Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets (No 6)
[2007] NSWSC 124
•30 March 2007
Reported Decision:
63 ACSR 1
New South Wales
Supreme Court
CITATION: Ingot Capital Investments & Ors v Macquarie Equity Capital Markets & Ors [No 6] [2007] NSWSC 124
This decision has been amended. Please see the end of the judgment for a list of the amendments.HEARING DATE(S): 108 days between 17 October 2005 and 13 September 2006
JUDGMENT DATE :
30 March 2007JUDGMENT OF: McDougall J at [1] DECISION: See para [1465] of judgment CATCHWORDS: CORPORATIONS - capital raising - whether misleading or deceptive conduct in relation to subunderwriting and firm placement commitments - whether draft prospectus or prospectus misleading or deceptive - whether representations made by prospectus continued after issue - whether representations became misleading or deceptive - whether misleading or deceptive conduct in relation to securities after issue of prospectus and before issue of securities
CAUSATION - whether plaintiffs relied on any representations - where board of company alleged to have relied on representations by due diligence committee and resolved to issue securities - where plaintiffs did not rely on those representations - whether in those circumstances plaintiffs suffered loss 'by' the alleged misleading or deceptive conduct
DAMAGES - whether plaintiffs entitled to recover damages for onmarket purchases of securities - whether plaintiffs have proved amount of damages
CONTRACT - whether obligation of good faith implied into subunderwriting contract - terms of obligation of good faith
NEGLIGENCE - whether members of due diligence committee owed duties of care to investors who took on faith of prospectus - whether directors and officers of company owed duties of care to investors who took on faith of prospectus - whether directors and officers owed duty of care to company - characterisation and incidents of that duty
LIMITATION OF ACTION - where amendments made by leave after expiry of limitation period - whether amendments introduce new cause of action - whether prejudice to defendants - date from which amendments should take effectLEGISLATION CITED: Australian Securities and Investments Commission Act 2001
Civil Procedure Act 2005
Corporations Act 2001
Evidence Act 1995
Fair Trading Act 1987
Partnership Act 1892
Trade Practices Act 1974CASES CITED: Abigroup Contractors Pty Limited v Sydney Catchment Authority (No 3) [2006] NSWCA 282
Allianz Australia Insurance Limited v GSF Australia Pty Limited & Anor (2005) 221 CLR 568
Aneve Pty Ltd & Ors v Bank of Western Australia Ltd [2005] NSWCA 441
Anns v Merton London Borough Council [1978] AC 728
Arthur Young & Anor v Tyco International & Ors (1995) 182 LSJS 367
Astley & Ors v Austrust Limited (1999) 197 CLR 1
Australian Securities and Investments Commission (2006) 229 ALR 223
Banque Commerciale SA En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279
Barnes v Addy (1874) LR 9 Ch App 244
Barnes v Hay (1988) 12 NSWLR 337
Barnes v Hay (1988) 12 NSWLR 337
Bishopsgate Insurance Australia Limited (In Liq) v Deloitte Haskins & Sells [1999] 3 VR 863
B P Refinery (Westernport) Pty Limited v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266
Brambles Australia Ltd Trading as CHEP Australia v Tatale Pty Ltd & Anor [2006] NSWSC 204
Briess v Woolley [1954] AC 333
Briginshaw v Briginshaw & Anor (1938) 60 CLR 336
Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541
Butcher & Anor v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592
Byrne v Australian Airlines Limited (1995) 185 CLR 410
Caparo Industries plc v Dickman & Ors [1990] 2 AC 605
Chappel v Hart (1998) 195 CLR 232
Cleary & Anor v Australian Co-operative Foods Limited & Ors (Nos 2 and 3) (1999) 32 ACSR 701
Commercial Banking Company of Sydney Limited v R.H. Brown & Company (1972) 126 CLR 337
Customs and Excise Commissioners v A & another [2003] 2 All ER 736
Daniels & Ors (Formerly Practising as Deloitte Haskins & Sells) v AWA Limited (1995) 37 NSWLR 438
Digi-Tech (Australia) Ltd v Brand & Ors (2004) 62 IPR 184
Donoghue v Stevenson [1932] AC 562
Elna Australia Pty Limited v International Computers (Australia) Pty Limited (No 2) (1987) 16 FCR 410
Empress Car Co (Abertillery) Limited v National Rivers Authority [1999] 2 AC 22
Esanda Finance Corporation v Peat Marwick Hungerfords (1994) 61 SASR 424
Esanda Finance Corporation Limited v Peat Marwick Hungerfords (1997) 188 CLR 241
Esso Australia Resources Pty Ltd v Southern Pacific Petroleum [2005] VSCA 228
Forge v Australian Securities and Investments Commission (2006) 229 ALR 223
Havyn Pty Ltd v Webster [2005] NSWCA 182
Hedley Byrne & Co Limited v Heller & Partners Limited [1964] AC 465
Henville & Anor v Walker & Anor (2001) 206 CLR 459
HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
Hughes v National Trustees, Executors & Agency Co of Australasia Ltd (1978) 143 CLR 134
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
Interchase Corporation Limited (in liq) v Grosvenor Hill (Queensland) Pty Limited (No 3) [2003] 1 Qd R 26
Janssen-Cilag Pty Ltd v Pfizer Pty Limited (1992) 37 FCR 526
John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) 15 ATPR 41-249
Jones v Dunkel (1959) 101 CLR 298
Karawi Constructions Pty Ltd v Bonefind Pty Ltd & Ors (1993) 15 ATPR 41-265
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392
Lam v Ausintel Investments Australia Pty Limited & Ors (1989) 97 FLR 458
Leda Holdings Pty Ltd v Oraka Pty Ltd (1997) 20 ATPR 41-601
Macquarie Generation v Peabody Resources Limited [2000] NSWCA 361
March v E. & M. H. Stramare Pty Limited (1990) 171 CLR 506
Moukhayber v Camden Timber and Hardware Co Pty Ltd [2002] NSWCA 58
Orix Australia Corporation Limited v Moody Kiddell & Partners Pty Ltd & Anor [2006] NSWCA 257
Overende Gurney Co v Gibb (1872) LR 5 HL 480
Peek v Gurney (1873) LR 6 HL 377
Permanent Building Society (in liq) v Wheeler & Ors (1994) 14 ACSR 109
Perre & Ors v Apand Pty Limited (1999) 198 CLR 180
Port Stephens Shire Council v Booth & Ors (2005) Aust Torts Rep 81-807
Possfund Custodian Trustee Limited & Ors v Diamond & Ors [1996] 1 WLR 1351
Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd (2005) 220 ALR 211
Re HIH Insurance Ltd (in provisional liquidation) and Ors; Australian Securities and Investment Commission v Adler (2002) 41 ACSR 72
Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Limited (1986) 12 FCR 477
Sellars v Adelaide Petroleum NL & Ors (1992) 179 CLR 332
Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619
Stanilite Pacific Limited (in liquidation) & Anor v Seaton (t/as PricewaterHouse) & Ors (2005) 55 ACSR 460
Sullivan v Moody & Ors (2001) 207 CLR 562
Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766
Tame v New South Wales (2002) 211 CLR 317
Travel Compensation Fund v Tambree (t/as R Tambree and Associates) (2005) 80 ALJR 183
Ultramares Corporation v Touche (1931) 255 NY 170
Vodafone Pacific Limited & Ors v Mobile Innovations Ltd [2004] NSWCA 15
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Wardley Australia Limited & Anor v The State of Western Australia (1992) 175 CLR 514
Watson v Foxman & Ors (1995) 49 NSWLR 315
Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830
With v O’Flanagan [1936] Ch 575
Woolcock Street Investments Pty Limited v CDG Pty Limited & Anor (2004) 216 CLR 515
Yorke & Anor v Lucas (1985) 158 CLR 661PARTIES: Ingot Capital Investments Pty Limited (First Plaintiff)
Macquarie Equity Capital Markets Limited (First Defendant)
Stocks Convertible Limited (formerly AOIT Limited) (Second Plaintiff)
ASC Pty Limited (Third Plaintiff)
Stocks Convertible Trust plc (formerly Australian Opportunities Investment Trust PLC) (Fourth Plaintiff)
Eastern States Securities Limited (Fifth Plaintiff)
Ingot Capital Management Pty Limited (Sixth Plaintiff)
Macquarie Equities Limited (Second Defendant)
Macquarie Bank Limited (Third Defendant)
Udayan Daniel Ghose (Fourth Defendant)
Jonathan Paul Beach (Fifth Defendant)
Azmin Firoz Daya (Sixth Defendant)
Craig Deery (Seventh Defendant)
Michael J Morrissey (Eighth Defendant)
William Peck (Ninth Defendant)
Paul Laurence Williams (Tenth Defendant)
Peter Aroney (Eleventh Defendant)
John Trowbridge Consulting Pty Limited (Twelfth Defendant)
Patrick Murray and the persons listed in Schedule "B" to the summons (PwC) (Thirteenth Defendant)
Andrew Mutton and the Persons in NSW Listed in Schedule "A" to the summons (Phillips Fox) (Fourteenth Defendant)
NCRA (36th Cross-claimant)
Guy Carpenter PartiesFILE NUMBER(S): SC 50169/01 COUNSEL: F M Douglas QC/D J Hammerschlag SC/W G Muddle/B F Katekar (for the Plaintiffs)
B C Oslington QC/A S Bell (for the Macquarie parties)
P C Silver (for the Fourth Defendant)
D J Fagan SC/A P Cheshire (for the Fifth, Seventh and Eighth Defendants)
L Gor (for the Ninth Defendant)
C Kintis, Solicitor (for the Tenth defendant)
P S Braham (for the Eleventh Defendant)
P H Greenwood SC/S A Goodman (for the Twelfth Defendant)
T F Bathurst QC/S M Nixon (for the Thirteenth Defendant)
J T Gleeson SC/R A Dick/J Watson (for the Fourteenth Defendant)
L McCallum SC/D L Cook (for the 36th Cross-claimant)
M A Pembroke SC/L P Menzies/N C T Bilinsky (for the Guy Carpenter Parties)SOLICITORS: Deacons (for the Plaintiffs)
Mallesons Stephen Jaques (for the Macquarie Parties)
Chang Pistilli & Simmons (for the Fourth Defendant)
Colin Biggers & Paisley (for the Fifth, Seventh and Eighth defendants and mention for the Ninth defendant)
Dibbs Abbot Stillman (for the Tenth Defendant)
M D Nikolaidis & Co (for the Eleventh Defendant)
Minter Ellison (for the Twelfth Defendant)
Blake Dawson Waldron (for the Thirteenth Defendant)
Freehills (for the Fourteenth Defendant)
Henry Davis York (for the 36th Cross-claimant)
Tresscox (for the Guy Carpenter Parties)
INGOT CAPITAL INVESTMENTS & ORS v MACQUARIE EQUITY CAPITAL MARKETS & ORS [No 6] [2007] NSWSC 124
Index to Judgment
30 March 2007
Para
INTRODUCTION; THE ISSUES; SUMMARY OF CONCLUSIONS 2 NCRH and its subsidiaries 2 Parties and personnel 10 The plaintiffs 11 The Macquarie parties 20 Mr Ghose 27 The fifth, seventh and eighth defendants 32 Mr Daya 39 Mr Peck 41 Mr Williams 44 Mr Aroney 46 Trowbridge 48 PricewaterhouseCoopers 52 Phillips Fox 58 Cross-claims 63 Brief outline of relevant circumstances 70 Outline of the plaintiffs’ case 100 The nature of the defences 112 The real issues 113 Approach to submissions 117 CREDIBILITY 122 Witnesses of fact – general observations 122 Individual witnesses 126 Mr Saville 127 Other witnesses of fact called by the plaintiffs 147 Mr Moran 150 Mr Coultas 151 Mr Jackson 155 Mr Donnelly 158 Dr McKenzie 161 Diversion – transcription of Dr McKenzie’s notes 162 Dr McKenzie’s credibility 176 Mr Ghose 180 Mr Beach 182 Mr Deery 188 Mr Morrissey 194 Mr Peck 197 Mr Aroney 199 Mr Williams 201 Messrs Minty and Atkins 203 Mr Murray 204 Mr Mutton 207 Mr Bromley 225 Jones v Dunkel submissions 227 Macquarie 228 PwC 232 Guy Carpenter 242 Expert witnesses 246 THE CASE AGAINST THE MACQUARIE PARTIES 258 Issue 1: the alleged misleading or deceptive conduct of Macquarie up to 18 November 1998 258 The pleaded case 260 Is a wider approach available? 276 Elements of the first issue 288 Approach 290 6FAS para 48: the “Macquarie Equities Essentials” representations 291 6FAS para 60: representations made to Mr Bloch 297 6FAS para 53: the draft underwriting agreement and draft prospectus 304 The relevance of the disclaimers 307 Why were the documents sent? 315 Macquarie a mere conduit? 323 No representation by Macquarie 339 6FAS para 46: the “October presentation” 345 Attention to detail is required 353 Mr Saville’s accounts 356 The accounts of Messrs Coultas and Jackson 368 What representations were made? 374 Representation of fact or of opinion? 378 Was the representation false? 381 Conclusion on first issue 392 Issues 2, 3 and 4: continuing representations? 393 Issue 5: the various representations to the DDC 402 The pleaded case 404 Issue 6: the applicable legislative regime 416 Issues 7 to 9: causation and reliance 417 Issues 10 to 15: evidentiary issues 418 Issue 16: continuing representation? 419 Issues 17 to 19: miscellaneous matters 423 Issues 20 to 23: Mr Saville’s evidence as to reliance; authority 424 Approach 427 Mr Saville’s evidence-in-chief as to reliance 431 Mr Saville’s evidence in cross-examination 437 Conclusions on the general question of reliance 473 Issues 24 to 26: falsifying facts; Macquarie’s knowledge 475 Issues 27 to 29: the “Sub-Underwriting Agreement Omission” 476 Issues 30 and 31: the indirect causation case 493 The case is bad in law 494 The case would fail on the facts 512 The resolution of 18 November 1998 515 The resolution of 12 January 1999 519 Other matters 526 Conclusion 530 Issues 32 and 33: as to Mr Saville’s knowledge of and likely reaction to certain matters 531 Issues 34 and 38: duty of care? 533 General observations 536 The relevant principles 540 Foreseeability of loss 542 Vulnerability 569 Assumption of responsibility/known reliance 581 Contractual terms and other matters of context 585 Availability of other remedies 589 Conclusion on duty of care 590 Issues 35 to 37: breach; causation; limits of any duty owed 591 Issue 39: implied duty of good faith 592 Issues 40 to 43: breach, loss and other matters 601 Issues 44 to 50: defences 602 Issues 51 to 57: damages 603 Issues 58 and 59: limitation issues 604 Conclusion on the case against the Macquarie parties 610 THE CASE AGAINST THE DIRECTORS AND MESSRS WILLIAMS AND ARONEY 612 Issue 60: was the conduct of NCRH up until the issue of the prospectus misleading or deceptive? 612 The pleaded case 613 The Prospectus Balance Sheet Representations 629 The Prospectus NTA Representations 653 The Prospectus Converting Note Security Representation 660 The Prospectus Future Prospects Representation 666 The Prospectus Purposes of the Capital Raising Representations 672 Were the representations false? 678 The Prospectus Balance Sheet Representations 678 Impact of the GCR transaction 679 DAC 726 Prudential margin 750 Conclusion on Prospectus Balance Sheet Representations 757 The Prospectus NTA Representations 758 The Prospectus Converting Note Security Representation 775 The Prospectus Future Prospects Representation 788 The Prospectus Purposes of the Capital Raising Representations 789 The Prospectus Claims Reserve Adequacy Representations 814 Conclusion on issue 60 829 Issue 61 – information given to Mr Saville on 21 December 1998 830 Issue 62: knowledge of the directors and Messrs Williams and Aroney by 18 November 1998 851 Issue 63: knowledge of the directors and Messrs Williams and Aroney up to 12 January 1999 858 Vesta 860 Background 861 The DDC meeting of 17 December 1998 866 Mr Ghose 874 Mr Beach 878 Messrs Deery and Morrissey 882 Mr Daya 883 Messrs Peck, Williams and Aroney 887 Additional stop loss cover 888 Background 890 Knowledge 895 Hurricane Georges 900 Background 901 Knowledge 902 Trowbridge’s updating of its assessment of reserves 907 Background 908 Sub paragraph (j) 913 Sub paragraph (k) 916 Sub paragraph (l) 919 Sub paragraph (m) 923 Conclusion 926 The proposed special prudential margin 932 Background 933 The DDC meeting of 12 January 1999 935 The alleged liquidity crisis 943 Sub para (n) 945 Sub paragraph (r) 948
