Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers

SUPREME COURT OF QUEENSLAND

CITATION:

Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers & Ors [2006] QCA 335

PARTIES:

GOLD RIBBON (ACCOUNTANTS) PTY LTD
ACN 081 156 078 (IN LIQUIDATION)
(plaintiff/respondent)
v
RICHARD THOMAS SHEERS
STEPHEN WILFRED ROMP
GARRY RAYMOND HOWES
ROBERT LLOYD TAYLOR
(first defendants)
TERENCE MICHAEL DUNN
(second defendant/appellant)
SHERIDAN ALVINA SCHWEITZER
(third defendant)
AUSTIDE HOLDINGS PTY LTD ACN 081 671 141
(fourth defendant)
GRH & M PTY LTD ACN 087 132 447
(AS TRUSTEE FOR THE AUSTIDE HOLDINGS TRUST)
(fifth defendant)

FILE NO/S:

Appeal No 5994 of 2005
SC No 10852 of 2002

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

5 September 2006

DELIVERED AT:

Brisbane

HEARING DATE:

13 June 2006; 14 June 2006

JUDGES:

Williams and Keane JJA and Wilson J
Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDER:

Appeal allowed and judgment below set aside1.

Respondent's action against the appellant dismissed2.

Respondent to pay the appellant's costs of the action and of the appeal to be assessed on the standard basis 3.

CATCHWORDS:

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - DUTY OF CARE, SKILL AND DILIGENCE - respondent company provided unsecured loans to accountants - appellant one of several directors of respondent - respondent made a number of improvident loans - proceedings brought against a number of persons including appellant to recover the outstanding principal sums - before this Court appellant challenged learned trial judge's conclusion that appellant breached duty of care and diligence owed to the company - appellant argued other directors excluded him from decision-making on the respondent's administrative procedures - appellant argued other directors deliberately decided not to adopt more stringent administrative procedures - appellant argued trial judge erred in finding that appellant was negligent in failing to ensure administrator of loans scheme was competent - appellant argued trial judge erred in finding that directors other than the respondent had no lending experience - appellant argued he had resigned as a director during period when two of the improvident loans were made - appellant argued he was entitled to rely on review of documentation made by the Bank and the insurer - appellant argued learned trial judge erred in finding that business judgment rule did not protect appellant - appellant argued evidence did not support learned trial judge's finding that loan procedures did not comply with "accepted lending practice" - whether the findings of the learned trial judge as to breach of duty should be overturned

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - DUTY OF CARE, SKILL AND DILIGENCE - appellant argued that learned trial judge erred in finding that appellant's breaches of duty were causative of the respondent's loss - appellant argued that certain other directors of the respondent would have approved the improvident loans regardless of what assessment procedures were in place - appellant argued that the making of the improvident loans resulted not from deficient procedures, but from administrator's failure to implement procedures - whether, on the balance of probabilities, the improvident loans would have been made if more explicit procedures of loan application assessment had been adopted and implemented by the respondent - whether the respondent's loss would not have been suffered but for the appellant's breach

Corporations Act2001 (Cth), s 180, s 182, s 1317F

Abalos v Australian Postal Commission (1990) 171 CLR 167, cited
ASIC v Rich & Ors [2003] NSWSC 85; (2003) 44 ACSR 341, applied
Bennett v Minister of Community Welfare (1992) 176 CLR 408, applied
Betts v Whittingslowe (1945) 71 CLR 637, cited
Chaplin v Hicks [1911] 2 KB 786, cited
Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232, applied
Clark Boyce v Mouat [1994] 1 AC 428, cited
Commissioner of Main Roads v Jones [2005] HCA 27; (2005) 79 ALJR 1104, applied
Daniels & Ors v Anderson (1995) 37 NSWLR 438, applied
Fink v Fink (1946) 74 CLR 127, cited
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118, cited
Francis v United Jersey Bank 432 A 2d 814 (NJ 1981), cited
Gould and Birkbeck and Bacon v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490, cited
Hollis v Dow Corning Corporation (1995) 129 DLR (4th) 609, cited
Hoyts Pty Ltd v Burns [2003] HCA 61; (2003) 201 ALR 470, cited
Jones v Dunkel (1959) 101 CLR 298, cited
March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, applied
Medlin v State Government Insurance Commission (1995) 182 CLR 1, applied
Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187, cited
Prast v Town of Cottesloe [2000] WASCA 274; (2000) 22 WAR 474, cited
Re HIH Insurance; ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72, applied
Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434, cited
Sellars v Adelaide Petroleum NL& Ors (1994) 179 CLR 332, applied
Vairy v Wyong Shire Council [2005] HCA 62; (2005) 80 ALJR 1, cited
Wilkins v Council of the City of Broken Hill [2005] NSWCA 468; Appeal No 40555 of 2004, 20 December 2005, cited

COUNSEL:

P H Morrison QC, with J W Peden, for the appellant
D J S Jackson QC, with K E Downes, for the respondent

SOLICITORS:

Gells Lawyers for the appellant
Blake Dawson Waldron for the respondent

WILLIAMS JA: Keane JA in his reasons has set out extensively the background circumstances in which this appeal has to be determined. I agree with the conclusion he has reached, but it is necessary that I set out my own reasons for so doing. I will only refer to those facts which are necessary in order for me to articulate my reasons. Except where there is some inconsistency between my approach and that adopted by Keane JA, I agree with the reasoning of Keane JA.

Notwithstanding the numerous assertions of fact and bases on which relief was sought as set out in the statement of claim as finally amended, the case presented to the trial judge for determination was much more confined. The respondent made loans to five borrowers who defaulted when the loans were ultimately called up. The loss sustained by the respondent with respect to those five loans was $3,629,000. The question put to the trial judge for his determination was whether or not that loss was caused by breach of the appellant's duty as a director in the manner particularised so that the respondent could recover that amount from him.

Once the issue was formulated in that way the court was only concerned with breaches of the appellant's duty as a director which might have been causative of that loss. It was irrelevant for purposes of the proceeding that the evidence may have established that the appellant was in breach of his duties as a director in ways which were not causally connected with the losses incurred by the respondent on the five loans.

It should be noted that at least 139 loans were made pursuant to the scheme and almost all of the $25 million bank facility was at one time on-lent by the respondent pursuant to the administrative arrangements put in place. There were problems recovering from the borrowers in a number of cases, but the respondent only relied on evidence relating to the five loans in order to establish a case against the appellant.

There is no dispute as to the details of the five loans and the quantum of the loss in each case. The following are the particulars:

Jumarsh1. Pty Ltd (Jumarsh)

There was an initial loan of $342,000 on 12 March 1999. A further $100,000 was advanced on 14 July 1999, and finally on 3 September 1999 there was another further advance of $400,000. Thus the total amount lent was $862,000 and when the loan was called up there was a loss of $692,000.

Venola2. Pty Ltd (Venola)

The initial loan in May 1999 was for $350,000. There was a further advance of $450,000 on 22 July 1999. The full amount lent, namely $800,000, was not repaid on demand.

Spiller Holdings Pty Ltd (Spiller)3.

The initial loan was for $143,500 on 17 June 1999. There were further advances of $102,500 on 14 July 1999, $80,000 on 6 October 1999, and finally $276,000 on 24 February 2000. Thus the total amount lent was $602,000 and nothing was repaid when demand was made.

Gary Peter Moss (Moss)4.

The initial loan was for $350,000 on 21 October 1999. There were further advances of $300,000 on 17 November 1999 and $85,000 on 28 April 2000. Thus the total amount lent was $735,000, and nothing was repaid on demand.

John McCouat (McCouat)5.

The initial advance was of $100,000 on 19 April 2000, and there was then a further advance of $700,000 on 15 May 2000. Thus the total amount lent was $800,000, and nothing was repaid on demand.
In each case the final demand was made in about mid-2001 when the respondent's facility with the Bank was withdrawn following on the lapsing of the insurance cover with respect to each of the loans.

It was not in dispute that the principal, if not sole, business of the respondent was that of lending money to accountants up to a maximum of 80% of their certified accounts receivable under a program which was called the "Accountants' Fee Funding Program". The learned trial judge found that the appellant "was introduced to the scheme in about the middle of 1997". The finding was that the promoters of the scheme at that stage were Sheers, Howes, Romp and Stewart.

An ASIC search with respect to the respondent indicates that it was incorporated on 24 December 1997, and acquired as a shelf company on that date by Gold Ribbon Corporate Services Pty Ltd and Romp, each then holding one of the two shares therein. The search also reveals that as and from 24 December 1997 the directors were Howes, Romp, Stewart and the appellant. Sheers and Taylor were appointed directors on 28 June 1999.

There is no doubt that in the first half of 1998 the appellant was involved in discussion with others, Romp in particular, as to the basis on which the business of lending to accountants would be conducted. Exhibit TMD5 to the appellant's affidavit of 23 February 2005 is a document which passed between Romp and the appellant in April 1998 dealing with a proposed administrative basis on which the scheme would be conducted. There can be no doubt that the document reflects the appellant's thinking at that time as to what administrative arrangements were required. Not surprisingly the document refers to a person described as the "risk manager" carrying out "due diligence on applicant". At that stage it was envisaged that the appellant's company Commercial Recovery Management Pty Ltd ("CRM") would be responsible for administering the scheme and carrying out the due diligence. The following extracts from the document illustrate what was then being considered:

"An accounting practice will be required in the first instance to register for participation in the program. This involves completing an application form setting out full particulars of the entity to which fees are paid together with all relevant information (see form herewith).
… [the respondent] will request CRM to carry out a due diligence in relation to the applicant. …
Risk management –
On all applications the lender will be provided with:
·Copy of the due diligence report by CRM;
…
·Asset and Liability Statements of Directors;
…
Advances over $250,000
All of the above plus
·Financials last 2 years."

There was also an observation that "risk control mechanisms shall be put in place by CRM".

Further, it is clear that by about April 1998 pursuant to the "Matrix" designed by the appellant and Romp it was proposed that loans be made to accounting practices up to a maximum of 80% of aged receivables. It was apparently considered, at least by the appellant and Romp, that advances could be made on that basis without the borrowers having to provide any security, other than the personal guarantees of directors if the borrower was a company. The respondent's principal security would be the insurance cover on the loan.

By 22 May 1998 a stage had been reached where Romp sent the following message to the appellant:

"Colonial have instructed Michael Stewart to prepare a draft administration agreement between Gold Ribbon (Accountants) Pty Ltd and the bank. This will be along the lines of the Real Estate Fee Product.
Can you prepare draft administration agreement between CRM and Gold Ribbon (Accountants) Pty Ltd.
…
I confirm meeting with Colonial on Thursday, 28 May 1998 at 9.30am. …."

Romp, Stewart and the appellant met with officers of the bank on that day; the meeting lasted some 2 hours. Relevantly the bank then wrote to the directors of the respondent on 20 August 1998 confirming approval of a Bank Bill facility to the amount of $25,000,000. The letter stated that the facility was to enable the respondent to carry out the "Scheme known as the Accountants' Fee Funding Program". It went on to say with respect thereto that the "final policy document is to be vetted by the Bank's legal advisers and must be to their absolute satisfaction and to the Bank's absolute satisfaction." There was reference therein to CRM and the clear inference is that the bank then believed that CRM would be responsible for risk management under the scheme. The advance was subject to an "insurance policy issued by HIH" covering the amount drawn down from time to time. Romp and Stewart accepted that offer on behalf of the respondent by signing the letter on 9 September 1998.

It is probably of little significance for present purposes, but it should be noted that the appellant in his affidavit said that he did not see a copy of that letter until after the commencement of these proceedings.

It is not entirely clear what documentation was shown to the bank at the meeting on 28 May 1998, but it can be reasonably inferred that there was a document similar to, if not identical with, exhibit TMD5.

