Orrong Strategies Pty Ltd v Village Roadshow Ltd

[2007] VSC 1

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 2066 of 2003

F5593

ORRONG STRATEGIES PTY LTD (ACN 060 554 985)	Plaintiff
v
VILLAGE ROADSHOW LIMITED (ACN 010 672 054)	Defendant
___
VILLAGE ROADSHOW LIMITED (ACN 010 672 054)	Plaintiff by Counterclaim
v
ORRONG STRATEGIES PTY LTD (ACN 060 554 985)	First Defendant by Counterclaim
- and -
PETER ZIEGLER	Second Defendant by Counterclaim
- and -
REMUT PTY LTD (ACN 070 127 990)	Third Defendant by Counterclaim

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JUDGE:	HABERSBERGER J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	30-31 MARCH;  4-7, 11-14, 18-20, 26-28 APRIL;  2-5, 9-12, 16-19, 23-27, 30-31 MAY;  1-2, 6-9, 14-17, 20-23, 27-30 JUNE;  4-5, 7-8, 11-14 JULY;  22-26, 29-31 AUGUST;  1-2 SEPTEMBER 2005
DATE OF JUDGMENT:	25 JANUARY 2007
CASE MAY BE CITED AS:	ORRONG STRATEGIES PTY LTD v VILLAGE ROADSHOW LIMITED
MEDIUM NEUTRAL CITATION:	[2007] VSC 1	2nd Revision:  4 May 2007

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Contract – Identity of contracting parties – Whether individual or his private company was the contracting party – Construction of termination bonus provision – Whether expression "termination of this contract for any reason" included termination by effluxion of time – Meaning of "three preceding financial years" – Computation of time – Construction of performance bonus provisions – Meaning of "non/limited resource financing" – Meaning of "The Village Roadshow Group" – Meaning of "7.5% ownership interest" – Rectification – Calculation of claim to a share of profits.

Trade Practices - Misleading and deceptive conduct – Representations by officer of corporation to fellow officers about terms of, and likely financial results of, proposed transaction – No loss and damage established – No reliance – Trade Practices Act 1974 (Cth), ss.52, 87 – Fair Trading Act 1985, ss.11, 41 – Fair Trading Act 1999, ss.9, 158.

Corporations – Applicable legislation – Transitional provisions – Whether agreement to pay, or payment of, termination bonus in breach of the retirement from office provisions of corporations legislation – Board or managerial office – In connection with retirement – Possible exceptions – Whether agreement to pay, or payment of, performance bonuses and profit shares in breach of the related party financial benefit provisions of corporations legislation – Onus of proof possible exceptions – At arm's length – Reasonable terms – The consequences of a contravention – Validity and enforceability of the agreement – Ex turpi causa non oritur actio – Exculpatory provisions – Directors' duties – [1990] Corporations Law, ss.60, 79, 103, 109E, 109F, 232, 232A, 237, 243A, 243C, 243D, 243F, 243G, 243H, 243N, 243ZE, 1317HD, 1317JA, 1318, 1324 – [2000] Corporations Law, ss.103, 180, 181, 182, 183, 191, 195, 200A, 200B, 200D, 200E, 200F, 200G, 200J, 207, 208, 209, 210, 228, 229, 1317E, 1317S, 1318, 1324, 1470, - Corporations Act 2001 (Cth), ss.1370, 1400, 1401.

Legal Practitioners – Prohibition on engaging in legal practice without holding a practising certificate – Whether consultant to company engaged in legal practice – Taxation advice – Whether given as solicitor or as accountant – Briefing counsel – Drafting documents – Relevance of claim for legal professional privilege – Whether there could be recovery of amounts in respect of anything done during the course of a contravention – whether there must be repayment of amounts received in respect of anything done during the course of a contravention – Legal Practice Act 1996, s.314 – Income Tax Assessment Act 1936 (Cth), s.251L.

Evidence – Standard of proof – Contravention of civil penalty provisions of Corporations Law – Civil proceeding – Expert evidence – Obligations of expert witness.

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Dreyfus QC with Mr IG Waller	Nathan Kuperholz
For the Defendant	Mr JL Sher QC with Mr CM Scerri QC, Mr ND Hopkins, and Ms K Anderson	Minter Ellison

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

The Parties and Their Witnesses..................................................................................................... 3

Orrong, Mr Zielger and Remut................................................................................................... 3

The Village Roadshow Group..................................................................................................... 4

The Witnesses................................................................................................................................ 5

Standard of Proof............................................................................................................................... 8

The Factual Background................................................................................................................. 11

The 1993 Agreement................................................................................................................... 11

The May 1993 Letters.................................................................................................................. 14

Service under the 1993 Agreement........................................................................................... 17

The 1995 Agreement................................................................................................................... 18

Project Ballarat............................................................................................................................. 28

Board and Executive Approval of Project Ballarat................................................................ 33

The 1997 Agreement................................................................................................................... 44

Project Bendigo............................................................................................................................ 54

The 1998 Negotiations................................................................................................................ 62

The 1999 Negotiations................................................................................................................ 69

Proposals for the Sale of VRP.................................................................................................... 73

The Alleged Anti-Semitic Remark............................................................................................ 76

The 2000 Agreement................................................................................................................... 77

Shareholder Querying of Executive Remuneration............................................................... 86

The Roadshow Distributors Facility......................................................................................... 91

The 2001 Agreement................................................................................................................... 92

The Breakdown in the Relationship......................................................................................... 95