Conclusions on issue 63 959 Issue 64: obligation to inform of change of circumstances relating to the representations alleged to have been made by NCRH 966 Issue 65: breach of any obligation to inform 980 Issue 66: withdrawal of prospectus or issue of supplementary prospectus 982 The pleaded case 982 Of what did NCRH become aware during the relevant period? 986 Consequences 998 Issue 67: the applicable legislative regime 1001 Outline of the plaintiffs’ case 1001 The legislative regime 1007 Corporations Law and Act 1007 ASIC Acts 1015 Fair Trading Act 1022 The Prospectus Balance Sheet Representations 1032 The Prospectus NTA Representations 1034 Vesta 1034 Additional stop loss cover 1035 Hurricane Georges: Trowbridge’s updating of its assessment of reserves 1039 The proposed special prudential margin 1043 The alleged liquidity crisis 1044 The Converting Note Security Representations 1045 The Prospectus Purposes of the Capital Raising Representations 1046 The Prospectus Claims Reserve Adequacy Representations 1047 Conclusion 1049 Consequences for the directors and Messrs Williams and Aroney 1050 Issue 69: other contravening conduct 1053 Issue 70: accessory liability 1058 Issue 71: causation 1061 Issues 73 to 78: Miscellaneous issues; Mr Aroney’s knowledge 1065 Issue 79: duty of care 1066 The legal context 1075 Assumption of responsibility/reliance 1081 Conclusion on duty of care 1094 Issues 80 and 81: breach, causation 1095 Issues 82 to 89: various matters 1096 Issues 90 to 92: damages 1097 Onmarket purchases 1099 The test of causation 1106 Analysis 1119 Did the plaintiffs prove any loss? 1126 Issues 93 and 94: miscellaneous 1142 Issues 95 and 96: limitation issues 1143 Background 1144 The parties’ submissions 1147 Analysis 1149 Conclusion on the case against the directors and Messrs Williams and Aroney 1155 THE CASE AGAINST PHILLIPS FOX 1156 Introduction 1156 Issues 97 to 99: the section 10 case 1159 Issue 100: knowledge 1163 Issue 101: misleading or deceptive conduct? 1168 Issue 102: causation; is reliance by Mr Saville essential? 1169 Reliance by the directors 1173 The Supplementary Prospectus Representation 1183 Issues 103 to 107: the applicable legislative regime; miscellaneous matters 1195 Issue 108: damages 1196 Issues 109 and 110: limitation issues 1198 Conclusion on the case against Phillips Fox 1214 ISSUES 111-131: THE CASE AGAINST TROWBRIDGE 1215 THE CASE AGAINST PwCA 1217 Introduction 1217 The plaintiffs’ summary of their case 1218 PwCA’s summary of their defence 1221 The plaintiffs’ response 1223 The plaintiffs’ propositions 1224 Proposition (a) : leg 1 1225 Proposition (b) : DAC 1230 Proposition (c) : the Dresdner net worth covenant 1232 Proposition (d) : prudential margin 1239 Proposition (e) : compliance with accounting standards 1241 Proposition (f) : purpose of the capital raising 1243 Proposition (g) : NTA calculation 1244 Proposition (h) : the position as at 12 January 1999 1247 Proposition (i) : the requirement to obtain Trowbridge’s opinion prior to 12 January 1999 1249 Issue 132: the PwC Representations 1250 What representations can be spelled out of the draft prospectus or the prospectus? 1250 Did PwCA make any of the representations? 1253 The plaintiffs’ case 1254 PwCA’s submissions 1256 Analysis 1264 Conclusion 1274 Issue 133: were the PwC Representations misleading or deceptive? 1276 The indirect causation case 1278 The pleaded case is bad in law 1279 Issues 134-137, 140, 141: the “PwC DDC Representations”, reliance 1291 Issues 138, 139 and 142: the applicable legislative regime 1296 Issue 143: duty of care 1297 The pleaded case 1297 How the plaintiffs put their case 1303 Negligent misrepresentation 1307 No duty of care to avoid economic loss 1310 PwCA’s retainer 1312 Authorities upon which the parties relied 1317 Analysis 1326 Conclusion 1335 Issues 144 to 155: breach, other defences 1336 Issues 156 to 160: damages 1337 Issues 161 and 162: limitation issues 1338 Conclusion on the case against PwCA 1344 NCRA’s CROSS-CLAIMS 1345 NCRA’s case on causation 1357 Dresdner’s attitude the key 1359 The relationship with Dresdner 1360 The position of PwC 1388 The position of Trowbridge 1396 The position of the Macquarie parties 1403 Conclusion on NCRA’s causation case 1411 Guy Carpenter’s additional submissions on causation: Mr Saville’s attitude 1412 Case based on the failure to go into runoff 1419 The relevant principles 1426 Analysis 1438 “Cross-road” - the available choices 1439 Hindsight analysis 1444 GCR transaction the key 1447 The position as at 2 September 1998 1452 Conclusion 1463 Conclusion on the 33rd and 36th cross-claims 1464 ORDERS 1465
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST
McDOUGALL J
30 March 2007
JUDGMENT
1 HIS HONOUR: NewCap Reinsurance Holdings Ltd (NCRH) was in 1998 a listed public company with an issued capital of about USD150 million. It carried on the business of reinsurance through subsidiaries in Australia and Bermuda. Accumulated losses up to 30 June 1998 had taken their toll of NCRH’s capital. Accordingly, in the second half of 1998, NCRH decided to raise approximately USD50 million (before fees and expenses) in further capital through a converting notes issue. The plaintiffs, by a variety of means, invested approximately AUD40 million in rights, notes and shares. However, it soon became apparent that NCRH’s financial position was far worse than expected, and the capital raised proved to be inadequate to make good the haemorrhage of losses. Provisional liquidators were appointed to NCRH and its subsidiaries on 19 May 1999. The plaintiffs claim to have lost the entirety of their investments. In these proceedings, they sue those connected with the capital raising to recover their alleged loss.
INTRODUCTION; THE ISSUES; SUMMARY OF CONCLUSIONS
NCRH and its subsidiaries
2 NCRH was incorporated in Bermuda on 30 August 1996. Its incorporation was procured by the fifth defendant, Mr Jonathan Beach (an insurance and reinsurance broker); the tenth defendant, Mr Paul Williams (who had substantial experience in insurance and reinsurance broking); and Mr Volker de Chelard. Mr de Chelard had been the chief underwriter for GIO Re. He enjoyed a high reputation, and had substantial connections, in the world of reinsurance. It was thought that his departure from GIO Re provided an opportunity to set up a reinsurance business in Australia that would, in effect, trade on Mr de Chelard’s experience and reputation, and take advantage of his perceived expertise and connections.
3 NCRH was initially capitalised by a private equity placement. After an initial public offering of securities, NCRH was listed on the Australian Stock Exchange (ASX) on 13 December 1996. It then had the capital to which I have referred. In addition, it had the benefit of a credit facility with a limit of USD50 million (see para [30] below), of which some USD47 million was drawn down before the end of December 1996.
4 NCRH’s operating subsidiary in Australia was NewCap Reinsurance Corporation Limited (NCRA). Its operating subsidiary in Bermuda was NewCap Reinsurance Corporation (Bermuda) Limited (NCRB). At all material times, NCRB was required under Bermudan law to have shareholders’ funds of not less than USD100 million.
5 The group structure was reorganised in the first half of 1998, in part to facilitate compliance with the requirement for NCRB to hold minimum shareholders’ funds of USD100 million. The group structure thereafter was that NCRH held the issued shares in NCRB; NCRB held the issued shares in a company known as NC Re Capital Limited (NC Capital); and NC Capital held the issued shares in NCRA.
6 In substance, the business model involved each of NCRA and NCRB reinsuring risks, and reinsuring part of those risks with each other. In general, the identity of the precise company with which reinsurance was placed is not relevant in these proceedings. Accordingly, and I hope without causing confusion, I will in general refer to the reinsuring entity or entities generically as “NewCap”. Nonetheless, it is important to bear in mind that at all times NCRA and NCRB had separate underwriting and administrative personnel.
7 When NCRA commenced to carry on business, Mr de Chelard was its chief underwriter. The managing director was Mr Iain Thompson. Mr Thompson was replaced as managing director of NCRA by the sixth defendant, Mr Azmin Daya (whom Mr Ghose described at T3675.19 as a “turnaround artist”), on about 7 May 1997. Mr de Chelard was stripped of his underwriting role with effect from 1 August 1998. He became, for a time, responsible for marketing and other matters. He was replaced by an expanded underwriting team including Mr Tim Sparkes, Mr Rob Johnson and others. NCRA terminated Mr de Chelard’s employment in September or October 1998.
8 Neither Mr Thompson nor Mr de Chelard took any part in these proceedings.
9 It will be necessary to deal in more detail with the vicissitudes experienced by NCRH during its short life. It is sufficient, for present purposes, to note that an inspector was appointed to NCRB on 26 February 1999 and that, as I have indicated, provisional liquidators were appointed to the group on 19 May 1999.
Parties and personnel
10 This section is intended only as a guide to the parties and their relevant personnel. It should not be taken to contain findings of fact. It will be necessary to return in detail to the roles and responsibilities of the parties; and to questions of credit.
The plaintiffs
11 The plaintiffs are a group of companies associated in one way or another with Mr Duncan Saville. They invested, or managed investments, in (among other things) securities in companies listed on the ASX. Their case is that at all relevant times in 1998 and 1999 their investment decisions were made (directly or indirectly) by or in reliance upon Mr Saville. Not surprisingly, Mr Saville was the principal witness of fact for the plaintiffs. Other witnesses of fact, who were all connected in one way or another with the business operations of the plaintiffs, included Mr Peter Burrows; Mr Anthony Bushell; Mr Brad Goddard; Mr Jonathon Chi; Mr Maurice Bass; and Mr Warren McLeland. Another witness, Mr Steven Bloch, was a business associate of Mr Saville.
12 The first plaintiff (ICM) was and is a company controlled by Mr Saville. It was at all material times the holder of a Dealer’s Licence, originally granted in 1995 by the then Australian Securities Commission. The business of ICM includes acting as trustee for, and managing and administering the funds of, two trusts known as the Pacific Rim Arbitrage Fund and the Pacific Rim No. 2 Fund.
13 ICM was one of the two plaintiffs who agreed to sub-underwrite part of the converting note issue.
14 The second plaintiff, Stocks Convertible Limited, was formerly known as AOIT Limited, and was referred to in these proceedings as AOITL. For convenience, I shall continue that usage in these reasons. AOITL was a wholly owned subsidiary of the fourth plaintiff, Stocks Convertible Trust plc. That company was formerly known as Australian Opportunities Investment Trust plc, and was referred to in these proceedings as AOIT. Again, I shall continue that usage in these reasons.
15 Mr Saville said, and I have no reason to doubt, that the only assets that AOITL has ever held are its investments in NCRH.
16 AOIT was and is a listed public company in the United Kingdom. Its business included investing in Australian securities. AOIT was the other of the plaintiffs who agreed to sub-underwrite part of the converting note issue.
17 ICM was during 1998 and 1999 an investment manager of AOIT. Mr Saville’s evidence was that in substance he made the relevant investment decisions on behalf of ICM; and that AOIT was informed prospectively (in the case of large investments and if it were convenient to do so) or retrospectively (in other circumstances) of those decisions.
18 The third plaintiff, ASC Pty Limited (ASC), was formerly known as ASC Limited and was, during 1998 and at least part of 1999, a listed public company in Australia. It invested principally in Australian securities. The plaintiffs‘ case is that ICM provided investment advice to it and that it made investments after discussions between its directors, Messrs Saville, Burrows, McLeland and Chi.
19 The fifth plaintiff, Eastern States Securities (ESS), is a company incorporated in Guernsey. Mr Saville and Mr Goddard are its directors. The plaintiffs’ case is that ICM made investment decisions on behalf of ESS, although there was no written agreement to that effect. Mr Saville said that investments were usually made following discussions between him and Mr Goddard.
The Macquarie parties
20 The first three defendants were referred to in the proceedings as “the Macquarie parties” or “Macquarie”. They will be so called in these reasons unless it is necessary to differentiate between them.
21 In September 1998, NCRH retained the first defendant, Macquarie Equity Capital Markets Limited (MECM), as a corporate adviser for a proposed capital raising. Once NCRH decided to proceed, MECM became the lead manager and underwriter for the converting note issue. The second defendant, Macquarie Equities Limited (MEL), was the broker to the issue.
