Lopez and Verge v Pawski
[2017] WASC 338
•23 NOVEMBER 2017
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: LOPEZ & VERGE -v- PAWSKI [2017] WASC 338
CORAM: MASTER SANDERSON
HEARD: 10 & 11 OCTOBER 2017
DELIVERED : 23 NOVEMBER 2017
FILE NO/S: COR 91 of 2017
BETWEEN: GEORGE AUBREY LOPEZ & EVAN ROBERT VERGE as Liquidators of WEALTHSURE PTY LTD (IN LIQ)
Plaintiffs
AND
ANDREW BARRY PAWSKI as Trustee for the PAWSKI FAMILY TRUST
STANELY JULIAN KAMINSKI
First DefendantsSENTRY GROUP PTY LTD
Second Defendant
Catchwords:
Corporations law - Application by liquidator for directions - Signing of deed by one of two directors - Whether 'indoor management rule' applies
Legislation:
Corporations Act 2001 (Cth)
Result:
Directions given
Category: B
Representation:
Counsel:
Plaintiffs: Mr A F Carles
First Defendants : Mr W C J Zappia
Second Defendant : Mr D F McAloon
Solicitors:
Plaintiffs: Carles Solicitors
First Defendants : HWL Ebsworth Lawyers
Second Defendant : Cottell & Co
Case(s) referred to in judgment(s):
Hely‑Hutchinson v Brayhead Ltd [1968] 1 QB 549
Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295
MASTER SANDERSON: This is the plaintiffs' application for directions under s 511 of the Corporations Act 2001 (Cth) in relation to two issues arising from a security agreement. The plaintiffs take a neutral view on the questions raised. The first defendants contend the deed was validly executed and created a security interest which was validly perfected by control. The second defendant maintains the opposite. The relevant background facts can be shortly stated.
Mr Darren Andrew Pawski was the sole director of WealthSure from 26 August 2009 until 2 September 2013. He was also the sole company secretary of WealthSure from 26 August 2009 until 2 September 2013. Mr Pawski is not the person named as first named first defendant to this action. Mr Andrew Barry Pawski who is named is a relation of Mr Darren Pawski. Nothing turns on that issue and I mention it for the sake of completeness. Mr Stanley Julian Kaminsky the other named first defendant was a director of WealthSure from 5 July 2001 until 26 August 2009. He was the sole company secretary from 10 December 2002 until 26 August 2009. After 26 August 2009 Mr Kaminsky was not an officer of WealthSure.
On 29 August 2013, Mr Darren Pawski entered into an enforceable undertaking with the Australian Securities and Investment Commission (ASIC). This enforceable undertaking (or EU as they are generally known) is of importance in the context of this application. The purpose and intent of the EU can be demonstrated by quoting a number of clauses in the document signed by the parties. Under the heading 'WealthSure' there appears the following:
2.2Since 15 January 2004, WealthSure has held an AFSL pursuant to Division 4 of Part 7.6 of the Corporations Act to provide financial Product Advice pursuant to section 766B of the Corporations Act and to deal in Financial Products pursuant to section 766C of the Corporations Act.
2.3Since 11 February 2011, WealthSure has also held an Australian Credit Licence pursuant to Division 3 of Part 2.2 of the NCCP Act to engage in Credit Activity.
The EU goes onto say that between December 2010 and June 2012 ASIC conducted surveillance checks of WealthSure's business. The deed then sets out what are referred to as 'ASIC's concerns'. Without quoting those concerns in full, a flavour of the matters raised can be seen by quoting cl 2.12:
2.12ASIC is concerned that WealthSure may not have adequately monitored and supervised its Representatives:
2.12.1in a consistent and appropriate manner, including failing to:
a.regularly and consistently review Representatives' Financial Product Advice;
b.conduct robust investigations into non‑compliant behaviour;
c.subject Representatives with a higher probability of compliance breaches, given their compliance history, associations or business model, to more regular random audits;
d.provide representative with robust documented policies and procedures, thereby facilitating breaches by Representatives when providing personal advice, general advice, and execution‑only transactions; and
e.provide appropriate assessment of possible breaches, consider remediation options for any breaches and whether those breaches should have been reported to ASIC.