Summary of Payments to Orrong and Remut........................................................................ 97

Employ.doc........................................................................................................................................ 99

The Contracting Parties................................................................................................................ 107

The Termination Bonus................................................................................................................ 116

The Meaning of "Three Preceding Financial Years"............................................................. 128

What Constituted a Performance Bonus?.............................................................................. 134

The Meaning of "Non/Limited Recourse Financing"............................................................. 135

Rectification.................................................................................................................................... 148

The Equity Interests...................................................................................................................... 151

The 5.25% Interest..................................................................................................................... 152

The 2.25% Interest..................................................................................................................... 162

The Declarations Sought by Orrong....................................................................................... 163

The Profit Share Claims................................................................................................................ 164

The Berman Profit Share.......................................................................................................... 166

The VRL Corporate Allocation................................................................................................ 168

The Internal Rate of the Interest Charged by VRL............................................................... 172

Incorrectly Calculated Interest................................................................................................ 177

Summary.................................................................................................................................... 177

Full and Final Settlement......................................................................................................... 178

Conclusion.................................................................................................................................. 180

The Roadshow Distributors Group Facility Performance Bonus Claim............................ 180

The Meaning of "The Village Roadshow Group"................................................................. 184

Mr Ziegler's Efforts................................................................................................................... 187

"Non/Limited Recourse" Finance.......................................................................................... 195

New Finance.............................................................................................................................. 201

Not Fully Drawn Down........................................................................................................... 201

Conclusion.................................................................................................................................. 202

Other Performance Bonus Claims.............................................................................................. 203

Misleading Conduct and Negligence......................................................................................... 204

The Corporations Legislation...................................................................................................... 219

The Applicable Legislation...................................................................................................... 220

The Purpose of the Relevant Statutory Provisions............................................................... 222

The Termination Bonus and Retirement from Office Provisions...................................... 224

Board or Managerial Office..................................................................................................... 230

In Connection With Retirement.............................................................................................. 233

Possible Exceptions................................................................................................................... 236

The Position Under the Corporations Law 1995-1999............................................................ 237

The Related Party Financial Benefit Provisions.................................................................... 238

The Provisions Before 13 March 2000.................................................................................... 241

The Provisions After 13 March 2000...................................................................................... 245

Possible Exceptions................................................................................................................... 246

Onus of Proof............................................................................................................................. 247

"At Arm’s Length" and "Reasonable"..................................................................................... 248

The Evidence of Mr Costello................................................................................................... 261

The Consequences of a Contravention.................................................................................. 269

Exculpatory Provisions............................................................................................................ 274

Payments After 15 July 2001.................................................................................................... 278

Conclusion.................................................................................................................................. 279

Directors' Duties........................................................................................................................ 279

The Legal Practice Act1996.......................................................................................................... 283

Standard of Proof...................................................................................................................... 287

Engage in Legal Practice.......................................................................................................... 288

Taxation Advice........................................................................................................................ 298

Briefing Counsel........................................................................................................................ 303

Other Examples of Legal Services.......................................................................................... 307

The Claim for Legal Professional Privilege........................................................................... 308

Exhibit 119.................................................................................................................................. 314

Section 314 and Orrong's Claims and VRL's Counterclaims.............................................. 322

Alternative Cash Claim................................................................................................................. 326

The Monetary Claims in VRL's Counterclaim......................................................................... 330

The Corporations Legislation.................................................................................................. 331

Unjust Enrichment.................................................................................................................... 336

The Advance Payment............................................................................................................. 337

The Valuation of the Termination Bonus................................................................................. 343

Conclusion....................................................................................................................................... 354

HIS HONOUR:

Introduction

1. These reasons for judgment involve a detailed consideration of a number of contractual entitlements claimed by the plaintiff, Orrong Strategies Pty Ltd ("Orrong"), against the defendant, Village Roadshow Limited ("VRL") pursuant to an agreement made in November 1995 (or, as pleaded by VRL, pursuant to an agreement made in May 1993 as varied by the agreement made in November 1995) whereby Orrong agreed to provide certain consultancy services to VRL for a five year period from 1 July 1996 to 30 June 2001, and pursuant to further agreements, or variations of the agreement made in November 1995, respectively made in September 1997 and June 2000.  Orrong is a company owned by the second defendant to VRL's counterclaim, Mr Peter Ziegler, and his wife.  VRL is a public company listed on the Australian Stock Exchange.

1. When this proceeding commenced on 23 September 2003, Orrong, in its statement of claim, sought payment by VRL of an amount in excess of $148 million.  In addition, Orrong sought declarations that it was entitled "in perpetuity" to "a 7.5% share of the net profits" of Village Roadshow Pictures ("VRP"), a division of VRL, and "a 7.5% share in the assets of VRP."  The amount of $148.682 million consisted of a termination bonus of $139.047 million, a performance bonus of $3.75 million for raising a $75 million "non/limited recourse" finance facility for the Roadshow Distributors Group, performance bonuses totalling $530,900 for "taxes saved" in the financial years ended 30 June 2001 and 30 June 2002 and the 7.5% share of VRP's profit in each of the financial years ended 30 June 2000 to 30 June 2003 which, after allowing for a payment by VRL of $283,000 in respect of the 2000 financial year, was said to total $5.354 million.