22 MECM and MEL were both subsidiaries of the third defendant, Macquarie Bank Limited (MBL). MBL played no direct role in the converting note issue, although it was the employer of those referred to in the following paragraph. The plaintiffs say that MBL “directed and controlled each of MECM and MEL in the conduct of the business, activities and affairs of each” (sixth further amended summons (6FAS), contentions para 31(c)).
23 Macquarie personnel involved in the transaction included Mr Wayne Kent; Mr Paul Donnelly; Dr Ian McKenzie; Mr Stuart Moran; Mr Anthony Jackson; and Mr Jonathan Coultas. All of these, with the exception of Mr Kent, gave evidence.
24 Messrs Kent, Donnelly, Moran and Dr McKenzie worked for MECM. At the relevant time, Mr Kent was an executive director and joint head of MECM. Mr Donnelly and Dr McKenzie were associate directors. Mr Moran was a manager.
25 Messrs Jackson and Coultas worked for MEL. Mr Jackson was an analyst, specialising in insurance and reinsurance stocks. He covered, and on behalf of MEL and for its staff and clients produced publications on, a number of companies including, during 1998, NCRH. Mr Coultas was head of hybrid equity sales (the converting notes, possessing both debt and equity characteristics, were classified as hybrid securities).
26 Mr Kent was named as MECM’s representative on the Due Diligence Committee (DDC) that was brought into existence once NCRH decided to proceed with the capital raising. Mr Donnelly and Dr McKenzie were his alternates. In practice, it was almost always Dr McKenzie who represented MECM on the DDC. Further, to the extent that MECM was required to perform tasks or functions in relation to the DDC and its activities, or the due diligence process, it was in substance Dr McKenzie who performed those tasks and functions for MECM.
Mr Ghose
27 The fourth defendant, Mr Udayan Ghose, describes himself as “a self employed consultant, specialising in private equity investments” (affidavit sworn 8 September 2005, par 6(a)). He is the president of a company now known as Aries Partners, Inc. but formerly known, and referred to throughout the documents and in these reasons, as Eldon Capital, Inc. (Eldon). Eldon advises (and at the relevant time advised) investment partnerships that invested in insurance, reinsurance and financial institutions.
28 Eldon, or some of the investment partnerships that it advised, invested in NCRH when, or shortly after, it was incorporated in Bermuda on 30 August 1996. Mr Ghose thereupon joined the board of NCRH. At all material times, he was chairman and chief executive officer of NCRH.
29 Through Eldon, Mr Ghose had built up contacts with a number of financial institutions, including Dresdner Kleinwort Benson (DKB) and Chase Manhattan Bank (Chase). DKB, an investment bank carrying on business in the United States of America, is a subsidiary or affiliate of Dresdner Bank AG, a bank incorporated in Germany and carrying on business in Europe and elsewhere. Unless it is necessary to distinguish between the two entities, I will refer to them without differentiation as “Dresdner”. Mr Anthony Valencourt was a senior vice president of Dresdner (strictly speaking, I think, of DKB) in New York.
30 Dresdner provided the loan facility to NCRH, to which I have referred in para [3] above, originally as leader of a syndicate and, later, in its own right. It will be necessary to return to the detail of that facility.
31 Chase is a bank carrying on business in the United States of America and elsewhere. It provided a letter of credit facility for the benefit of NCRA and NCRB. From time to time, those companies could only do business if they gave letters of credit (LOCs) to the reinsured entity, either on inception of the cover or when a claim was made. Chase provided those LOCs. The facility required that the companies, or NCRH, give security over assets to a multiple of the value of the LOCs outstanding, with the precise multiple depending upon the nature of the assets.
The fifth, seventh and eighth defendants
32 The fifth defendant, Mr Beach, is an insurance and reinsurance broker carrying on business from Toronto, Canada. He was one of those involved in the foundation of NCRH. He was, at all material times, a non-executive member of its board.
33 Mr Beach was a member of the underwriting committee of the board of NCRH from late in 1997 until his resignation in March 1999. This involved, as he recognised, at the least a potential conflict with his role as a reinsurance broker: his company, Beach and Associates, placed reinsurance in the market, and was responsible for placing with NewCap what was known in these proceedings as the Vesta Contract. Mr Beach was also a member of the audit committee of the board of NCRH.
34 The seventh defendant, Mr Craig Deery, was at all relevant times an employee of BancBoston Capital. That is a subsidiary of Bank Boston, a bank carrying on business in the United States of America and elsewhere. As with Dresdner, I shall refer to both these companies as BancBoston unless it is necessary to distinguish between them.
35 Mr Ghose had a business relationship with BancBoston. He proposed to BancBoston that it invest in NCRH. The investment proposal was referred to Mr Deery, who, with another officer of BancBoston, decided on behalf of BancBoston to invest. That investment was made partially directly and partially through a joint venture with Eldon. When the investment was made, Mr Deery became a director of NCRH. He then became a member of the audit committee.
36 The eighth defendant, Mr Michael Morrissey, is the chairman and chief executive officer of a company known as Firemark Group Inc (Firemark). Firemark manages funds that invest in insurance-related businesses.
37 In 1996, Mr Ghose approached Mr Morrissey and suggested that Firemark invest in NCRH. It decided to do so, through one of its managed funds. Thereupon, or shortly after, Mr Morrissey was appointed to the board of NCRH. He was a member of the audit and underwriting committees.
38 From time to time, Messrs Beach, Deery and Morrissey were referred to collectively as “the non-executive directors”. That expression is somewhat imprecise, because they were not the only non-executive directors. Nonetheless, it is a convenient collective term.
Mr Daya
39 The sixth defendant, Mr Azmin Daya, was the managing director and chief executive officer of NCRA from 7 May 1997 until 25 March 1999. He was a qualified accountant who had had substantial experience in insurance and, particularly, reinsurance operations. He was at all material times a member of the board of NCRH.
40 Before the hearing of these proceedings commenced, the solicitors acting for Mr Daya sought and obtained leave to file Notice of Ceasing to Act. This occurred, as I understand it, because the insurance company by whom in reality they were instructed denied liability under the relevant policy. Although Mr Daya had prepared, and there has been filed, a detailed statement of evidence, he was not represented and took no part in the proceedings. He was contacted by the Court to ascertain whether he wished to give evidence, and replied that he would not do so. He said, relevantly, that his solicitors had ceased to act “given that my personal financial situation has prevented me from defending the claims made against me in these proceedings.” Thus, he said, “[a]lthough I would like to be in a position to respond to the allegations made against me by the plaintiffs, my impecunious financial position does not allow me to participate and as such I am unable to give evidence.”
Mr Peck
41 The ninth defendant, Mr William (Bill) Peck, was appointed to the board of NCRH at a board meeting on 13 February 1998. At the time, he was a partner in the law firm Phillips Fox. It was part of the plaintiffs’ case against Phillips Fox that Mr Peck accepted appointment to the board of NCRH in the course of that firm’s business, or with the authority of his then partners, so that the partnership as it then existed is liable for what the plaintiffs say were the defaults and omissions of Mr Peck in the performance of his duties as director of NCRH.
42 Mr Peck became a member of the audit committee. In due course, he became a member and the chairman of the DDC.
43 Mr Peck ceased to be a partner in Phillips Fox in June 2000. He is now the general manager, risk and compliance, of AON Risk Services Australia Limited.
Mr Williams
44 The tenth defendant, Mr Williams, was one of the founders of NCRH, together with Mr Beach and Mr de Chelard. He had a background in insurance and reinsurance broking. He was the deputy managing director of NCRA, but was not at any relevant time a director of NCRH.
45 Mr Williams became a member of the DDC.
Mr Aroney
46 The eleventh defendant, Mr Peter Aroney, is a chartered accountant. He became the chief financial officer of NCRA in October 1997, having had six or seven years’ experience in the world of reinsurance.
47 Mr Aroney was not a director of NCRH or its subsidiaries. However, he became a member of the DDC.
Trowbridge
48 The twelfth defendant, John Trowbridge Consulting Pty Limited (Trowbridge), is a company carrying on business as a consulting actuary. It provided actuarial services to NCRH from about mid 1996. The work performed by Trowbridge included reporting on the outstanding claims reserves of NCRH (through its operating subsidiaries) at its annual and semi-annual reporting dates. (I interpose to mention that NCRH prepared its accounts on a calendar year basis. Its first financial statements were prepared for the period from incorporation until 31 December 1997, and thereafter its annual financial statements were due on 31 December from year to year.)
49 The principals of Trowbridge who were involved in the events with which these proceedings are concerned were Mr David Minty and Mr Geoffrey Atkins. Each has since ceased to work for Trowbridge. Ms Katherine Robertson, a junior actuary, was also involved. She has since died.
50 Neither Trowbridge nor Mr Minty nor Mr Atkins (nor, for that matter, any other employee of Trowbridge) was a member of the DDC. Trowbridge was, however, commissioned to provide an independent actuarial expert’s report for the purposes of the capital raising. Messrs Minty and Atkins consulted with the DDC from time to time; and long and short forms of their report were given to the DDC. The short form of the report made its way into the prospectus. (It was not suggested during the proceedings that there was any material discrepancy between the two forms of the report; the difference is, rather, one of detail.)
51 After the evidence was complete, and whilst the parties were preparing written submissions, the plaintiffs came to a compromise with Trowbridge. I made orders to give effect to that compromise. However, Trowbridge remained involved in the proceedings as a cross-defendant to a number of cross-claims, and as a cross-claimant for contribution or indemnity in the event that it was found liable as a cross-defendant.
PricewaterhouseCoopers
52 The Australian accounting firm PricewaterhouseCoopers came into existence on 1 July 1998. It was formed by the merger of Price Waterhouse and Coopers & Lybrand. I shall refer to the Australian firms of Price Waterhouse (up until 30 June 1998) and PricewaterhouseCoopers (from 1 July 1998) as “PwCA”.
53 There was a similar situation in Bermuda, where the Bermudan firms of Price Waterhouse and Coopers & Lybrand merged to form a Bermudan partnership known as PricewaterhouseCoopers. I shall refer to that firm, and its Price Waterhouse antecedent firm, as “PwCB”.
54 All work relevant to these proceedings was undertaken by PwCA or PwCB as the case may be. It was not suggested that anything turned on the circumstance that, prior to 1 July 1998, there had been different firms in both Australia and Bermuda.
55 Mr Tom Conyers of PwCB was the audit partner for NCRH (which, of course, was a company incorporated in Bermuda). He was also the audit partner for NCRB (likewise, a company incorporated in Bermuda). Mr Patrick Murray of PwCA was the audit partner for NCRA. To the extent that the audit of NCRH required work to be done in relation to NCRA, it was Mr Murray who was responsible for that work.
56 Throughout the proceedings, the term “PwC” was frequently used generically (as, without prejudgment, it will be used in these reasons) to refer to either PwCA or PwCB. It was, nonetheless, PwCA’s case that at no time did there exist an international “Price Waterhouse” or “PricewaterhouseCoopers” partnership; in other words, that at no time did the relationship of partner exist between (for example) Mr Conyers and Mr Murray.
57 Mr Murray and Ms Elsa Payne (another partner in PwCA) became members of the DDC. In essence, Mr Murray provided advice or input in relation to accounting issues and Ms Payne provided advice or input in relation to taxation issues. There is no issue in these proceedings as to the latter.
Phillips Fox
58 I have already referred briefly to the case against the fourteenth defendant, Phillips Fox, pursuant to s 10 of the Partnership Act 1892. However, there was a further case brought against Phillips Fox, through the firm’s involvement in the capital raising.
59 Phillips Fox was retained to advise in connection with the capital raising. The partner responsible was Mr Andrew Mutton. He was assisted by a number of employed solicitors, including Ms Julie Athanasoff, Ms Fiona Morris and Ms Kirstine Russell.
60 Mr Mutton became a member of the DDC. Usually, one or more employed solicitors of Phillips Fox attended DDC meetings with him, their task being to prepare notes from which they, under the supervision of Mr Mutton, would prepare and circulate draft minutes of those meetings.
61 I should mention that three partners in the firm of Phillips Fox retired or resigned after the prospectus was issued, but before the capital raising was complete. Those retired partners (as I shall call them for convenience) raised a separate issue based on the dates of their retirements.
62 I should also mention that the firm as it existed at times material to these proceedings has since been dissolved, and a new firm, carrying on business under the same firm name, has been formed. Nothing of present significance turns on this fact.
Cross-claims
63 Numerous cross-claims have been brought by defendants against other defendants. In the main, those cross-claims seek contribution or indemnity, if and to the extent that the plaintiffs make out their case against the cross-claimant and the cross-defendant, based only on the allegations made by the plaintiffs against the cross-defendant. In some cases, however, independent causes of action are alleged.
64 As part of that process, NCRA became a cross-defendant. It has cross-claimed against (among others) Guy Carpenter and Company Pty Limited (Guy Carpenter Australia) and Guy Carpenter and Company Limited (Guy Carpenter UK). Those companies have brought reciprocal claims against NCRA.
65 Guy Carpenter UK is a large international insurance and reinsurance broker, having its headquarters in London. Its Australian affiliate, through whom it carries and carried on business, is Guy Carpenter Australia. It is convenient to refer to the two companies as “Guy Carpenter” unless there is a need to differentiate between them.
66 Guy Carpenter became involved because it brokered what became known as the “smoothing cover” entered into by NCRA in September 1998. One “leg” of that transaction, under which NCRA retroceded certain liabilities to a company in the Cologne Reinsurance (Cologne Re) Group, purported to have effect from 1 January 1998; and the net benefit purporting to flow from that contract was taken up by NCRA in its half-yearly accounts as at 30 June 1998.
67 The second “leg” of that transaction was a contract under which another company in the Cologne Re group retroceded certain liabilities to NCRA. That contract purported to have effect from 1 January 1999. It was not reflected in the half yearly accounts as at 30 June 1998, although it was the plaintiffs’ (and NCRA’s) case that the attachment point under that contract would inevitably be “hit”.
68 The transactions to which I have referred were given a variety of names and descriptions. I shall refer to them in composite as the GCR transaction or the smoothing cover, and individually as the first leg and the second leg, or as leg one and leg two. Those descriptions should be understood to refer to the smoothing cover as it was finally put in place in September 1998. However, it is necessary to bear in mind that what was originally discussed was another transaction, structured in a very similar way, but with much larger limits on each proposed leg.
69 The Cologne Re entities involved in the transactions were said to be one or other of General Cologne Re Australia Limited (GCRA), Cologne Reinsurance (Dublin) Limited (CRD) or General Cologne Re Services UK Limited (GCRUK). The generic term “GCR” was often used to denote the relevant company; and that usage will be continued in these reasons. None of the Cologne Re group of companies participated in any way in the proceedings.
