”, and added:

‘ ... he was certainly a smart man and certainly you could, I have used the word before, confidence man. I think he would certainly take you into his confidence and because of his astuteness he could often say lead you down the garden path.” (T 518)

Wu negotiated the TAG transaction with Webber. After settlement on 2 November 1987, Webber continued to be the managing director of the Toikan Group (now TKN and its subsidiaries) under a contract of employment, while Wu was the chairman of directors of TAG and its subsidiary TAGNT, the latter being the holder of 60 per cent of the shares in TKN. Wu was based in New Zealand but had frequent contact with Webber who was based in Sydney. Wu gave this evidence:

“I would like you to assist the court in an understanding of the sort of man that Mr Webber was based upon your experience of him. Please tell the court? - I think he initially was very charming, smooth, fairly persuasive. Obviously my impression changed as events took effect.

How did they change? - I think to use the word colloquially he is a bit of a conman. I think he manipulates people to his own ends I suspect.” (T 724)

It is remarkable how long the relationship between TAG and Webber continued. The fact of the unpresented cheques became known to TAG in the first half of 1988. On 3 September 1988 a deed was entered into between TKN (by then called “Toikan International Insurance Broking Pty Ltd”) and Webber, Mrs Webber and the Webber family companies, Sabada, Shamm Pagny, Ligon, TIBG, Salamander Leasing Corporation Pty Ltd and Salamander Finance Corporation Ltd. By the deed, Webber assumed responsibility for, and agreed to pay, the amount of the deficiencies which had existed in the broking and general accounts of the members of the Toikan Group as at 1 July 1987, which the parties agreed had amounted to $2,232,145.54. The Webber family companies guaranteed, and agreed to provide security for, payment of this sum. Of course, payment was not made. Webber’s services were not terminated until 1992.

Phillips, McS’s partner who signed the audit certificates dated 30 November 1987 for TIIB, C & G and CJ & H, said that Webber had “turned out to be a charleton [sic - charlatan]”.

Webber disregarded McS’s advice in mid-1986 that the Act required that separate broking accounts be maintained for the receipt and disbursement of underwriting moneys. Webber seems to have used any money in any account of any company for any purpose that suited him, leaving it to others to find a way to record his misappropriations. When his past misdeeds stood in his way in connection with the TAG transaction, he brushed aside the difficulty. A particular instance is to be found in his meeting held with McS and Beazley on the night of Tuesday 28 July 1987, extending into the early hours of Wednesday 29 July (I will henceforth refer to this lengthy meeting as having occurred on 28 July to distinguish it from the meeting with the representatives of TAG at Rosenblums’ office on the afternoon of Wednesday 29 July). McS gives the following account of part of the conversation at the meeting in his affidavit sworn 7 September 1993:

“I said to Mr Webber and Mr Beazley words to the effect:

‘The draft financials for the group which Eric and I have prepared show that there are intercompany loans between the companies. We have discussed this previously and you are aware that this is contrary to the provisions of the Insurance Brokers Act. I spoke with you both about this matter last year, and the need to use the broking accounts for a limited number of purposes. This appears to have been ignored. You are simply going to have to stop the pooling of the broking funds and correct the inter-company loan balances.’

Mr Webber said words to the effect:

‘How are we going to fix it up?’

I said words to the effect:

‘Funds will have to be moved back into the correct companies [sic] bank accounts.’

Mr Webber said words to the effect:

‘We will do whatever is needed to fix it up. What do we have to do?’

Mr Beazley said:

‘We will have to draw cheques at 30 June.’

A discussion took place concerning the work paper of intercompany loan balances that had been prepared by Robert Yip .... I cannot recall in detail what was discussed. However, I do recall that during the discussion, Mr Beazley said:

‘I think you will find that we will be about $800,000 short.’

I cannot recall what my response was to Mr Beazley’s comment. However, I recall that I was surprised by the comment. The comment did not make any sense to me based on what I understood to be the financial position of the group at the time.

To the best of my recollection, I said:

‘I don’t believe there should be a problem because the loan accounts are within the group and should have no effect on the nett [sic - net] cash position of the group as a whole. I think you should check your figures in the morning.’

Mr Beazley said:

‘What will I do if there is a problem?’

Mr Webber said:

‘Speak to the Bank if you need to and get it completed in the morning.’

I said:

‘So you don’t hold everything up, you could consider drawing two cheques, one for $800,000 and one for the balance. But we are going to need confirmation of what you have done in the morning.’

I recall Mr Wallis then said to Mr Beazley words to the effect:

‘If you are going to get the loan accounts correct you will have to do a lot of work. You will have to go through the records from 1 July 1986 to make sure you identify what transactions need to be reversed.’

Mr Webber said to Mr Beazley words to the effect:

‘You will need to do this first thing in the morning. Please send all of the information necessary to finalise the accounts to Phillips McSweeney.’

Mr Webber said to me:

‘We will make sure that is done. I want the preliminary accounts prepared on that basis and ready for the morning.’

Mr Beazley said:

‘I will phone through details of the adjustments in the morning.’

The above conversation about the possibility of $800,000 shortfall in funds was raised by Mr Beazley towards the end of the meeting.

The meeting finished at about 2.00 a.m.” (emphasis supplied)

“The morning” had already begun. In effect, Webber was instructing Beazley to “fix up”, within a few hours, the results of his own misappropriations, knowingly committed in contravention of the Act over the preceding twelve months. He expected similar service from McS. McS, who was impressed by Webber’s talk of his and his wife’s family’s wealth and connections, and, no doubt, by his apparent success in business, appears to have been disposed to succumb rather than to take the independent stand for which the circumstances called.

It is difficult to resist the impression that McS was, in terms of personality and the coincidence of his own financial interest with that of Webber, no match for Webber’s determination to see the joint venture with TAG consummated. Webber was one to brush aside obstacles, and it would have taken a stronger person than McS to withstand him.

Elaboration of underlying facts of the TAG transaction
I adopt Olney J’s account in the extract from the TAG judgment set out in Part I of these Reasons, of the Act’s provisions, the chronology of key events, and “THE FACTS”, to the extent to which his findings of fact have not been the subject of a notice of intention to contest. However the facts merit elaboration in view of the differences between the issues involved in the TAG proceeding and those involved in the TAG insurance proceeding.

“Pooling”
The insurance broking companies in the Toikan Group did not observe the requirement of s 26(3) of the Act. It has been said that broking moneys were “pooled”. But this does not mean that there was one “composite” or “group” broking account into which they were paid, or even that they were paid into the wrong broking accounts. Rather, they had their own broking accounts, but moneys which should have been paid into and retained in those accounts and applied exclusively to the broking account purposes specified in s 26(3), were applied to other impermissible purposes.

Structure of the TAG transaction
It is useful at this early stage to note the main features of the TAG transaction as it was ultimately to proceed pursuant to the Acquisition Deed dated 1 October 1987. But the “shape” of the transaction evolved over some months before its ultimate structure was attained. The acquisition by TAG involved a subscription for shares in TKN in which the Webber interests already held shares. Prior to the transaction, all 100 $1.00 issued shares in the capital of TKN were held by a Webber family company, Ligon 125, which was itself a wholly owned subsidiary of another Webber family company, Sabada. On the TAG side, the acquisition was to be effected by Kelso Pty Ltd (“TAGNT”), a wholly owned subsidiary of TAG, which was itself a wholly owned subsidiary of The Anthony Group Limited (“GROUP”). TAGNT was incorporated in the Northern Territory, TAG in Tasmania, and GROUP in New Zealand. As part of the transaction, Ligon was to subscribe for an additional two shares in TKN at a premium of $399,999 per share. This would result in Ligon’s owning 102 shares and having injected $800,000 into TKN as share capital and premium. TAGNT was to subscribe for 153 shares in TKN at an aggregate premium of $1,199,847, making a total payable by TAGNT of $1,200,000 as share capital and premium. In the result, TKN would have received share capital and premium aggregating $2,000,000 and would have an issued share capital of 255 shares, held as to 153 (60 per cent) by TAGNT and as to 102 (40 per cent) by Ligon.

But TKN was to need more than $2,000,000. Accordingly, it was also part of the transaction, as ultimately expressed in the Acquisition Deed, that TAG and TAGNT would procure a bank to lend $900,000 to TKN, and that Ligon would lend or procure the Webber interests to lend $600,000 to TKN. It will be noted that the total of this loan capital of $1,500,000 was to be procured as to 60 per cent by TAG and as to 40 per cent by the Webber interests.

TKN was to have the benefit of ownership of the broking portfolios, or of the Webber owned proportions of the broking portfolios, of TIIB, Vana, Locna, CJ & H and C & G. The most substantial broking portfolio was that of TIIB. Although TKN was to acquire TIIB’s portfolio, it was not to acquire shares in TIIB, which was therefore to become an ordinary Webber family company (in fact it was to be wound up and its net funds distributed to Ligon); TKN was to change its name to “Toikan International Insurance Broking Pty Ltd” in order to enjoy the goodwill of TIIB’s broking business; and TIIB was to change its name to a name not including the word “Toikan” or any similar word (the name changes did not take place until mid-1988, long after the TAG transaction was settled on 2 November 1987). In the case of the other four insurance broking companies mentioned, Locna, Vana, CJ & H and C & G, TKN
was to acquire the Webber interests’ shareholdings in those companies.