By about August 1998 the appellant was in dispute with Sheers and Howes over a number of matters, probably primarily his entitlement to shares in the respondent. That provided a background to the decision taken by directors of the respondent that CRM should not be the administrator of the program. Stewart said in his affidavit of 18 February 2005:

"As at 19 August 1998 there were four (4) directors of the plaintiff's company namely Howes, Romp, Dunn and myself. I had decided that to advance the interests of the plaintiff I would support Howes as the person who would undertake the task of management of the accounting product. To my observation Romp also supported Howes."

In his affidavit of 17 December 2004 Romp said:

"Sherie Schweitzer, who was the defacto partner of Sheers, was chosen by the directors to carry out the administration of the Program because she presented well and had experience administering financial arrangements and she was proposing to carry it out through a separate company, being Austide Holdings Pty Ltd (Austide). Sherie indicated she owned a company called Austide and would contract to GRA to administer the Program. I was unaware that her defacto, Richard Sheers had an interest in Austide."

Between about August 1998 and May 1999 the appellant appears not to have been directly involved in making decisions with respect to the respondent's business. He did not attend, or was not invited to attend, directors' meetings. These matters are fully discussed in the reasons for judgment of Keane JA and I do not wish to add anything to what is said therein about this aspect of the case.

Significantly on 24 February 1999 the formal agreement was entered into between the respondent, the bank, and the insurer, HIH Casualty & General Insurance Limited ("HIH"). What is of significance (as is established by the report of Bundesen and the annexures thereto) is that there was attached to that agreement a document headed "Credit Policy – Accountants' Fee Funding Program – Gold Ribbon (Accountants) Pty Ltd – Imposed by HIH" and another document headed "Self Imposed by GRA". The following is a relevant extract from the conditions "Imposed by HIH":

"Limit of $1,000,000 to each firm of accountants plus conditions precedent contained in Clause 4 of Accountants' Fee Funding Program:

(a) The Accountant must give to GRA immediate notice in writing of any change that occurs in the Accountant's entitlement to Receivables;

(b) The Accountant must supply to GRA a Certificate within 14 days of the end of each 90 day period;

…

(d) The Accountant must give to GRA immediate notice about any claim arising in relation to Receivables that are disputed …

…

(f) The Accountant must at all times use care in the selection of competent employees …

(g) GRA may carry out an audit of the Accountant's Receivables at any time;

(h) The Accountant, must, if operating as an incorporated entity, provide personal guarantees of its directors to GRA."

The following are relevant extracts from the document headed "Self Imposed by GRA":

"(b)       Registration by firm of Accountants pursuant to Form ‘A’;
(c)(i)       GRA to carry out due diligence on applicant Accountant in accordance with Administrative Procedures and shall determine:
·      Whether the documentation received is in order;
…
(ii)Where an Application does not satisfy criteria, GRA shall refer it to Directors with a recommendation to:
·     Request further information from applicant, or
·     Refuse Application.
…

(d)Upon Receipt of Application for Funding, GRA shall:

(i) Confirm applicant is registered under the Program and calculate maximum funding entitlement;

(ii) Approve the funding request where maximum funding entitlement is below $200,000;

…

(iii)Where the maximum funding entitlement is above $200,000, make a recommendation to a Director that the funding be approved. A Director shall be required to certify any approval of such a recommendation following careful examination of relevant documentation.

(e) Upon Receipt of an Application for Extension and Variation, GRA shall adopt procedures outlined in (d) above except in those instances where there has been a substantial change in the Applicant's Outstanding position from original application to date.

(f) In such instances GRA shall make a recommendation to a Director as to whether the funding should be approved, noting that in all cases two Directors shall be required to approve the funding where the maximum funding entitlement exceeds $200,000."

The lending business conducted by the respondent effectively commenced in February 1999. As already noted, by then Austide had been appointed to administer the lending scheme, but the formal agreement between the respondent and Austide was not executed until 7 June 1999. However, it is reasonable to infer that from its appointment in late 1998 the terms of the arrangement between Austide and the respondent had been worked out and were identical to those ultimately contained in the formal agreement. The formal agreement between the respondent and Austide obliged the latter to carry out the duties "contained in the Summary of Administrative Procedures", and had the exclusive right to do so. Those duties had to be carried out "diligently, honestly and in a professional manner". The agreement provided for the remuneration of Austide, which was in broad terms on a commission basis.

There was then annexed to that agreement a document headed "Summary of Administrative Procedures for the Management of the Accountant's Funding Program". Relevantly it provided:

"A. Registration

1. GRA receives application for registration from Accountant (Form A), and shall complete the following:

·Check that all relevant documentation is received and properly completed.
·Perform a due diligence assessment of the applicant. Such assessment shall involve but not be restricted to:
·          ASC searches;
·          CRAA searches;
·          Any other relevant searches;
·Confirmation of membership(s) of professional organisation(s);
·Confirmation of currency of Professional Indemnity Insurance Policy.

2.In accordance with results of the ASC search, GRA shall check and verify guarantees provided by various parties … GRA shall also verify that all relevant parties have provided guarantees.
3.GRA shall complete the Application Assessment Form and determine, in accordance with the credit policy, whether the application for registration is successful.
…
Rejected Applications
7.After consultation with a Director, GRA shall notify unsuccessful applicants in writing of rejection. Any subsequent enquiries from unsuccessful applicants shall be referred to a Director of GRA."

There does not appear to be any direct evidence that the Bank and HIH saw a document such as that before the agreement of 24 February 1999 was signed, but the annexures to that agreement refer to "Administrative Procedures" and it is a reasonable inference that something along the lines of that document was revealed then to the Bank and HIH.

Bundesen, in Appendix F to her report has prepared a table which helpfully compares the Austide Procedures as confirmed in the agreement between it and the respondent, with the procedures self imposed by the respondent and annexed to the agreement with the bank and HIH, and also with the procedures imposed by HIH and annexed to that agreement.

To my mind that summary of undisputed evidence establishes two propositions. Firstly, though the appellant was not involved (as perhaps he ought to have been) in finalising the administrative arrangements with Austide, he may well not have required further detail to be inserted into the "Administrative Procedures". That is because there is for all practical purposes no difference between the administrative arrangements he and Romp worked out in April 1998 when it was believed CRM would be the administrator, and the procedures set out in the agreement between the respondent and Austide. The only significant difference is that the April 1998 draft required the applicant for a loan to provide "Financials last 2 years" where the loan was for more than $250,000. But if adequate due diligence was carried out in most instances that would require perusal of recent financial statements. The second matter which emerges is that the expression "due diligence" was a term clearly understood in the context by the Bank, HIH, and all the directors of the respondent. There can be no doubt that in the context in which the expression "due diligence" was being used it required a proper investigation of the proposed borrower's financial position with a view to ensuring that the proposed borrower had the capacity to repay the amount lent. If the expression did not mean at least that, it meant nothing. There can be no doubt that the use of the expression "due diligence" in the "Summary of Administrative Procedures" required Austide to undertake a close examination of the risks involved in the making of a particular loan, and satisfying itself that it would be prudent for the respondent to make the loan.

The learned trial judge held that the case against the appellant was that he breached both his statutory and common law duties as a director in three respects, namely:

(i) failure to ensure that the scheme was set up so as to comply with "accepted lending practice";

(ii) failure to ensure that accepted lending practice was followed in the operation of the scheme;

(iii) failure to ensure that the scheme was administered by a person with the capacity to administer it properly.

In paragraph [8] of the statement of claim it was alleged that it was an implied term of the agreement between the respondent and Austide that the latter "would conduct the administration of the program with the degree of care and skill that a person or entity in [Austide's] position would be expected to exercise when carrying out the administration of the program, being in accordance with accepted lending practice ("accepted lending practice")." That expression "accepted lending practice" was then particularised in the pleading as follows:

"accepted lending practice was the practice undertaken by professional lenders from in or about 1999 until 2001, being to undertake appropriate pre-lending due diligence which required the lender, before making a loan, to be firstly satisfied that the applicant, plus the asset base being funded, qualified for a loan under the terms of the facility; secondly, that the applicant had the financial capacity to both service the loan (in terms of making the required payments on the loan) plus repay the loan capital; and thirdly, that the requirements imposed on applicants by the terms of the loan application had been satisfied by the applicant."

If it is correct to conclude, as I have, that the expression "due diligence" when used in the "Summary of Administrative Procedures" required the administrator to carefully evaluate the risks associated with the making of the loan, and to satisfy itself of the proposed borrower's capacity to meet its loan obligations, then there was substantial identity between the obligation imposed on Austide by the terms of its agreement with the respondent, and the concept of "accepted lending practice" referred to in the statement of claim.

That also appears to be the conclusion reached by the learned trial judge in [57] of his reasons; there he said:

"Consequently, what was contemplated by the obligation imposed on Austide to perform a ‘due diligence assessment of the Applicant’ was not something purely formal and directed to showing that the applicant qualified for a loan and had completed the requisite forms. The required assessment also concerned the ability of the applicant to meet its obligations should a loan be made. In other words, it included a risk assessment."

But significantly for his reasoning the learned trial judge went on to say in [58]:

"The scheme as devised failed to comply with accepted lending practice. The essence of the failure was not establishing a set of procedures under which the plaintiff would conduct enquiries and obtain evidence with a view to ensuring that loan applicants had the financial capacity to service the loan and repay loan capital. There was a failure to take measures to ensure that the certification of debts by the borrower was accurate in all relevant respects and that the debts actually existed. These deficiencies also existed in respect of loan increases and extensions."

That resulted in a finding that the appellant "failed to ensure that the scheme was set up so as to comply with accepted lending practice." I understand those passages in the reasoning to be saying that in principle the "Summary of Administrative Procedures" required Austide to comply generally with accepted lending practice, but that there were no specific guidelines or set procedures in place which would ensure such practice was followed in each case.

There is a finding in the judgment (at least with respect to the five loans in question) that Austide did not conduct appropriate due diligence enquiries and that directors of the respondent "had no expectation that it would do so". But that does not mean that the procedures specified in the "Summary of Administrative Procedures" failed to comply with accepted lending practice. If "accepted lending practice" required something more to be done than was encompassed by the term "due diligence" construed as stated above and the other requirements set out in the "Summary of Administrative Procedures", then that additional requirement had to be established by evidence.

The respondent placed extensive evidence before the court from L M Bundesen, a forensic accountant. Her evidence referred to the various agreements, and to the five subject loans. In the course of his reasons the learned trial judge said that he did "not place much weight on Ms Bundesen's evidence as to what constitutes ‘accepted lending practice’." There was no other evidence on which a finding could be made as to any specific requirement which ought to have been included in the agreement between the respondent and Austide to ensure that "accepted lending practice" was complied with. If in finding that the scheme as set up failed to comply with accepted lending practice the learned trial judge was holding that there was some obligation which ought to have been imposed on Austide which went beyond what was encompassed by the expression "due diligence" as I have previously construed that expression, then there was simply no evidence to found such a conclusion. If, for example, "accepted lending practice" obliged a prudent lender to conduct some specific enquiry or follow some specific procedure then it was necessary for the evidence to establish that. The evidence led by the respondent failed to establish any such procedure or enquiry and no such specific finding was made by the learned trial judge.

The evidence of Ms Bundesen, led by the respondent and admitted without objection, was to the effect that, if the program had been administered in accordance with the procedures agreed to between the respondent on the one hand and the Bank and HIH on the other, none of the five loans would have been made at all. The learned trial judge observed that such was no more than a finding of fact and did not involve any expression of expert opinion. But he did not reject the evidence entirely, and indeed it would have been wrong for him to do so. It was evidence led by the respondent from a forensic accountant in support of its case that the appellant was in breach of his duties as a director. Given that evidence, the case against the appellant had to be considered in the light of the fact that on the respondent's own admission the loans in question would not have been made if the procedures set out in the agreement between the respondent and Austide had been followed.