Brief outline of relevant circumstances
70 NCRH commenced operations (through NCRA and NCRB) in December 1996. It commenced to write business in a major way in January 1997, the commencement of the 1997 underwriting season. At least for NCRA, that underwriting was effected by Mr de Chelard and his team.
71 Because NCRH was a new business, many brokers and insurers that did business with it required the obligations undertaken by NCRH (or, more accurately, by its operating subsidiaries NCRA and NCRB) to be secured by LOCs. I have referred above to the arrangements whereby Chase issued those LOCs and took security for its obligations under them. The extent to which the assets of NCRH were “collateralised” to provide security to Chase increased steadily during the 1997 operating year, and very substantially during the 1998 operating year. By late 1998, the extent of the collateralisation was such that NCRH was obliged to manage its cash flow very carefully, including by the deferral where possible of payment obligations and by the restructuring of the investments pledged to Chase as security.
72 After the first full year of operations, it became plain that NCRH, in a time of general profitability for the reinsurance industry, had succeeded in making a substantial loss.
73 NCRH issued announcements in February and March 1998, the effect of which was that it had experienced a combined operating ratio of 108%, and an operating loss before foreign currency effects, abnormals and income tax of USD1.2 million.
74 NCRH published its full year financial statements on 10 March 1998. Those financial statements revealed, among other things, an underwriting loss of USD12.75 million, and a reduction in shareholders’ equity from USD150.9 million (31 March 1997) to USD143.3 million.
75 Mr de Chelard headed the underwriting team for the relevant part of the 1998 underwriting year. He and his team effected the renewal of business already written and the underwriting of new business.
76 By May 1998 – when employees of NCRH and others were focussed on the preparation of half yearly accounts – it became plain that the results for the six months to 30 June 1998 would not be good. The company considered what might be done. One of the topics considered was a continuation of the restructuring of management (including of NCRA) and the raising of further capital to enable NCRH to continue to compete in the international reinsurance market. Another (investigation of which had commenced already, in about March 1998) was whole account excess of loss, or “stop loss”, reinsurance.
77 Mr de Chelard’s underwriting authority was first curtailed and then removed; but by the time the first of those steps occurred, the 1998 book of business had been written. The new underwriting team included Messrs Sparkes and Johnson.
78 As preparation of the half yearly accounts continued, conflicts arose between management and the internal actuary, Mr Baker. Mr Baker proposed a central estimate as at 30 June 1998 of USD154.7 million (being a central estimate, there was no prudential margin). Management considered that the figure was too high. PwC suggested that there should be in addition a prudential margin of at least USD10 million. Mr Johnson suggested a prudential margin of at least 15%. Ultimately, Trowbridge concluded that a central estimate of USD150 million was appropriate.
79 By mid May 1998, Mr Daya had come to appreciate, and had informed Mr Ghose, that substantial losses were emerging. Mr Daya communicated current figures to Mr Daya and stated that “[t]he picture is not pretty – it is getting uglier.”
80 Mr Daya reported to the board of NCRH on 2 June 1998. He identified the need for “additional contingent capital support” and the importance of “solidifying 1998 profits”. For the latter purpose, he said, consideration should be given to obtaining a whole of account stop loss protection “to “ring fence” any latent deterioration beyond current provisioning on the 1997 accounting year.” Any such contract “would act as a stop-loss on 1998 and future years and a smoothing cover for the impact in 1998 of 1997 deterioration.”
81 In fact, Mr Daya had opened negotiations with Guy Carpenter UK in about March 1998. That company understood its task to be to “[d]esign a cover which allows [NCRH] to borrow someone else’s money in the event of a result in excess of 100% and allow them to pay this back over a period of years.” That required a multi year policy to enable the payback to be achieved.
82 Ultimately, after extensive and detailed negotiations, Guy Carpenter proposed a structure whereby NCRH would receive an aggregate of AUD40 million cover for a total premium of AUD19 million, and would reciprocate (so as to give the assurance of payback) by writing cover of USD22.5 million for a premium of USD1 million. It seems that GCR was prepared to participate in this structure.
83 Further investigation and negotiation proceeded, to the point where, by 14 July 1998, the essential terms of the reciprocal covers were settled and all that was needed was approval from the board of NCRH. Mr Peck had concerns at the proposal, and the proposed accounting for the two legs. Other members of the board shared his views. The proposal did not proceed.
84 What then emerged was the smaller (in terms of limits) structure that was put in place through what I have called leg 1 and leg 2, or the GCR transaction. That was negotiated and documented over the period from about 5 August 1998 to 2 September 1998. On this latter date, the board of NCRH approved NCRA’s entering into legs 1 and 2.
85 Also during the meeting of 2 September 1998, NCRH’s board considered the draft financial statements for the six months to 30 June 1998. Those draft statements showed an operating loss of USD14.8 million for the period, and accumulated losses and equivalent reductions in shareholders’ equity of USD22.6 million. Those figures took into account a receivable of USD5.675 million attributable to the benefit of leg 1 of the GCR transaction, and did not take into account any impact of leg 2. The board approved the accounts on 4 September 1998.
86 At the same board meeting, the directors resolved to pursue a capital raising. That topic had been under discussion for some months previously. The structure of the capital raising comprised an issue of converting notes. The offer was targeted at existing shareholders and institutional investors.
87 NCRH set up the due diligence committee to which I have referred earlier. The draft prospectus was prepared and, ultimately, made available to potential investors on 18 November 1998.
88 MECM, as lead underwriter, sought sub-underwriting and placement commitments prior to 18 November 1998. Among those approached was Mr Saville. He was given a copy of the draft prospectus shortly prior to 18 November 1998; and the draft prospectus was likewise provided to other potential subunderwriters and investors.
89 One of the declared purposes of the capital raising, referred to frequently in the prospectus, was to enable NCRH to repay its existing debt, owed to the syndicate originally headed by Dresdner and, ultimately, to Dresdner alone. There was a concern that NCRH was, or might be, in breach of those facilities. The negotiations with Dresdner, to obtain an appropriate indication of waiver of any breach (so as to avoid the need for disclosure in the prospectus), are central to both the plaintiffs’ case and the 33rd and 36th cross-claims brought by NCRA.
90 The information required for the prospectus included a pro forma balance sheet, the declared intention of which (see section 6.2 of the prospectus) was to show the effect of the issue and placement of converting notes, and the subsequent repayment of existing borrowings, as though all those transactions had occurred on 30 June 1998.
91 Trowbridge prepared a report for inclusion in the prospectus. The functions of the report were to assess the outstanding claims liability of NCRH as at 30 June 1998, and to examine claims experience from that date to the date of the report (which became 26 October 1998) “in order to comment on the implications of this experience for 1998 financial results and the adequacy of the outstanding claims provision.” The short form of report that was included in the prospectus (the Trowbridge prospectus report) concluded that NCRH’s claims provision as at 30 June 1998 was “reasonable although … it does not include a prudential margin of any significance.” The report also discussed subsequent claims experience and gave an indication of the financial impact of certain major claims.
92 NCRH became exposed to some very substantial losses in the second half of 1998. They included:
(1) The failure of the Galaxy 10 satellite launch in late August;
(2) The crash of Swissair flight 111 in early September;
(4) A Thai Airlines’ plane crash in early December.(3) Hurricanes Georges and Mitch in late September/late October respectively;
93 The Swissair crash and Hurricane Georges were discussed in the Trowbridge prospectus report, and the satellite launch failure (and another claim involving a Globalstar satellite) were mentioned and their impacts analysed.
94 Further development of the claims that were mentioned in the Trowbridge prospectus report, and the impact of the other claims to which I have referred, indicated that NCRH was heavily exposed. On 23 December 1998, NCRH announced to the ASX that it was expecting to report a loss of USD12.1 million for the six months from 1 July to 31 December 1998.
95 Meanwhile, in early November 1998, work began on the preparation of NCRH’s financial statements for the twelve month period to 31 December 1998. Trowbridge began to assess the outstanding claims liability. It prepared a number of draft estimates, or “model summaries”, between mid December 1998 and mid January 1999. A draft model summary given to Mr Daya on 23 December 1990 projected a provision of USD204 million. A draft model summary provided to Mr Daya on 29 December 1998 projected a provision of USD214 million. Both figures represented the net discounted claims provision plus a prudential margin of USD10 million. Those figures were based on claims data up to the end of November 1998. Trowbridge required the claims data for December 1998 before it could continue with its work.
96 The December claims data were provided to Trowbridge on 5 January 1999. On 11 January 1999, Trowbridge provided a draft model summary to Mr Daya, taking into account the December claims data, which projected a net discounted claims provision, including some prudential margin, of USD244 million.
97 Mr Daya did not communicate any of these matters to the boards of NCRH or NCRA, or to members of the DDC.
98 In the result, the issue closed on 31 December 1998, and the notes were allotted on 12 January 1999, without any information of the kind to which I have just referred being given to investors.
99 Trowbridge continued work on its assessment of the outstanding claims liability. Although that work was not finalised, it became clear that NCRH had suffered, and would be obliged to report, enormous losses for the 1998 financial year. This became clear by at least 24 February 1999. On that day, NCRH delivered what an analyst called its “tombstone” announcement, which stated that it then expected to report a loss for the 1998 year of USD90 million.
Outline of the plaintiffs’ case
100 What follows is a very broad summary, intended to make these reasons as comprehensible as their subject matter will allow.
101 The plaintiffs assert that the various defendants were guilty of misleading or deceptive conduct under whichever is found to be applicable of various legislative regimes: the Trade Practices Act 1974; the Corporations Act 2001; the Fair Trading Act 1987; or the Australian Securities and Investments Commission Act 2001 (the ASIC Act).
102 The plaintiffs’ formulations of their cases against the various defendants include also allegations of negligence; and, in the case of the Macquarie parties, a claim under the sub-underwriting agreements based on an implied obligation of good faith, and non-disclosure of certain matters said to constitute a breach of that obligation.
103 In substance, the plaintiffs’ case focuses on four periods of time.
104 The first period of time is that up until but not including the issue of the prospectus on 18 November 1998. The plaintiffs say that a number of representations were made to Mr Saville by the Macquarie parties. Those representations are said to have been made in a number of ways including:
(1) In meetings or conversation between Mr Saville and representatives of Macquarie;
(3) When Macquarie gave Mr Saville the draft prospectus and draft underwriting agreement, shortly prior to 18 November 1998.(2) In documents, including “Macquarie Equities Essentials” and a dealer’s note given either directly or (on the plaintiffs’ case) indirectly to Mr Saville by Macquarie; and
105 The plaintiffs’ representation case against the Macquarie parties based on events up until but not including 18 November 1998 alleges the making of a number of representations by the draft prospectus, as well as other, specific, representations. It is convenient now to refer to the nature of the representations said to have been made by the provision of the draft prospectus. They include:
(1) A group of representations relating to the statement of the NTA: that statement is said to have been false and misleading or deceptive for a number of reasons.
(2) A group of representations relating to statements concerning the future prospects of NCRH: in substance, the draft prospectus could be taken to suggest that, with recapitalisation, NCRH had good prospects of continuing to operate and, ultimately, making profits. Those representations are said to have been false and misleading or deceptive, including because of the increasing extent to which the assets of NCRH were collateralised to provide security to Chase for LOCs issued by it.
(3) A group of representations relating to statements as to the “security”, or “secure” position, of noteholders: those representations are said to have been false and misleading or deceptive because, among other things, of the privileged security position of Chase.
(4) A group of representations relating to the Prospectus Balance Sheet, which is said to have been false and misleading or deceptive for a number of reasons: including that it included the benefit of leg 1; took into account deferred acquisition costs (DAC) when they should not have been treated as recoverable; and failed to provide for a prudential margin of any significance.
(6) A representation relating to the disclosure of attempts to obtain whole account stop loss cover: that disclosure is said to have been false and misleading or deceptive because it was unlikely that cover could be obtained, or obtained except at a cost that was prohibitive.(5) A group of representations relating to statements as to the purposes of the capital raising: those statements are said to have been false and misleading or deceptive because they concealed the true state of affairs between NCRH and Dresdner.
106 The second period of time is 18 November 1998: the date of the issue of the prospectus. The substantial representations said to have been made then include those to which I have referred. They are said to have been made by all members of the DDC whose names appear in the prospectus.
107 The third period of time is that from 18 November to 31 December 1998 (the application period for the converting notes), with particular focus on the end of that period. The plaintiffs say that, even if the representations on which they rely were not false and misleading or deceptive at the time they were made, they were falsified by events that occurred over that time period. In other words, the plaintiffs assert that a number of the representations alleged to have been made in the prospectus were representations of a continuing nature, or otherwise such that there was a duty to correct or restate them as adverse events occurred; and that adverse or falsifying events did occur. Those events include further adverse claims development over and above what was disclosed in the prospectus. This aspect also of the plaintiffs’ case is maintained against all the members of the DDC.
108 The last period of time is that from 1 to 12 January 1999. That is the period from the close of the issue to the issue of the notes. Again, the plaintiffs say that the representations on which they rely were continuing and were falsified, or further falsified, over that time period. Again, this aspect of the plaintiffs’ case is maintained against all members of the DDC.
109 The plaintiffs say that they, through Mr Saville, were misled or deceived at the various times and in the various ways to which I have referred, so that in some cases they agreed to underwrite the note issue, in other cases they agreed to accept a firm placement of notes, and in many cases they bought rights and notes on market. They say that they have suffered the loss of the whole of their investment made in those various ways.
110 Further, the plaintiffs say that the various members of the DDC owed them duties of care. They rely in substance on the matters pleaded in relation to the representational cases to assert that those duties of care were breached.
111 In addition, the plaintiffs bring an alternative “indirect representation” case against the various members of the DDC. In substance, they say that the members of the DDC made false and misleading or deceptive representations to the board of NCRH in the reports that led to the issue of the prospectus on 18 November 1998 and the resolution to issue the notes on 12 January 1999. They say that, but for that misleading or deceptive conduct, the board of NCRH would not have resolved to issue the prospectus or to issue the notes (as the case may be), and that the plaintiffs would not have suffered the losses that they did through their participation, in the ways that I have described, in the issue.
The nature of the defences
112 It is sufficient for present purposes to give only a very broad outline of the various defences raised. In substance, the defendants take issue with every aspect of the plaintiffs’ case. They deny the misleading or deceptive conduct, or negligence, attributed to them. In addition, they raise the following matters:
(1) They submit that the plaintiffs have not proved that they relied in any relevant way on any misleading or deceptive conduct that may be found to have occurred. Included within this general argument is the proposition that Mr Saville lacked, or has not been shown to have had, authority to bind the plaintiffs to the various transactions whereby they say they suffered loss.