Supply of financial statements by PMS to TAG
PMS prepared the financial statements of TIIB, TIBG, TKN, TFS, Locna, Vana, CJ & H and C & G for the year ended 30 June 1987. As well, PMS were the auditors of the accounts of the insurance broking companies, TIIB, Vana, Locna, CJ & H and C & G, for that year. PMS provided “preliminary accounts” and “audited accounts” to TAG. On Wednesday evening, 29 July 1987, under cover of a PMS letter of that date signed by Wallis and addressed to TAG care of TAG’s solicitors, Rosenblums, PMS forwarded “preliminary Financial Statements” (including preliminary balance sheet and preliminary profit and loss accounts) which they had prepared for the year ended 30 June 1987 for TIIB, TFS, Locna, Vana, and the proposed joint venture vehicle, TKN, which had not yet traded, those for each company being accompanied by an “Accountant’s Report” signed by McS, the terms of which were set out by Olney J in the TAG judgment quoted earlier. On 28 August and 9 September 1987, McS forwarded to Wu “preliminary Financial Statements”(and accompanying Accountant’s Report) for the same year for CJ & H and C & G, on both occasions under a covering faxed memo from McS to Wu. A close consideration of the facsimile cover sheets might suggest that the preliminary accounts were not enclosed with the memo of 28 August, but the parties have treated them as having been, and I will proceed on the same basis - nothing appears to turn on the question whether they were sent twice or on 9 September alone.

The inter-company debts and cheques
As at Tuesday night 28 July 1987, McS knew that the “inter-company debts” had existed on 30 June as a result of the “pooling” of moneys which should have been maintained in the insurance broking companies’ separate broking accounts. McS says that it was in reliance on the assurance given by Webber at the meeting that night and a communication on the following morning 29 July from Beazley to PMS (Yip), that he caused the preliminary accounts as at 30 June to be drawn up as if the inter-company debts had in fact been paid by that date, although he knew that they had not been. Properly understood, his evidence is that because he believed Beazley had caused the inter-company debts to be paid following and in accordance with the discussion on the night of Tuesday 28 July, he (McS) treated the inter-company debts in the preliminary accounts as not having existed at all as at the preceding 30 June.

Either on the morning of Wednesday 29 July or over a period from then to 19 August 1987, Beazley prepared requisitions for thirty-one cheques and the cheques themselves, necessary to put the accounts in order. According to an uncontested finding by Olney J, the cheques were drawn over the period from 29 July until about 19 August. In cross-examination before me, Beazley agreed that he drew them (and the associated requisition forms) on the morning of Wednesday 29 July. The difference is inconsequential for present purposes. Some of the cheques were expressed to be drawn on a company’s broking account and others on a company’s general account. In some instances they were drawn in favour of a company’s broking account and in others in favour of a company’s general account. Two signatures were required but in the case of each cheque only one appeared, in most cases that of Beazley, but in a few cases that of Webber. It follows that although it is convenient to refer to these pieces of paper as “cheques”, they were not signed by the customer or by signatories authorised by the customer. The cheques were not presented for payment. If they had been completed by the addition of the second signature and presented, they would not have been met without a special arrangement having been put in place by Webber with the manager of the Maroubra branch of the National Australia Bank (“NAB”) where the accounts were kept. The reason is that there were inadequate funds actually in the accounts on which the cheques were drawn. Most of the funding of the cheques was to come ultimately from the Webber company, TIBG, and it had insufficient money available for the purpose. Before me there was much evidence as to the extent of the shortfall. If one resorts only to the money actually standing in the various bank accounts, the shortfall was $2,232,146. If one takes into account other matters it is much less. (see later)

The cheques were placed by Beazley in a drawer in his desk. The cheques give a picture of what moneys had to be paid and deposited if the various accounts were to be put in order.  Penklis analysed the cheques and the various preliminary balance sheets which were provided to TAG. He demonstrated the position in a table in his affidavit as follows:

“Company	Deposits [of cheques into both broking and general accounts] $  (In)	Cheques [to be paid out of both broking and general accounts]      $      (Out)	Result $
TIIB [not involved in the takeover] Vana TFS Charlton James Carroll Locna	2,088,524 116,000 3,444 337,761 110,491 893,516 ________	728,359 3,444 31,578 187,000 491 366,719 ________	1,360,165 112,556 28,133 150,761 110,000 526,797 ________	+ + - + + +
Total of all deposits and cheques	3,549,736 =======	1,317,592 =======	2,232,146 =======	”

Excluding TIIB, the share capital of which was not to be acquired, the table shows that the net result for Locna, Vana, CJ & H, and C & G was that they needed to have deposited into their broking and general accounts an aggregate net amount of $900,114, while TFS, which did not have a broking account, was liable to disgorge a net amount of $28,133 from its general account, with the result that the companies involved in the acquisition needed a net injection overall into their broking and general accounts, of $871,981. When TIIB is brought into the picture, however, its need of a net injection of $1,360,165 brings the total required up to $2,232,146. As noted above, this amount was to come from TIBG, a company which was not involved in the acquisition, and which, since selling its broking portfolio in 1986 to TIIB, had been a Webber family company.

Penklis also set out the effect on the broking accounts alone of the deposits and withdrawals referred to above. The actual but undisclosed overdrafts $29,700 (TIIB), $5,175 (C & G) and $13,759 (CJ & H), would have been converted into credit balances of $1,057,812 (TIIB), $105,316 (C & G) and $191,852 (CJ & H) respectively. Similarly, Locna’s credit balance of $17,944 would have been increased to a credit balance of $506,734, and Vana’s credit balance of $163,957 would have been increased to a credit balance of $279,957. After making allowance for an error in the figure shown in a note to the preliminary accounts for TIIB, these were the figures that appeared in the preliminary balance sheets for those companies as at 30 June 1987 supplied by PMS to TAG.

In his affidavit, Penklis also set out in a table as follows, the amounts shown in the preliminary accounts which were provided to TAG (column B below), and beside those balances, the net differences resulting from the inter-company transactions (column A below) and the correct balances (column C below):

“Company	A Net Difference (Overstated) (c) $	B In Balance Sheet As an Asset $	C (A - B) Correct Balance $
TIIB Locna Vana Carroll Charlton James TFS TKN	1,087,513 + 488,790 + 116,000 + 110,491 + 205,611 +	*1,057,812 506,734 279,957 105,316 191,852 (a) (b)	29,700 17,944 163,957 5,175 13,759	O/D O/D O/D
Total	________ 2,008,405 =======	________ 2,141,671 =======	________ 133,266 =======

(a)       Did not have a Broking Account
(b)       Broking Account not shown in preliminary accounts as at 30 June 1987

(c)Calculated as per Schedule 3A attached [Schedule 3A gave particulars for each of TIIB, Vana, Locna, C J & S, and C & G of the cheques to come into and go out of the company’s broking and general accounts.]

*Notes to the Balance Sheet are incorrect, I have used the figures in the Balance Sheet as supported by the figures in Exhibit A49, attached to this report as Schedule 3B. [I need not discuss Schedule 3B, and mention elsewhere the need to correct the erroneous figure of $1,199,200 shown as the credit balance in TIIB’s broking account]”

Penklis observed that of the total deposits of $3,549,736 required to be made into both broking and general accounts referred to in the table set out earlier, $3,051,920 was required to be credited to the broking accounts and $497,816 was required to be credited to the general accounts.

I turn now to TIBG. It had sold the insurance portfolio to TIIB with effect as from 1 July 1986, that is to say, from the time when Part III of the Act commenced to operate. The sale price was to be calculated as a multiple of the earnings of the portfolio for the year ended 30 June 1987. The price was owed by TIIB to TIBG.  TIBG was to be the source of cheques totalling $2,307,230.49. It had ceased trading as an insurance broker and was not to be a party to the agreement. It was therefore not necessary for its accounts to be provided to TAG and they were not provided. The total of the required net injection by TIBG of $2,232,146 was to come as to $99,894 from its general account and as to $2,132,252 from its “broking account” (although it is convenient to use this expression, it must be remembered that TIBG had ceased to trade as an insurance broker as from 1 July 1986). But as at 30 June 1987, TIBG’s broking account was overdrawn to the extent of $405,194.63. If $2,132,252 had been paid out of that account, the overdraft would have risen to more than $2,500,000. In fact, according to Penklis, after allowing for a small amount of certain unrelated outstanding cheques totalling $617.39, TIBG’s broking account would have been overdrawn to the extent of $2,538,063.78. McS was aware that TIBG’s broking account was already overdrawn. Moreover, McS had signed the accountant’s report attached to the financial statements of TIBG for the year ended 30 June 1986 which showed that it had had net assets of only $7,267 as at that date. He was appointed as a director of TIBG on 17 June 1987.