2.12.2WealthSure's remediation practices have been inadequate, including:
a.Representative misconduct has not been dealt with in a consistent appropriate manner, due to a failure to have documented procedures for dealing with representative misconduct; and
b.failure to ensure clients are notified, or their position rectified, when inappropriate advice has been identified in audits.
The deed then contains an acknowledgement by WealthSure of ASIC's concerns. Clause 3 sets out the undertakings. A number of the undertakings relate to appointment of an external and independent 'Compliance Consultant'. Those undertakings are not presently relevant. What is relevant is the 'WealthSure Group Board Restructure'. The relevant clauses are as follows:
3.41Within 72 Hours of ASIC accepting this enforceable undertaking, Darren Andrew Pawski, as the most senior WealthSure executive, will voluntarily resign from his position as a Director and current CEO of WealthSure. WealthSure will appoint a senior, suitably qualified and experienced Financial Services (while it holds an AFSL) and Credit Activity (while it holds an Australian Credit Licence) MD, to assume day‑to‑day responsibility for the management of WealthSure.
3.42The MD appointed by WealthSure will have, at least, the formal qualifications as set out in ASIC Regulatory Guide RG 105, Table 1, page 14 (while it holds an AFSL) and Regulatory Guide 206, Table 1, page 10, heading 'Responsible managers' (whilst it holds an Australian Credit Licence).
3.43Companies in the WealthSure Group will not have sole‑director boards and will maintain a majority of independent non‑executive members on their boards.
A number of points can be made about this EU. First, it was the result of a lengthy investigation by ASIC - the investigation ran for 18 months. Second, when the concerns of ASIC were put to WealthSure and in particular Mr Pawski they were acknowledged. That is to say Mr Pawski effectively agreed with the concerns expressed by ASIC. Third, the EU was negotiated between Mr Pawski and ASIC. It was not some external framework imposed upon WealthSure and Mr Pawski without their consent. Mr Pawski can be taken to have clearly understood the undertakings he was giving.
For present purposes the important undertaking is the prohibition against one director companies. Clearly ASIC as a consequence of their investigations were concerned that Mr Pawski as the sole director was acting unilaterally uninhibited by the checks and balances which flow from a multi‑member board. ASIC's proposed solution to the problem was to ensure WealthSure had at least two directors. In other words, it had directors which were not only independent but needed to work together as any conventional responsible board works together. Any fair reading of the EU leads to that conclusion.
When Mr Pawski resigned, two independent directors were appointed. Mr David John Newman who had worked for WealthSure for some time became managing director. Mr Newman's appointment was in compliance with cl 3.41 of the EU. A second director Ms Kathryn Anne Humphries was also appointed as an independent director. Thus, there was two person board.
On 15 April 2015, WealthSure purportedly entered into a General Security and Loan Facility Agreement (Loan Facility Agreement) with the first defendants. It was signed by Mr Newman but it was not signed by Ms Humphries. The first question to be determined is whether in those circumstances the agreement is enforceable between the parties.
Mr Pawski says he understood that Mr Newman had authority to sign the Loan Facility Agreement. In an affidavit sworn 13 June 2017 Mr Pawski puts the position this way:
8.At all times, I understood and believed that Mr Newman was the managing director and CEO of Wealthsure, and was therefore authorised to execute documents on behalf of Wealthsure, including the Security Deed. I never came across anything that would suggest Mr Newman was not so authorised.
9.I had the authority of the first defendants to act on their behalf in relation to the Security Deed. Neither of the first defendants dealt with Mr Newman in relation to the Security Deed, and neither of them ever spoke with Mr Newman requesting him to sign the Security Deed.
10.In an email from Sam Cottell to Francois Carles dated 7 April 2017, which is attached to Mr Lopez's affidavit, Mr Cottell wrote:
'our understanding of the circumstances surrounding signing of the document means that there is no prospect of there being any implied or ostensible authority applying in this instance. Moreover, our understanding of the circumstances is that Pawski were expressly told by the director who signed [Mr Newman] that the document would still require the other director's signature. Yet having been told this, Pawski became frustrated and took the document away saying words to the effect of 'leave that to me, I am comfortable with your signature for now'. As far as we are aware, it was never actually presented to or signed by the other director even though Pawski had expressly been told that it would require the other director's signature.'