(2) The defendants submit that the plaintiffs have not proved the extent of their loss.
(3) The defendants raise the question of contributory negligence (including, in relation to the representational case, as a defence based on considerations of causation).
(5) The defendants submit that the indirect representation case is bad in law.(4) The defendants rely on the “due diligence” defences available under the Corporations Act.
The real issues
113 The issues in this case were articulated through the 6FAS, defences thereto, and a large number of cross-claims (thirty seven in all). The parties referred to these as “pleadings”, although they were governed not by the rules relating to pleadings but by the requirements of the former Practice Note (PN) 100. Nonetheless, it is convenient, and not in substance inaccurate, to use the term “pleadings”, having regard to the manner in which the 6FAS, the defences, the cross-claims and the defences thereto are structured.
114 The pleadings are complex, repetitive and lengthy (they occupied, in total, some nine lever arch folders). I directed the parties to file a statement of agreed issues. This they did, although there were disputes between them as to the formulation of some issues and as to whether other issues arose on the pleadings or otherwise.
115 I propose to structure these reasons by reference to the issues so formulated. However, it will be necessary from time to time to refer to the pleadings: both to resolve disputes as to whether something is properly in issue, and to understand what underlies other issues.
116 The statement of agreed issues was reformulated from time to time. For convenience, although at the expense of brevity (unfortunately, not a significant consideration in these proceedings), I set out below the issues as they were last formulated, together with references to the paragraphs below where my conclusions on each issue may be found.
Agreed Statement of Issues on the Plaintiffs’ case and Cross Claims against Ingot Capital Management Limited and Saville
1. Plaintiffs’ claims against the Macquarie Parties a) Misleading and deceptive conduct Conclusion at para 1
Was the conduct of Macquarie up to and including 17 November 1998 and in particular the representations made by Macquarie to Mr Saville as pleaded in paragraphs 46, 48, 50 and 55 of the 6FAS and the omission pleaded in paragraph 58 of the 6FAS misleading and deceptive conduct in all the circumstances of the case. The Macquarie Parties say that this issue does not arise on the pleading in these terms. The only pleaded misleading or deceptive conduct case in relation to the Macquarie Parties’ dealings with the Plaintiffs is that the representations pleaded in paragraphs 46, 48, 50 and 55 were false by reason of the matters pleaded in and particularised to paragraphs 70-75 and 77-79 and only those matters; and that the omission pleaded in paragraph 58 amounted to conduct that was misleading or deceptive. [392] 2 Did Macquarie become aware of the circumstances alleged in paragraphs 77 and 79 of the 6FAS in the period up to and including 12 January 1999. Agreed. [400] 3 If so, did Macquarie have any obligation to the plaintiffs to act as pleaded in paragraph 81 of the 6FAS. Agreed. [400] 4 Was the failure, if any, of Macquarie to act as pleaded in paragraph 81 of the 6FAS misleading or deceptive conduct in all the circumstances of the case. The Macquarie Parties say that this issue does not arise on the pleading. The issue that arises on the pleading is whether or not, by reason of, inter alia, the alleged failure to act as pleaded in paragraph 81, the representations pleaded in paragraphs 46, 48, 50 and 55 and the omission pleaded in paragraph 58 were or became misleading or deceptive - see paragraph 83 of the 6FAS [400] 5 Was the conduct of Macquarie by its representatives on the DDC, and, in particular, the making of the Macquarie 5 November 1998 DDC Representations, the Macquarie 18 November 1998 DDC Representations, the Macquarie 12 January 1999 DDC Representations, the DDC Representation and the DDC Supplementary Representations, misleading or deceptive conduct in all the circumstances of the case. The Macquarie Parties say that this issue does not arise on the pleading in these terms. The only pleaded misleading or deceptive conduct case in relation to conduct of Macquarie’s representatives on the DDC is that: - the Macquarie 5 November 1998 DDC Representations, the Macquarie 18 November 1998 DDC Representations and the DDC Representation were misleading or deceptive by reason of those of the matters pleaded in paragraphs 70-75 known and considered by Macquarie and only those matters; and
- the Macquarie 12 January 1999 DDC Representations and the DDC Supplementary Representations were misleading or deceptive by reason of those of the matters pleaded in paragraphs 70-75 and 77-79 known and considered by Macquarie and only those matters.
See paragraphs 75A-75C and 81H-81J of 6FAS.
[415] 6 Whether the Corporations Law, Fair Trading Act and/or Trade Practices Act is applicable. Agreed. [416] 7 Was all or any of the plaintiffs’ loss caused by a breach or breaches by Macquarie of sections 995 and 1005 of the Corporations Law and/or other statutory provisions pleaded. Agreed. [417] 8
Whether reliance by Mr Saville directly on Macquarie is an essential element of causation in each of the causes of action. Agreed. [417] 9
Whether Mr Saville relied on the representations made Macquarie. Agreed. [417] 10 Whether the so-called “October” meeting occurred in October as Mr Saville alleged in his first statement, on 3 or 4 November 1998 as Mr Saville alleged in his second statement or on 16 November 1998. The Plaintiffs say that this is a submission relating to some of the evidence and not an issue. The date(s) and/or place(s) of Macquarie’s representations are not elements of the cause of action. [418] 11 Whether there was one meeting at Mr Saville’s home or two meetings (as Mr Saville alleges in his second statement). As per 11 above. [418] 12 Whether a copy of the roadshow presentation document (referred to as the “Slides” in Mr Saville’s statements) was provided to him at the meeting. The Plaintiffs say that this is a submission relating to part of the evidence and not an issue. The means by which Macquarie’s representations were conveyed to Mr Saville is not an element of the cause of action. For example, the evidence of Macquarie’s witness was that whether or not they handed over the Slides and or Dealer’s notes, they would have told him orally what was in those documents. The Macquarie Parties say that the above summary is not an accurate reflection of the evidence.
[418] 13 Whether a number of extracted pages from the document used during the management presentation to the DDC on 18 September 1998 (which Mr Saville refers to as the “Further Slides” in his statements) were provided to him at the meeting. As per 13 above. [418] 14 Whether the representations alleged in paragraph 46 of the 6FAS were made in those terms at the meeting. The Plaintiffs say that the issue is correctly formulated in paragraph 1 above. How and when the representations were conveyed are not elements of the action. [418] 15 Whether any representations pleaded in paragraphs 46, 48, 50 and 55 that may be found to have been made by the Macquarie Parties were representations as to future matters or representations of opinion and, if so, whether the Macquarie Parties had reasonable grounds for those representations. Agreed. [418] 16 Whether any representation found to be made by the Macquarie Parties was a “continuing” representation or instead was one which spoke as at the date it was made. It is agreed that there is an issue as to whether any of Macquarie’s representations were continuing representations. The Plaintiffs do not agree that “continuing” and “spoke as at the date” are true alternatives. [422] 17 Whether the Macquarie Parties made any representation to Saville by faxing the Dealer’s Note to Bloch. As per 13 above. [423] 18 Whether the representation alleged in paragraph 50(d) was a representation that the converting notes were an attractive investment or whether, as the Plaintiffs contend, it was a representation that the security of the notes (in the sense of a secured instrument) was attractive. The Plaintiffs say that the issue is whether the representation was misleading or likely to mislead in all the circumstances and whether the Plaintiffs suffered loss in consequence. More specifically, an issue arises as to what Mr Saville in fact understood the representation to be. [423] 19 Whether the Macquarie Parties made any material representation to Mr Saville in the Draft Prospectus or by providing him with a copy of the Draft Prospectus, having regard to the terms of the draft sub-underwriting letter under which the Draft Prospectus was provided and Mr Saville’s understanding. The Plaintiffs agree that there is an issue as to what representations were made by Macquarie in promoting the draft prospectus in all the circumstances. [423] 20 Whether Mr Saville or the Plaintiffs relied on any representations by the Macquarie Parties. The Plaintiffs contend that Macquarie’s DDC representations (paragraphs 39D, 39E, 49A, 67A, 81A) caused loss to the Plaintiffs in causing the note issue to proceed and thus the notes to be available under the prospectus to be purchased by the Plaintiffs, regardless of direct reliance on these DDC representations by Mr Saville. [424] 21
Whether Mr Saville’s evidence as to reliance can be accepted. The Plaintiffs say this is a submission on evidence and not an agreed issue. [473], [474]
22
Whether, to the extent Mr Saville relied on information in the prospectus in exercising the rights on 31 December 1998, he relied on the Final Prospectus (about which no representational claim is made against the Macquarie Parties) rather than the Draft Prospectus. The Plaintiffs say the issue is whether Macquarie’s draft prospectus representations were “a” cause of his exercise of the rights on 31 December. [425] 23 If it is open to the Plaintiffs to run a case that Saville was the decision-maker in respect of all acquisitions, whether he had authority on behalf of the Plaintiffs to make those acquisitions. The Plaintiffs say the issues as formulated by Macquarie erroneously excludes the possibility of reliance on Macquarie’s draft prospectus representations and the final prospectus as leading to liability for Macquarie. The Macquarie Parties note, in relation to the comment above, that there is no direct representational case against them based on the final prospectus.
[426] 24 Whether the facts pleaded in paragraphs 70-75 and 77-79 as falsifying the representations allegedly made in fact falsify those representations. Adding the words “in all the circumstances evidenced”, the issue is agreed. The Macquarie Parties do not agree to the additional words referred to above - see response to issue 1 above.
[475]
25
Which of the matters pleaded in 6FAS paras 70-79, and the documents on which the Plaintiffs rely to support those matters, were known to the Macquarie Parties and whether knowledge of those matters or documents is inconsistent with a reasonable basis for any representations or opinions expressed by the Macquarie Parties. Agreed. [475] 26 The Macquarie Parties consider that a number of the falsifying facts pleaded in the 6FAS should no longer be in issue, having regard to Mr Saville’s evidence that he was either aware of those matters or would have proceeded with the investment even if he was aware of them. Those matters include: Not agreed by the Plaintiffs. [475] (a) the US$5.7 million overstatement of retrocession recoveries as a result of the GCR profit smoothing contract (6FAS paras 70(a), 71(c)(i)(C));
(b) inclusion of a prudential margin in the 30 June 1998 reserves figure (6FAS paras 70(c), 75(a)-(b)); (c) the A$/US$ exchange rate used to calculate the NTA range of A$2.06 - A$2.20 per share in the prospectus (6FAS para 71); (d) the effect of the Chase arrangements on the security position of noteholders (6FAS para 72); (e) the future prospects of the group, including the quality of the business written in 1998 (6FAS paras 73(a)-(d)); (f) that New Cap Re was in breach of the Dresdner facility, which Dresdner waived to allow the capital raising to proceed (6FAS para 74); and (g) that New Cap Re had allowed no reserve for the Vesta claim (6FAS para 77(a), (b) and (i)).
27
Whether MECM intended to reserve for itself the possibility of not exercising an entitlement to terminate the Underwriting Agreement, should such an entitlement arise, in circumstances where it may be in MECM’s interests but not in the interests of sub-underwriters to terminate the Underwriting Agreement. Agreed. [492] 28 Whether, if MECM had any such intention, the reservation of that right was disclosed to Saville by the terms of the sub-underwriting agreements. Agreed. [492] 29 Whether, if no such reservation was disclosed, it was misleading or deceptive conduct on the part of MECM not to disclose that reservation to Saville. Agreed. [492] 30 Whether, as a matter of law, the plaintiffs can succeed in a misleading or deceptive conduct case based on the “DDC Representations” in circumstances where neither Saville nor the Plaintiffs relied on those representations. Agreed by the Plaintiffs if “directly” is inserted after “relied”. [511] 31 If an indirect causation case is open to the Plaintiffs as a matter of law:
· what were the relevant representations; and
· whether the persons alleged to have relied on the various Macquarie DDC Representations - the other members of the DDC, the NCRH board and the NCRH board sub-committee of Daya and Peck - in fact relied on any representations by Macquarie in making the decisions and taking the actions pleaded and, if they did, whether they were misled in light of the qualifications attaching to the representations and in circumstances that it is alleged by the Plaintiffs that those persons were aware of the facts said to falsify the representations.Agreed save for the last 23 words (“and in circumstances…) which the Plaintiffs say presume findings of fact by the Court. [530] 32 Was Mr Saville aware of any of the matters referred to in paragraphs 77 and 79 of the 6FAS? The Plaintiffs say this is but one factual question relevant to the question of causation. [531] 33 Whether there is any evidence as to how Mr Saville would have responded or reacted had he known of any of the matters referred to in paragraphs 77 and 79 of the 6FAS. The Plaintiffs do not accept that such evidence is an essential element of the cause of action. [531] (b)
Negligence 34
Whether Macquarie owed the plaintiffs a duty of care as alleged in paragraph 86 of the 6FAS. Agreed. [590] 35 If so, whether Macquarie breached its duty of care in the respects alleged in paragraphs 87 and 87A of the 6FAS. Agreed. [591] 36 Whether the alleged breaches of a duty of care by Macquarie caused the plaintiffs’ loss. Agreed. [591] 37 If any such duty was owed, whether the duty was limited to a duty to those Plaintiffs who sub-underwrote the issue and only in that capacity. Agreed. [591] 38 Whether any such duty of care is excluded by the terms of the sub-underwriting agreements. Agreed. [590]
c)
Contractual claims 39
Whether there was an implied term of good faith in the ICM and AOIT sub-underwriting agreements, obliging MECM to exercise its decision whether to terminate the underwriting agreement in good faith. Agreed. [600] 40 If there was such an implied term, did Macquarie breach that term? Agreed. [601] 41 If Macquarie did breach that term, whether that breach caused the plaintiffs’ loss. Agreed. [601] 42 Whether MECM at any time held the opinion that an entitlement to terminate the Underwriting Agreement had arisen. Agreed. [601] 43 Whether, if a decision not to terminate the Underwriting Agreement was in fact made, there was any lack of good faith on the part of MECM in respect of that decision. Agreed. [601]
d)
Defences 44
Does Macquarie have a due diligence defence under Section 1011 of the Corporations Law, and if so, has that defence been established. Agreed. [602] 45 Ought Macquarie fairly be excused under Section 1318 of the Corporations Law. Agreed. [602] 46 Whether the plaintiffs failed to take reasonable care in making the relevant investments and if so, whether damages ought to be reduced by reason thereof. The Plaintiffs contend that this issue does not arise on the statutory and contractual counts. [602] 47 Whether the provisions of the contractual arrangements between the plaintiffs and MECM preclude or limit any of the claims brought against the Macquarie parties, and if so which. The Plaintiffs contend that this issue does not arise on the statutory counts. [602] 48 Whether the Plaintiffs were guilty of contributory negligence and whether any damages award should be reduced accordingly. As per 46 above. [602] 49 Whether Saville and/or Ingot breached a duty of care to the Plaintiffs by recommending or making purchases on the Plaintiffs’ behalf in volumes vastly in excess of the sub-underwriting and firm placement offers made to them. The Cross Defendants do not agree that the relationship of the purchased volumes to the sub-underwriting and firm placement offers, is relevant to the alleged negligence. [602] 50 Whether Saville, Ingot and/or the Plaintiffs breached the terms of the sub-underwriting agreements by using the information contained in the Draft Prospectus for a purpose other than considering the sub-underwriting and firm placement offer, and are accordingly liable under the terms of the sub-underwriting agreements to indemnify the Macquarie Parties for any liability they might have to the Plaintiffs in these proceedings. It is agreed that this is an issue in all the circumstances evidenced and not merely those assumed in the issue as propounded by Macquarie. [602] e) Damages 51 Whether the plaintiffs have proved their alleged loss. Agreed. [603] 52 Whether on-market acquisitions by the plaintiffs may be recoverable as part of the damages claim. Agreed. [603] 53 Whether losses arising from the acquisition of shares in NCRH by the plaintiffs are recoverable as part of the damages claim. Agreed. [603] 54 Whether the Plaintiffs’ loss recoverable against the Macquarie Parties is limited to the value of notes acquired under the sub-underwriting and institutional placement (A$4,661,221) and interest. The Plaintiffs contend that this issue does not arise. [603] 55 Whether, by reason of the terms on which MECM dealt with Saville and the Plaintiffs as set out in the sub-underwriting agreements, they have no claim against the Macquarie Parties in respect of any matter relating to the offer of the converting notes. The Plaintiffs say this issue as propounded by Macquarie presumes a finding in their favour of the terms on which they dealt and that such terms can exclude statutory rights. The Plaintiffs do not agree. The “issue” does not articulate the basis propounded for the Plaintiffs having “no claim”. [603] 56 Whether the plaintiffs are entitled to any losses arising from transactions after (i) the 23 December 1998 ASX announcement and (ii) the 24 February 1999 announcement. Agreed. [603] 57 Whether the Court should mould any relief for the plaintiffs if they otherwise succeed against the defendants or any of them. The “issue” is obscure and the Plaintiffs cannot agree or disagree. The Macquarie Parties agree the issue is obscure - it was included by the Plaintiffs.