Pro forma balance sheets

A distinction must be made between the “preliminary balance sheets” which formed part of the “preliminary accounts” to which I have referred, and the “pro forma balance sheets” which were to be, and were, schedules to the Acquisition Deed. The preliminary balance sheets were historical in the sense that they purported to give an account of historical actuality on 30 June 1987. The pro forma balance sheets with which the case was also much concerned stated financial states of affairs which Webber was to undertake in the Acquisition Deed, and did so undertake, would exist immediately following settlement of the TAG transaction.

The form of the pro forma balance sheets developed over time.  Under cover of a letter dated Monday 28 September 1987, PMS, (Wallis) forwarded to Wu, the final form of the pro forma balance sheets for TKN, CJ & H, C & G, TFS, Locna and Vana, showing how the balance sheets were to appear “as at the close of the effective date”, that is, immediately following settlement. There is no suggestion in these figures that inter-company debts were to be paid. So far as TAG understood, underwriting debtors plus cash at bank equalled or exceeded underwriting creditors.

McS knew that the pro forma balance sheets were to be “warranted” in the Acquisition Deed. His case is that he understood that in deciding to contract, TAG was relying on that warranty by Webber and associated companies and a warranty by them as to future performance of the business, and not on the preliminary accounts at all.

The Acquisition Deed was entered into on 1 October 1987. By clauses 2.5, 4.1(b), 4.2(b), 4.3, 4.4 and 4.5, the Webber interests warranted to TAG and TAGNT that as at the “Effective Date”, and upon completion of the transactions contemplated by the deed, the balance sheets of TKN, C & G, CJ & H, Locna, Vana and TFS would be “no less favourable” than the pro forma balance sheets contained in Schedules 2, 7, 8, 9, 10 and 11 respectively to the Deed. The expression “Effective Date” was defined to mean the fifth business day after satisfaction of the last of certain conditions relating to the Foreign Takeovers Act 1975 (Cth) and registration of TKN as an insurance broker. Settlement occurred on 2 November 1987.

Awareness of McS subsequent to 29 July 1987, that cheques not presented
On or about Monday 19 October 1987 McS became aware that the cheques drawn as at 30 June 1987 had still not been banked. On that date, Wallis wrote a memo to “Audit File” in relation to each of TIIB, CJ & H, C & G, Locna and Vana. In each case, the memo was headed “outstanding cheques and deposits as at 30th June 1987”. Each memo commenced:

“In the course of our audit for the year ended 30th June, 1987, we have reviewed aspects of the books and records of the above company. There are a number of outstanding cheques and deposits which related to June, 1987 transactions which have not been presented at the National Australia Bank Marouba [sic] Junction.

This matter has been raised with Ray Webber and Brian Beazley today and action required to clear these cheques. We also advised that inter Company cheques should in future be cleared as soon as possible.

Set out below are the outstanding cheques and deposits referred to above.”

There followed particulars of “outstanding cheques” and “outstanding deposits” with cheque number, payee or payer as the case may be, whether payment was made to or from (as the case may be) the broking or the general account, and the amount in question. (Wallis’s reference to “June, 1987 transactions” was misleading: the transactions had not occurred in or by the end of June and the cheques represented an attempt to “create” transactions retrospectively as at the end of June.)

On settlement of the TAG transaction on Monday 2 November 1987, knowing that the cheques had still not been banked, McS took the precaution of writing to Webber:

“Further to our meeting on 19 October, 1987 we confirm that, during the course of our audit, it has come to our notice that a number of cheques and deposits which related to June, 1987 transactions have not been presented and on enquiry these cheques were found to be held by Brian Beazley and had not been banked. These cheques are listed below for your attention.

This holding over by Brian Beazley is contrary to discussions on 28 July, 1987 at which time assurances were given that arrangements would be made to clear those cheques.

Please make suitable arrangements to clear these cheques forthwith and confirm those arrangements by reply to enable us to complete our audit.

We further advise that inter Company cheques should in future be cleared as soon as possible.”

As at settlement on 2 November, McS knew that Webber had dishonoured undertakings given on 29 July and 19 October that the cheques drawn on, or on and after, 29 July, and backdated to 30 June, would be promptly presented and cleared.

Issue of audited accounts on 30 November 1987
Four weeks later, on Monday 30 November, McS, knowing that the cheques were even still outstanding, approved of a form of five “representation letters” to be written by Webber to PMS, one in respect of each of C & G, CJ & H, TIIB, Locna and Vana. They commenced:

“After our discussions held early today, I now confirm in writing the following details which to the best of my knowledge and belief are correctly and accurately recorded as at 30th June, 1987:-”

Each letter went on to state that the “total of unpaid Underwriters as at 30 June, 1987” was a specified amount, that the “total of Debtors owing monies as at 30 June, 1987” was a specified amount, and that “related company cheques totalling [a specified amount] were held at the 30th June, 1987 by [the company in question] are [and were] still unbanked.” No letter was written in relation to TFS, no doubt because it did not have a broking account. The letters advised that the cheques would be banked “within the next week” and stated that Webber had had Beazley make arrangements with the bank to ensure that they would be “immediately cleared”. In relation to the failure to bank the cheques, the letter said:

“At the 30th June, 1987 these were to have been banked, however, with the sale of the insurance portfolio to Tag Pacific, this special banking was not completed by the Accounts Department.”

In fact, the cheques were not banked “within the next week” or at all.

On the same day (30 November), PMS issued audited accounts for the year ended 30 June 1987 for TIIB, Vana, Locna, CJ & H and C & G. In each case, the “auditor’s report” was addressed to the members of the company. Those for Locna and Vana were signed by McS as a partner of PMS, and those for TIIB, C & G and CJ & H were signed by Phillips as a partner of PMS. The report read as follows:

“We have audited the accompanying accounts being the profit and loss statements for the year ended 30th June, 1987, balance sheet at that date, notes, statement of sources and applications of funds and statement by directors. Our audit was conducted in accordance with Australian auditing standards.

In our opinion, the accounts of [TIIB, C & G or CJ & H, as the case might be] are properly drawn up:

(i)so as to give a true and fair view of the state of affairs of the company as at 30th June, 1987 and of the Profit of the company for the year ended on that date, and the other matters required by Section  269 of the Companies [name of State] Code to be dealt with in the accounts;

(ii)      in accordance with the provisions of that Code; and

(iii)     in accordance with applicable approved accounting standards.”

On the same day (30 November) PMS furnished financial statements to the Insurance and Superannuation Commission in respect of the same year for TIIB, Locna, Vana, C & G and CJ & H. In all five cases the auditor’s certificate dated 30 November was signed by McS, notwithstanding the fact that he was a director of TIIB, C & G and CJ & H. The form of auditor’s certificate supplied to the Commission was not expressed to be addressed to anyone and was as follows:

“In our opinion,

1.The accompanying financial statements, being the Balance Sheet and Profit and Loss Statement of [name of company] appear to be properly drawn up in accordance with the Insurance (Agents and Brokers) Act 1984.

2.The accounts of [name of company] have been properly kept and record and explain correctly the transactions and financial position of the Company.

3.In relation to the accompanying accounts all information and explanations requested from [name of company] have been supplied.

4.The accompanying financial statements agree with the accounts of  [name of company] and appear to truly represent the transactions and financial position of the Company.”

The financial statements to which the certificates were attached were in a special form required under the Act. They perpetuated the erroneous statements of positive balances in the broking accounts. The documents represented to the Commissioner that as at 30 June 1987, “in bank account or prescribed investments”, TIIB had $966,806, C & G had $105,255, CJ & H had $191,852, Vana had $117,236 and Locna had $472,681. (These representations were false to McS’s knowledge.)

On 21 December 1987 Wu instructed PMS to complete the accounts of all companies in the Toikan Group to 31 December 1987. In mid-January 1988, McS saw from bank reconciliations that the cheques had still not been banked.

On Friday 22 January 1988, McS wrote to Wu enclosing what he described as “Composite Balance Sheets” of TKN, TFS, C & G, CJ & H, Locna and Vana as at 1 July 1987. The purpose was stated in the covering letter to be “to establish an opening position as at 1st July, 1987”. The letter said that the “balance sheets [were] a representative statement of position of the Companies and [did] not purport to reflect the financial position of the Companies as at the balance date stated thereon”. The covering letter also said that the balance sheets had been “constructed for comparative purposes” and represented “the position of the Company as at the start of business on the 1st July, 1987 adjusted fo [sic] transactions which [had] occurred subsequent to the balance date and up to the effective date” as defined in the Acquisition Deed. The “Composite Balance Sheets” continued to treat the cheques as if they had been presented and paid by 1 July, although McS knew that they had not been. These were, so far as the evidence reveals, the last financial statements provided by McS to TAG which misstated the position.

McS’s own account of the TAG facts
Background matters
In the face of the serious allegations made against him, I am called upon to make findings as to
whether McS was fraudulent (including “recklessly indifferent” as to whether a position being put forward was true or false).

McS swore a lengthy affidavit (108 pages comprising 123 paragraphs) which referred to documents contained in three lever arch binders. He did so with a view to explaining his conduct and state of mind from time to time during the course of the TAG facts. It is important to consider closely what he says. I will therefore address the TAG facts and McS’s contemporaneous state of mind, in the first instance, by reference to McS’s account as given in that affidavit.  Except where otherwise indicated, the following is McS’s own account as found in that affidavit, and I will not further say so.