11.The meeting referred to by Mr Cottell never took place. I never met with Mr Newman to sign the Security Agreement. I never therefore 'took the document away' from Mr Newman. Mr Newman never informed me, expressly or otherwise, of any purported requirement that the Security Agreement be signed by the other director.
12.I never said words to the effect of 'leave that to me, I am comfortable with your signature for now', or any words to any similar effect.
Mr Newman swore an affidavit on 26 June 2017. He set out his position as follows:
20.At no time did Wealthsure's board of directors (consisting of me and Ms Humphries) resolve to approve Wealthsure's entry into, or performance of, the Security Agreement or that I had sole or unilateral authority to approve or execute the Security Agreement on behalf of Wealthsure. Nor did I have any sole authority under my employment arrangements (which arrangements were negotiated between me and Mr Pawski) or Wealthsure's constitution. Nor was anyone else at Wealthsure authorised to approve borrowings or the granting of any security interests.
21.There was no formal meeting for the signing of the Security Agreement. My correspondence with Mr Pawski regarding that document was via email and telephone. I noticed that the signature clause for Wealthsure contemplated that it would be signed by Wealthsure's 'sole director', yet at the time Wealthsure had two directors i.e. Ms Humphries and I. On one occasion prior to signing the Security Agreement but after I had received a copy from Mr Pawski via email, I commented to Mr Pawski words to the following effect:
'This agreement needs to be tidied up to provide for Kate to sign [a reference to Ms Humphries].'
22.For the reasons stated above, I do not agree with the last sentence of paragraph 11 of the Pawski Affidavit.
23.I do not agree with the contents of paragraph 12 of the Pawski Affidavit. In March and April and the first half of May 2015, Mr Pawski attended the offices of Sentry Group at 1/190 Stirling Street, Perth on a number of occasions in connection with operational issues arising in relation to Wealthsure's business including Sentry merger matters. He was neither a director nor an employee of Wealthsure at this time. On a day in early May 2015, when Mr Pawski was in attendance at Sentry Group's offices I handed Mr Pawski Wealthsure's corporate records folder plus a file containing copies of all of the signed Sentry Group/Wealthsure transaction agreements. Either separately or within the corporate records file was the original Security Agreement that I had signed. I said to Mr Pawski words to the following effect:
'I'm not sure about this agreement as it doesn't have Kate's signature.'
24.My reference to Kate was a reference to Ms Humphries. Mr Pawski responded with words to the following effect:
'She can go and get [expletive]. I'll check with Andrew. It should be fine with just yours.'
25.I understood Mr Pawski's reference to Andrew to be a reference to Mr Pawski's then lawyer (Andrew Houghton). I was aware at this time that Mr Pawski was unhappy with Ms Humphries. She had issued invoices to Wealthsure and Wealthsure Financial Services Pty Ltd for her services as non‑executive director and her role chairing the Audit and Risk Management and Investment Committees that had become the source of considerable angst for Mr Pawski.
This evidence from Mr Newman responds to particular paragraphs of Mr Pawksi's affidavit. However earlier in his affidavit Mr Newman set out what he saw as relevant background facts. In particular the following paragraphs of Mr Newman's affidavit are relevant:
11....
(a)'Mr Pawski is an Associate of the Pawski Family Trust, which owns two thirds of Wealthsure's and WFS' issued capital.' (paragraph 3.1.5);
(b)'In practical terms, Pawski has controlling interests in Wealthsure and WFS.' (paragraph 3.1.12);
(c)'ASIC has formed the view that Pawski ... failed to foster and maintain a proper commitment to, and culture of risk and compliance management within the Wealthsure Business ...' (paragraph 3.3.1.4) and;
(d)'Pawski undertakes not to exercise or attempt to exercise any influence in any manner whatsoever over any current or future shareholder or Senior Executive of the Wealthsure Group in respect of any aspect of the Wealthsure Business.' (paragraph 4.2).