1. At the time the hearing commenced on 30 March 2005, Orrong amended its claim to increase the amount sought for the termination bonus to over $208 million.  This, together with earlier amendments brought the total amount claimed in the third further amended statement of claim to nearly $220 million.  This figure consisted of a termination bonus of $208.427 million, the Roadshow Distributors Group performance bonus of $3.724 million, the "taxes saved" performance bonuses totalling $530,900 and the unpaid balance of the 7.5% profit share for the financial years ended 30 June 2000 to 30 June 2004 said to total $7.089 million.  In addition, Orrong had included an alternative claim that if, by reason of the defences raised by VRL, the claims relating to the 7.5% share of VRP failed then it was entitled to performance bonuses totalling $65.567 million for "non/limited recourse" finance raising which in turn resulted in a termination bonus of $44.792 million being payable, a total of $110.359 million.

1. By its defence and counterclaim, delivered on 23 December 2003, VRL raised numerous defences including defences under the relevant corporations legislation from time to time and the Legal Practice Act1996 and sought repayment from one or more of Orrong and the other two defendants to the counterclaim, Mr Ziegler and Remut Pty Ltd ("Remut"), of the sum of approximately $25.68 million, which it alleged it had paid to one or other of the three defendants to the counterclaim over the six years between 1 July 1996 and 30 June 2002.

1. The stakes were, therefore, very high and accordingly both sides devoted considerable resources to this litigation.  VRL pleaded a raft of defences to each of Orrong’s claims, which raised a multitude of both factual and legal questions.  The hearing lasted for 71 sitting days with virtually every possible issue explored in detail.

1. Although in final submissions both parties reduced the sums claimed by them, the amounts in dispute were still significant.  The final principal monetary figure sought by Orrong was approximately $85.09 million, consisting of a termination bonus of $76.814 million, the Roadshow Distributors Group performance bonus of $3.724 million, the "taxes saved" performance bonuses totalling $530,900 and the outstanding amount of the 7.5% profit share for the financial years ended 30 June 2000 to 30 June 2002 and the financial year ended 30 June 2004 said to total $4.024 million.  The reduction was largely due to the lower amount sought for the termination bonus - $76.814 million compared with the original claim of $139.047 million and the amended claim of $208.427 million.  By now the alternative claim had been reduced to $59.719 million for the performance bonuses and $42.598 million for the termination bonus, a total of $102.317 million.

1. Depending on which, if any, of VRL's many defences and counterclaims might be found to be successful and depending on the manner of calculating the various claims for loss and damage or statutory entitlements to repayment, the maximum final figure sought by VRL in its counterclaim came to approximately $18.28 million.

The Parties and Their Witnesses

Orrong, Mr Zielger and Remut

1. As previously stated, Orrong was Mr Ziegler's private family company.  He purchased the recently incorporated shelf company, then known as Commercial and Taxation Services Pty Ltd, in May or June 1993.  Shortly thereafter the company changed its name to Peter Ziegler & Co Pty Ltd.  On 27 November 2002 it changed its name to Orrong Strategies Pty Ltd.  Mr Ziegler and his wife, Andrea Ziegler, became and have remained the only directors and shareholders of Orrong.

1. Mr Ziegler obtained honours degrees in Commerce and Law from the University of Queensland in 1982 and 1983, respectively, and a Masters degree in Financial Management from the same University in 1983.  His studies focused on accounting, corporate finance and law.  From 1984 to 1988 Mr Ziegler was a lecturer and then senior lecturer in the Department of Commerce at the University of Queensland.  He lectured in commercial law, taxation law and corporate finance to both undergraduate and post-graduate students.

1. In December 1988, Mr Ziegler joined Ernst & Whinney in Melbourne.  He became a partner in the tax division of that firm’s successor, Ernst & Young, in 1992.  He had been a Certified Practising Accountant since 1986.  He became a Fellow of the Taxation Institute of Australia and an Affiliate of the Securities Institute of Australia in 1990 and a Chartered Accountant in 1992. 

1. Mr Ziegler was admitted to legal practice in Queensland in 1984 and in Victoria on 3 September 1990.  Since that date he has held a Victorian corporate practising certificate. 

1. VRL was already a major client of the tax division of Ernst & Whinney when Mr Ziegler joined that firm.  He said that through his work on VRL’s tax affairs he "came to know most of the senior executives of VRL well and to understand intimately VRL’s business operations and imperatives."  He worked extremely hard on VRL’s tax matters whilst he was with Ernst & Young and its predecessor.  In 1993 he left Ernst & Whinney and commenced working full time for VRL.  The circumstances in which that arrangement came about will be examined in the next part.

1. Remut is the trustee of the Remuneration Unit Trust which in 1995 became the vehicle for the payment by VRL of personalised employee share plan subscriptions.  Mr Ziegler and certain other VRL executives had entered into such arrangements with VRL.  Pursuant to the arrangement between Orrong and VRL, the payment for some of the services provided by Orrong was made to Remut as trustee for the Remuneration Unit Trust.  Mr Ziegler agreed that this had "beneficial tax consequences."

The Village Roadshow Group

1. The history of the Village Roadshow Group started in 1954 when Mr Roc Kirby became the proprietor of a drive-in cinema in Croydon, an outer suburb of Melbourne.  Mr Roc Kirby’s two sons, John and Robert, are both executive directors of the public company, VRL, and they have alternated as Chairman and Deputy Chairman of the Board of Directors for a number of years.  The managing director, Mr Graham Burke, has been with the Village Roadshow Group since the late 1950s.  (As Mr Robert Kirby played a greater role in these events and was called as a witness, any reference hereafter to "Mr Kirby" means Mr Robert Kirby.  Mr John Kirby, who was not called as a witness, is always referred to hereafter as "Mr John Kirby".) 