Background
McS first met Webber in about 1974. Webber asked him to do accounting work for him and his business. The work included the preparation of accounts and tax returns. At that time, Webber conducted an insurance broking business through a corporate structure. When PMS was established in 1976, Webber and his companies became clients of the firm.

In the second half of the 1970s, Webber expanded his insurance broking business by acquiring other such businesses. In the early 1980s, he caused the broking businesses to be transferred to R J Webber Insurance Management Services Pty Ltd, which later changed its name to TIBG. PMS did not participate in negotiations for the acquisition of the new businesses: the firm’s work was limited to “compliance work” after acquisitions had been made.

In about the second half of 1986, Webber made further acquisitions through Dawlarnu. Dawlarnu entered into “joint venture arrangements” with Associated Newsagent Cooperative Limited through Locna and with Victorian Authorised Newsagents Association Limited through Vana. Dawlarnu held a 40 per cent interest in each of Locna and Vana. It also acquired a 51 per cent interest in the Victorian broker, CJ & H.  In the first half of 1987, TKN acquired all the capital of the Queensland broker, C & G. (I note that it was a feature of the acquisitions or of some of them that the price was payable by instalments payable over some years and that Webber borrowed to fund the first instalment, using as security any property of any company in his empire available to him.)

Initially, PMS had a role in the preparation of the annual accounts, particularly for the purpose of preparation of the statutory account. This role continued when Webber appointed Beazley as “financial controller” in October 1985. Beazley was responsible for banking, for the maintenance of financial records including cash books, general ledgers and broking accounts, and for day-to-day financial management advice. Beazley remained employed with the Toikan Group until “at least December 1987”. PMS at no time had any involvement in day-to-day financial management and did not prepare regular management accounts. However, from time to time, upon request, PMS made available employees to assist Beazley to carry out such matters as bank reconciliations, where difficulties arose or where the Toikan Group did not have sufficient staff to complete work within applicable time constraints.

As at about June 1987, McS held shares in eleven of the sixteen Webber companies, was a director of thirteen of them and secretary of fourteen of them. Some of his directorships began in June 1987 when a previous director resigned. Any share held by him was held on trust for Webber interests; his directorships were non-executive; he did not receive director’s fees; he did not attend directors’ meetings, except for the purpose of formalising and recording decisions of Webber and of complying with statutory obligations of the companies; he was not involved in day-to-day management; and he became aware of a company’s affairs only in so far as they were disclosed in its annual accounts or were discussed in casual conversations with Webber. As at mid-1987, the day-to-day affairs of the companies were managed by Webber, Panozzo, who was the general manager of the Toikan Group, and Beazley, who was its financial controller. McS was secretary of some of the Toikan companies but his role as secretary was “essentially for the purpose of assisting with compliance work”. That role involved the preparation of minutes and the preparation and filing of documents with the Corporate Affairs Commission and other authorities. McS did not receive fees as secretary, although PMS charged and was paid fees for work carried out by McS and employees of the firm of a “company secretarial” kind.

McS at no time had a beneficial interest in any of the companies and the only income which he received as a result of the association was as a partner of PMS in relation to services performed by the firm. PMS charged on a time basis and rendered fees in relation to the TAG transaction on that basis.

As at June 1986, a major portion of the Toikan Group’s insurance broking activity was conducted through TIBG. Webber told McS that he had been seeking an investor to enter into a joint venture arrangement in relation to TIBG’s broking business, in order to provide capital to fund further expansion. McS told Webber that an investor would find a joint venture more attractive if the business was held by a new company that did not have potential liabilities. McS was aware that the Act required that companies carrying on insurance broking business in the year beginning 1 July 1986 apply for registration, and, in support, submit accounts. He thought that it would be difficult to prepare the necessary accounts of TIBG within the time available because of Beazley’s problems of the kind referred to earlier. (McS rejected the proposition that he made the suggestion because he believed that TIBG would be refused registration.)

In about June 1986, Webber and McS agreed that TIBG’s insurance broking portfolio should be sold to TIIB. They agreed that the price would be a multiple of whatever the broking commissions and other earnings of TIIB proved to be for the 1986-1987 financial year. Accordingly, the price could not be known until after 30 June 1987. Webber said that for a time, TIBG would continue to employ the staff necessary to run the business and own property associated with it; that it would take time for subsisting agreements between TIBG and insurers to be “transferred” to TIIB; and that, in the meanwhile, for six months or so, TIBG would act as manager of the portfolio, for which work TIIB would have to pay a “management fee in due course” to TIBG. McS told Webber and Beazley:

“The Act requires that all premiums must be paid into a separate broking account and you can only use monies in that account to pay underwriting creditors of that particular company, or commission where the company is entitled to it, or other limited investments as specified in the Act. Each of the companies must operate discrete broking accounts. From 1 July 1986 there will be a new company which will run the broking business. As there will be a period of transition to allow company staff to be put into a new employer, and for arrangements to be made with the underwriters, TIBG will act as an agent for TIIB until that is put into effect. However, you will need to open up a fresh bank account and operate the broking account from this.”

Minutes of meeting of directors of TIBG and TIIB bearing date 26 June 1986 purport to record resolutions for the sale and purchase of the insurance portfolio for a price of 1.7 times broking commissions (including management fees) based on the 1986/87 broking earnings as determined from the audited financial statements for the year ended 30 June 1987. The minutes also purport to record an agreement by TIBG to provide management services to TIIB in relation to the portfolio for six months from 1 July 1986. McS states:

“The Minutes are dated 26 June 1986, I believe, to reflect the date [1 July 1986] when the agreement to effect the transfer was made.”

(In cross-examination, McS conceded that the minutes were in fact prepared later and back-dated, but did not agree that they were prepared as late as July 1987. )

Early negotiation of the TAG transaction: Wu’s fax of 24 April and Wise’s letter of 12 May
PMS received a letter dated 26 February 1987 from Edward Hogg Group Pty Limited valuing the insurance broking business at between $3,300,000 and $3,600,000. On 30 April 1987, Webber told McS of a proposed joint venture with TAG. McS noted that: Webber and TAG hoped to settle by 1 June; he (McS) was to receive a heads of agreement document from TAG; Dawlarnu was to acquire a further 24 per cent of the shares in CJ & H, increasing its holding from 51 per cent to 75 per cent (other records show 75.5 per cent which is correct); the total insurance broking business was to be brought into the joint venture at $3,500,000; TAG was to acquire a 60 per cent interest so that it would, in substance, be paying $2,100,000 to Webber; and this amount of $2,100,000 was to be paid as to $1,200,000 on settlement and as to the balance of $900,000 by three equal instalments of $300,000 each. The provision that Webber was to receive $2,100,000 for the 60 per cent interest sold to TAG did not subsequently change, although the proposal as to payment by instalments did. Webber told McS that certain amounts of external debt totalling $863,000 would have to be paid out on settlement.

On 11 May, Webber forwarded to McS a copy of an important fax dated 24 April 1987 which he had received from Wu. The fax identified the business to be taken into the joint venture as all the insurance and finance broking business operated by the Toikan Group and Webber in Australia and New Zealand, and, more specifically, the insurance broking business carried on in Sydney by the Toikan Group; that carried on in Queensland owned by C & G; 75 per cent (see the qualification above) of that carried on in Victoria owned by CJ & H; 60 per cent of the business of TFS; and the Toikan Group’s joint venture interests in various other enterprises, including Locna and Vana. According to the fax, a new company (“Newco”) was to be formed, owned as to 60 per cent by TAG and 40 per cent by the Webber interests; its paid up capital was to be $2,000,000; and it was to acquire the business for $3,500,000, payable as to $2,000,000 on settlement and the balance by three instalments of $ 500,000 each over the next three years. TAG was to ensure that Newco had sufficient funds, whether by lending them to it or providing a guarantee to support a borrowing by it, to operate and develop the business; and Webber was to guarantee up to 40 per cent of borrowings by Newco.

According to the fax, settlement was to be effected on 1 June (the target date later became 1 July) on which date all profits actually earned and secured were to be the property of “the vendor”, but funds held in trust (apparently a reference to broking accounts) were to be transferred to Newco and all interest earned on them were to become the property of Newco. It is convenient here to recall Olney J’s explanation set out earlier that although moneys held in an insurance broking account were held in trust to be paid to insurer or insured as the case might be, a registered insurance broker was entitled to retain for its own benefit interest earned on those moneys, and that this was a considerable advantage because the broker was not obliged to pay premiums to an insurer until ninety days after it had accepted the risk.

Importantly, the fax said that Webber was to provide a “performance guarantee” to the effect that Newco would earn a profit before taxation for the years ended 30 June 1988 and 30 June 1989 of not less than certain amounts yet to be agreed upon, and that if it should not perform to those levels, the purchase price was to be reduced proportionately according to a formula. (This provision assumes importance because McS says that on the basis of it, and a repetition of it in a later letter dated 12 May from Wise to Webber, he understood that TAG was relying, not on past performance or historical accounts, but on Webber’s warranty of future performance.) Webber was to agree to execute an employment contract with Newco for at least ten years and was to accept a “restraint of trade” during the period of that contract and for five years after termination of it. Webber was to arrange for Newco to take a lease of the premises at 30-38 Victoria Street, Paddington (owned by Sabada) at which the business was carried on. The “Toikan” name was to be transferred to Newco, and any Webber family companies having “Toikan” in their names were to change their names at settlement.