[603] f) Limitations issues 58 Whether the claims introduced under the ASIC Act and the Fair Trading Act in the 5FAS, and whether the claims introduced in the 6FAS are time barred. Agreed. [608(1)] 59 Whether the court should “otherwise order” in relation to the amendments allowed pursuant to section 65(3) of the Civil Procedure Act 2005. Agreed. [609] 2.
Plaintiffs’ claims against the Directors, Williams & Aroney (a)
Misleading and deceptive conduct 60
Whether the pleaded conduct of NCRH, up to and including 18 November 1998, namely the representations made by NCRH in the Draft Prospectus and the Prospectus as pleaded in paragraphs 104 to 109 of the 6FAS, was misleading or deceptive conduct in all the circumstances of the case. Agreed [829] 61
As against Daya and Williams, whether the information they gave to Mr Saville on behalf of the plaintiffs on or about 21 December 1998 was incomplete and/or gave a misleading impression, so as to render their conduct in providing that information misleading or deceptive conduct in all the circumstances of the case. [Neither Daya nor Williams has served a Statement of Issues.] [850] 62 Whether the Directors, Williams and Aroney were aware of the matters pleaded in paragraphs 111(a), 111(c), 115, 117, 120, 121, 127 on or prior to 18 November 1998. Agreed (save that Ghose and Beech say that the matters in paragraph 111(c) are not pleaded against them). [857] 63
Whether the circumstances alleged in paragraph 129 of the 6FAS were brought to the attention of NCRH, the Directors, Williams and Aroney in the period up to and including 12 January 1999. Agreed [959] to [965] 64
Whether NCRH, the Directors, Williams and Aroney were under an obligation to inform Mr Saville on behalf of the plaintiffs of any change in circumstances which was such as to render the representations made by NCRH in the Draft Prospectus or the Prospectus misleading or deceptive, during the period up to and including 12 January 1999. Agreed [979] 65
If so, whether NCRH, the Directors, Williams and Aroney were in breach of that obligation so as to render their conduct misleading or deceptive conduct in all the circumstances of the case. Agreed. [980] 66
Whether, in the circumstances NCRH was obliged to lodge a Supplementary Prospectus or to withdraw the Prospectus and give reasonable public notice of the withdrawal. Agreed. [1000] 67 Whether the Corporations Law, ASIC Acts, Fair Trading Act and/or Trade Practices Act is applicable. Agreed. [1026] 68 Whether the pleaded conduct of NCRH, the Directors, Williams and Aroney was misleading and deceptive conduct in all the circumstances of the case, in contravention of section 995 and 1005 of the Corporations Law, and other statutory provisions pleaded. Agreed [1049] to [1052] 69 Whether the conduct of the Directors, Williams and Aroney was conduct in contravention of Sections 996, 999 or 1022 and 1005 of the Corporations Law. Agreed, subject to the deletion of the words “1022 and”. The conduct is limited to that pleaded in paragraph 154.
[1057] 70 Whether the Directors, Williams and Aroney were knowingly concerned in, or involved in, any breaches of the Corporations Law by NCRH (Sections 995, 1023B, 1024 and 1005 of the Corporations Law) and equivalent statutory provisions. Agreed, subject to the following: The allegations against Aroney and Williams are of being “knowingly concerned” in the pleaded NCRH breaches. There is no allegation that they were otherwise “involved in” those breaches (pars 152, 153). [1060] 71 Whether the conduct of NCRH, the Directors, Williams and Aroney in breach of the statutory provisions pleaded caused the plaintiffs’ loss. Agreed. [1063] 72 Did the Plaintiffs (through Mr Duncan Saville) rely upon any alleged false representations in such a way that the representations caused the Plaintiffs to invest or expend money and thereby to suffer loss. Agreed. [1064] 73 Whether each of the plaintiffs falls within section 1005(1) of the Corporations Law, section 12G of ASICA, section 82 of the Trade Practices Act and section 68 of the Fair Trading Act. This issue is propounded by Peck. The Plaintiffs do not agree that this is a real issue. [1065] 74
Whether ICM was an investment adviser to each of the first to fifth Plaintiffs and/or made investment recommendations or directions with which the first to fifth Plaintiffs complied. This issue is propounded by Peck. The Plaintiffs do not agree that this is a real issue. [1065] 75
What the Macquarie Parties, prior to 18 November 1998, provided to Saville and whether this was to be used by the Plaintiffs to decide whether to sub-underwrite or otherwise commit to the Placement. Agreed [1065] 76 Whether some of the representations, if made, were representations as to future matters.
Agreed.
[1065] 77 Whether the matters pleaded in 6FAS paragraphs 123-126 (which describe a usual practice in relation to a draft prospectus) are correct; This issue is propounded by Aroney. The Plaintiffs do not agree that it is a serious issue. [1065] 78 If so, whether Aroney was aware or ought reasonably to have been aware, of the practice, and of Macquarie’s intentions to circulate the draft prospectus; Agreed. [1065] b) Negligence 79 Whether the Directors, Williams and Aroney owed the plaintiffs a duty of care as alleged in paragraph 159 of the 6FAS. Agreed [1093] 80
If so, whether the Directors, Williams and Aroney breached their duty of care in the respects alleged in paragraph 160 of the 6FAS. Agreed [1095] 81
Whether the alleged breaches of duty of care by the Directors, Williams and Aroney caused the plaintiffs’ loss. Agreed [1095] c) Defences 82
Whether Ghose, Peck, Beach, Deery and Morrissey have a defence under Section 1007 of the Corporations Law. Agreed. [1096] 83
Whether Peck, Ghose, Aroney, Beach, Deery & Morrissey ought fairly be excused under Section 1318 of the Corporations Law. Agreed. [1096] 84
Whether the plaintiffs failed to take reasonable care and if so, whether damages ought to be reduced by reason thereof. The Plaintiffs contend that the issue does not arise on the statutory and contractual counts. [1096] 85
As regards the claim against Ghose, whether he has made out a defence under Section 996(2)(b) or (c) of the Corporations Law. Agreed. [1096] 86 Whether Ghose, Peck, Beach, Deery and Morrissey have a defence to the Plaintiffs’ claims under section 1008A of the Corporations Law. Agreed. [1096]
87
In terms of section 1011 of the Corporations Law, if the Prospectus did contain Representations that were false whether Ghose, Beach, Deery and Morrissey are not liable to the Plaintiffs because any misleading matter or material omission was due to:
i. reasonable mistake;ii. reasonable reliance on information supplied by another person or persons; and/or
iii. the act or default of another person or accident or some other cause beyond their control notwithstanding them having taken reasonable precautions and exercised due diligence.
Agreed. [1096] 88
Whether by virtue of their membership of NCRH and the terms of the Memorandum of Association, the First, Third, Fourth, Fifth and Sixth Plaintiffs have waived any claim or right of action against any Director or Officer of NCRH. This issue is propounded by Ghose, Beach, Deery and Morrissey. The Plaintiffs contend that it does not arise. [1096] 89
Whether Ghose avoids liability under clause 5(2) of the Memorandum of Association of NCRH (Defence paragraph 78). This issue is propounded by Ghose. The Plaintiffs contend that it does not arise. [1096] d) Damages 90
Whether the plaintiffs have proved their alleged loss. Agreed. [1141] 91 Whether on-market acquisitions by the plaintiffs may be recoverable as part of the damages claim. Agreed. [1141] 92 Whether losses arising from the acquisition of shares in NCRH by the plaintiffs are recoverable as part of the damages claim. Agreed. [1141] 93 Whether the plaintiffs are entitled to any losses arising from the transactions after (i) the 23 December 1998 ASX announcement and (ii) the 24 February 1999 announcement. Agreed. [1142] 94 Whether the Court should mould any relief for the plaintiffs if they otherwise success against the defendants or any of them. Not agreed [1142] e) Limitations issues 95
Whether the claims introduced under the ASIC Act and the Fair Trading Act in the 5FAS, and whether the claims introduced in the 6FAS and the claim under the Trade Practices Act are time barred. Agreed. [1153] 96 Whether the court should “otherwise order” in relation to the amendments allowed pursuant to section 65(3) of the Civil Procedure Act 2005. Agreed. [1153] Plaintiffs’ claim against the 14th defendants (Phillips Fox) a)
Misleading and deceptive conduct 97 Did Peck engage in, or was he involved in, misleading and deceptive conduct in all the circumstances of the case by virtue, in particular, of the representations pleaded in paragraphs 104 to 109 of the 6FAS. The fourteenth defendants do not agree with the words “in particular” if they are sought to extend the representations beyond those pleaded in the 6FAS. The fourteenth defendants also do not agree with the words “in all the circumstances of the case”. The matters alleged to falsify the pleaded representations are limited to those pleaded in the 6FAS.
[1159] 98 Was Peck negligent in all the circumstances in not taking steps to ensure that the advice of Trowbridge as to the adequacy of provisioning for claims was obtained prior to the allotment of the Notes. [1159] 99
Did Peck assume the office of Director of NCRH on behalf of, with the authority of, or otherwise in the ordinary course of the business of, Phillips Fox. The fourteenth defendants say that the words “on behalf of” are not pleaded in the 6FAS, and do not appear in s.10 of the Partnership Act 1892 (NSW). The plaintiffs plead “capacity” in paragraph 175 of the 6FAS. [1159] 100
Is the knowledge or conduct of Peck from February 1998 until 12 January 1999, and the knowledge of Mutton from September 1998 to 12 January 1999, to be attributed to Phillips Fox. Phillips F Phillips Fox say (but the plaintiffs disagree) that this involves the following sub-issues: ( (a) was the knowledge of Mutton (for whose conduct Phillips Fox accepts it will be responsible under section 10) limited to the matters as set out in his 2 witness statements (assuming they are led in evidence) with effect that the only matters known to Mutton or Phillips Fox beyond those expressly set out in the prospectus were: (i) the company being in apparent breach of the net worth covenant with Dresdner, but with a waiver likely to take effect and the facility to be repaid, and the company in any event having adequate resources to repay the facility without the note issue; (ii) the extent of collateralisation of the Chase facility, noting that this was a financial matter outside the expertise or responsibility of the firm which had adequately been considered by others; (iii) in relation to GCR, that the company had entered a smoothing cover providing a benefit of $5 million which had been investigated by Peck and Aroney and was to be reserved for, and was not considered by management to be material; (iv) that the company had not established a reserve for the disclosed $12.5 million Vesta claim, bearing in mind that the natural implication of the Vesta disclosure in the prospectus was already to this effect; (as the 14th defendants say) or have the plaintiffs established any additional relevant knowledge in Mutton? (b) did Peck sit on the DDC in dual capacities with effect that his knowledge acquired on the DDC was the knowledge of the firm (as the plaintiffs allege), or did he sit on the DDC solely in his capacity as director such that his knowledge was not firm knowledge (as the 14th defendants say)? (c) even if (which Phillips Fox denies) Peck sat on the DDC in the dual capacity of partner and director is there an irrebuttable presumption that Peck’s knowledge acquired on the DDC constitutes the knowledge of the firm (as the plaintiffs allege) or can the Court make the contrary conclusion where there was no relevant disclosure by Peck to the partners (as Phillips Fox say)? (d) if yes to the plaintiffs’ contentions in (b) and (c), was the additional knowledge which Peck, along with the other members of the DDC, acquired at the 12 January meeting, in particular of the possibility of establishing a $10 - $20 million special margin (in circumstances where management represented that the proposal did not reflect any deterioration) such that the opinion expressed by Peck in the supplementary DDC report that day could not reasonably have been formed? [1167] 101 Was the conduct of Phillips Fox, by Peck and/or Mutton, and in particular, the making of the Phillips Fox 5 November 1998 DDC Representations, the Phillips Fox Verification Representations, the Legal Issues Representations, the Phillips Fox Opinion Representations, the Phillips Fox 18 November 1998 DDC Representations, the Phillips Fox 12 January 1999 Representations, the Phillips Fox Supplementary Prospectus Representations, the DDC Representation and the DDC Supplementary Representation, misleading and deceptive conduct in all the circumstances of the case. The fourteenth defendants do not agree with the words “and in particular” if they are sought to extend the representations beyond those pleaded in the 6FAS. The fourteenth defendants also do not agree with the words “in all the circumstances of the case”. The matters alleged to render the pleaded opinion representations made by Phillips Fox misleading or deceptive are limited to those pleaded in the 6FAS.