1. VRL listed on the Australian Stock Exchange in 1988.  It appeared to be common ground that at all material times the Kirby family and Mr Burke, through their ownership of Village Roadshow Corporation Limited ("VRC"), controlled VRL.  VRC owned around 60% of VRL’s ordinary shares.  The Village Roadshow Group has five main divisions – a cinema or exhibition division; a film distribution division;  a film production division;  a theme park division;  and a radio division.  It operates in 13 countries through numerous subsidiary companies, partnerships, joint ventures and trusts.

1. The film production division is VRP.  It operated as though it were a separate business, with its own Board of Directors and management accounts.  Since VRL's Annual Report for the financial year ended 30 June 1998, VRP's results have been reported separately in the Segment Reporting section.  VRP was made up by a large number of companies, partnerships, trusts and other entities, not all of which were wholly owned by VRL.

1. Mr Robert Kirby, Mr John Kirby and Mr Burke effectively acted as the joint Chief Executive Officers of VRL.  Mr Burke said that he had the primary executive responsibility for the film production division or VRP.

1. Mr Peter Foo joined the VRL Group in the finance area in 1978.  He was appointed Group General Manager in 1992, an alternate director of VRL in 1995 and the Finance Director of VRL in 1998.  Between 1991 and 2000 he was also a Company Secretary of VRL.

The Witnesses

1. Not surprisingly Mr Ziegler was the principal witness called by Orrong and many of its claims depended virtually entirely on his evidence being accepted.

1. At first blush, Mr Ziegler appeared to be a reliable witness with an impressive recall of events and conversations.  His initial witness statement dated 11 March 2005 was 153 pages and 829 paragraphs in length.  However, closer examination revealed that this first impression was not necessarily correct.  As will be seen, Mr Ziegler added important pieces of evidence in the witness box which had not been mentioned in his lengthy witness statement served only five or six weeks before.  Further, at times, his oral evidence contradicted that witness statement.  Finally, it turned out that his memory was not that good as he was unable to recall details of conversations with Orrong's expert valuer, Mr Paul Lom, only days before he gave evidence.  This was a significant contrast to his purported ability to remember in great detail conversations occurring up to ten or more years before.  Thus, Mr Ziegler's memory was not as good as represented or he was deliberately pretending inability to recall the detail of his discussions with Mr Lom.

1. In its closing written submissions VRL mounted a most forceful attack on Mr Ziegler's credibility.  For example, it was submitted that:

"Ziegler's evidence in the witness box cannot be considered in isolation. It is just a small part of a much bigger picture. That bigger picture is Ziegler's ambition to be wealthy. VRL submits that Ziegler's conduct while at VRL and during this proceeding demonstrate that he is an individual whose driving motivation is the accumulation of significant quantities of money. In the single minded pursuit of this ambition he has demonstrated a willingness to cross normal moral lines, including deceiving people who trusted him, manipulating his work colleagues, setting out to avoid the requirements of the Corporations Law and being dishonest with the ATO. For Ziegler, telling untruths in the witness box is just another necessary part of the fulfilment of his ambitions.

Ziegler spent much of his time at VRL in the pursuit of personal gain.  His ambition outstripped his market value, so from the very outset he was careful to document his entitlements in a way that allowed him 'flexibility' for adapting to future circumstances. When circumstances arose that Ziegler could exploit for personal gain, he took advantage of the situation.  When VRL resisted, he became aggressive and demanding."

1. The tone of the submissions by VRL is illustrative, in my opinion, of the depth of ill-feeling manifested between the parties during the hearing.  Clearly Mr Ziegler believed that his work had brought great benefit to VRL and he was greatly aggrieved that Orrong had not received what he perceived to be its just rewards.  On the other hand, those executive directors of VRL who gave evidence were obviously upset at what they saw to be the unjustified claims by Orrong, when it had been very generously remunerated for the work done by Mr Ziegler, and at what they perceived to be manipulative attempts by Mr Ziegler to embarrass VRL and its directors in the public arena through the litigation.

1. I do not accept that Mr Ziegler has been as devious, manipulative or far sighted as VRL submitted.  Nevertheless, as will be seen, on many occasions his evidence conflicted with that of the principal factual witnesses called by VRL – Mr Kirby, Mr Burke and Mr Foo.  Whilst criticisms can be made of aspects of these witnesses' evidence, I have concluded that, with respect to quite a number of issues, some critical, others less so, I should accept the evidence of Messrs Kirby, Burke and Foo in preference to that of Mr Ziegler.

1. Apart from Mr Ziegler, Orrong called only two witnesses.  One was Mr Lom, Orrong's expert valuer, who gave evidence about the value of Orrong's claimed termination bonus.  The remaining witness was Mr Darryn Hugo, a former employee of Roadshow Distributors Pty Ltd, who gave evidence about Orrong's claim for a performance bonus in respect of a Roadshow Distributors Group facility of $75 million arranged in June 2001.  The reliability of each of those witnesses will be considered when I deal with the respective topics on which they gave evidence.