Paragraph 11(a) [there was no 11(b)] of Wu’s fax of 24 April has assumed importance:

“11     Warranties and Representations

(a)Webber agrees to give warranties to Newco on the representations he has made about the business that Newco is to acquire. It is acknowledge [sic] that Tag Pacific has relied entirely on the financial information supplied by Webber and the disclosure that the formal annual accounts do not represent the true nature of the business being acquired.”

McS noticed this term but did not know then or ever find out what “financial information” Webber had given to TAG. He did not know what Webber had told TAG as to why the “formal annual accounts” did not “represent the true nature of the business being acquired”. In par 12 of his affidavit, he states:

“To the best of my recollection I concluded from this paragraph that Tag had been told that the annual accounts of the Toikan businesses prior to that date did not truly reflect the nature of the businesses that would be transferred to Newco. I believe that I also thought that Tag had agreed in principle to enter into the joint venture upon the basis of its belief as to the future profitability of the business, and the protection as to reduction of the purchase price, and the withholding of part of the purchase price referred to above.”

In May 1987, McS received a copy of a letter dated 12 May from Wise to Webber. It outlined the basis on which TAG saw the venture proceeding. The letter stated that Wise understood that Webber had agreed with Wu on the points listed in it. The letter departed from that of 24 April in certain respects. For example, it suggested that as an alternative to Newco, TIIB might be used as the joint venture vehicle; that $2,100,000 (rather than $2,000,000) be paid on settlement and a further sum of up to $900,000 be paid on or as soon as possible after settlement, leaving $500,000 to be paid by equal instalments on 1 July 1988, 1989 and 1990; that settlement take place on 30 June; and that so long as there should still be a liability by Webber under the profit performance guarantee, he should also leave as a shareholder’s loan an amount to cover “his exposure under the guarantee”. Paragraph 10(a) [there was no 10(b)] was substantially the same as par 11(a) in Wu’s fax of 24 April, but with an additional final sentence:

“10     Warranties and Representations

(a)Webber shall agree to give warranties to Newco on the representations he has made about the business that Newco is to acquire. It is acknowledged that Tagpac has relied entirely on the financial information supplied by Webber and the disclosure that the formal annual accounts do not represent the true nature of the business being acquired. Webber shall also provide the normal vendor warranties usual in transactions of this nature.”

Paragraph 11(b) of Wise’s letter was as follows:

“The contents of this letter sets out [sic] the intention of the parties to enter into an association with each other, however this letter shall not bind Tag to proceed with implementation of the proposals contained herein.”

FAI emphasised the latter part of this paragraph. When Webber handed McS a copy of the letter, Webber told him that the deal with TAG was “done”, that it remained “for the formalities to be settled”, and that to this end he had retained Binetter to act. Webber requested McS to give Binetter whatever accounting information he required so that he could draw up the agreement.

Further negotiations including requests for PMS to provide sets of accounts
In June, Webber said to McS:

“Tag is buying the business on the basis of its performance. No accounts are to be provided to Tag, as the performance terms agreed relate to future profit premiums and commissions earned on the insurance portfolio, and not historical accounts.”

As will be seen, the instruction not to supply accounts was to change.

McS had discussions with Binetter about the structure of the transaction, and, in particular, the capital gains tax consequences for Webber if his interest in the joint venture should not be regarded as a pre-capital gains tax asset. McS was largely guided by Binetter in relation to capital gains tax issues, although he emphasised their importance to Webber. It was capital gains tax considerations that led to the use of TKN as the joint venture company: it had become part of the Toikan Group a few days prior to the introduction of capital gains tax.

On 22 June, Webber told McS:

“As part of the deal with Tag, I have agreed to give warranties that the companies will be in a certain financial position as at the date of completion. Larbalestier requires accounts for the purpose of the warranties in the agreement.

Wu describes them as ‘pro forma balance sheets’. Please discuss this with Michael Binnetter [sic]. We are going to have to move quickly in relation to the accounts, particularly so that it doesn’t hold up the preparation of the agreement.”

McS replied:

“To allow us to start working on the accounts, get Brian [Beazley] to send the trial balances to the end of May. We can start work on them so we are ready to move quickly when the trial balances for June become available in July.”

McS understood that the “pro forma balance sheets” were intended to set out what the balance sheet positions of the companies involved in the joint venture were to be immediately following settlement; that they would be exhibited to the agreement; and that it would be Webber’s obligation to ensure that the companies’ actual balance sheet positions immediately after settlement conformed to them.

Binetter told McS that Larbelestier had asked for the profit and loss statements and balance sheets for TIIB and TFS as at 31 May and that the balance sheets were required in order to facilitate preparation of a “heads of agreement” document. McS queried Webber as to whether the agreement was to be referable to the position of the companies as at the end of May, and Webber told him that he thought that TAG would wish to “do this deal as at 30 June” and that McS should proceed on that basis. Webber told McS to check, however, whether the supply of the balance sheets would hold up preparation of the draft heads of agreement. McS made a note, “Check if holding up Agreement”, and was concerned that it would be some time before balance sheets and profit and loss statements referable to 30 June could be prepared.

McS had a conversation with Wu during July to the following effect:

WU:“I require pro forma balance sheets as at completion for each of the companies which will show the position of the underlying assets of the companies for inclusion in the sale agreement for warranty by Webber. These should exclude the assets and liabilities which are changing relating to trading.”

McS:“I won’t be able to do anything until the accounts for 30 June 1987 are completed. They should form the basis for the pro formas. I will need to clarify with you further on the presentation of information you need in the pro formas after I have completed the preliminary accounts.” (emphasis supplied)

Wu agrees that he probably said the words attributed with the exception of the words emphasised, which he denies saying. Wu says that he also asked Webber and McS several times in July for “financial accounts as at 30 June 1987”, without qualifying the request by reference to his purpose. McS understood that Wu was not concerned to have information about such matters as creditors, debtors and cash, because those elements were the subject of change on account of ongoing trading, and he (McS):

“understood that Mr Wu wished to know the basic capital structure of the companies, so that he could work out how the companies which were to become part of the joint venture structure could have their financial position arranged so that they fitted the overall concept that the joint venture structure would have a capitalisation of $3,500,000.00.”

McS’s affidavit continued:

“To the best of my recollection I understood that the pro forma balance sheets would be in a form appropriate to constitute the basis of warranties by Mr Webber to be made in the proposed agreement that the financial structure of the companies would conform at the time of completion at the agreement to the structure set out in the Exhibits.”

I interrupt my account of McS’s affidavit to note the significance of McS’s reference to “creditors, debtors and cash”. That significance derives from the nature of insurance broking and, in particular, of a broking account. “Creditors” are “trading” or “underwriting” creditors, that is to say, insurers or insureds to whom money is payable out of the broking account. “Debtors” are “trading” or “underwriting” debtors, that is to say, insurers or insureds whose money, when paid to the broker, will be properly deposited in the broking account. “Cash” is a reference to the cash balance in the broking account. Putting to one side extraordinary circumstances not presently relevant, if an insurance broking business is carried on as required by the Act, debtors plus cash must always equal or exceed creditors, or, to express the point differently, “cash” must always equal or exceed any amount by which “creditors” exceeds “debtors”. McS knew this.

McS received a copy of a letter dated 15 July 1987 from Dunhills (Binetter) to Rosenblums (Varejes). The letter advised that TKN was to be the joint venture holding company; that it would acquire TIIB’s business; and that it would hold various stated percentages of the other specified companies.

McS understood that it was necessary to ensure that all relevant external debt would be paid at or before settlement, in order to ensure that the financial positions of the companies to be “sold into the joint venture” would conform to the pro forma balance sheets. He also knew that it was important to ensure that third party securities given by such companies in respect of borrowings by other companies did not exist following completion.

On 20 July, McS had a lengthy meeting with Binetter. He made notes of matters which TAG required to be attended to. The notes record a request from TAG for information as to the actual present structure of the Toikan Group. He and Binetter discussed this request as he was aware that Webber’s instructions were that such information should not be given to TAG. To the best of his recollection, Binetter and he (McS) agreed that the information should not be supplied; he told Binetter that he would discuss the matter with Webber; and the following day he did so and Webber agreed that the information should not be supplied.

Monday 22 July
On Monday 22 July, McS wrote to Binetter enclosing a “shareholding schematic including details of cash flow and proposed shareholdings”. Also enclosed was a valuation (by Edward Hogg Group Pty Ltd) of the portfolio as at 30 June 1986 of “in the region of between $2,700,000 and $2,800,000”.