Phillips Fox says (but the Plaintiffs disagree) that once findings are made as to the extent of knowledge of Phillips Fox, the dispute will be whether in the light of that additional knowledge a solicitor acting reasonably could have come to the opinion that no further disclosure was required in the prospectus (as the 14th defendants say) or whether the contrary is true (as the plaintiffs say).
[1168] 102 Did the misleading and deceptive conduct Phillips Fox (by Peck and Mutton) in breach of Sections 995 and 1005 of the Corporations Law and the other statutory provisions pleaded, or the negligence of Peck, cause the plaintiffs’ loss and whether reliance by Mr Saville on behalf of the plaintiffs directly on Peck or Mutton, is an element of causation in each of the causes of action pleaded. Phillips F Phillips Fox say (but the Plaintiffs disagree) that this raises the following sub-issues: (a) what is the minimum additional information or qualification which Mutton or Phillips Fox needed to provide in order to avoid the representations being misleading? (b) have the plaintiffs proved that, if Phillips Fox had provided that additional information or qualification, any different behaviour would have occurred at the level of the DDC or the board, bearing in mind the plaintiffs have closed their case (apart from the adduction of expert evidence not relevant to this issue) and have not led any evidence from members of the DDC or the board (the 14th defendants say the critical reliance which needs to be proved by the plaintiffs is that of the board)? (c) even if the plaintiffs satisfy (a) and (b), have the plaintiffs proved a sufficient causal connection between the representations of Phillips Fox and any primary representations which the plaintiffs allege were made to them by the company or other defendants and have the plaintiffs proved the primary representations were misleading? (d) have the plaintiffs established the allegation in para 178AJ, or read together with para 272, that their decision to enter the relevant transactions was done in reliance on the primary representations? (The 14th defendants say that, as a matter of law (Digitech in the Court of Appeal 62 IPR 184 at [156]) and on the form of the plaintiffs’ pleading, the plaintiffs’ reliance is an essential element to be proved in the so-called indirect causation case. This is because on the plaintiffs’ case, they suffered loss because Mr Saville was allegedly induced by misleading representations to cause the securities in NCRH to be acquired. The alleged inducement of Saville and the plaintiffs and the act of acquiring the rights, notes and shares in the company form an essential link in the chain of causation.) (e) after the cross-examination of Saville, is his evidence and credibility sufficiently destroyed that the Court cannot place any reliance on it? (f) does the evidence of Saville (including his willingness to invest after the tombstone announcement and email) demonstrate that in any event the matters which he says in paragraph 120 of his statement would or might have made a difference to him had he known of them, were matters which he already knew of or were of the type that would not have troubled him given his attitude and behaviour in the transactions?
1416 If NCRA’s causation case, as I have outlined it in para [1413] above, were made good, there would have been no capital raising. There would have been no prospectus or draft prospectus. There would have been no solicitation of Mr Saville. There would have been no solicitation of the plaintiffs through Mr Saville. There would have been no opportunity for Mr Saville, or through him the plaintiffs, to decide whether to support the capital raising if the net assets of NCRH were USD5.675 million less than the stated amount.
1417 Based on their analysis of the cross-claim (including as they characterise the case on causation), Guy Carpenter submit that “[t]he difference of US$5.675 million would have made no difference to Saville, in the sense that, by itself, it would not have deterred him from investing in the capital raising.” (para 171).
1418 For the reasons that I have given, I do not think that this issue is raised on the pleadings, because NCRA’s case, on this aspect, is that there would have been no capital raising but for the various matters to which I have referred. If, contrary to my analysis, the issue were raised, I would accept the submission. In substance, I think, the matters to which Guy Carpenter refer in paras 171-179 of their written submissions lead to the conclusions which they contend. I would add to those matters, Mr Saville’s attitude in the face of the warning from RBoS: see paras [576] to [579] above.
Case based on the failure to go into runoff
1419 This arises only under the 36th cross-claim. The relevant duties are those alleged in paras 21 and (save for Mr Aroney) 22A of the 36th cross-claim:
…“21. Each of the Cross Defendants owed NCRA a duty to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances.
- 22A In conducting the business of NCRA, each of Messrs Daya, Ghose, Peck and Williams owed NCRA an equitable duty of care to act with the care and skill that an ordinary prudent man of business would exercise in conducting that business as it were his own.”
1420 Paragraph 23 alleges that by 26 August 1998, the cross-defendants knew or should have known that the only option was to place NCRA into runoff. Paragraph 24 alleges that by no later than 2 September 1998, Mr Aroney should have recommended this to the directors of NCRA, and those directors should have resolved to put the company into runoff. Paragraphs 25 and 25A allege breach of the relevant duties because the cross-defendants did not act as, according to para 24, they were in the circumstances obliged to act.
1421 The duty of care alleged in para 21 is based on s 232(4) of the Corporations Law. NCRA submits further that para 21 also reflects the common law duty of care owed by directors: relying on cases such as Daniels & Ors (Formerly Practising as Deloitte Haskins & Sells) v AWA Limited (1995) 37 NSWLR 438. The equitable duty of care alleged in para 22A is based on the proposition that legal and equitable duties may co-exist, so that directors may be under an equitable duty of care that reflects their common law duty: relying on Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 and Permanent Building Society (in liq) v Wheeler & Ors (1994) 14 ACSR 109.
1422 NCRA appears to accept that the standard of care imposed by the statutory duty of care reflects the common law; and as I have indicated, that the equitable duty of care imposes no higher standard than does the common law.
1423 The written submissions for Mr Peck accepted that he owed duties of the kind alleged, although they raised issues as to the correct characterisation of the duties (for example, whether they were of a fiduciary nature). On the view to which I have come, it is not necessary to consider those complications.
1424 The written submissions for Mr Williams admitted that he owed the statutory and common law duties of care alleged, but denied that he owed any equitable duty of care. Again, on the view to which I have come, it is not necessary to deal with this dispute.
1425 The written submissions for Mr Aroney accepted that he was an “officer” of NCRA, but only on the basis that he was a company secretary (para 20 of his written submissions on the 36th cross-claim). They did not concede that he was an executive officer, asserting that “he did not have sufficient management responsibilities”. They relied on the decision of Gummow J in Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766. However, the written submissions appeared to accept that, as an officer (even if only because he was a secretary of NCRA), he owed duties of the general nature alleged.
The relevant principles
1426 On the current state of the authorities, the directors of a company owe a duty of care to that company: a duty to take reasonable care in the performance of their office (see Clarke and Sheller JJA in Daniels at 505); or a duty to exercise “a reasonable degree of care and diligence in accordance with the requisite standard” (see Ipp J, with whom Malcolm CJ and Rowland J agreed, in Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450).
1427 In Vrisakis, Ipp J said at 450 that the test to be applied in deciding whether a director has exercised the requisite degree of care and diligence is that stated by Lord Hatherley LC in Overende Gurney Co v Gibb (1872) LR 5 HL 480 at 486-487: whether the directors “were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as [was] entered into?”.
1428 The duty of care has been described as an equitable duty of care, owed by persons who are fiduciaries (as Clarke and Sheller JJA pointed out in Daniels at 505). However, Ipp J said in Wheeler at 239, it is not thereby “to be equated with or termed a “fiduciary” duty”.
1429 The duty is also one owed at common law but there is no sensible distinction between the common law and equitable duties of care. Nor is there any sensible distinction between those duties and the statutory duty of care imposed (in this case) by s 232(4) of the Corporations Law.
1430 There is no uniform applicable standard determining the ambit of the duty of care or the standard of care required. Those matters depend upon the particular circumstances of the case. See Ipp J in Vrisakas at 451. However, in determining whether in a particular case a director has exhibited the relevant standard of care and diligence, it is legitimate to inquire what an ordinary person with the knowledge and experience of that director might have been expected to have done in the circumstances if acting on his own behalf. See Ipp J in Vrisakas at 450, citing Pidgeon J (with whom Franklyn and Walsh JJ agreed) in Australian Securities Commission v Gallagher (1993) 10 ACSR 43 at 53. That test may require supplementation in the case of an executive director, who will be under an obligation (arising from an implied term in the contract of employment, but equally, I think, an incident of a common law or equitable duty of care) to have and to use the skills of a reasonably competent person in his or her category of appointment. See Santow J in Re HIH Insurance Ltd (in provisional liquidation)and Ors; Australian Securities and Investment Commission v Adler (2002) 41 ACSR 72 at 166-167 [372(5)]. (His Honour refers to Wheeler “at [14] ACSR 287-8” as authority for that proposition; I have been unable to verify the citation.)
1431 There is some ambiguity in the way that Pidgeon J framed the test. His Honour’s test enquires “what an ordinary person… might be expected to have done if he was acting on his own behalf”. Three points need to be made:
(1) The fact that one “ordinary person” might have decided in the relevant circumstances not to undertake a particular transaction does not mean that another “ordinary person” in the same circumstances might have decided to undertake it, and (without more) it cannot be said that one or other of those persons acted unreasonably simply because he or she decided “no” or “yes”.
(3) The court should be careful not to impose its own business judgment when assessing whether, in all the circumstances, it was reasonable for directors to enter into a particular transaction or to act (or refrain from acting) in a particular way.(2) Nor can it be said that a decision was unreasonable, in circumstances where one ordinary person taking into account relevant circumstances, might reasonably have decided one way but another ordinary person, taking into account the same circumstances, might reasonably have decided the other way.
1432 The first two considerations suggest to me that the negative test propounded by Lord Hatherley remains fundamental. Alternatively, they suggest that the “ordinary person” test propounded by Pidgeon J should be directed not to what that person “might be expected to have done in the circumstances if he was acting on his own behalf” but to whether that person “might be expected to have done as the directors did if he was acting on his own behalf.”
1433 In determining whether a director has exercised the necessary degree of care and skill, it is necessary to bear in mind that risk and benefit are often two sides of the same coin, or two possible consequences of the same course of conduct, and that risk and return are an integral part of industry and commerce. Ipp J made this point plain in Vrisakis at 449-450 where his Honour said:
- “Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.”
1434 In similar vein, Clarke and Sheller JJA said in Daniels at 494 that “the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested”.
1435 Their Honours expanded on this at 501: “the courts have recognised that directors must be allowed to make business judgements and business decisions in a spirit of enterprise untroubled by the concerns of a conservative investment trustee. Any entrepreneur will rely upon a variety of talents in deciding whether to invest in a business venture. These may include legitimate, but ephemeral, political insights, a feel for future economic trends, trust in the capacity of other human beings. Great risks may be taken in the hope of commensurate rewards. If such ventures fail, how is the undertaking of it [sic] to be judged against an allegation of negligence by the entrepreneur? In our opinion the concept of negligence which depends ultimately “upon a general public sentiment of moral wrong doing for which the offender must pay” (Donoghue v Stevenson [1932] AC 562 at 580) can adapt to measure appropriately in the given case whether the acts or omissions of an entrepreneur are negligent.”
1436 Thus, I think, the question for decision can be put in two ways:
(2) Could an ordinary person with that degree of prudence and with the knowledge and experience of the directors have entered into the transaction in the circumstances if acting on her or his own behalf?
(1) Could someone with an ordinary degree of prudence have entered into such a transaction if acting on her or his own behalf; alternatively
1437 In answering that question (whichever way it is posed) it is necessary to recognise that in some circumstances it may be appropriate for directors to “display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested”, and that the mere foreseeability of harm does not of itself dictate that the question must be answered adversely to the directors in this case. It is necessary to balance risk and reward, or, more accurately, to be satisfied that the directors, acting reasonably and in the best interests of NCRA and employing their individual knowledge and skills and taking account of relevant circumstances, did so.
Analysis
1438 Since I have concluded that there is no difference in principle between the statutory and equitable duties of care, it is convenient to consider together all NCRA’s “negligence” claims against all the remaining cross-defendants to the 36th cross-claim, notwithstanding that one of them (Mr Aroney) is sued only pursuant to his alleged statutory duty of care.
“Cross-road” - the available choices
1439 NCRA’s written submissions on this topic referred to a “cross-road” at which NCRA had arrived by 18 August 1998. They rely upon an e-mail that Mr Williams sent to Messrs Peck and Eastham on that day, attaching a draft paper in which he stated that NCRH “faces a single all-encompassing hurdle towards future operation – Insufficient Capital. All other issues are a function of capital.”
1440 That draft paper formed the basis of the half yearly report and recommended action plan that was considered by the board on 2 September 1998. Section 6 of that report identified four options for NCRH:
(1) runoff, which, it was said, would preserve most if not all of its book value;
(2) continue operations, with the risk of further losses;
(4) raise further capital from a credible investor, who would exercise some degree of control over the affairs of the company.(3) outright sale, which would realise only a heavily discounted value of the assets; or
1441 In relation to the fourth option, the report recognised that “ … without an injection of additional capital, the company would have insufficient capital to continue in its current form. The security committee of most major brokers would deem the company unacceptable security and resist using it for new or renewed business. A continuance of operations could risk further loss. Some emerging market clients would continue to do business with the company and premium levels would undoubtedly fall below $100 million in 1999.”
1442 The draft report had recorded, in addition, that “without additional capital, management could not recommend a continuance of under-writing operations, particularly with regard to the current soft market environment. Doing so would risk further loss. As distressed security, it will be hard to retain the existing under-writers and impossible to attract quality clients.”
1443 NCRA submitted that the only realistic options were runoff (perhaps with sale of the business as an alternative) or raising further capital. It submitted that senior management accepted this and that the board agreed. I think that those submissions should be accepted.
Hindsight analysis
1444 However, the submissions do not show why, as at 2 September 1998:
(2) A reasonable director in the position of Mr Daya, Mr Peck or Mr Williams, with the knowledge that they then possessed, and acting in the best interests of NCRA, should have concluded that runoff was the only option, and that to raise further capital and continue in business was entirely inappropriate.
(1) A reasonable chief financial officer in Mr Aroney’s position, with the knowledge that he then possessed, and acting in the best interests of NCRA, should have concluded that runoff was the only option, and that to raise further capital and continue in business was entirely inappropriate; or
1445 In truth, I think, this aspect of NCRA’s 36th cross-claim is informed by hindsight. Hindsight, no doubt, is an extremely powerful analytical tool; but it was not a tool available to any of Messrs Daya, Peck, Williams or Aroney at the time.