1. Apart from Messrs Kirby, Burke and Foo, VRL called factual evidence from another nine witnesses.  They were Mr William Conn, a non-executive director of VRL and former investment banker with Potter Warburg Limited and McIntosh Securities Limited;  Mr Brian Wilson, an investment banker formerly and relevantly with Salomon Smith Barney Australia Limited;  Mr Anton Le Rutte, who at the relevant time was an Executive Director in Australia of the Canadian Imperial Bank of Commerce;  Mr Peter Buzzard, a Chartered Accountant and a partner in the firm of Ernst & Young, the auditors of VRL;  Ms Julie Raffe, the Chief Financial Officer of VRL and a member of its Executive Committee;  Mr Philip Leggo, the Group Company Secretary of VRL;  Mr Shaun Driscoll, the co-Company Secretary of VRL;  Mr Leigh Butterworth, the senior business analyst for the production division of VRL;  and Mr Bryce Wolfe, the finance director of the production division of VRL;  Mr Richard Mereine, a partner in the firm of Clayton Utz, Mr Ziegler's former solicitors;  and Mr Dane McLeod, a former employee solicitor with Clayton Utz.  It also called evidence from five expert witnesses.  They were Mr Cullimore Gower, a Chartered Accountant and director of GCA Gower & Co Pty Ltd;  Mr Gregory Meredith, a Chartered Accountant and partner in the firm of Ferrier Hodgson;  Mr Christopher Costello, the Chairman and Managing Director of Remuneration Planning Corporation Pty Ltd and then of RPC Group Pty Ltd;  Mr Roy Salter, the Principal of the Salter Group, LLC, an American financial and strategic advisory firm to the entertainment and media industry;  and Mr Richard Williams, an Associate Director of Pricewaterhouse Coopers' Computer Investigations and Forensic Services group.  The reliability of each of these witnesses will be considered when I deal with the respective topics on which they gave evidence.

1. Orrong submitted that VRL had failed to call, without explanation, evidence from a number of relevant witnesses.  They included Mr John Kirby, who at some relevant times was Chairman of VRL and Mr Greg Basser, a partner with Herbert Geer & Rundle, a firm of solicitors acting for VRL, and who later joined VRL as its senior legal officer.  Orrong submitted that the failure to call these witnesses or explain their absence was an additional basis for rejecting the attack on Mr Ziegler's credibility.[1]  Where I have considered it relevant, I have taken into account this submission when dealing with the respective topics on which these witnesses might have given evidence.

   [1]Jones v Dunkel (1959) 101 CLR 298.

Standard of Proof

1. Before embarking on any findings of fact it is necessary that I say something about the standard of proof applicable in this proceeding.  As with a multitude of other issues, the parties had conflicting positions even on this question.

1. Counsel for Orrong submitted that, given the serious nature of the many contraventions of the corporations legislation and of the Legal Practice Act1996 and other misconduct alleged against Orrong and/or Mr Ziegler, the question of whether there should be any adverse findings against Orrong and/or Mr Ziegler in respect of such allegations were serious matters which required proof by VRL at least to the higher level of satisfaction required by Briginshaw v Briginshaw[2].  Reliance was frequently placed by Orrong on the following statement by Dixon J (as his Honour then was) in that case:

"Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal.  But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved.  The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal.  In such matters 'reasonable satisfaction' should not be produced by inexact proofs, indefinite testimony, or indirect inferences."[3]  (Emphasis added)

[2](1938) 60 CLR 336

[3](1938) 60 CLR 336 at 361-362

1. On the other hand, counsel for VRL submitted that there were only two standards of proof, the criminal and the civil, and that as this proceeding was undoubtedly a civil dispute the appropriate standard of proof was on the balance of probabilities.  VRL relied on what was said by Mason CJ, Brennan, Deane and Gaudron JJ in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd[4]:

"The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities.  That remains so even where the matter to be proved involves criminal conduct or fraud.  On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove.  Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary 'where so serious a matter as fraud is to be found'.  Statements to that effect should not, however, be understood as directed to the standard of proof.  Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.  As Dixon J. commented in Briginshaw v Briginshaw:

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

There are, however, circumstances in which generalisations about the need for clear and cogent evidence to prove matters of the gravity of fraud or crime are, even when understood as not directed to the standard of proof, likely to be unhelpful and even misleading.  In our view, it was so in the present case."  (Citations omitted)

[4](1992) 67 ALJR 170 at 170-171

1. Part of Orrong's argument relied on the fact that some of the provisions of the corporations legislation which were said to have been contravened by Orrong and/or Mr Ziegler involved civil penalty provisions.  These were described in Orrong's submissions as "quasi-criminal" in nature.  Whether or not that is an appropriate description does not matter because the situation in this case is that there are no claims by a regulatory authority for the recovery of a pecuniary penalty or for disqualification orders, and even in those cases where such orders have been sought, it has been held that the standard of proof was the civil standard on the balance of probabilities, although the seriousness of the allegations and the consequences thereof in terms of the orders sought were matters that "should be taken into account in deciding whether there has been proof on the balance of probabilities.[5]

   [5]Adler v ASIC (2003) 179 FLR 1 at [146] per Giles JA. See also Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd (2003) 216 CLR 161 at [135]-[136] per Hayne J, with whom Gleeson CJ and McHugh J agreed; Whitlam v ASIC (2003) 57 NSWLR 559 at [117] per Hodgson, Ipp and Tobias JJA; ASIC v Plymin (2003) 175 FLR 124 at [363]-[367] per Mandie J; on appeal Elliott v ASIC (2004) 10 VR 369 at [161] per Warren CJ, Charles JA and O'Bryan AJA.