12.I understood that, principally due to the requirements on the 2013 Wealthsure EU and 2013 Pawski EU:
(a)Pawski ceased to be a director of Wealthsure and was no longer engaged by Wealthsure on any other basis eg as an employee, committee member or representative;
(b)the governance and compliance culture of Wealthsure needed to be improved; and
(c)I became a director of Wealthsure and, from 13 November 2014, Ms Humphries was appointed as a second director of Wealthsure.
…
14.In the period following the appointment of Ms Humphries as a director of Wealthsure, she and I approved and executed all material documents on behalf of Wealthsure, including a large number of documents in connection with a merger transaction between Sentry Group and Wealthsure that entailed a subsidiary of Sentry Group (Sentry Group Advice Pty Ltd) acquiring Wealthsure Financial Services Pty Ltd. On each occasion, both Ms Humphries and I approved and signed those documents that Wealthsure was required to execute. The documents executed by both Ms Humphries and on behalf of Wealthsure included:
(a)a settlement deed referred to in an email from Rose Bollard to me dated 21 November 2014, a copy of which is attached to this affidavit as pages 42‑43 of 'DJN‑1';
(b)a withdrawal of caveat referred to in an email from Rachel Frost dated 23 January 2015, a copy of which is attached to this affidavit as pages 44‑51 of 'DJN‑1';
(c)a Merger Deed dated 6 February 2015, a copy of which is attached to this affidavit as pages 52‑100 of 'DJN‑1';
(d)a Share Transfer Deed dated 6 February 2015, a copy of which is attached to this affidavit as pages 101‑122 of 'DJN‑1';
(e)an Asset Transfer Deed dated 13 February 2015, a copy of which is attached to this affidavit as pages 123‑141 of 'DJN‑1';
(f)the Sentry Shareholders Deed dated 1 March 2015 that is attached to the Lopez Affidavit as 'GAL-13' (at pages 127‑168, the signing page of which is at pages 167‑168 and is signed by both Ms Humphries and I on behalf of Wealthsure and separately by Mr Pawski in his personal capacity);
(g)Enforceable Undertaking dated 22 April 2015, a copy of which is attached to this affidavit as pages 142‑157 of 'DJN‑1'; and
(h)Withdrawal of Enforceable Undertaking dated 12 May 2015, a copy of which is attached to this affidavit as pages 158‑160 of 'DJN‑1'.
15.I discussed with Mr Pawski the need to obtain Ms Humphries' signature on documents that were to be executed by Wealthsure. In an email sent to Mr Pawski on 7 January 2015, I told him that I had sent signing pages of the Merger Deed (referred to above) 'to Kate Humphries for her execution and return asap'. A copy of this email is attached to this affidavit as page 161 of 'DJN‑1'.
16.The 'Extension Agreement' referred to at paragraph 7(b)(i) and DAP‑1 of the Pawski Affidavit was an informal ancillary document which extended a date under the Merger Deed. As noted above, the Merger Deed had already been executed by both Ms Humphries and I on behalf of Wealthsure.
17.The 'email signature' referred to at paragraph 7(b)(ii) and DAP‑2 of the Pawski Affidavit is unrelated to my role at Wealthsure. Rather, that email shows my details as 'Executive Director, Head of Business Development, Sentry Group'.
18.The merger transaction described above occurred around the same time that a financing transaction was entered into by Sentry Group. In the context of the merger, the financier required some of the finance documents to be executed by Wealthsure. On each occasion, both Ms Humphries and I approved and signed those documents that Wealthsure was required to execute. The documents executed by both Ms Humphries and I on behalf of Wealthsure included a shareholders deed poll consent letter dated 9 February 2015, a copy of which is attached to this affidavit as pages 162‑167 of 'DJN‑1'. Mr Pawski and each of the First Defendants also signed this document.
Mr Pawski filed a supplementary affidavit sworn 13 July 2017. He deals in some detail with the date and conduct of his meetings with Mr Newman. The relevant paragraphs read as follows:
11.In paragraph 23 of his affidavit, Mr Newman says that at a meeting 'in early May 2015', he handed me Wealthsure's corporate records folder plus a file containing copies of all of the signed Sentry Group and Wealthsure transaction agreements.