The scheme as finally set up essentially complied with the administrative requirements that the appellant would have put in place if his company CRM was administering the scheme. The scheme as set up required the administrator to undertake appropriate due diligence before recommending that a loan be made and if that requirement had been followed no loan would be made to a borrower unless capacity to meet loan obligations was established. On the evidence the due diligence referred to in the procedure to be followed broadly equalled "accepted lending practice". The evidence did not establish any further specific procedure which should have been adopted. It follows in my view that the conclusion reached by the learned trial judge that the appellant "failed to ensure that the scheme was set up so as to comply with accepted lending practice" meant that there should have been additional safeguards in the "Summary of Administrative Procedures for the Management of the Accountants' Fee Funding Program" to ensure that in all cases the requirements thereof were strictly followed.

In theory what was required to constitute "due diligence" would vary from case to case. Initial enquiry may reveal that particular searches should be carried out which would not be required in every case. Even the respondent's concept of "accepted lending practices" would be variable according to the particular circumstances. The evidence led by the respondent did not establish (and no finding was made) that a prudent director in the position of the appellant ought to have been aware that some particular enquiry not encompassed by the term "due diligence" ought to have been made with respect to one or more of the five loans or that some "set procedures" ought to have been put in place to ensure compliance by Austide with its obligation.

The real issues then become, was there a failure on the part of the appellant to ensure that the scheme was administered by a person who had the capacity to administer it properly, or a failure on his part to ensure that "accepted lending practice", namely the carrying out of appropriate "due diligence" was followed in carrying out the scheme so that the losses in issue were incurred. Those questions must ultimately be addressed with respect to each of the five loans in question.

The learned trial judge appears to have concluded that Austide, through its employees, had the capacity to administer the scheme properly, but in fact they failed to do so. Relevantly on the issue whether the scheme was administered by a person who had the capacity to administer it properly the learned trial judge made the following findings:

"Ms Schweitzer had 16 years experience with Custom Credit Corporation, including experience as a loans assessor and a relieving branch manager. She had also spent 10 years in administration at a private hospital and in managing a medical day procedure centre. Her former husband, Ronald Schweitzer, who was employed by Austide at relevant times, had also worked in reasonably senior positions at Custom Credit. Prior to the making of loans under the scheme Ms Schweitzer had extensive dealings with the directors, particularly Mr Taylor. She discussed the proposed administrative procedures with Mr Taylor who formed a favourable view of her competence. That view did not change as the scheme commenced to be implemented. None of the other directors, apart from Mr Dunn, had reservations about Ms Schweitzer's abilities and expertise. . . .
Ms Schweitzer's background appeared adequate to enable her to perform her duties, particularly when regard is had to the fact that Austide also employed Mr Ronald Schweitzer. No doubt was cast upon her general administrative efficiency or the efficiency of any employee of Austide."

The appellant's assessment of Ms Schweitzer was coloured by his reaction to CRM being replaced as the prospective administrator of the lending program. The appellant's evidence, given with hindsight, was essentially to the effect that Ms Schweitzer was more than qualified to administer the scheme; in consequence little weight should be attached to the trial judge's observation that the appellant had at earlier points in time experienced reservations about Ms Schweitzer's abilities and expertise.

Notwithstanding those findings as to the competency of the Schweitzers the learned trial judge concluded that the appellant failed to ensure that the scheme was administered by a person who had the capacity to administer it properly. Essentially he did so for the following reasons:

"Although Ms Schweitzer and Mr Ronald Schweitzer appeared sufficiently qualified to administer the scheme, the inadequacy of their administration, as earlier discussed, revealed their lack of competence. If appropriate administrative procedures had been devised from the outset, Austide and Ms Schweitzer were capable of carrying them out. Ms Schweitzer and her company, however, did not prove capable of devising and establishing such procedures.
. . .
The fact that Ms Schweitzer, working with apparent industry, succeeded in devising manifestly deficient procedures suggests that a director exercising appropriate care, in ensuring that a safe lending scheme was put in place and carried out, may well have detected her and Austide's failings.
Mr Dunn, with his experience and knowledge of what was originally contemplated probably would have detected Mr Taylor's and Austide's inability to establish sound procedures had he involved himself in its affairs. On balance, I find that this allegation has been made out, but it does not appear to me that the finding is central to the question of liability. The real issues are whether proper loan administration procedures were put in place and implemented, whether, if they were not, Mr Dunn bears responsibility in that regard or whether he was entitled to rely on others."

The reference in the first sentence of that quote to the "inadequacy of their administration" appears to be a reference back to the finding in [57] that: "Austide did not conduct due diligence enquiries of this nature and the directors of the plaintiff who had contact with Ms Schweitzer concerning the administration of the scheme had no expectation that it would do so", and the findings in [61]. Those findings were made before the learned trial judge considered the actual steps taken by Austide prior to the making of the five loans in question.

There is a deal of evidence (though the learned trial judge did not make any findings in relation to it) which strongly suggests that the appellant and probably Romp at least were not aware of the business and personal relationships between Ms Schweitzer, Sheers and Howes. At least it can be said that the respondent did not prove that at the material time the appellant was aware of the business links between Howes and Sheers and the borrowers, or of the fact Sheers was a director of Jumarsh and had an interest in Austide, or perhaps of the personal relationship between Sheers and Ms Schweitzer.

The learned trial judge made findings in [61] which led to his conclusion that in administering the scheme Austide failed to follow "accepted lending practice" as defined in the statement of claim. He found that Austide "conducted no due diligence enquiries with a view to satisfying itself that the applicant had the financial capacity to service and repay the loan. Nor did Austide seek independent proof, or some other means of verification, of the debts certified in the application for the loan." He then went on to conclude that: "Generally speaking, it did no more than what was required to process the application forms settled by Ms Schweitzer in conjunction with representatives of the plaintiff."

The findings are stated in general terms, and it is not clear whether the learned trial judge was limiting his finding to the five loans in question. If the finding was broader then it is not clear what evidence it was based on. Significantly, the learned trial judge did not consider the evidence in relation to those five loans until later in his judgment. There was some, but mostly non-specific, evidence as to Austide's administration generally, and that evidence would not justify a finding that "accepted lending practice" was not followed or that appropriate due diligence was not conducted generally. Such a conclusion had to be based on a consideration of the files in relation to the five loans.

It is now necessary to turn to each of the five relevant loans and to consider the circumstances in which the loans came to be made in some detail.

Loan to Jumarsh

The learned trial judge made the following relevant findings. At the time of making the advances the directors of the company were Julian Norton-Smith and Sheers. The loan form showed the applicant to be Julian Norton-Smith trading as Jumarsh Pty Ltd, but in another part of the form the "authorised person" was said to be Michael Norton-Smith and Julian Norton-Smith. Michael Norton-Smith was a certified practising accountant and it was his professional membership which was relied on to obtain the loan. He was a bankrupt at the material time. The learned trial judge stated: "It would seem that no credit check was done on him, or, if it was, it was not acted upon." Finally with respect to this loan the learned trial judge made the following findings:

"The purpose of Jumarsh in borrowing the subject monies was to re‑lend them to persons and companies, including Mr Howes, and companies in which Mr Sheers had an interest. Mr Sheers witnessed Julian Norton-Smith's signature on the original loan application and I infer that Mr Sheers and Mr Howes were aware of the purpose for which Jumarsh was borrowing the subject money. I infer also that Mr Sheers was aware that Julian Norton-Smith's certification of receivables bore little, if any, relation to reality."

The Jumarsh loan file (as was the case with the other relevant loans) was put in evidence as part of the respondent's case. Nothing in the documentation was challenged and in consequence on appeal regard can be had to the contents of the file on the basis that it was uncontradicted and put forward by the respondent in order to prove its case.

Before proceeding to consider the files it should be noted that Ms Schweitzer was initially the third defendant in the proceedings, but a notice of discontinuance was filed prior to the trial, which proceeded only against the appellant. The respondent subpoenaed Ms Schweitzer to give evidence at the trial, but at the last moment informed her that she need not attend. The relevant files contain many abbreviated notes, apparently in Ms Schweitzer's hand, and the failure of the respondent to call her deprived the court of the benefit of her evidence in relation to such matters. Certainly one can draw the inference from the fact that the respondent sent her away that she could not strengthen the respondent's case.

The initial Jumarsh application form gives Jumarsh Pty Ltd as the trading name and the applicant's name as Julian Richard Norton-Smith. Later the name of the "authorised person" is given as Michael Richard Norton-Smith and Julian Norton‑Smith. That application form dated 22 February 1999 is witnessed by Sheers. There was an accompanying declaration as to health with respect to Michael Richard Norton-Smith and again that document was witnessed by Sheers. The file includes reports from CRAA on both Jumarsh and Julian Norton-Smith. A copy of the practising certificate of Michael Richard Norton-Smith as a Certified Practising Accountant is also on the file. On the basis of total receivables of $428,100 a loan of $342,000 was approved on 12 March 1999. There is then a memo from Ms Schweitzer to Taylor of 22 March 1999 indicating that she did not have an authorisation signature on the application for Jumarsh; the memo went on: "I have attached the assessment form completed on 19/2/99 and would appreciate it if you would have Steven [Romp] authorise it." Taylor returned the form to her on 23 March 1999 duly signed by Romp. The advance of a further $100,000 in July 1999 was approved by Howes. Again the borrower's forms with respect to that further advance were witnessed by Sheers. The further advance in September also appears to have been approved by Howes. Romp wrote to Ms Schweitzer on 29 October 1999 raising some issues with respect to the Jumarsh loan. The following is a relevant extract from that letter:

"In respect of Professional Indemnity insurance for above please advise, if Jumarsh Pty Ltd is a registered accounting practice and a member of which professional body.
. . .
Also, please confirm that the directors of Jumarsh Pty Ltd are accountants and what are their qualifications and how long have they been practising in this practice and in any previous practice.
Until these questions are answered no more advances or extensions of advances are to be approved."

That elicited a reply from Ms Schweitzer in the form of a letter to Romp dated 3 November 1999. Relevantly that letter stated:

"Jumarsh Pty Ltd, is an Administration Company for the Norton-Smith Family Trust. Michael Norton-Smith is a beneficiary under that Trust and is the sole practising practitioner. He is not a Director of the Company, as he is presently under a disability.
I refer you to the attached Assessment Form sent to you at the time of the application for your approval of the loan. As can be seen, you were advised at the time that Mr Norton-Smith was not a Director of the Company and that he was working as a Consultant to Ingles & Partners. Mr Norton-Smith's son Julian signed the Guarantee as the sole director of the company.
I would also like to confirm that the other requirements listed on the Assessment Form, were completed prior to advancing the funds.
. . .
Please also note that all subsequent increase of advances have been approved by a GRA Director - Mr Garry Howes - copies of Approvals and Authorisations are attached."

That letter also suggested that the Jumarsh file would be brought to the attention of the board of the respondent at the next meeting.

There is a copy of an ASIC search with respect to Jumarsh on the file, but it would appear that it was obtained well after the loan was initially made. That form discloses that Michael Richard Norton-Smith was a director of Jumarsh from 28 June 1996 until 21 August 1998. One could infer that it was on the latter date that he became bankrupt. From then Julian Norton-Smith became a director. Sheers became a director on 16 February 1999 and remained as such until 1 November 1999.

Thus it can be said that Sheers, who was found by the judge to have been one of the promoters of the "Accountants' Fee Funding Program" from the middle of 1997, became a director of Jumarsh some six days before the application for a loan was submitted and he witnessed all documents associated with the loan application. He then became a director of the respondent on 28 June 1999 which was before each of the additional advances were made to Jumarsh.