1. As I have said, this proceeding was not one brought by a regulatory authority.  It is simply an ordinary civil proceeding in which VRL seeks in its counterclaim declarations that corporations law provisions have been contravened, and orders for damages and compensation.  Therefore, insofar as VRL's case against Orrong and Mr Ziegler alleged breaches of the corporations legislation and other instances of misconduct, it is, in my opinion, a proceeding in which the civil standard of proof, on the balance of probabilities, is applicable.  However, both common sense and authority such as Briginshaw, as explained by Neat Holdings, dictate that findings of serious misconduct should not be made lightly.

1. As the argument about the standard of proof in respect of alleged breaches of the Legal Practice Act1996 had its own special issues, I will deal with it separately when I come to consider that topic.

The Factual Background

1. In order to understand the many legal issues discussed in this judgment, it is necessary to set out in some detail the factual background to this litigation.

The 1993 Agreement

1. Mr Ziegler said in his witness statement that in March 1993 Mr Kirby asked him at a lunch whether he would be interested in joining VRL in some capacity.  Mr Ziegler expressed interest.  He then had several conversations with Mr Foo.  Mr Ziegler said that Mr Foo suggested that he should resign from Ernst & Young and provide taxation advice to VRL through a consultancy company.  Mr Foo mentioned a $300,000 per annum retainer plus certain performance bonuses which would provide explicit incentives to achieve what VRL wanted.  Mr Ziegler gave evidence that Mr Foo said that the provision of consulting services to VRL through an incorporated entity would limit liability, help VRL capitalise the expenditure incurred and provide flexibility in the way in which the remuneration arrangements could be entered into.  Mr Foo disputed much of the detail of this evidence.

1. What is clear is that following the discussions between them, Mr Foo wrote to Mr Ziegler a letter dated 4 May 1993 which relevantly read as follows:

"This confirms our discussions today with respect to your consultancy agreement with Village Roadshow Limited.  Effective from 1^st July, 1993, your new consultancy company will be paid a retainer fee of $300,000 per annum for an initial period of three years.  In this $300,000 package you are expected to provide your own vehicle and superannuation cover, etc.  Village Roadshow will, however, reimburse you for your reasonable entertaining expenses, travelling and car running costs such as petrol and car parking.  In addition, consideration for any share options will be given as if you were an employee of Village Roadshow Limited.

In addition to this fixed retainer, we agree to pay a fee of 5% of tax savings instigated by you in terms of sales tax, stamp duty/refunds and income tax for our group.  Peter, as you are aware the determination of these savings can be somewhat subjective, however, I undertake to negotiate in good faith to determine a fair and reasonable outcome in this respect."

1. Mr Ziegler responded by a letter dated either 12 or 13 May 1993.  I consider below the dispute about which letter was sent and conclude that it was the letter dated 12 May 1993.  Because of the importance of this exchange of correspondence between the parties, I set out below virtually the whole of the letter dated 12 May 1993 from Mr Ziegler to Mr Foo:

"RE     TAXATION CONSULTANCY AGREEMENT WITH VILLAGE ROADSHOW LIMITED ("VRL")

I refer to our recent discussions, and your letter of 4 May 1993.  As requested, by this letter I confirm my acceptance of the proposed arrangements to commence on 1 July 1993.

In order to obviate the need for a formal contract to be executed, and to avoid any later concerns, this letter more fully outlines my understanding of the arrangements, and addresses some operational issues.  (Obviously, should a formal contract be required, I can draw one up for you.)  Please come back to me if any of the following points are not in keeping with what you envisage, or cause any concerns.

Consultancy Fee Package

$300,000 package per annum (able to be taken by cash, ‘Menzies’ arrangement, motor vehicle, superannuation, etc.) by way of retainer to my new consultancy company for an initial three year period, capable of extension for a further two years.

This $300,000 per annum retainer to be payable in monthly instalments, and adjusted annually for inflation over the previous 12 months period.

Four weeks holiday per annum plus declared public holidays.

Reimbursement of Other Outgoings

Reimbursement of all out of pocket expenses reasonably and properly incurred in the course of the business of the Village Roadshow Group, including travelling costs and entertainment expenses.

Reimbursement of motor vehicle running costs (including insurance, registration, maintenance, petrol, car parking, etc.)

Eligibility for Share Options

Consideration given to the issue of share options as if an employee of VRL of similar standing.

Performance Bonus

(a)5% of tax refunds (income tax, sales tax, payroll tax, stamp duty, etc.) obtained for the Village Roadshow Group.

(b)5% of 'non-recourse' financing raised by the Village Roadshow Group as a direct result of my efforts (and, of course, exclusive of the present Village Roadshow film finance raising.)

(c)5% of tax savings made for the Village Roadshow Group in terms of income tax, sales tax, payroll tax, stamp duty, etc. with negotiation in good faith to determine a fair and reasonable outcome given the somewhat subjective nature of these savings.

Elements (a) and (b) to be paid as received, with (c) to be determined and paid annually after the preparation of the Village Roadshow Group financial statements.

Other Resources Required

It is expected that approx. $20,000 per annum will be required to be expended by VRL to provide the necessary taxation library resources.

… office, secretarial support … and a personal computer running Microsoft Word, to be provided.

Annual professional subscriptions, and attendance at conferences and educational courses as reasonably required.

…

Peter, I am confident that the present quality of taxation advice rendered to the Village Roadshow Group can be maintained, if not enhanced, under our new arrangements.