12.That meeting took place in late May 2015, and in any event on a day after 8 May 2015. Mr Newman handed me the documents because he and Ms Humphries had resigned as directors of Wealthsure. Mr Newman and Ms Humphries ceased to be directors of Wealthsure on 8 May 2015, and the meeting took place after that date, in order for Mr Newman to hand over Wealthsure's corporate records to me following the appointment of a replacement director. The replacement director Albert di Sabatino, was appointed on 14 May 2015.
13.I have reviewed the file of documents Mr Newman handed to me. The documents in that file include:
(a)an email from Mr Newman to a Craig Turner of ASIC sent on 8 May 2015 at 5.16pm;
(b)a letter from Wealthsure to Mr Turner attached to that email, also dated 8 May 2015; and
(c)the ASIC form 484 lodged by Wealthsure on 14 May 2015 in respect of the appointment of Mr Sabatino as a director of Wealthsure.
…
15.At the meeting:
(a)Mr Newman never said words to the effect of 'I'm not sure about this agreement as it doesn't have Kate's signature'; and
(b)I never said words to the effect of 'She can go and get [expletive]. I'll check with Andrew. It should be fine with just yours'.
16.In fact, as I said in my earlier affidavit, Mr Newman never suggested to me that the Security Deed was not properly executed. At all times I believed the Security Deed was properly executed and enforceable.
Mr Newman filed a further affidavit responding to the supplementary affidavit of Mr Pawski. That affidavit was sworn 20 July 2017. Relevantly par 5 of that affidavit reads as follows:
5.Regarding paragraphs 11 and 12 of the Supplementary Pawski Affidavit, I do not agree that I provided Wealthsure's corporate records folder to Mr Pawski in 'late May 2015'. I provided the folder to Mr Pawski on Friday, 8 May 2015 (being the day on which I resigned as director of Wealthsure). This was prior to the appointment of Mr di Sabatino as a director of Wealthsure. As stated at paragraph 26 of my affidavit sworn on 26 June 2017, the folder was provided to Mr Pawski (rather than to Mr di Sabatino) pending the appointment of replacement directors to Wealthsure and so that Mr Pawski could hold it on behalf of Wealthsure and in turn pass the folder on to the replacement director or directors once appointed.
Both Mr Pawski and Mr Newman were cross‑examined on their affidavits. Neither resiled from their stated positions. There were no inconsistencies which emerged in cross‑examination which cast doubt on the evidence of either person. Accordingly, it is difficult to determine which version of the facts is correct.
In the end resolution of this question has not been necessary to determine the outcome of this action. However, if forced to accept one or other version I would accept the version offered by Mr Newman. It is more internally consistent. True it is from time to time Mr Newman did sign documents unilaterally in his capacity as managing director, but Mr Newman was well aware of the EU. He was also aware that entering into the Loan Facility Agreement was a significant undertaking for WealthSure. The fact he says he told Mr Pawski that Ms Humphries would have to sign the agreement is consistent with what he says about the EU. Counsel for the plaintiffs did make the point that it seemed odd Mr Newman would sign the Loan Facility Agreement and not have it signed by Ms Humphries before handing it to Mr Pawski. I accept that is a rather odd state of affairs. But even taking that into account I am satisfied that it is Mr Newman's version of the facts which should be accepted.
The constitution of WealthSure is in a conventional form. For present purposes a number of clauses of the constitution are relevant:
67....
(2)Without limiting the generality of Sub‑Article (1), the Directors may exercise all of the powers of the Company to borrow money, to charge any property or business of the Company or all of any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the Company or of any further person.
80....
(1)The Directors may from time to time appoint one or more of their number to the office of Managing Director for such period and on such terms as they think fit, and, subject to the terms of any agreement entered into in a particular case, may revoke any such appointment.
82....
(1)The directors may, upon such terms and conditions and with such restrictions as they think fit, confer upon a Managing Director any of the powers exercisable by them.
(2)Any powers so conferred may be concurrent with, or be to the exclusion of, the powers of the Directors.
(3)The Directors may at any time withdraw or vary any of the powers so conferred on a Managing Director.
All parties accepted that in this case the board had not conferred on Mr Newman the power to unilaterally enter into the Loan Facility Agreement. It was the position of the first defendants that Mr Newman had the authority to enter into this agreement under what is generally known as the indoor management rule. Part 2B.1 of the Corporations Act deals with when a person dealing with a company may assume a document is validly executed. Section 126(1) is in the following form:
A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal.