One sees a detailed summary of the relationship between Jumarsh, the Norton-Smiths, and Sheers in the reasons for judgment of McMurdo J in ASIC v Sheers [2003] QSC 474; the evidence in this case supports the findings made in that decision. In that proceeding it was held that, by his involvement in the making of the further advances to Jumarsh, Sheers contravened s 182 of the Corporations Act 2001 (Cth) and he was in consequence disqualified from managing a corporation for a period of two years. It is relevant for present purposes to note that of the initial advance of $342,000, Jumarsh paid $200,000 to Sheers by cheque dated 15 March 1999, that is three days after the loan was made. That was undoubtedly because of the various business ventures which had been entered into between the Norton-Smiths and Sheers, particularly what was referred to as the Timber Tec venture. The further advance in September also ultimately benefited both Sheers and Howes. The affidavit of R A Duus (including exhibits) largely supports all these conclusions.

There is no doubt that Sheers benefited substantially from the loans made to Jumarsh, as also did Howes, but probably to a lesser extent. It is not irrelevant to recall at this stage that Ms Schweitzer was the de facto partner of Sheers. The critical questions are whether or not Austide carried out a proper due diligence with respect to Jumarsh, and if not, why not? Clearly there was major involvement of directors of the respondent in the approving of the initial loan and the further advances. Romp formally approved the initial application, and the subsequent further advances were approved by Howes. Taylor, though not then a director, was involved with the original application, and Sheers was a director at the time of the approval of the further advances. Given that Sheers had witnessed the applicant's signature on the original application the directors of the respondent would have been immediately aware that he had particular knowledge of the applicant. The direct involvement of Sheers in both the lender and the borrower, and the fact that he benefited significantly from the loan, put the approval of this loan into a special category. There is nothing in the file to indicate that at the initial stage Austide was actually aware that Michael Richard Norton-Smith was a bankrupt, but it is clear that at some stage Ms Schweitzer became aware of that because she refers in the subsequent letter to his "disability".

The inescapable conclusion is that the initial loan to Jumarsh, and the further advances, were made because Sheers and Howes stood to benefit from the loan. If the procedures set out in the "Summary of Administrative Procedures for the Management of the Accountants' Fee Funding Program", including conducting due diligence with respect to the applicant, had been carried out the initial loan and further advances would not have been made. But those procedures were bypassed because of the involvement of directors of the respondent.

The relevant question for purposes of the present proceeding then becomes, was there, in those circumstances, a failure on the part of the appellant to ensure that accepted lending practice was followed and which resulted in the loss. That is a matter to which I will return after considering the other relevant loans.

Loan to Venola

At the outset it should be noted that the learned trial judge found that there appeared to be "a close connection between Venola, Spiller and Mr McCouat." Loane was the director of Venola and the learned trial judge also found that there was evidence "that Mr Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had had some form of business dealings with them."

The learned trial judge made a finding that the initial loan application by Venola was "approved by Mr Howes". He also found that "Venola was not carrying on an accounting practice at any material time". Loane, as director of Venola, did not put forward any evidence as to his membership of any relevant professional accounting body.

The learned trial judge made no further specific findings with the loan to Venola, but again consideration of the relevant file is instructive.

The file discloses that a reference from CRAA was obtained with respect to Venola. There was also an ASIC search done on the company. The application form indicated that Venola was part of the "Capital Assets Group". That form also made it clear the applicant was not a registered tax agent; the following information was provided: "Work in association with tax agent - we are management accountants and corporate advisers". Significantly on the assessment form, which was signed by Howes indicating the loan was approved, it was stated: "Known to Ric Sheers".

There is a file note dated 10 December 1999 indicating that Howes and Sheers would try and make contact with the client; it would appear by then there may have been some problem with the account. There is another diary note for 15 February 2000 (the handwriting was not identified in the evidence) to the effect that Howes was advised that further forms were due with respect to a rollover of the loan. The note went on: "Client's file now being handled by him". Another file note on 29 May 2000 suggests a link between Venola, Ryland (the principal of Spiller) and McCouat. Subsequent diary notes suggest that Howes and Sheers were involved in attempting to resolve problems with Venola and Spiller accounts.

In November Venola sought an increase in funding to make the total loan $1,000,000. Schweitzer replied by facsimile of 25 November 1999 as follows:

"I refer to your application for Variation and Extension to your funding with our program, and advise that the application has been referred to two Directors of the Company.
Before they will consider any further increase in funding, they have requested that you supply to them, a full list of your aged debtors as per your statement."

That would indicate Ms Schweitzer, at least on that occasion, was following the procedures laid down in the various protocols. In the following month Venola defaulted in making a monthly interest payment and as Ms Schweitzer advised Venola she had "no option but to refer the matter to a Director of the Company, Mr Gary Howes." Again an indication of appropriate management of the account on the part of Ms Schweitzer and Austide.

Also on the Venola file is an ASIC search of Capital Asset Holdings Ltd; it may well have been initially obtained in April 2000. Relevantly for present purposes it established that Ryland, McCouat and Loane were associated with that company. Other documents on the file carry the suggestion that the loan to Venola and Spiller was on behalf of the Capital Assets Group. That appears to be confirmed by the guarantee given by Ms Caerdinel (Loane's wife) who had replaced him as a director of Venola; that guarantee is dated 15 August 2000. There are other documents on the file which also confirm a relationship between Ryland and Venola.

There are diary notes on the file for January 2001 which may be of significance if they were more fully explained. For example there is a note that Ryland claimed that he had given Sheers $50,000 "part of which was to bring this account [Venola] up to date."

Finally on the Venola file there is a typed file note, unsigned, to the following effect:

"RTS advised that he has entered into a contract on Clarkes Cove Property - valuation $15 million in order to raise finance to pay out both the first mortgage approximately $4 million and capital and outstanding interest payments on GRA debtor accounts above.
File handed over to Directors of the Company and Board advised of security held.
This client is in partnership with other GRA clients - Spiller Holdings and J McCouat on this project."

RTS is clearly a reference to Sheers. Later on in other files there is also reference to the Clarkes Cove project, but there is little if anything in the evidence to establish who was involved in it and what loan funds from the respondent were involved.

Again this would appear to be a loan which was formally approved of by Howes and in which at all material times Sheers was heavily involved. If only because neither Venola or Loane were practising accountants, the loan would never have been made if the procedures laid down in the relevant protocols were followed. The inescapable conclusion is that the loan was only made because of the involvement of Sheers and Howes with Venola. It follows that the remaining relevant consideration for purposes of this proceeding is whether the appellant failed to ensure that "accepted lending practice" was followed in relation to the loan to Venola and which resulted in the loss.

Loan to Spiller

The learned trial judge found that the initial loan application was dated 28 May 1999. The application form described the applicant as "David Ryland, trading as Spiller Holdings Pty Ltd Manly Business Services". Ryland was the sole director of Spiller. The learned trial judge merely held that the "application was approved by Mr Sheers". He also found that Austide did not obtain a search of the name "Manly Business Services". He also found that it did not appear that Spiller carried on any accountancy practice.

Again, reference to the file documents discloses further relevant information. The application form asserted membership of the Institute of Chartered Accountants and that Ryland was a registered tax agent. A Certificate of Registration of Tax Agent is on the file and also a certificate establishing as at 1981 that Ryland was a member of the Institute of Chartered Accountants.

Significantly it would appear that Sheers approved of the loan on 1 June 1999; that appears from the Assessment Form. That approval was given some weeks before Sheers became a director of the respondent on 28 June. The comment on the assessment form indicates that due diligence was carried out in the name of Manly Business Services though the loan was to be to Spiller. It indicated that the business name search had been carried out as well as an ASIC and CRAA search. The final further advance of $276,000 in February 2000 was approved by Howes, but it is difficult to decipher signatures approving the earlier additional advances.

There is an interesting document on file, being a letter from Manly Business Services signed by Ryland of 21 December 1999 to Howes. It is in the following terms:

"Following my discussions with Rick Sheers this afternoon I have agreed to meet both Venola Pty Ltd and Spiller Holdings Pty Ltd monthly drawdowns until at least April 2000 drawdowns. Please therefore deduct the amount for Venola as agreed. You have my banking details. If you require an additional authority please advise."

There is then another copy of that document on the file with a handwritten notation on it; again it might be Ryland's signature but one cannot be sure of that. The handwritten notation is in these terms:

"Please stop trying to deduct Venola's payment from Spiller Holdings account. Contact John McCouat as he has the money to pay for it."

Further evidence of the close relationship between Ryland and McCouat is seen in the letter of 30 June 2000 from Ryland to the respondent signed in the presence of McCouat as a witness. That document relates to the guarantee given by Ryland. The guarantee itself, dated 30 June 2000, is also witnessed by McCouat. There is then a diary note signed by Ms Schweitzer but undated dealing with default with respect to this loan; it is in these terms:

"Ron [Schweitzer] spoke to David Ryland on the 19^th October and he requested that Rick Sheers talk to him with regard to another GRA client that Ryland is involved with – Venola Pty Ltd. This client's account is currently under the management of Gary Howes and Rick Sheers.
Sherie advised Rick Sheers on 20^th October of the above comments and handed the file over to him and Gary Howes on 24 October for further action.
30/10/2000 advised by both directors that they were having difficulties in contacting the client. …
Rick and Gary both made contact with the client and I was told to draw back one payment from GRC's account. Client apparently could come up with half of a payment until the property settlement is complete."

Then comes a very interesting letter from David Ryland dated 15 December 2000. It is addressed to:

"Mr Rick Sheers
Director
Timber Tec Holdings Pty Ltd and
Gold Ribbon Corporate Services Pty Ltd"

The letter is headed "Outstanding Gold Ribbon Facilities" and then is in these terms:
"I refer to Elliot & Harvey's letter of 14 December 2000 in respect of the settlement of the Pacific Sands Motel and your Group's contracting to purchase Clarkes Cove.
The Clarkes Cove sale contract provides for full clearance of current debts to Gold Ribbon in the names of Spiller Holdings Pty Ltd, Venola Pty Ltd and John McCouat at your request.
As discussed I confirm that upon settlement of Pacific Sands Motel set down for Thursday 21 December 2000, that all arrears interest payments in respect to Spiller Holdings Pty Ltd and Venola Pty Ltd will be brought up to date and prepaid to 30 March 2000."

It will be recalled that on the Venola file there was also reference to Clarkes Cove.

The next relevant document on file is a letter from Ryland addressed to Ms Schweitzer of 25 January 2001 in relation to the Spiller loan; the relevant text is as follows:

"Prior to Christmas a transaction was completed via Rick Sheers of your office wherein your Group was given the benefit of $50,000 in relation to matters clearing both the principal and interest owing from my company and associated entities to Gold Ribbon. In addition a further $20,000 was drawn in favour of Gold Ribbon Accountants Pty Ltd and handed over at settlement on the 22^nd of December 2000. This money should have been allocated directly towards Spiller Holdings facilities.
In all a total of $70,000 has been paid as per the direction of Gold Ribbon's director – Mr Sheers. This is more than adequate. Your Group has undertaken via other dealings to have the limits of Spiller Holdings Pty Ltd, Venola Pty Ltd and John McCouat cleared by the 30^th of March 2001. I believe Mr McCouat is already covering his own interest and will continue to do so until the 30^th of March 2001. The money that I have paid, more than covers my limit until that date. I am more than happy for any excess amounts to be allocated towards Venola Pty Ltd's service ability to that date.
We have requested, but have yet to receive, a full reconciliation of the outstanding position of Spiller Holdings Pty Ltd, Venola Pty Ltd in respect to interest payments due and payable to 30 March 2001. We continue to wait for your reconciliation and confirmation of this position.

It is obvious that you have misallocated the money paid to your company at settlement on 22 December 2000. Could you kindly amend your records to show Spiller Holdings Pty Ltd's payment of the above amounts."