I regard this move as a major career opportunity to join an exciting organisation that is pre-eminent in its chosen fields.  I really do look forward to joining the Village team on a long term basis, and contributing to its long term growth and success."

1. The reference to a " 'Menzies' arrangement" was to the term in one of two agreements (an Employment Agreement and a Profit Share Agreement) between a number of VRL and Warner Bros subsidiaries and Mr John Menzies, the chief executive officer of VRL's theme park businesses on the Gold Coast.  A term of the Profit Share Agreement provided for payment of "Employee Profit Shares" by way of share subscription by the VRL entities in an entity controlled by Mr Menzies and for payment of an "Employee Termination Profit Share" upon termination.  Mr Ziegler said that this was one of the matters which Mr Foo and he had discussed.  Mr Ziegler knew about the arrangement because he had advised on certain income tax aspects associated with them in mid 1992.

1. Mr Ziegler said that shortly after 13 May 1993, Mr Foo told him that the letter was fine and that they were agreed.  I refer to this agreement hereafter as "the 1993 Agreement."  Mr Ziegler then purchased the company Orrong as his corporate vehicle to perform the 1993 Agreement.

The May 1993 Letters

1. As previously mentioned, there was a dispute about whether Mr Ziegler had replied to Mr Foo's letter by a letter dated 12 May 1993, which had been discovered by both Orrong and VRL, or one dated 13 May 1993, which had been discovered only by VRL.  The differences in the wording of the two letters were very minor.  This otherwise unimportant dispute deserves consideration only because of the impact it has on the credibility of Mr Ziegler and Mr Foo.

1. Orrong did not refer to the 1993 Agreement in any of its numerous amended statements of claim.  It simply pleaded an agreement made in November 1995 ("the 1995 Agreement").  VRL in its defence and counterclaim pleaded the 1993 Agreement and the 1995 Agreement as a variation or extension of the earlier Agreement.  Originally VRL pleaded that the 1993 Agreement had been made "on or about 13 May 1993."  In its reply and defence to counterclaim Orrong asserted that the 1993 Agreement was made "on or about 12 May 1993."  Subsequently, VRL amended its plea to substitute the date "12 May 1993."

1. In his witness statement Mr Ziegler referred to his letter of 13 May 1993.  In cross-examination he denied any knowledge of the letter of 12 May:

"In fact I can't even recollect the 12 May document";  and

"I have never seen this document before."

1. Mr Foo gave evidence that some years after Mr Ziegler commenced working for VRL he looked for a copy of Mr Ziegler's letter, the one dated 12 May 1993, but not being able to locate it he asked Mr Ziegler for a copy.  Some time later Mr Ziegler handed him a copy of the letter, dated 13 May 1993.  Mr Foo subsequently found his copy of the letter dated 12 May 1993.  It had a series of ticks down the right hand margin by Mr Foo and the words "Film tax" in Mr Foo's handwriting.  He said these had been added by him at the time of the 1993 negotiations.  Mr Ziegler denied this evidence.  He said:

"I gave him [Mr Foo] the letter of 13 May, and to the best of my knowledge he never asked for another copy of my contract and I never gave him one."

1. When taxed with the situation of two letters, Mr Ziegler said that the earlier letter was a draft, even though it had been signed.  Mr Foo emphatically rejected that suggestion.  I reject Mr Ziegler's evidence that the signed version of the letter could have been a draft.  VRL pointed out that, significantly, when Mr Ziegler's computer was examined, although copies of his 12 May letter were located, there was no copy of the 13 May letter found.  Why he would have saved his draft but not his final version of the letter was not explained by Mr Ziegler.

1. VRL drew attention to two documents from Mr Ziegler which, it submitted, supported its contention that the letter dated 12 May 1993 had been sent and had formed the basis of the 1993 Agreement.  One document was an undated facsimile from Mr Ziegler to a solicitor, Mr John Atanaskovic, referring to a telephone conversation and attaching "copies of letters constituting my company's (Peter Ziegler & Co Pty Ltd), consultancy agreement with Village Roadshow Limited."  It also said:

"The first letter, dated 12 May 1993 constituted the basis of the arrangement for the three year period commencing 1 July 1993 to 30 June 1996.  A further 5 year contract was entered into with effect from 1 July 1996 (expiring 30 June 2001), with the same being constituted by two letters dated 2 October 1995 and 27 November 1995."

The second document was a memorandum from Mr Ziegler to Mr Wilson which appeared to have been dated in handwriting "18 May 2000" in which Mr Ziegler asserted:

"In summary, PZ & Co entered into a consultancy agreement with VRL on 12 May 1993 (copy attached) as extended in October/November 1995 (copies attached)."

1. In the light of this evidence I am satisfied that the evidence of Mr Foo should be accepted.  It is entirely credible and explains why there were two almost identical letters dated 12 and 13 May 1993.  I conclude that the 12 May letter was the one forwarded by Mr Ziegler at the time of the negotiations in May 1993.

1. VRL submitted that not only had Mr Ziegler lied about the date of the letter but he had deviously planned ahead, and seized an opportunity to bolster his position.  It pointed to the addition to the 12 May letter found in the 13 May version under the heading "Other Resources Required."  After talking about expenditure on a taxation library, the following was added:

"(Obviously, total resources required will be a reflection of Village Roadshow Group activities from time to time.)"