The letter stated McS’s understanding that a paid-up capital of $2,000,000 would be insufficient to satisfy the guidelines issued by the Insurance Commissioner under the Act and that a paid-up capital of $2,800,000 would be necessary . The letter suggested that the obvious solution would be to convert proposed loans of $320,000 by the Webber interests and $480,000 by the TAG interests, into share capital. In the event, this proposal was not acceptable to TAG and led to a restructuring. The restructuring involved TIIB’s “valuing” its insurance broking portfolio down to $2,000,000 and selling it to TKN for that sum. The remaining $800,000 purchase money to be paid by TKN to TIIB was to be accounted for by a sale by TIIB of “computer software”.

Also on 22 July, Webber advised McS that Wu would be in Sydney at the end of July and that his (Wu’s) solicitors, Rosenblums, needed accounts for contract purposes. He said:

McS’s evidence was that in June, Webber told him that TAG was “buying the business on the basis of performance” and that no accounts were to be provided to it. The reference to “performance” was to the future performance of the portfolio. According to McS, on 22 June Webber instructed him that Larbelestier of Rosenblums required accounts for the purpose of the warranty of pro forma balance sheets.

McS did not simply supply pro forma balance sheets setting out the positions to exist immediately following settlement. It would be quite inappropriate for such documents to state balances in bank accounts as at 30 June. According to McS, on 2 July Binetter told him that Rosenblums required profit and loss statements and balance sheets as at 31 May. McS says that afterwards, Webber told him to proceed on the basis that the deal was to be done “as at 30 June”. This was a reference to the notion that trading after 30 June would be on account of the purchaser.

There is a conflict between McS and Wu as to the content of a conversation or conversations between them in July. McS says that Wu told him that he (Wu) wanted

(a)       pro forma balance sheets,

(b)showing the position of the underlying assets of the companies for inclusion in the agreement for warranting by Webber, and

(c)excluding the assets and liabilities which were changing on account of trading.

Wu agrees that he requested McS to supply pro forma balance sheets but says that he did not add qualification (b) or (c). As well, he says that several times he requested McS to provide “financial accounts as at 30 June 1987”.

I prefer Wu’s evidence, particularly since preliminary accounts as at 30 June 1987 were precisely what McS provided soon afterwards. But the difference does not seem to me to be of critical importance. The fact is that McS did provide financial accounts as at 30 June. It would be extraordinary to think that he intended TAG to only act in reliance on parts of them, and not on the Representations, arising, as they did, from the figures given for the balances in the various bank accounts.

There was evidence from Beazley that at the time of the meeting on Tuesday night 28 July, Webber had a “secret game plan” which he kept from McS. This was that the inter-company loans were to be discharged, not prior to settlement, but out of the proceeds of settlement. But it is no objection to the conclusion that McS intended TAG to act in reliance on the Representations, that Webber secretly intended to take steps later than he had led McS to believe, to prevent them from causing harm to TAG.

At the evening meeting at Rosenblums’ office on Wednesday 29 July, when the first batch of preliminary accounts was delivered to Wu in McS’s presence, it may well be that McS believed that Beazley had, that morning, “cured” the problem of the outstanding inter-company debts. If he did, he nonetheless knew that the documents being handed over wrongly stated what the position had been a month earlier as at 30 June. Therefore he knew that they misrepresented that as at 30 June, there had been a credit balance in each broking account earning interest and that the accounts had not been overdrawn in contravention of the Act.

In August and September, in addition to the sending to Wu the preliminary accounts for C & G and CJ & H, McS gave attention to the preparation of the pro forma balance sheets to be attached to the proposed agreement. These are important for showing the parties’, and in particular McS’s, understanding that it was important that the assets and liabilities on account of broking as at 30 June 1987 were simply to “cancel each other out”.

I have earlier recounted the development, over time, of the content of the note into its final form on the pro forma balance sheets forwarded by PMS (Wallis) to Wu on 28 September:

“In addition to the abovementioned assets and liabilities the balance sheet is to include the insurance broking and other operating assets and liabilities of the company.

Other than the effect upon such balance sheet by reason of the net profit or loss from trading operations, the inclusion of such assets and liabilities will not materially effect [sic - affect] the net asset position of the pro forma balance sheet.”

McS clearly knew that TAG was entering into the Acquisition Deed relying on an assumption that underwriting assets (underwriting debtors plus cash in the broking account) and underwriting liabilities (underwriting creditors) cancelled each other out. While this evidence does not strictly compel an inference that McS understood that it was significant to TAG that underwriting assets and liabilities on the preceding 30 June should also have cancelled each other out, it strongly points in that direction. Moreover, it is only common sense to think that it would have been important to TAG that there should not have been a shortfall at that earlier date because of the significance of a shortfall for the legality of operations and the earning of interest.

On 19 October, McS became aware that the “cheques” had still not been presented. That date was three months and nineteen days after the date (30 June 1987) which appeared on the cheques, and two months and twenty-one days after the date (28 July) when Webber had implicitly undertaken to ensure that the money which had been misappropriated would be restored the following morning. Even if the cheques had truly been drawn on 30 June, the view could not properly have been taken by as late as 19 October that they had been the equivalent of cash in the bank as at 30 June. By 29 July, and certainly by 19 October, they should have been shown as being inter-company debts as at 30 June. The notes on the memoranda to audit file dated 19 October understate the position. By the time of the writing of those notes, a fortiori by the time of the signing of the audit certificates on 30 November, there would have been simply no justification for treating the inter-company debts as having been discharged by 30 June, even if the cheques had been, contrary to the fact, drawn on 30 June. The views which I have expressed as to the proper classification of the amounts of the cheques are supported by the expert evidence of Penklis which I accept. Penklis referred to the length of time that had passed since balance date, the size of the amounts in question, and their materiality in the context of the preliminary accounts as a whole.

By 19 October, settlement had not occurred. McS knew on that date that the preliminary accounts supplied to TAG continued to be falsified by the actual state of the companies’ accounts, in a respect which he knew was of significance to TAG. But he did nothing to disabuse TAG by 2 November and allowed the transaction to proceed to settlement.

What occurred after 2 November is relevant as revealing McS’s state of mind throughout. Astonishingly, the audited accounts, like the preliminary ones, to McS’s knowledge showed positive figures for “cash at bank” in the various companies’ broking accounts as at 30 June. McS procured Webber to write to PMS the representation letters dated 30 November set out earlier. It will be recalled that the letters stated that the details in them, to the best of his (Webber’s) knowledge and belief, were “correctly and accurately recorded as at 30 June, 1987”. But the details set out in the letters did not, and to McS’s knowledge did not, correctly and accurately record the position as at 30 June. In particular, I refer to the following “details”:

“(c)That related company cheques totalling $2,088,524.14 were held at the 30th June, 1987 by Toikan International Insurance Broking Pty Limited are still unbanked, however, I confirm that these will be banked within the next week and that I have had Brian Beazley make arrangements with the Bank to ensure they are immediately cleared.

At the 30th June 1987 these were to have been banked, however, with the sale of the insurance portfolio to TAG Pacific, this special banking was not completed by the Accounts Department.”(emphasis supplied)

McS was cross-examined in relation to this wording of which he had approved. I found his “explanation” unconvincing. In my view, he well understood and intended letters of 30 November to mean that the cheques had been in existence at 30 June, were to have been banked by 30 June, and had not been banked by 30 June because of the sale. This was all fabrication. In my opinion, by 30 November, McS felt that he was so far committed to the Representations that he must continue to seek to support them. McS’s conduct in knowingly certifying incorrect audited accounts as at 30 November, knowingly issuing an incorrect statement to the Commissioner on that date, and procuring from Webber on that date a letter known to be untrue for the purpose of “covering his tracks”, reveals something about his understanding throughout as to the significance of the Representations to TAG. If McS had thought down to settlement that they were of no consequence to TAG he would not have gone to such lengths to continue to suppress the truth.

On 21 December, Wu engaged PMS to complete the accounts of all companies in the Toikan Group to 31 December 1987. McS says that about mid-January 1988, he learned that the cheques had still not been banked (he had also known this on 1 December). Did he immediately inform Wu? Not at all - again he spoke to Webber. Any accounts to be prepared by McS for Wu would, however, surely reveal the truth. Yet even at this late stage, McS obfuscated in his letter dated 22 January to Wu.

I confirm my provisional finding earlier that McS intended that TAG act in reliance on the Representations.

1. That the person, or a person belonging to the class of persons, acts in reliance on the representation
   The following findings of Olney J in the TAG judgment are not contested: that TAG relied on the preliminary balance sheets as a general indication of the extent of the cash balances held in the broking accounts upon which interest could be earned pending payment of premiums to underwriters; that TAG relied on them as an indication that the various companies maintained broking accounts as required by the Act and had been conducting the insurance broking business in accordance with the Act’s requirement; that if TAG had known the truth, it would not have entered into the Acquisition Deed, or, having entered into it, have proceeded to settlement; and that if TAG had known the truth, it would not have paid the money paid out at settlement nor entered into the other obligations associated with the settlement.

1. That loss or damage is suffered as a result of the reliance
   The following findings of Olney J in the TAG judgment are also not contested: that the ultimate failure of the Toikan Group was at least contributed to by the reduced amount of income received from interest on the broking accounts; that TAG continued to provide financial support to the Toikan Group after settlement, beyond the extent of its contractual obligations, for the purpose of trying to maintain the value of the broking portfolio; that TAG suffered loss and damage by reason of the misleading and deceptive conduct of PMS; and that TAG did not fail to take any step reasonably open to it to mitigate its loss or damage.