Ms Schweitzer replied by facsimile the same day; relevantly she said:

"I have spoken to Rick Sheers about your letter, who advises me that during the transactions that took place prior to Christmas, the only communication Rick Sheers received from you is a fax dated 15 December 2000. … All other arrangements including the dispersion of the $20,000 paid on 22 December 2000 were coordinated by your associate Mr Darryl Loane. The only communication that this office has had with you during that time, was a phone conversation with Ron Schweitzer regarding your overdue payments. …
Mr Sheers advised me that you were well aware that the $50,000 as stated in your letter, was being used as part deposit on the purchase of Clarkes Cove. He further stated that all documentation pertaining to that settlement would show this to be the true fact. That money therefore, was never received by Gold Ribbon Accountants Pty Ltd.
I take exception to the comments you make in your last paragraph and I shall be tabling all correspondence at next weeks Board meeting at Gold Ribbon …"

Unfortunately the material on the file, and the other evidence contained in the 18 volumes of appeal record, does not appear to clarify what was the relationship between Sheers, Howes, Loane, Venola, Spiller, Ryland and McCouat with respect to ventures such as Clarkes Cove. It is unclear what the settlements are that are referred to in the documents just quoted.

The files with respect to Venola and Spiller would tend to suggest that once the loans were in default appropriate steps were taken by Ms Schweitzer and Ron Schweitzer to remedy the situation and to ensure that Board members of the respondent were fully appraised of the situation.

One is left with the clear impression that the Spiller transactions were only entered into because of the association between Sheers and Howes on the one hand and the borrower on the other.

Again, the question for purposes of this proceeding is whether the appellant failed to ensure that the protocols governing the making of such loans were followed which resulted in the loss.

Loan to Moss

In relation to this loan the learned trial judge made the finding that Moss failed to complete "the part of the form which made provision for identification of particulars of the borrower's professional indemnity insurance." He also found that Howes witnessed the signature of Moss on the form and Howes also approved the application. Significantly a further finding was made: "Howes was aware that false information was being submitted and he and Sheers stood to benefit indirectly from, at least, the initial advance." Then there was a finding as follows:

"The CRAA search obtained by Austide showed that Mr Moss had become self-employed as an Accountant on 14 October 1999, three days after he signed the application form. It may be inferred from these facts that the fees certified by Mr Moss were highly unlikely to have existed. At the very least, this fact suggested that a careful investigation of the applicant's certificate was warranted. There was no such investigation."

Handwritten file notes which form part of the file with respect to Moss, strongly suggest that Howes was very involved in all dealings with Moss.

The file reveals that extensive credit enquiries were made with respect to Moss, and indeed by letter of 12 October 1999 he gave an explanation with respect to two matters revealed by those enquiries which could be regarded as adverse.

As found by the learned trial judge the initial application form submitted by Moss was very deficient in particulars, yet it was witnessed by Howes and then approved by him. Signatures approving extensions of the loan in March and April 2000 are difficult to decipher, but it is of some significance that the application for an extension of loan dated 12 July 2000 is witnessed by Howes.

Solicitors for the respondent wrote to Moss on 29 May 2001 asserting that $735,000 was outstanding in respect of his loan. Moss replied by an email of 27 June 2001 as follows:

"While I do agree that I do have a loan from your client for $735,000, I wish to point out to you the fact that this loan was obtained due to representations made to me by Directors of Gold Ribbon (Accountants) Pty Ltd. A substantial amount of the loan was used to fund several companies of which these Directors were shareholders and officeholders. In simple terms the Directors used me as a vehicle to obtain funding for their own purposes. I did not approach the company for a loan at any stage.
I have in my possession a signed written agreement by Gary Howes, Rick Sheers and Michael Norton-Smith that names them as being guarantors for my loan with Gold Ribbon. Also their involvement in the abovenamed companies is a matter of public record with the ASIC statutory records in addition to the other relevant documents. There are also other witnesses to these facts.
If you wish to pursue me in this regard to this loan then I will have no choice but to take appropriate action against the abovenamed.
I suggest that in the first instance you contact Gary Howes to verify the claims made by me. If you wish to contact me then please do so by return mail. No doubt that it would be in the interests of all parties that this matter be dealt with in a sensitive and sensible manner."

The file does not reveal any response from the respondent to the allegations contained in that document.

McMurdo J also recorded findings with respect to the Moss loan in ASIC v Sheers referred to above. Findings were there made that the falsified statements as to the receivables of Moss were "planned by Mr Howes". There was also a finding that "some of the monies lent to Mr Moss were to benefit entities in which Mr Sheers had an interest"; as was said therein: "… according to the affidavit of Mr Moss, whose evidence was not challenged by cross-examination and which I accept, a substantial part of the initial borrowing of $343,380.80 from GRA was used to pay companies in which Mr Sheers had an interest or the expenses of other shareholders in those companies." It is also not irrelevant to note in this context the finding in that decision with respect to the companies Cable Drum Pty Ltd and Innovation Design Marketing (International) Pty Ltd; it was found that 50 per cent of the shares in those companies was held by a consortium of Moss, Howes, Sheers and Michael Norton-Smith. There was also a link to the company Timber Tec Holdings Pty Ltd. All these findings are supported by evidence in this case.

Reference should also be made to the findings of fact and conclusion by Dutney J in ASIC v Howes [2003] QSC 270. In that proceeding it was held that, by his involvement in the making of advances to Moss, Howes contravened s 182 of the Corporations Act 2001, and he was in consequence disqualified from managing a corporation for a period of five years. There were findings in that case that Moss was "approached by Mr Howes to invest start-up capital in a number of ventures. Mr Howes advised him that the capital could be obtained from GRA. Two of the companies involved were Cable Drum Pty Ltd and Innovation Design Pty Ltd. In return for providing start-up capital Mr Moss received shares in each company. Mr Howes also took a shareholding through a family trust, the trustee of which was a company owned by Mr Moss." There was also a finding that Howes "created a fictitious debtor's list for Mr Moss. Mr Moss had never had debtors even approaching the figure of $900,000 at any point in his entire accounting career. Mr Moss transposed Mr Howes' fictitious debtors list on to a loan application form." There was also a finding that because Moss was concerned as to his liability he received a "cross-guarantee from … Howes and [Sheers] to protect him against" such liability. Again all these findings are supported by evidence in this case.

The conclusion is inescapable that the loan to Moss was only approved and made because of the direct involvement of Howes and Sheers in the transaction in the fact that each of them stood to benefit from the making of the loan.

For present purposes the question is whether the appellant failed to ensure that the protocols governing the making of such loans were followed which resulted in the loss.

Loan to McCouat

The learned trial judge found that McCouat's application was approved by Sheers. He noted that the "practice address" given was that of "Manly Business Services". Loane witnessed the signature of McCouat on the application form. There was also a finding that "McCouat did not have receivables certified in his application or in any of the applications for further loans or further extensions of loans." The judgment recorded that McCouat had obtained membership of the National Institute of Accountants and taken out professional insurance only at about the time of making the loan application, yet the application listed outstanding practice debtors of $1,707,023. As the trial judge said: "[t]hese matters ought to have suggested that the facts certified by the applicant be investigated carefully. There was no such investigation."

There is a document on the McCouat file headed "file note" which contains some typewritten and some handwritten notations. There is an undated handwritten note at the foot of that page in the following terms:

"RTS [Sheers] has entered into a contract on Clarkes Cove property valued at $15 million in order to raise funds to payout the first mortgagee ($4 million) and o/s capital and interest on GRA debtor accounts. Spiller/Venola and McCouat (all previous partners in Clarkes Cove)."

Clearly some due diligence was carried out because on the assessment form it is noted that the CRAA report "shows one default but since paid". There is on the file a letter dated 4 April 2000 establishing that McCouat was admitted to membership of the National Institute of Accountants on 3 April 2000.

Ms Schweitzer wrote to McCouat on 21 February 2001 in the following terms:

"Over the past few weeks, we have had indications from you that you are expecting your current facility with Gold Ribbon Accountants Pty Ltd to be paid out on the 31^st March, 2001. Further, it is evident that pending this settlement you believe that your current terms and conditions with us do not need to be adhered to.
Please note that any arrangements that you may have with Mr Rick Sheers for the anticipated settlement of this account should not affect in any way, how you are required to maintain your facility with Gold Ribbon Accountants."

As the account had not been settled by 11 April 2001 Ms Schweitzer wrote threatening immediate commencement of legal action. That brought a reply from McCouat in the following terms:

"In reply to your correspondence of 11 April 2001 I would like to point out information returned to Mr R Taylor and Mr R Schweitzer in previous correspondence sent to your company. Accordingly could you please refer this matter to Mr Rick Sheers, and also to provide me with a balance of account to 30 March 2001."

All of that material, put in by the respondent, strongly suggests an involvement by Sheers, and probably Howes, with respect to this loan, but the respondent has not provided any more detailed information as to the background transactions.

On the evidence presented to the court by the respondent the inference is compelling that again it was Sheers and Howes who were instrumental in ensuring that this loan was made to McCouat. The inference is that that was influenced by the business dealings that Sheers and Howes were involved in with Spiller, Venola, Moss and McCouat.

The remaining question is whether the appellant failed to ensure that the protocols were followed in relation to the making of this loan which resulted in the loss.

Finally, in dealing with the five loans in question some further findings by the learned trial judge should be noted. Initially he concluded that there appeared to have been "a close connection between Venola, Spiller and Mr McCouat" and that there was "evidence also that Mr Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had some form of business dealings with them". There was then a finding as noted above in [45] that the purpose of the Jumarsh loan was to on-loan the borrowed funds to entities in which Howes and Sheers had an interest. Finally, the learned trial judge found as recorded in [82] that Howes and Sheers stood to benefit from at least the initial advance to Moss. Those findings are more than amply supported by evidence placed before the court by the respondent.

But then his Honour went on and made a finding that the "evidence though does not support the conclusion that Messrs Sheers or Howes stood to gain financially from the loans to Venola, Spiller, Moss or McCouat". Given the material placed before the court by the respondent, much of which has been summarised above, that finding cannot stand. Even if the evidence does not enable the court to make findings as to how Sheers and Howes specifically benefited from the making of those loans, the material placed before the court by the respondent clearly establishes the inescapable conclusion that in some way they were to benefit materially. The finding by the trial judge is so contrary to the evidence that this Court should set it aside.

Against the background of all that has been set out in these reasons the conclusion is inescapable that Howes and Sheers were prepared to take whatever steps were necessary in order to ensure that the loans were made to each of the five borrowers in question, regardless of what was contained in the protocols governing eligibility for the making of such loans. Despite conflict of interest each was prepared to exercise the power of approving a loan even in the face of documentation indicating that such a loan fell outside applicable guidelines. In relation to the Jumarsh loan Sheers was a director of that company, the person whose signature appeared on the application form as witness, at the time of the initial advance a promoter of the respondent, a person with an interest in Austide, and the de facto partner of Ms Schweitzer who was the person primarily responsible for carrying out due diligence. At least some of the monies lent to Jumarsh were on-lent to Howes and Sheers or entities in which they had an interest. The further advances to Jumarsh were approved by Howes. Sheers was a witness to the applications for further advances. In those circumstances it is improbable, if not fanciful, to conclude that any specific direction given or conditions imposed by the appellant as to the procedural steps to be taken to ensure that due diligence was carried out, or accepted lending practice followed, would have deterred Howes and Sheers from having the loan approved and made.

Without again re-stating the position with respect to the approval of loans to Venola, Spiller, Moss and McCouat the same conclusion must be reached. In each case a director of the respondent approved the loan notwithstanding that it failed to meet the guidelines set for approving loans. Further, in many instances it was obvious to anyone approving the application that false information was being provided. Notwithstanding conflict of interest, because of the association between Howes and Sheers on the one hand and the borrower and those ultimately to benefit from the loan on the other, the loans were approved. Again it would be improbable, if not fanciful, to conclude that any direction given or condition imposed by the appellant as to the procedural steps to be taken to ensure that due diligence was carried out, or accepted lending practice followed, would have deterred the directors in question from approving the loans.

For present purposes it can be accepted that Austide conducted inadequate due diligence with respect to each of the five loan applications. The findings of the trial judge can be accepted that with respect to those five loans it did not seek independent verification of the receivables and did not satisfy itself that the applicant had the financial capacity to service the loan.