1446 If it be accepted that a reasonable chief financial officer could have recommended, or a reasonable director could have decided, that in the best interests of NCRA runoff was not the only option, and that continuing in business with the benefits of a capital raising was something proper to be undertaken in the relevant prevailing circumstances, then this aspect of the cross-claim must fail.
GCR transaction the key
1447 It is apparent from NCRA’s written submissions that the key to its case in negligence lies in the GCR transaction. Paragraphs 155-157 make the point:
- “155. NCRA contends that, for reasons expanded later in these submissions, in the circumstances that prevailed at the time, but for the conclusion of the GCR transaction, the directors and officers of NCRA would have been forced to place NCRA into run-off.
- 156. If this contention is accepted, then the directors and officers of NCRA could not but have failed to exercise their duty of care to NCRA by failing to place it into run-off.
- 157. It has not been suggested, nor could it be in the circumstances of this case, that, in the absence of further capital, it was reasonable for the directors and officers of NCRA to continue trading on the basis that it previously had. NCRA contends that had accurate financial results been reported, NCRA would not have succeeded in raising further capital.”
1448 There are ambiguities in the phrase “accurate financial results” in para 157. Does it refer to the financial results of NCRA (as, contextually, it seems to do) or of NCRH? If it refers to the financial results of NCRH, does it refer to the results according to Australian GAAP or the results according to US GAAP?
1449 If the phrase refers to the financial results of NCRA, then the submission must fail. There is no evidence that anyone regarded the results of NCRA as of themselves relevant to the capital raising. The only error that has been alleged to flow from the recording of the GCR transaction is that said to arise on consolidation in the accounts of NCRH.
1450 If the phrase refers to the results of NCRH according to Australian GAAP, then again the submission must fail. That is because, as I have found, the way in which the results were accounted for (including the offsetting increase in the prudential margin) meant that the results were not materially misleading. Thus, the way in which the GCR transaction was recorded (again, including the offsetting increase in the prudential margin) of itself had no impact on the capital raising unless one considers the Dresdner issue.
1451 If the phrase refers to the results of NCRH according to US GAAP, then the submission depends, in substance, on the matters that have been considered already in relation to Dresdner, and must fail for that reason. I think the reality is that even if “correct” results had been reported according to US GAAP (ie, a net worth of USD119.6 million as at 30 June 1998), Dresdner would not have intervened in such a way as to prevent the capital raising. On the contrary, I think, it is reasonably plain that Dresdner saw the capital raising as something that would have permitted it to “exit” the relationship on good terms and without encountering ”legal and regulatory pitfalls”.
The position as at 2 September 1998
1452 As at 2 September 1998, the circumstances known to Messrs Daya, Peck, Williams and Aroney included the following:
(1) NCRH (and, presumably, its operating subsidiaries) had recorded losses for the accounting period ended 31 December 1997 and the half year period ended 30 June 1998.
(2) In substance, those losses flowed from risks underwritten during the 1997 underwriting years, and, in particular, from Mr de Chelard’s approach to underwriting.
(3) The “tail” for risks underwritten by Mr de Chelard and his team in 1997 would persist through 1998 and into 1999.
(4) Mr de Chelard and his team had also been responsible for writing the 1998 book of business; at least some of that book of business included renewal of the (known to be unsatisfactory) business written in 1997.
(5) There had been a total restructure of management, with Mr Daya – a “turnaround artist” – coming in as managing director, Mr Aroney coming in as chief financial officer of NCRA, Mr de Chelard and his team being stripped of underwriting responsibility, a new underwriting team being brought in, and an inhouse actuary (Mr Baker) being appointed.
(6) Losses on the 1997 book of business had depleted the capital of NCRH by about USD25 million up to and including 30 June 1998.
(7) Although further losses might be expected on the 1997 book of business, the 1998 book of business was thought to be performing well.
(8) Nonetheless, if NCRH were to survive, it was essential that its capital be boosted and that the flow of losses be stemmed.
(10) In substance, Trowbridge’s review of NCRH’s claims provisions as at 30 June 1998 suggested that the provisions held were adequate, even if there were no significant prudential margin (see the analysis in paras [1399] and [1400] above).(9) Thus, although there might be tolerance for a further loss as at 31 December 1998, both investors and brokers (through whom NCRH, or more accurately, its operating subsidiaries obtained much of their business) would be intolerant of losses thereafter.
1453 Those matters, and other relevant considerations, were laid out for all to understand and consider in the half yearly report and recommended action plan. As I have noted in para [1440] above, that document set out the options with which the board of NCRH was confronted. It may be accepted that, insofar as the board of NCRA was concerned, exactly the same options required consideration, and the circumstances laid out in the half yearly report and recommended action plan were relevant to that board’s deliberations.
1454 The half yearly report and recommended action plan went further than simply setting out options. It contained management’s analysis of each. The analysis was flawed, because of the way that it dealt with the GCR transaction – specifically, leg 1. That flaw had come into existence because of the way that Mr Daya rewrote the draft prepared by Mr Williams; but there is no reason to think that the directors other than Mr Williams were aware of this.
1455 There can be no doubt that the “safe” option was runoff. However, as the authorities to which I have referred make plain, directors of a company are not always bound to choose the safe option, when considering what course a company should take. They are entitled to consider whether the company should undertake some less safe option, but with the possibility of greater reward. Applying those generalities to the present case, I see no reason why the directors of NCRA were required to choose the safe option (as it then seemed) of runoff. They were entitled to consider whether, among other things, the original business model remained viable (on the assumption that NCRH’s capital could be augmented): in other words, whether there was a profitable future for NCRH with an augmented capital base. Equally, I think it was open to an officer of NCRA in Mr Aroney’s position to put forward for consideration all available options. So long as they were propounded with appropriate supporting information and analysis, I do not think that an officer in Mr Aroney’s position was bound to recommend the safe option of runoff.
1456 I referred in para [1445] above to what I perceived to be NCRA’s hindsight analysis in this aspect of its cross-claim. Hindsight shows that it was the severe, rapid and unexpected claims deterioration in December 1998 and beyond that caused the massive losses that, ultimately, led to the collapse of NCRH. There is no basis for thinking that any reasonable officer or director, considering the matter as at 2 September 1998, should have foreseen those losses. I note that Trowbridge’s assessment of the claims reserves as at 30 June 1998 suggested in essence that they were adequate, although not conservative: not including any prudential margin. Further, and with the aid of hindsight, it could be noted also that Trowbridge’s prospectus report likewise in substance confirmed the adequacy of the claims reserves as at 30 June 1998, although again on the basis that the reserves did not include a prudential margin of any significance.
1457 Continuing with hindsight analysis for a moment: the Macquarie parties supported the capital raising, in the sense that one or other of them agreed to act as an adviser, underwriter or broker. Notwithstanding the plaintiffs’ submissions based on the attractiveness of the fees on offer, it is difficult to see why a large and reputable banking/financial organisation (and no one suggest that Macquarie did not possess those qualities) would have participated in a capital raising venture if it thought that the venture had no prospects of success.
1458 Further, as at early September 1998, and after the release of the half yearly results, a number of brokers expressed views on NCRH that could not be said to have reflected the proposition that runoff was the only option. Thus:
(1) ABN-AMRO referred to the losses, stating that they were caused by the “claims arising from the 1997 book of business” and noting that “[t]he investment proposition for [NCRH] relies upon the dramatic change in management and underwriting ability of the company since it wrote the 1997 book.” The report continued:
- “New Management, new experienced underwriters and, above all, a focus on profit rather than the top-line mean NCC has a strong platform for profit growth from 1999 onwards. This fact, and the extreme discount to book value (38%) applied by the market enable us to remain positive on the stock.
- However, the lack of a successful track record means the company must deliver profits before it will be rerated. This will probably not occur until well into 1999. This timeframe and the sceptical attitude of the market makes investment in NCC a more speculative proposition.
- Accordingly, we maintain NCC as a buy, but definitely a SPECULATIVE BUY. Investors looking for a safer bet should buy ReAC – a proven performer – as a better entry into reinsurance.”
- “NCC” was the ASX code for NCRH.
(2) Deutsche Bank likewise referred to the half yearly results and attributed them to the 1997 book of business. It said that despite that “disappointing result, the outlook for the company is considerably brighter” and that the company “is now well positioned to write profitable business using its strengthened underwriting team, and more technical underwriting approach and appropriate operating systems.” It predicted that NCRH “should be able to embark on its maiden year of profits in FY99.” The report noted that the share price would be unlikely to rise “until management gets some runs on the board”, but identified three factors as likely to “drive” the share price:
“- Establishment of a profitable track record. Assuming there are no further surprises from FY97 business and that FY98 business continues to track well. NCC should be able to generate profits in FY99, resulting in a share price re-rating at least towards net asset value (currently A$2.59).
- An improvement in global reinsurance market conditions, with both NCC and RAC ($4.00) management indicating that there are early signs of rates bottoming in some classes.”- Global consolidation in the reinsurance industry, with NCC a possible participant given its low valuation and desire for additional capital.
(4) Merrill Lynch referred to the half yearly loss as disappointing. It stated that “short term uncertainty is likely to prevent any price recovery”, and thus maintained an investment recommendation of “neutral”. However, the report saw “positive developments” in the future, including the following:
(3) JB Were & Son were perhaps less optimistic, but stated that nonetheless that NCRH “[l]ong term has speculative potential to move towards our valuation of 186¢.” That firm’s analysis too suggested that the share price would not improve “until a positive profit history is achieved”, but noted the restructure and that there would be “a more disciplined approach to risk selection moving forward”.
We have had a Neutral intermediate term recommendation on NCC since initiating coverage mid last year and despite some positive developments, see no reason now to change this opinion despite the share price.”
“ On the positive front –
- NCC has expanded its underwriting team and replaced the original team with 6 new underwriters. The new team brings considerable experience in a range of risk classes and territories. Increasing diversity provides an increasing degree of comfort as to business written in the Jun 99 renewal season and beyond.
- The risk management and back office infrastructure is now broadly in place. This has been a reduction in net risk retention, a change in retrocession levels (more), actuarial modelling of risk to individually evaluate the profitability profile of each contract and the impact of that contract on the overall risk profile of the portfolio.
- NCC has also started auditing loss making clients.
- Significant changes to the management team through 1997 and into 1998 have been encouraging. This team has shown considerable restraint in not releasing any profit from business written in 1998 despite the slight profit recorded year to date.
- Finally, NCC remains inexpensive relative to its cash backing of $2.59 per share (46% discount). If nothing else changed, NCC would have to incur losses of more than $104m to even bring the current share price into line with NAV.
1459 MECM downgraded its short term recommendation from “out perform” to “under perform”, although it stated that its long term view was “market perform”. That report, written by Mr Jackson (perhaps with his colleague, Mr Steven Wheen), stated the following after referring to the half yearly result and its impact:
- “- Although the losses stem from business written during 1997 by underwriters no longer with the Group and despite having a new management and underwriting structure in place, the loss will further delay a turnaround in market sentiment towards NCC in what is currently a difficult reinsurance pricing environment.
- - Although most investors recognise the massive discount at which the stock is currently trading to its NTA backing ps, prospective investors will continue to heavily discount the stated NTA backing until the Group posts a profit.
- - In this regard, MEL expects NCR will report a small profit during 2H98, however, this will not be announced until early 1999.
- Recommendation
- - NCC remains extremely cheap at current levels trading at roughly 50% its estimated NTA backing of A$2.75.
- - Despite this fact, likely disappointment at the quantum of the 1H98 loss and the probability of a ‘wait and see’ attitude being adopted by prospective investors, is expected to see further underperformance. Additionally, the cancellation of the share buyback may contribute to some short term weakness, albeit with limited downside.
- - As a consequence of the above, MEL has downgraded its short term recommendation to underperform from outperform previously.”
1460 Those views were expressed by reference to, and within a few days of the release of, the half yearly report. Although each of them refers to the NTA, and to the discount (or “massive discount”) of the share price to that NTA – something that might be realised, or turned to advantage, in an orderly runoff – none of the brokers suggested that runoff was the only option, or that clients should buy shares in NCRH only so as to enjoy the likely benefits of runoff. On the contrary, the majority of brokers seemed to think that conditions would improve in 1999 with some going so far as to predict a ”maiden profit” during that year.
1461 I accept that Messrs Daya, Peck, Williams and Aroney were in possession of more information than the brokers. Nonetheless, the information that was relevant to their decision was in substance that which was encapsulated in the half yearly financial reports (on the basis that, as I have said many times, the overall result under Australian GAAP were not misstated because of the recording of leg 1).
1462 The reactions and recommendations of brokers in my view support the proposition that it was reasonably open to a director or officer, acting honestly and in what he believed to be the best interests of NCRA, to conclude in late August and early September 1998 that capital raising rather than runoff was an appropriate course.
Conclusion
1463 For those reasons, I conclude that NCRA’s case in negligence against Messrs Daya, Peck, Williams and Aroney must fail.
Conclusion on the 33rd and 36th cross-claims
1464 Each of those cross-claims should be dismissed. It follows that all cross-claims for contribution brought in respect of them by the cross-defendants to them must likewise be dismissed.
ORDERS
1465 I make the following orders:
(1) Order that the sixth further amended summons be dismissed against the first to eleventh, thirteenth and fourteenth defendants thereto.
(2) Order that the stay of orders 1 and 2 made on 29 June 2006 as between the plaintiffs and the twelfth defendant be lifted.
(3) Order that each cross-claim for contribution or indemnity in respect of a claim made by the plaintiffs in the sixth further amended summons be dismissed.
(4) Order that the third further amended 33rd cross-claim and the second further amended 36th cross-claim be dismissed against all cross-defendants thereto.
(5) Order that each cross-claim for contribution or indemnity in respect of a claim made by the cross-claimant in the third further amended 33rd cross-claim or the second further amended 36th cross-claim be dismissed.
(6) Reserve for further consideration the question of costs.
(7) Direct any party seeking an order or a special order for costs to notify (with a copy to my associate) the party or parties against whom such an order is sought within 28 days of the date on which these reasons are published; such notification to specify both the order or special order sought and in brief the reasons why it is sought.
(8) Reserve liberty to apply either in respect of costs or generally.
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18/04/2007 - Amended representation for 14th defendant on record sheet - Paragraph(s) N/a 03/07/2007 - - Paragraph(s) 03/07/2007 - Para [245]: last word should have been adequatepara [334]: incorrect quotationpara [1024]: Trade Practices Act should have been Fair Trading Actpara [1363] first reference to NCRH should have been to NCRA. - Paragraph(s) [245], [334], [1024] and [1363]
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