The first defendants argument here is that Mr Newman had the implied authority of the company to enter into the deed. In Dal Pont GE, Law of Agency (3rd ed) the learned author deals with the implied authority of a managing director. He makes reference to the decision of Hely‑Hutchinson v Brayhead Ltd [1968] 1 QB 549 where Lord Denning MR said that 'when a board of directors appoint one of their number to be managing director ... [t]hey thereby impliedly authorise him to do all such things as fall within the usual scope of that office'. The learned author then continues:
The 'things that fall within the usual scope of that office' are a question of fact to be determined on a case‑by‑case basis taking into consideration factors including the size of the company, the nature of its commercial undertakings and the role and responsibilities of the managing director. Generally speaking, however, he managing director of a company has authority to commit the company to contracts entered into within the ordinary course of the company's business. The position differs in the case of contracts that fall outside the company's normal trading activity. Ultimately, in each case a court will require sufficient evidence from which to infer what, in that case, the usual scope of the office of managing director was (183).
It is important to note under cl 1 of the Loan Facility Agreement the security for loans advanced from time to time was all the 'present and after acquired property' of WealthSure. In other words, the agreement was of great significance to WealthSure - they were pledging all the assets of the company in return for the loans. This was a point quite rightly emphasised by counsel for the second defendants. In Hightime Investments Pty Ltd v Adamus Resources Ltd [2012] WASC 295 Edelman J found that an alleged contract affected by an executive director of the defendant company was not within the director's implied authority because it was 'far from the normal trading activity for the defendant' for two reasons:
(1)it involved a strategic decision of critical importance to the business of the defendant; and
(2)the alleged dealing would have committed the defendant to a payment that could potentially have compromised a large part, possibly even the majority, of its then market capitalisation.
Section 129(2) is in the following terms:
A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:
(a)has been duly appointed; and
(b)has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
The reference to the duties 'customarily exercised' by a director is curious. If the reference is intended to refer to 'customary authority' it is referring to one form of implied authority. On one view then s 129(2) is more limited in scope than s 126. Be that as it may it is not customary for a managing director to pledge all of the company's assets to a lender without having the approval of the board. It is not open to the first defendants to rely on s 129(2) of the Act. Even if it were possible for reliance to be placed on that section the first defendants would be precluded from doing so by the provisions of s 128(4). That section reads as follows:
A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.
In this case I am satisfied that Mr Pawski who was the agent of the first defendants actually knew it was not open to Mr Newman alone to sign the Loan Facility Agreement. He knew that because of the terms of the EU. I have dealt with the scope of that undertaking above and I will not repeat what I have said. But to suggest that Mr Newman alone was in a position to so comprehensibly bind the company as was anticipated by the Loan Facility Agreement could not have been a belief genuinely held by Mr Pawski. It was patently at odds with the EU.
Two further arguments were advanced by the first defendants. First it was said WealthSure in accepting funds which were advanced by the first defendants ratified the agreement. There is no evidence of ratification by WealthSure. While they accepted loan funds, there is nothing to suggest that the board of WealthSure adopted the Loan Facility Agreement. If, upon becoming aware the Loan Facility Agreement was not properly executed the board of WealthSure had taken steps to accept funds from the first defendants and affectively to bind themselves to the Loan Facility Agreement, then the board could truly be said to have ratified the Loan Facility Agreement and would be bound by its terms. That is not the case here.
The second argument was an estoppel argument. Essentially the first defendants contended WealthSure was a estopped by representation from asserting that it was not bound. But the first defendants were at all times on notice via their agent Mr Pawski on the need to obtain Ms Humphries signature on the April agreement for it to be enforceable. There is no unconscionable conduct on the part of WealthSure. The fact is the first defendants did not ensure the Loan Facility Agreement was signed by both directors.
The two questions put by the liquidator were first, was the security deed validly executed? The answer to that question is no. The second question is whether the security created by the security deed was validly perfected by control. It is unnecessary to answer that question.
I will hear the parties as to the form of orders and as to costs.
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