It is important to note that it was not part of the respondent's case as pleaded or presented that the appellant was in breach of his duties as a director in not taking steps to prevent his co-directors from breaching their duties as directors and acting, despite conflict of interest, in approving the loans.

There is nothing I wish to add to what Keane JA has said in his reasons as to the nature of the duty owed by a director in the circumstances in which the appellant was placed here.

The ultimate question then is one of causation. Did the respondent prove that the losses in question were incurred because the appellant breached his duty as a director in that he failed to ensure that accepted lending practice was followed? That question can only be answered after consideration of the appropriate test for causation in such circumstances.

In March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 the majority of the High Court held that causation is essentially a question of fact to be answered by reference to common sense and experience. But all of the judges were of the view that the "but for" test was at least a useful and relevant aid in determining whether something is an effective cause of something else. As Deane J said at 522, citing Duyvelshaff v Cathcart & Ritchie Ltd (1973) 47 ALJR 410: "In particular, the test [the 'but for' test] will commonly exclude causation for the purposes of the law of negligence if the answer to the question it poses is that the accident which caused the injuries would have occurred in the same way and with the same consequences in any event." That reflects what was said by Mason CJ in March at 515: ". . . the 'but for' test, applied as a negative criterion of causation, has an important role to play in the resolution of the question [of causation]."

What the learned trial judge in this case relevantly held was that:

"The inadequate loan application procedures and the general lack of rigour applied in assessing applications greatly enhanced the likelihood that bogus or unmeritorious applications would be approved. Whilst the adoption of procedures which conformed with 'accepted lending practice' may not have ensured that all such applications were detected, the prospects of detection, and deterrence, would have been substantially enhanced. "

That appears to be largely based on a passage in the judgment of McHugh J in Chappel v Hart (1998) 195 CLR 232 at 244-5, but to my mind it overlooks the significance of the "but for" test as "a negative criterion of causation", to use the words of Mason CJ. The learned trial judge did, however, adopt to some extent that approach in [138] and [139], where he said:

"The remaining argument on causation is that the five defaulting loans were made as a consequence of the fraudulent or improper activities between the borrowers on the one hand and Messrs Sheers and Howes on the other. It is said that even if there were some breach of duty on Mr Dunn's part it cannot be said to have caused the loss. The argument identifies the true cause of the loss as the improper conduct of Messrs Howes and Sheers.
It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended."

But there the learned trial judge was essentially dealing with an argument that the improper activities of Sheers and Howes were the "true cause of the loss". As the reasoning in March vStramare demonstrates, there is a significant difference between the appropriate application of the "but for test" and asking the question was some identified conduct the "true cause of the loss".

     In my opinion in this case there were sufficient, indeed overwhelming reasons to the contrary. The most important is that the appellant's speed averaged at least 135 km per hour throughout his journey. Self evidently he must have either ignored or overlooked speed limit signs which were in place, and the overall State speed limit in order to achieve that average speed. As an experienced traveller in the area, a matter to which the majority in the Full Court accorded no relevant and sufficient weight, he chose to maintain that average speed through country and on a highway over which he must have known animals both domestic and feral strayed.
     The majority made a further error: in preferring and giving almost conclusive weight to the evidence of the respondent's wife, and his passenger who was asleep at the time of the accident, that the respondent was a careful driver responsive to road signs, in the teeth of the inexorable arithmetic of the distance that he travelled over the time elapsed. The admissibility of the wife's and passenger's evidence was not the subject of any objection, but assuming it to be admissible little probative value could possibly be attached to it in the circumstances.
     In Rosenberg v Percival ((2001) 205 CLR 434) I counselled against too ready an acceptance of a plaintiff's evidence, given after the event, that had she been informed of a risk, even a slight one, subsequently realised, she would have elected not to take it (Rosenberg (2001) 205 CLR 434 at 504 - 505 [221]). Unfortunately the respondent in this case could give no useful evidence of any kind as to what he would have done in relation to signage because of the serious and disabling injuries that he suffered. But his inability to do so could provide no warrant for the drawing of an inference that he would have heeded a warning sign or signs in the light of the other, compelling evidence and inferences to the contrary to which I have referred."

[166](2005) 79 ALJR 1104 at 1119 [80] - [83] (citations footnoted in original).

In Hoyts Pty Ltd v Burns,[167] McHugh, Gummow, Hayne and Callinan JJ made the point that greater awareness of risks does not necessarily lead to a change of conduct on the part of persons confronted by those risks.
[167](2003) 201 ALR 470 at 474 [14].

In the light of these observations, and the evidence to which reference has already been made, it is proper to regard with scepticism the proposition that Ms Schweitzer was always willing and able to ensure that loan applications complied with the respondent's lending criteria whatever the wishes of Sheers and Howes, and that all that she needed to make her an effective steward was explicit instruction to decline applications from those applicants who were unable to produce verification of their receivables or financial statements indicating some ability to service and repay loans. There is evidence, in addition to that referred to by the trial judge, which strengthens one's reluctance to make findings in favour of the respondent which the trial judge did not make. To a summary of that evidence I now turn.

Further evidence relating to Austide and the defaulting loans

The detail of this summary is drawn from the evidence of Bundesen whose historical account the learned trial judge regarded as a useful summary of the circumstances of the improvident loans.[168] Bundesen's report, and the files of the respondent on which it was based, were adduced by the respondent.
[168]See Gold Ribbon (Accountants) P/L v Sheers & Ors [2005] QSC 198 at [130].

In relation to the Jumarsh loan, no ASIC search was carried out. If an ASIC search had been carried out in relation to Jumarsh, it would have revealed that Sheers was a director of that company. The failure to conduct such a search was of a piece with Austide's failure to conduct an ASIC search in relation to the Spiller loan. It may, therefore, not have been omitted for the sinister reason of concealing Sheers' involvement with Jumarsh from other directors of the respondent. But, however that may be, Austide's failure to conduct an ASIC search of Jumarsh was a failure to carry out an elementary and minimal requirement of the due diligence process which was in place. No explanation for that failure appears from the evidence which might support the conclusion that Ms Schweitzer could be relied upon to enforce any standards adopted by the respondent in the circumstances which existed when the improvident loans were made.

Further in relation to the Jumarsh loan, on 29 October 1999, Romp wrote to Ms Schweitzer inquiring as to whether Jumarsh was a registered accounting practice and asking for confirmation that its directors were practising accountants. Ms Schweitzer replied on 3 November 1999 to the effect that Michael Norton-Smith was the sole practising practitioner, but was not a director because he was "presently under a disability". That is how Ms Schweitzer chose euphemistically to refer to the fact of Michael Norton-Smith's bankruptcy. There were five extensions of the Jumarsh loan made after this correspondence. To expect that the performance of Ms Schweitzer, or, indeed, of Sheers and Howes, was related to the respondent's standards of assessment, and might have been improved by an improvement in those standards, would truly represent a triumph of hope over experience.

In relation to the Venola borrowings, Venola applied for an extension on 22 November 1999. It listed receivables totalling $1,677,889, but the application was accompanied by an "Asset and Liability Statement of D J Loane Group of Companies as at 19th November 1999". This statement showed a combination of work in progress and receivables/debtors at only $450,000. Venola's application sought to increase the facility to $1,000,000. Venola also advised Ms Schweitzer that the funds previously borrowed by Venola had largely been spent on improving a motel at Kingscliff. Ms Schweitzer sent a facsimile to Venola on 25 November 1999. In that facsimile, she advised Venola that the request for an increase to $1,000,000 had been referred to two directors of the respondent and asked Venola to supply a full list of aged debtors but no action was taken to call up the loan notwithstanding the readily apparent, and gross, overstatement of receivables. That this was so amply supports his Honour's view of the incompetence of Austide and Ms Schweitzer. But more importantly for present purposes, it casts further doubt on the assumption that the adoption of more rigorous loan assessment standards would have actually improved the stewardship of Austide and Ms Schweitzer. It is apparent from this incident that Ms Schweitzer's problem was not that she was incapable of identifying obvious problems with borrowings. Plainly, she was sufficiently "alert" to problems with borrowings that would have been apparent to any interested person receiving the same information; but equally plainly there was a serious problem in translating this "alertness" into executive action for the benefit of the respondent.

In relation to the Spiller application, no ASIC search was conducted. The CRAA search showed that the principal activity of Spiller was not the practice of accountancy. It seems, according to Bundesen's report, the issue whether the loan was actually to be made to Spiller or Ryland was recognised in the course of the assessment of the application, but not investigated further. No attempt was made to determine whether the receivables listed were fees rendered by an accountant. This was a significant omission. It was particularly important to the respondent that an applicant's receivables were professional fees rendered by an accountant to a client. That is because the policy of insurance issued by HIH provided cover in respect of loans up to a maximum of 80 per cent of fees defined as fees rendered by an accountant to a client in accordance with the standards of professional practice set down by the various professional bodies.

In relation to the Moss application, Ms Schweitzer did not even ensure that the application assessment form was completed. Once again, a failure by Ms Schweitzer to observe such a basic requirement of the loan application assessment procedures casts doubt on the thesis that Ms Schweitzer's inadequate performance was the result of the absence of more explicit or rigorous lending requirements.

Could the appellant have procured the removal of Austide and thereby prevented the loss?

It will be recalled that the trial judge found that the appellant could not have secured the removal of Austide as administrator of the loan program. The respondent argued that this finding should be understood as limited to the possibility of having Austide removed in favour of CRM. The respondent contended that the appellant might have procured the removal of Austide and its replacement by a competent administrator other than CRM.

The first thing to be said about this argument is that, even if one were to regard the trial judge's finding in favour of the appellant as limited in the way for which the respondent contends, it would remain the case that the respondent does not have the benefit of a finding which would support its contention. Importantly, it does not have the benefit of a finding that the appellant could have procured the removal of Austide in time to prevent some or all of the improvident loans being made.

Furthermore, when one refers to the respondent's statement of claim, one sees that the case made in relation to what the appellant should have known of the incompetence of Austide and Ms Schweitzer as administrator of the loan program was very limited. The relevant allegation was contained in paragraph 97 of the respondent's statement of claim. It was in the following terms:

"At all material times from in or about late December 1999 or by no later than April 2000, [the appellant] was aware that the administration of the Programme was not being conducted in accordance with accepted lending practice …
The awareness of [the appellant] arose from the following:
(a)            his receipt from Taylor of a memo relating to a meeting which had been held on 16 November 1999 attended by Taylor, Norm Allen and [Ms Schweitzer]. That meeting decided that [Austide] would be able to accept the receivables shown on the applications for extension and variation without reference to earlier data provided;
(b)            his receipt from Howes of a facsimile dated 18 February 2000 attaching an internal memorandum referring to a proposal to obtain lists of aged debtors at the time of new applications;
(c)            his receipt of a facsimile from Taylor dated 6 April 2000 which stated:
'List of Aged Debtors - We do not believe that there should be a need for clients to provide details of the accounts receivables at the time of making an application for the loan.'

There can be no doubt that, in early 1999, an argument by the appellant to the board that Austide was incompetent, and that it should be replaced because of Ms Schweitzer's insufficient lending experience, would not have overcome the preferences of most members of the board for Austide as administrator as at the commencement of the loan program. Bearing in mind Austide's incumbency, the appellant would have had to cite examples of Austide's poor stewardship, and there is no suggestion that they were then available. The examples cited by the respondent in paragraph 97 of its statement of claim relate to the period from late 1999 to early 2000. His Honour made no finding that the appellant could have persuaded the board to remove Austide in favour of another administrator on the grounds of the examples of incompetence particularised in paragraph 97 of the statement of claim. The respondent did not suggest that there were other acts or omissions on Austide's part which the appellant could and should have raised with the other directors as a basis for the removal of Austide and its replacement by another administrator.