RESULT IN RELATION TO FRAUD AND THE TAG FACTS
In my opinion, FAI has established that the claim by McS and Phillips for indemnity by FAI in respect of the TAG judgment is a claim for indemnity in respect of a claim made against them for actual fraudulent acts and omissions of McS within Exclusion (b) of the PMS policy. Although the findings which I have made serve to establish this, I will have occasion to consider the TAG facts further in relation to issues yet to be addressed, such as the issues of misrepresentation and non-disclosure to FAI. FAI did not seek to establish that Phillips condoned the fraudulent acts of McS.

I certify that this and the preceding  seventy-six (76) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren

Associate:

Dated:             9 April 1998

Proceeding No NG 312 of 1992

Counsel for the Applicant:	Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Applicant:	Colin Biggers and Paisley (FAI)
Counsel for the Respondents:	Mr P M Biscoe QC with Mr S Climpson appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr K Manion appeared (submitting) for the sixth respondent (Gaertner)
Solicitors for the Respondents:	Gillis Delaney appeared for the first, second, fourth and fifth respondents (McSweeney, Phillips, Turner and Cullen) Mr D M Vaughan, solicitor, of Heaney, Richardson & Nemes appeared (submitting) for the third respondent (Beale) Walters Solicitors, appeared (submitting) for the sixth respondent (Gaertner)
Proceeding No NG 948 of 1992
Counsel for the Applicant:	Mr P Roberts with Mr M K Minehan (TCF)
Solicitor for the Applicant:	T G Hartmann & Associates (TCF)
Counsel for the Respondent:	Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Respondents:	Colin Biggers & Paisley (FAI).
Date of Hearing:	5, 6, 7, 8, 9, 13, 14, 15, 16, 19, 20, 21, 22, 23, 26, 27, 28, 29, 30 June; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14 July; 23, 25 August 1995; 11 March 1996.
Date of delivery of Part I:	12 March 1997
Date of Judgment:	9 April 1998

DRAMATIS PERSONAE - PART I
ANNEXURE TO PART II OF REASONS FOR JUDGMENT
TAG FACTS

PARTNERS OF PMS
BEALE, John William (“Beale”): chartered accountant; employed by PMS in its Sydney office from 1982; became a salaried partner in June 1985, of an “associated firm”, PMS Lismore; returned to the Sydney Office in about mid-1988 and became a salaried partner in PMS proper at that time; in mid-1990 ceased to be a partner of PMS to become a foundation partner in the firm Beale Gaertner Young; was actively involved in the 1988 TCF facts; was examined under s 541 in relation to the affairs of Travel and Wheels.

CULLEN, Timothy Patrick (“Cullen”): qualified as an accountant in New Zealand in 1980; moved to Australia in August 1980; became employed by PMS from 6 April 1985 and became a salaried partner on 23 May 1989; following the “split” with retrospective effect from 1 September 1990 (but for insurance purposes from 24 October 1990) became, with Phillips, a partner in PMS Gosford; as an employee, was actively involved in doing work for Travel and Wheels but played no part in the TAG facts; completed the proposal form dated 22 April 1991 for the renewal of the Gosford policy for 1991-1992 under which Phillips claims to be entitled to indemnity in respect of the TCF judgment; was examined under s 541 in relation to the affairs of Travel and Wheels.

GAERTNER, Michael John (“Gaertner”): became a salaried partner in PMS in May 1989; on 1 July 1990 ceased to be a partner in PMS to become a foundation partner in Beale Gaertner Young as from 23 July 1990; had no active role in either the TAG facts or the TCF facts.

McSWEENEY, Brian Albert (“McS”): chartered accountant; obtained first accountancy qualification in 1967; became a member of Australian Society of Accountants in 1969; with Phillips, “equity partner” in PMS from its establishment in August 1976 down to the “split” with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990); from about 1976 was engaged as accountant by Webber and the Webber companies; was actively involved in the TAG facts and the TCF facts; of the sixteen Webber companies, held shares in eleven (in each case as trustee for a Webber interest) was a director of thirteen and secretary of fourteen; in particular, was a director and secretary of TIBG, TIIB, C & G, CJ & H, TKN and TFS, and although not a director or secretary of the joint venture companies Locna and Vana, held a 40 per cent interest in each of them; was a director and the secretary of the Webber family company, Dawlarnu and a director of other Webber family companies; was examined under s 541 in relation to the affairs of Travel and Wheels following the “split” became, with Turner, a partner in PMS Chatswood; completed the proposal form dated 22 May 1989 for renewal of the PMS policy for 1989-1990 under which he and Phillips seek indemnity in respect of the TAG judgment; completed the proposal form dated 28 April 1991 for renewal of the Chatswood policy for 1991-1992 under which he seeks indemnity in respect of the TCF judgment; with Phillips, a respondent in TAG proceeding and TCF proceeding; PMS undertook the work associated with the annual accounts, tax returns and statutory returns for all sixteen Webber companies and the audit of the accounts of some of them; PMS prepared the annual financial statements of Travel and Wheels and undertook the audit of those of Travel.

PHILLIPS, Bruce William (“Phillips”): chartered accountant; “equity” partner with McS in PMS from its establishment in August 1976 down to the “split” with retrospective effect from 1 September  1990 (but for insurance purposes from 24 October 1990); following the “split”, became, with Cullen, a partner in PMS Gosford; not involved in the TCF facts; at McS’s request, auditor of TIIB, CJ & H and C & G of which McS was a director, and, as auditor, had some role in the TAG facts.

TURNER, Paul Frederick (“Turner”): accountant; apparently became a salaried partner of PMS in 1987; following the “split” with retrospective effect from 1 September 1990 (but for insurance purposes as from 24 October 1990), became, with McS, a partner in PMS Chatswood; not actively involved in the TAG facts or, except in a minor respect, the TCF facts.

OTHER THAN PARTNERS OF PMS
Individuals
BEAZLEY, Brian Michael (“Beazley”): chartered accountant; employed as “financial controller” of the Toikan Group by TIBG full-time from about 1 October 1985 to 30 June 1986, and by TIIB full-time from 1 July 1986 to about February 1987 and on a casual basis from February 1987 to settlement of the TAG transaction on 2 November 1987; following the TAG transaction, employed by (ultimately) TKN until February 1988; his immediate supervisor on day to day matters was Stephen Panozzo, the general manager of the Toikan Group, and his ultimate controller was Webber, the Group’s managing director; on (or on and after) 29 July 1987, wrote out and signed cheques back-dated to 30 June 1987 to put broking companies’ bank accounts “in order”, but placed the cheques in a safe or drawer rather than bank them, because of his knowledge that there were insufficient funds in the bank accounts to enable them to be met.

BINETTER, Michael: solicitor; partner of Dunhills, solicitors for the Webber interests and the Toikan Group on the TAG transaction.

CHALKER, Warren Anthony (“Chalker”): chartered accountant; following termination of PMS’s retainer, employed by TKN as its financial controller from February 1988 to 20 April 1989; as a witness called by FAI, gave evidence of dealings with McS, Webber and Wu, and the eventual discovery of the problem of the unpresented cheques.

CONSTABLE, Robert Terrence (“Constable”): non-executive New South Wales director of TAG since before the beginning of 1987; with effect from settlement of the TAG transaction on 2 November 1987, chairman of directors of the TAG/Webber joint venture vehicle, TKN.

DUNHILL BUTLER (“Dunhills”): solicitors for the Webber interests on the TAG acquisition.

FINNEY, Warwick: chartered accountant; partner of Deloitte Touche Tomahtsu; expert witness called by FAI.

GOWER, Goodwin Bultimore Allen (“Gower”): chartered accountant; partner in Duesburys; expert witness called by PMS.

LARBALESTIER, Paul: solicitor; partner in Rosenblums, solicitors for TAG and TAGNT on the TAG transaction.

MOFFITT, Richard Niven (“Moffitt”): chartered accountant; partner in Thompson Douglass Butterell (formerly “Thompson Douglass”); secretary of TAG from February 1987 to October 1989; not active in the negotiation of the TAG transaction, but attended on settlement on 2 November 1987 at Dunhills’ offices with Constable for the TAG interests, and had involvement after that date; conducted an investigation at Wu’s request; discovered problem of the outstanding cheques in the first half of 1988.

PANOZZO, Stephen Aldo (“Panozzo”): both prior to and after the TAG transaction, general manager of the Toikan Group.

PENKLIS, Alexander (“Penklis”): chartered accountant; partner of Green Penklis Lawson; expert witness called by FAI.

RAINBOW, John (“Rainbow”): solicitor; partner of TCM; retained by FAI to represent McS and Phillips in the TAG proceeding.

REES, Richard Noel (“Rees”): chartered accountant; partner of Ernst & Young; expert witness called by TAG in the TAG proceeding.

ROSENBLUM R I & PARTNERS (“Rosenblums”): solicitors for TAG and TAGNT on the TAG transaction.

VAREJES, Ellis (Varejes”): solicitor; partner of Rosenblums, solicitors for TAG and TAGNT on the TAG transaction.

WALLIS, Eric Charles (“Wallis”): certified practising accountant; long time employee of PMS; undertook work in the Webber interests on the TAG transaction.

WEBBER, Raymond James (“Webber”): managing director of the sixteen Webber companies, including the Toikan Group of companies; after the TAG transaction, continued as managing director of the TAG/Webber joint venture company, TKN, and its subsidiaries, under an employment contract.

WISE, Peter Harry (“Wise”): chairman of directors of The Anthony Group Limited (“Group”), a New Zealand company controlled by Wise's family interests, of its subsidiary TAG, and of TAG’s subsidiary TAGNT.

WU, Harvey (“Wu”): resident of New Zealand; director of TAG and TAGNT; chartered accountant; retired from practice in 1987 to devote time to company directorships and consulting services; negotiated the TAG transaction for TAG interests.

YIP, Robert (“Yip”): accountant; between May 1987 and March 1990, employed by PMS as a “senior accountant”; did work in the Webber interests on the TAG transaction.

Companies
THE ANTHONY GROUP LTD (“GROUP”): New Zealand company which was the parent of TAG, and, through it, of TAGNT.

CARROLL & GEORGESON (QLD) PTY LTD (“C & G”): incorporated in Queensland on 12 August 1986 as “Orbec Pty Ltd”; carried on business as insurance broker, chiefly in Queensland; was purchased by TKN in the first half of 1987 (the price being payable by instalments) when it became a wholly owned subsidiary of TKN and, as such, part of the Toikan Group; at material times its directors were Webber and McS, and Phillips was its auditor; McS was appointed as a director on 23 April 1987 and resigned on 16 March 1988; successfully applied for registration as an insurance broker in May 1987; was “sold into the TAG/Webber joint venture”.

CHARLTON JAMES & HEALY (VIC) PTY LTD (“CJ & H”): incorporated in Victoria where it carried on business as an insurance broker; in the latter half of 1986, the Webber family company Dawlarnu purchased a 51 per cent interest in it and an option to acquire remaining shares (the price being payable by instalments), whereupon it became part of the Toikan Group of broking companies; at material times, its directors were Webber and McS, and Phillips was its auditor; McS was appointed as a director on 19 September 1986 and resigned on 8 December 1987; successfully applied for registration as an insurance broker in 1986-1987 year; as part of the TAG transaction Dawlarnu increased its shareholding to 75.5 per cent and sold that shareholding to the TAG/Webber joint venture company, TKN.

CLASSIC CAR INSURANCE BROKERS PTY LTD: a Webber family company which sold its insurance broking portfolio to TIBG in 1986.

DAWLARNU PTY LTD as trustee of a Webber family discretionary trust (“Dawlarnu”): a Webber family company; held 40 per cent of the issued shares in each of Vana and Locna and 51 per cent (later 75.5 per cent) of those in CJ & H; sold them all to the TAG/Webber joint venture company, TKN, as part of the TAG transaction; McS was a director of Dawlarnu as from 4 March 1985.

DUFF HALLAM PROSURE PTY LTD (“Duff Hallam”): a Webber family company; sold its insurance broking portfolio to TIBG in 1985.

KELSO PTY LTD (“TAGNT”): incorporated in the Northern Territory (hence the abbreviation); changed its name to Tag Holdings Pty Ltd; wholly owned subsidiary of TAG; was the vehicle through which TAG  acquired 60 per cent interest in the joint venture company, TKN, as part of the TAG transaction.

LIGON 125 PTY LTD (“Ligon”): a Webber family company; prior to the TAG transaction, immediate parent of TKN and subsidiary of Sabada; as a result of the TAG transaction, its shareholding in TKN became only a 40 per cent shareholding in that company.

LOCNA INSURANCE BROKERS PTY LTD (“Locna”): one of the Toikan Group of companies; Dawlarnu acquired a 40 per cent shareholding in Locna in April 1985, the holder of the remaining 60 per cent being Associated Newsagents Corporation Ltd; as part of the TAG transaction, Dawlarnu sold its 40 per cent interest to the TAG/Webber joint venture company, TKN; McS was not a member, director or secretary of Locna but was its auditor.

MARSH & McLELLAN PTY LTD (“M & M”): insurance brokers for PMS, PMS Chatswood and PMS Gosford; on their behalf, dealt with FAI in relation to renewals of the respective policies.

SABADA PTY LTD as trustee of the “Sabada Number 1 Trust” (“Sabada”): A Webber family company; owned the office building at 30-38 Victoria Street Paddington at and from which the Toikan Group carried on business; parent company of Ligon and, through it, of TIIB; prior to the TAG acquisition, had owned (through Webber and McS) all the shares in TKN since 16 September 1985, that is, since prior to the introduction of capital gains tax.

SALAMANDER LEASING CORPORATION PTY LTD: a Webber family company; a 100 per cent subsidiary of TKN; changed its name from “Toikan Insurances Pty Ltd”; at material times, its directors were Webber and McS and its auditor was Phillips.

SALAMANDER FINANCE CORPORATION LTD: a Webber family company; a 100 per cent subsidiary of TKN; McS became a shareholder (in trust for TKN) and a director on 27 June 1985.

SHAMM PAGNY CORPORATION PTY LTD as trustee of the “Shamm Pagny No 1 Trust” (“Shamm Pagny”): a Webber family company which owned and operated a horse stud at Mudgee; McS was a shareholder, director and the secretary.

TAG PACIFIC LTD (“TAG”): incorporated in Tasmania and listed on the Australian Stock Exchange; first applicant in the TAG proceeding and parent of the second applicant, TAGNT; a subsidiary of Group.

TAG HOLDINGS PTY LTD (“TAGNT”): incorporated in the Northern Territory (hence the abbreviation); at the time of the TAG transaction, called “Kelso Pty Ltd”; wholly owned subsidiary of TAG; the vehicle through which the 60 per cent interest in the TAG/Webber joint venture company, TKN, was acquired by the TAG interests.

TKN HOLDINGS PTY LTD (“TKN”): prior to the TAG transaction, all its issued shares were owned by Sabada (through Webber and McS as trustees); owned all the issued shares in TIBG and TIIB, Salamander Leasing Corporation Pty Ltd, Salamander Finance Corporation Pty Ltd and C & G; as well, owned a 60 per cent shareholding in TFS; was called into service as the TAG/Webber joint venture company used in the TAG transaction to purchase the TIIB insurance broking portfolio, Dawlarnu’s 75.5 per cent shareholding in CJ & H and 40 per cent shareholdings in Vana and Locna; following the transaction, was 60 per cent owned by TAG interests and 40 per cent by Webber interests; some time after the transaction, changed its name to “Toikan International Insurance Broking Pty Ltd”.

TOIKAN FINANCIAL SERVICES PTY LTD (“TFS”): one of the Toikan Group of companies; in 1984 when it was called “S R Hillston (Insurances) Pty Ltd”, 60 per cent of its shares were acquired by TKN and the remaining 40 per cent were held by Ligon 92 Pty Ltd, the ownership and control of which are not revealed by the evidence; McS was secretary from 12 October 1984 and became a director at some time prior to 9 February 1987 (the other director was Webber) and resigned on 31 March 1988; did not carry on business as an insurance broker and therefore did not maintain a broking account.

TOIKAN INSURANCE BROKING GROUP PTY LIMITED (“TIBG”): the major company in the Toikan Group; from 16 September 1985 to 30 June 1986, carried on insurance broking business in New South Wales; sold its business as at that date to TIIB; McS was a majority shareholder (holding in trust for TKN), the secretary, and, as from 17 June 1987, a director (with Webber); a 100 per cent subsidiary of TKN; was not a party to the TAG transaction and stood outside it; was the entity which was the ultimate debtor in respect of the money needed to fund the outstanding cheques which were directed to “curing” the earlier misappropriation of money from the broking accounts.

TOIKAN INTERNATIONAL INSURANCE BROKING PTY LTD (“TIIB”): incorporated in New South Wales on 23 April 1986 as “Geldome Pty Ltd”; as from that date its directors and shareholders were Webber and McS, and McS was its secretary; its auditor was Phillips; successfully applied in June 1986 for registration as an insurance broker; as from 1 July 1986, purchased the insurance portfolio of TIBG, but for some time afterwards it operated through the vendor, TIBG, as its agent; was a 100 per cent subsidiary of Ligon which, in turn, was a 100 per cent subsidiary of Sabada; some time after the TAG transaction, changed its name from TIIB to “Salamander Investment Corporation Pty Ltd”.

VANA FINANCIAL SERVICES PTY LTD (“Vana”): one of the Toikan group of companies by reason of Dawlarnu’s having acquired a 40 per cent shareholding in Vana in August 1986, the holder of the remaining 60 per cent being Victorian Authorised Newsagents Association Ltd; as part of the TAG transaction, Dawlarnu sold its 40 per cent interest in Vana to the TAG/Webber joint venture company, TKN; McS was not a member, director or secretary of Vana, but was its auditor.