There was a substantial question mark over the appellant's ability to procure the adoption of the more rigorous procedures which he was then bound to oversee. The prospects of removing Austide and installing an effective administrator were even more doubtful. There was evidence which suggested that Taylor had a high regard for Ms Schweitzer's competence as did Romp. Taylor's vote was critical to control of the respondent's board of directors once Romp became aligned with the appellant. His Honour made no finding as to when Romp and Taylor might have become sufficiently concerned by Ms Schweitzer's performance to support Austide's removal: the evidence simply did not permit him to do so.

For these reasons, the contention which the respondent now advances should, in my respectful opinion, be rejected.

Maintaining accepted lending practice and the prevention of the loans

The trial judge concluded that the "principal failure" of the appellant and the other directors "lay in not ensuring that the terms and conditions of loan and the administrative procedures were [designed] such as to minimise the risk of defaults by borrowers".[169] His Honour's findings in relation to the appellant's breach of duty also allude, however, to the appellant's failures to ensure that appropriate lending procedures were "implemented and maintained".[170] It is, therefore, necessary to consider the sufficiency of this finding as a support for his Honour's conclusion in relation to causation.
[169]Gold Ribbon (Accountants) P/L v Sheers & Ors [2005] QSC 198 at [84].
[170]Gold Ribbon (Accountants) P/L v Sheers & Ors [2005] QSC 198 at [144]. See also at [64], [69] and [84].

The principal difficulty for the respondent here is that any breach of a director's duty of supervision necessarily involves a failure over time properly to oversee the performance of the company's executives. A director is not obliged to assume that the company's executives are either unable, or not disposed, to perform their duties. In the present case, the full amount of the improvident advances had been outlaid by May 2000. His Honour made no finding that proper supervision with a view to maintaining proper standards would have been apt to ensure that deficiencies in Austide's "due diligence" would have been discovered before that time so as to prevent any of the improvident loans being made.

Furthermore, the circumstance that a non-executive director is broadly entitled to rely upon the honesty and competence of a corporation's executives in the absence of reason to be on his or her guard invites attention to the question to the circumstances which, it is said, should have alerted the appellant to the possible absence of basic prudence and regard for established lending procedures in the respondent's lending practices.

The learned trial judge made no finding in this regard. That is hardly surprising, given the absence of any attempt by the respondent to plead a case in that regard. The closest the respondent came to pleading the necessary factual basis for such a case is paragraph 97(c) of its statement of claim. But that relates to information in April 2000. It must be acknowledged that any attempt by the appellant to have the board recognise the imprudence of the aspect of the respondent's lending procedures there in question might well have been rebuffed. In any event, even if the appellant had been spurred to a course of agitation which would have been likely to result in a tightening of procedures, it cannot be said that this result would have been achieved in time to prevent any of the improvident loans being made. To seek to establish a causal nexus between a failure of proper supervision of loan assessment procedures and the making of the improvident loans is to pile uncertainty upon uncertainty. This aspect of the respondent's attempt to sustain the judgment must also be rejected.

Summary in relation to causation

For these reasons, I consider that the trial judge's conclusion - that the appellant's breach of duty caused the loss suffered by the respondent on the improvident loans - cannot be sustained.

I have not reached this view on the basis that the fraudulent misconduct of Sheers and Howes was the sole cause of the respondent's loss, nor because I consider that the learned trial judge erred in failing to find that Ms Schweitzer was complicit in the fraudulent activities of Howes and Sheers. Rather, I have reached this conclusion because I consider that one cannot say that, but for the absence of the loan assessment procedures involved in what his Honour found to be "accepted lending practice", the improvident loans would not have been made.

The findings which his Honour made, and the evidence adduced by the respondent, do not support the conclusion that it was more probable than not that Ms Schweitzer would, in fact, have been an effective steward of the respondent's funds if the standards of due diligence which his Honour found to be involved in "accepted lending practice" had been made more explicit. Further, in my respectful opinion, one cannot conclude that it is more probable than not that Sheers and Howes would have deferred to Ms Schweitzer, even if the respondent's lending procedures had explicitly conformed with "accepted lending practice", or that Sheers and Howes would have refrained from the improvident decision-making which led to the respondent's loss.

Nor can one conclude that proper supervision of the respondent's affairs by the appellant as a non-executive director would have led to the removal of Austide as administrator or prevented the making of the improvident loans.

Conclusion and orders

It will be apparent that I have rejected the appellant's attempt to overturn the learned trial judge's findings in relation to breach of duty. On the other hand, because I consider that the learned trial judge's conclusion in relation to causation in favour of the respondent cannot be sustained, I have concluded that the appeal must be allowed.

The judgment below should be set aside and the respondent's action against the appellant should be dismissed.

The respondent must pay the appellant's costs of the action and of the appeal to be assessed on the standard basis.

WILSON J: I have read the reasons for judgment of Williams and Keane JJA, and agree with the orders they propose. I respectfully adopt Keane JA’s thorough analysis of the trial judge’s factual findings and the issues at trial, and his reasons for upholding the trial judge’s conclusion that the appellant breached duties of care which he owed to the respondent at common law and in equity. I shall confine my observations to the issue of causation.

The trial judge made careful findings in relation to the improvidence associated with each of the five loans, the borrowers’ relationships inter se and their relationships with Howes and Sheers, and the extent of the fraud of Howes and Sheers. Those findings are fully set out in the reasons for judgment of Keane JA at paras [203] – [217].

The loans’ non-conformity with the respondent’s lending scheme could not have been more basic: in two cases, there was no accountancy practice and in all cases the certification of receivables was false. A thumbnail sketch of the loans is as follows:-

(a)Jumarsh Pty Ltd
Three advances were made - $342,000 on or about 12 March 1999, $100,000 on 14 July 1999 and $400,000[171] on 8 September 1999. The initial application was witnessed by Sheers at a time before he became a director. It appears that the first advance was made before it was officially approved: Romp approved the loan on 22 or 23 March 1999.[172] It was made before the respondent’s formal agreement with Austide Pty Ltd, but nothing turned on this as Austide’s involvement dated from November 1998. Michael Norton-Smith, one of Jumarsh’s principals, was an accountant, but bankrupt, and Sheers knew that the certification of his receivables was false. The purpose of the loan was to relend to Howes and companies in which Sheers had an interest.[173]

(b)Venola Pty Ltd
Two advances were made - $350,000 in May 1999 and $450,000 on 22 July 1999. The initial advance was made before Sheers became a director and before the respondent’s formal agreement with Austide Pty Ltd. It was approved by Howes. Venola had no association with an accountancy practice; the certification of receivables was false. Darryl Loane, the sole director of Venola, was known to Sheers and/or Howes.[174]
(c)Spiller Holdings Pty Ltd
Four advances were made - $143,500 on 17 June 1999, $102,500 on 14 July 1999, $80,000 on 6 October 1999 and $276,000 on 24 February 2000. The sole director of Spiller Holdings was David Ryland. The initial advance was approved by Sheers after his appointment as a director. Spiller Holdings had no association with an accountancy practice; the certification of receivables was false.[175]
(d)Garry Moss
Three advances were made - $350,000 on 21 October 1999, $300,000 on 17 November 1999 and $85,000 on 28 April 2000. The initial advance was approved by Howes. Moss became self-employed as an accountant three days after he signed the application form. In support of the application he submitted information which was false, to the knowledge of Howes. Sheers, or both Sheers and Howes stood to benefit financially from the loan.[176]
(e)John McCouat
Two advances were made - $100,000 on 19 April 2000 and $700,000 on 15 May 2000. The initial advance was approved by Sheers. McCouat had only recently joined the National Institute of Accountants and taken out professional indemnity insurance, and his certification of receivables was false.[177]

[171]The trial judge appears to have erred (Gold Ribbon (Accountants) Pty Ltd v Sheers & Ors [2005] QSC 198 (“Gold Ribbon”) at [109]) when he stated that the third advance was of $420,000. See Bundeson’s report, which stated that the total amount loaned to Jumarsh was $842,000.

[172]Affidavit of Grant Dene Sparks exhibit GDS1 – Jumarsh file page 16.

[173]See Gold Ribbon [2005] QSC 198 at [109], [111] and [112].

[174]See Gold Ribbon [2005] QSC 198 at [113], [116] and [141].

[175]See Gold Ribbon [2005] QSC 198 at [117] – [119].

[176]See Gold Ribbon [2005] QSC 198 at [120] and [142]. But see [126].

[177]See Gold Ribbon [2005] QSC 198 at [122].

One or other of Howes and Sheers or both of them were intimately associated with the approval of each of the loans. They both stood to benefit financially from two of the loans.[178] Sheers knew that false information was supplied in relation to one of the loans,[179] Howes participated in the fraudulent application in another,[180] and it was probable that Sheers knew false information had been supplied in respect of other loan applications.[181]
[178]The Jumarsh and Moss loans.
[179]The Jumarsh loan.
[180]The Moss loan.
[181]Gold Ribbon [2005] QSC 198 at [112] and [142].

Each loan was approved by one of the directors (four of them by Howes or Sheers), but it was not the respondent’s case that the appellant was at fault because a single director could approve a loan. The full amount of those loans was advanced by 15 May 2000 – that is, before the board meeting of 17 May 2000 attended by the appellant when it was agreed to form a committee to make recommendations about imposing more stringent requirements for advances (a resolution never implemented), and it was not part of the respondent’s case that action taken after this time could have saved the position.

It was not the respondent’s case that Ms Schweitzer was complicit in the fraud. The trial judge considered that the evidence did not establish that she had participated in any misconduct in relation to the Venola, Spiller, Moss and McCouat loans.[182] His comment that the evidence did not disclose that she would have approved an application had she been alerted to its failure to meet loan criteria or the existence of obvious risks of default[183] is difficult to comprehend in the context of such fundamental non-conformity with the respondent’s lending scheme and his findings about her incompetence.[184] While each of the loans was approved by a director, the evidence plainly established that Austide failed to conduct adequate due diligence inquiries with respect to each of them.[185]
[182]Gold Ribbon [2005] QSC 198 at [143].
[183]Gold Ribbon [2005] QSC 198 at [143].
[184]Gold Ribbon [2005] QSC 198 at [65]-[68].
[185]See Williams JA’s conclusion at [104].

The trial judge’s findings that the appellant breached his duty as a director focus on his failure to recognize and take steps to remedy the inadequacies of Austide’s procedures and their implementation. It is pertinent to recall those findings, as they form the critical substratum from which his Honour reasoned that the breaches were causative of the respondent’s loss - in essence because the breaches increased the risk that the respondent would suffer loss of the kind that eventuated and materially contributed to that loss.[186]

(a)The appellant failed to ensure that the scheme was set up so as to comply with accepted lending practice: a set of procedures to conduct inquiries and obtain evidence with a view to ensuring applicants had the capacity to service and repay loans was not established.[187]
(b)The appellant did not apply himself to identifying deficiencies in the administration of the scheme with a view to remedying them: due diligence inquiries were not conducted; there was no independent proof of debts as certified; there was no system for considering fluctuations in the amounts of the debts.[188]
(c)The appellant failed to detect Austide’s inability to establish sound procedures. This was as a result of his failure to involve himself in these matters. Although the two Schweitzers appeared sufficiently qualified, they were incompetent in the way in which they set up the scheme.[189]
(d)The appellant failed to cause the respondent’s board to replace Austide, or at least to put a reasoned submission before the board. It was probable the board could have been persuaded to oblige Austide to adopt criteria and procedures calculated to minimise the risk.[190]

[186]Gold Ribbon [2005] QSC 198 at [134]-[145].

[187]Gold Ribbon [2005] QSC 198 at [60], [58].

[188]Gold Ribbon [2005] QSC 198 at [64], [61] and [63].

[189]Gold Ribbon [2005] QSC 198 at [69] and [65].

[190]Gold Ribbon [2005] QSC 198 at [70] and [107].

The trial judge concluded that, had proper procedures been in place, it would have been more difficult for loans to be made to borrowers lacking proven capacity to repay, and more difficult for borrowers to satisfy the pre-conditions for a successful application. The resultant increased prospect of exposing irregularities and fraud, and the knowledge that the appellant was ensuring proper loan administration procedures were being carried out and that Taylor (another director and company secretary) was exercising a properly informed supervisory role would have been deterrents to directors inclined to act dishonestly.[191]
[191]Gold Ribbon [2005] QSC 198 at [139].

In Bennett v Minister of Community Welfare[192] Mason CJ, Deane and Toohey JJ said[193] –
[192](1993) 176 CLR 408.
[193]at 412-413.

“In the realm of negligence, causation is essentially a question of fact, to be resolved as a matter of common sense.[194] In resolving that question, the ‘but for’ test, applied as a negative criterion of causation, has an important role to play but it is not a comprehensive and exclusive test of causation; value judgments and policy considerations necessarily intrude.[195]”

In the same case Gaudron J said[196] –
“Leaving aside cases involving some positive act and those in which an omission can be treated as a positive act, a case based on omission or a failure to act will, in certain respects, fall for analysis in a way that differs from that appropriate for a case based on a positive act. Thus, in the case of a positive act, questions of causation are answered by reference to what, in fact, happened. In the case of an omission, they are answered by reference to what would or would not have happened had the act occurred.[197] In that exercise, the larger philosophical questions are brushed aside and the issue is approached on the basis that ‘when there is a duty to take a precaution against damage occurring to others through the default of third parties or through accident, breach of the duty may be regarded as materially causing or materially contributing to that damage, should it occur, subject of course to the question whether performance of the duty would have averted the harm’[198].”

This is the approach to be adopted both to the appellant’s breaches of his duty at common law and to his breaches of his duty in equity.[199]

[194]Fitzgerald v Penn (1954) 91 CLR 268 at 277-278 per Dixon CJ, Fullagar and Kitto JJ, March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506 at 515 per Mason CJ, 522-523 per Deane J.

[195]March v Stramare (E & M H) Pty Ltd.

[196]Bennett v Minister of Community Welfare (1993) 176 CLR 408 at 420 (emphasis added).

[197]See e.g., Duyvelshaff v Cathcart & Ritchie Ltd (1973) 47 ALJR 410; Quigley v The Commonwealth (1981) 55 ALJR 579; 35 ALR 537. See also Hart and Honoré, Causation in the Law, 2nd ed. (1985), pp. 59-61 where the authors identify the hypothetical nature of an inquiry as to the causal significance of providing or failing to provide a person with, or depriving a person of, an opportunity.

[198]Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 467 per Mason J. See also Hart and Honoré, op cit., p. 38.

[199]Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187 at 243 – 248.

It was for the respondent to establish causation on the balance of probabilities. If it was more probable, or equally probable, that the loans would have been made regardless of the appellant’s omissions, then the respondent’s case must fail.

The trial judge concluded[200] –

“Here loss through fraudulently obtained loans was ‘the very kind of thing likely to happen as a result of the [appellant’s] negligence’ if appropriate lending procedures were not implemented and maintained. [The appellant], by his breaches of duty in respect of fundamental aspects of the [respondent’s] business, increased the risk that the [respondent] would suffer loss of the kind that eventuated and materially contributed to it loss.
For the above reasons, I consider that [the appellant’s] breaches of his duty as a director of the [respondent] were causative of its loss.”

[200]Gold Ribbon [2005] QSC 198 at [144]-[145] (emphasis added).

His Honour had earlier quoted the following passage from the judgment of McHugh J in Chappel v Hart[201] –

“Before the defendant will be held responsible for the plaintiff's injury, the plaintiff must prove that the defendant's conduct materially contributed to the plaintiff suffering that injury. In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increases the risk of injury to another person. If a wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant's conduct has materially contributed to the injury that the plaintiff suffers whether or not other factors also contributed to that injury occurring. If, however, the defendant's conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff.”

[201]Chappel v Hart (1998) 195 CLR 232 at 244 (citations removed).

In my respectful opinion true analysis and application of what McHugh J said does not lead to the conclusion reached by the trial judge.

The appellant could not be found liable unless his omissions increased the risk of the loss sustained. Had the only evidence of causation been that he had breached his duty and that loss within the scope of risk arising from the breach had been sustained, his Honour could have inferred that the breach caused the loss. But if the loss would have occurred notwithstanding the breach, such an inference could not be drawn.[202]
[202]See the discussion by Keane JA at [278] herein, and Commissioner of Main Roads v Jones (2005) 79 ALJR 1104 at 1109 per McHugh J.

As Keane JA has observed,[203] the immediate causes of the making of the loans were decisions voluntarily made by Ms Schweitzer, Sheers and Howes. How would those people have behaved but for the appellant’s defaults? Was there evidence from which the inference that they would have acted differently could be drawn?
[203]At [273].

The trial judge said[204] –

“It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended. Nor does it follow that any loan made for the benefit of them would have become a defaulting loan.”

I respectfully disagree with what his Honour said in the second and third sentences. In my view there was powerful evidence from which it could be inferred that it was at least equally probable that the five loans would still have been made. First there was the fact that the existing loan procedures, such as they were, were not followed.[205] It is not clear whether Ms Schweitzer’s failings stemmed from lack of ability, carelessness or some other cause. She had considerable experience in the finance industry, but whether that experience was more than ministerial in character is not clear. One should be cautious in drawing conclusions from the mere fact of her de facto relationship with Sheers, especially when she was not alleged to have been complicit in the fraud and the trial judge did not make any finding whether she knew of it. Nevertheless, it would be reasonable to infer that that relationship would have made it more difficult for her to have exposed Sheers’ and Howes’ conduct to the other directors. Then there was the extent of Sheers’ and Howes’ involvement in each of the loans. Their conduct was free, deliberate and informed, and intended to exploit the situation created by the appellant’s omissions.[206] It would be reasonable to infer that they would have applied the same determination in subverting more rigorous procedures.

[204]Gold Ribbon [2005] QSC 198 at [139].

[205]The trial judge accepted Bundesen’s analysis of the transactions: Gold Ribbon [2005] QSC 198 [128], [130].

[206]See Hart and Honoré, Causation in the Law, 2^nd ed (1965) at 136, cited by McHugh J in Bennett v Minister of Community Welfare (1993) 176 CLR 408 at 429 – 430: conduct of this natures negates a causal connexion between a defendant’s negligence and a plaintiff’s damage.

For the foregoing reasons I consider that the trial judge erred in his conclusion on causation.

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Corporate Law & Governance

Legal Concepts

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Breach of Contract
Negligence
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Citations

Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335

Most Recent Citation

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CITATION:	Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers & Ors [2006] QCA 335
PARTIES:	GOLD RIBBON (ACCOUNTANTS) PTY LTD ACN 081 156 078 (IN LIQUIDATION) (plaintiff/respondent) v RICHARD THOMAS SHEERS STEPHEN WILFRED ROMP GARRY RAYMOND HOWES ROBERT LLOYD TAYLOR (first defendants) TERENCE MICHAEL DUNN (second defendant/appellant) SHERIDAN ALVINA SCHWEITZER (third defendant) AUSTIDE HOLDINGS PTY LTD ACN 081 671 141 (fourth defendant) GRH & M PTY LTD ACN 087 132 447 (AS TRUSTEE FOR THE AUSTIDE HOLDINGS TRUST) (fifth defendant)
FILE NO/S:	Appeal No 5994 of 2005 SC No 10852 of 2002
DIVISION:	Court of Appeal
PROCEEDING:	General Civil Appeal
ORIGINATING COURT:	Supreme Court at Brisbane
DELIVERED ON:	5 September 2006
DELIVERED AT:	Brisbane
HEARING DATE:	13 June 2006; 14 June 2006
JUDGES:	Williams and Keane JJA and Wilson J Separate reasons for judgment of each member of the Court, each concurring as to the orders made
ORDER:	Appeal allowed and judgment below set aside1. Respondent's action against the appellant dismissed2. Respondent to pay the appellant's costs of the action and of the appeal to be assessed on the standard basis 3.
CATCHWORDS:	CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - DUTY OF CARE, SKILL AND DILIGENCE - respondent company provided unsecured loans to accountants - appellant one of several directors of respondent - respondent made a number of improvident loans - proceedings brought against a number of persons including appellant to recover the outstanding principal sums - before this Court appellant challenged learned trial judge's conclusion that appellant breached duty of care and diligence owed to the company - appellant argued other directors excluded him from decision-making on the respondent's administrative procedures - appellant argued other directors deliberately decided not to adopt more stringent administrative procedures - appellant argued trial judge erred in finding that appellant was negligent in failing to ensure administrator of loans scheme was competent - appellant argued trial judge erred in finding that directors other than the respondent had no lending experience - appellant argued he had resigned as a director during period when two of the improvident loans were made - appellant argued he was entitled to rely on review of documentation made by the Bank and the insurer - appellant argued learned trial judge erred in finding that business judgment rule did not protect appellant - appellant argued evidence did not support learned trial judge's finding that loan procedures did not comply with "accepted lending practice" - whether the findings of the learned trial judge as to breach of duty should be overturned CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - DUTY OF CARE, SKILL AND DILIGENCE - appellant argued that learned trial judge erred in finding that appellant's breaches of duty were causative of the respondent's loss - appellant argued that certain other directors of the respondent would have approved the improvident loans regardless of what assessment procedures were in place - appellant argued that the making of the improvident loans resulted not from deficient procedures, but from administrator's failure to implement procedures - whether, on the balance of probabilities, the improvident loans would have been made if more explicit procedures of loan application assessment had been adopted and implemented by the respondent - whether the respondent's loss would not have been suffered but for the appellant's breach Corporations Act2001 (Cth), s 180, s 182, s 1317F Abalos v Australian Postal Commission (1990) 171 CLR 167, cited ASIC v Rich & Ors [2003] NSWSC 85; (2003) 44 ACSR 341, applied Bennett v Minister of Community Welfare (1992) 176 CLR 408, applied Betts v Whittingslowe (1945) 71 CLR 637, cited Chaplin v Hicks [1911] 2 KB 786, cited Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232, applied Clark Boyce v Mouat [1994] 1 AC 428, cited Commissioner of Main Roads v Jones [2005] HCA 27; (2005) 79 ALJR 1104, applied Daniels & Ors v Anderson (1995) 37 NSWLR 438, applied Fink v Fink (1946) 74 CLR 127, cited Fox v Percy [2003] HCA 22; (2003) 214 CLR 118, cited Francis v United Jersey Bank 432 A 2d 814 (NJ 1981), cited Gould and Birkbeck and Bacon v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490, cited Hollis v Dow Corning Corporation (1995) 129 DLR (4th) 609, cited Hoyts Pty Ltd v Burns [2003] HCA 61; (2003) 201 ALR 470, cited Jones v Dunkel (1959) 101 CLR 298, cited March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, applied Medlin v State Government Insurance Commission (1995) 182 CLR 1, applied Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187, cited Prast v Town of Cottesloe [2000] WASCA 274; (2000) 22 WAR 474, cited Re HIH Insurance; ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72, applied Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434, cited Sellars v Adelaide Petroleum NL& Ors (1994) 179 CLR 332, applied Vairy v Wyong Shire Council [2005] HCA 62; (2005) 80 ALJR 1, cited Wilkins v Council of the City of Broken Hill [2005] NSWCA 468; Appeal No 40555 of 2004, 20 December 2005, cited
COUNSEL:	P H Morrison QC, with J W Peden, for the appellant D J S Jackson QC, with K E Downes, for the respondent
SOLICITORS:	Gells Lawyers for the appellant Blake Dawson Waldron for the respondent

[2006] QCA 335

5 September 2006

Key Legal Topics

Areas of Law

Corporate Law & Governance

Legal Concepts

Duty of Care

Breach of Contract

Negligence

Fiduciary Duty

Restitution

Statutory Interpretation