VRL submitted that whilst the difference in the letters was marginal, the words in brackets had a subtle purpose as they supported the argument, that as long ago as 1993 it was contemplated that Mr Ziegler would move beyond tax based fundraising.  VRL argued that by about 1995 or 1996 when Mr Ziegler probably produced the 13 May version he was undoubtedly thinking in terms of earning massive bonuses from insurance backed film financing and that perhaps he wished to show that such activity had been contemplated as early as 1993.

1. I am not persuaded by this Machiavellian interpretation.  In my opinion, it is far more likely that there is some innocent explanation, such as that Mr Ziegler also could not find his final version of the 12 May letter and that he attempted to reconstruct it from an earlier draft.  Whatever the reason, Mr Ziegler stoutly denied forwarding the 12 May version of the letter.  That was evidence I could not accept and was evidence which, as far as I am concerned, damaged his credibility.

Service under the 1993 Agreement

1. When the 1993 Agreement commenced in July 1993, Mr Ziegler’s initial focus was, he said, primarily on completing the taxation assignments he had been undertaking for VRL whilst at Ernst & Young.  The services he performed for VRL involved income tax and other tax minimisation and planning strategies, recovery of taxes previously overpaid by VRL and other entities in the Village Roadshow Group, and the raising of finance for the production of films.  Mr Ziegler was first appointed to the position of Chief Tax Counsel and later of Group Counsel of VRL "responsible for fiscal and legal affairs and advising on group strategies" according to VRL's 1995 Annual Report.

1. Mr Ziegler explained that at this time VRP was operating on a business model of producing predominantly Australian low-budget films.  These films were usually pre-sold to film distributors prior to completion of production in an attempt to cover the financial risk.  But in return for providing a guaranteed minimum financial return, the film distributors charged high distribution fees.  According to Mr Ziegler, in the 1990s the film distributors reduced the amounts they were prepared to advance by way of their minimum guarantee with the result that VRP was increasingly exposed to the risk of a loss on a film unless it was a box office hit. 

1. At this time the Australian taxation system provided specific tax incentives for certain types of investment in film production pursuant to Division 10B and Division 10BA of the Income Tax Assessment Act1936 ("the ITAA") in addition to the ordinary allowable deductions for losses or outgoings incurred in the gaining of assessable income. 

1. Mr Ziegler played an important role in obtaining significant funding from third party investors in a tax effective way.  Mr Ziegler said that a typical VRP film-related investment was structured so that the third party investor only contributed 20% of the investment from its own money with 80% borrowed from a VRL subsidiary.  The terms of the loan were such that it was only repayable out of any proceeds received by the investor from the exploitation of the film.  The investor was able to claim a deduction for 100% of the investment, whilst the consequent increase in VRL’s assessable income could be offset against VRL’s tax losses.  If the film was unsuccessful then any losses would be added to VRL’s tax losses.  Mr Ziegler described this funding as "non-recourse" or "limited recourse" funding.

1. However, according to Mr Ziegler, by the mid-1990s this type of limited recourse investment financing was becoming unpopular with the Australian Tax Office ("the ATO").  It started disallowing a deduction for the  borrowed 80% of the investment unless the investor was at full legal and economic risk of repaying the principal and interest.  This meant that the tax benefit of the investment was reduced by 80% or that the risk of the investment was substantially increased if the loan became full recourse.  As a consequence, this form of tax advantaged film financing was drying up.

The 1995 Agreement

1. According to Mr Ziegler, on 26 September 1995 Mr Kirby and Mr Burke approached Mr Ziegler about renewing the existing consultancy agreement, some nine months prior to the end of its three year term.  Mr Kirby told Mr Ziegler that he wanted him to agree to a new five year consultancy commencing after the expiration of the existing agreement.  Mr Kirby said that he wanted Mr Ziegler to take a more commercial role in VRL’s affairs than previously and not to concentrate as heavily on tax planning and structuring.  He wanted Mr Ziegler to become more directly involved in the development of overall VRL strategy and to explore new ways of raising non/limited recourse financing for VRL’s businesses.  Mr Zeigler said that Mr Burke said that he agreed with what Mr Kirby had said.

1. Mr Ziegler said in his witness statement that he replied that he would be interested in exploring new ways of raising finance and that he would expect to have his company paid performance bonuses in relation to raising that finance.  Mr Ziegler also said that he rejected the suggestion of a five year contract saying that five years was a long time and that he did not know what the future might hold.  He explained that his daughters were then still very young and that he wanted to be able to enjoy being with them when they were growing up and reaching school age. 

1. Mr Ziegler said that in response to Mr Kirby saying that he wanted to be sure that Mr Ziegler would be there for "the long haul", he then said that, as an inducement for him to enter into a five year agreement, rather than his preferred three year agreement, he would require VRL to agree to a termination bonus to be paid at the end of that five year period so that he would have a concrete incentive to be available and to provide consulting services through his company to VRL for the longer term.  He referred to the termination bonus in the Menzies contract and said to Mr Kirby and Mr Burke that that was an example of VRL having agreed to pay that type of bonus.  He said to both Mr Kirby and Mr Burke that if VRL agreed to pay a termination bonus at the end of the period, he would be prepared to commit to a new five year term commencing on 1 July 1996.  He said, further, that a termination bonus would "incentivise" him to remain fully committed to VRL for that longer five year term period which is what they both said they wanted.

1. According to Mr Ziegler, Mr Kirby then asked him how the termination bonus would be calculated, and he replied that he wanted to ensure that any termination bonus would be "performance" rather than "profit" based.  Mr Ziegler said that the termination bonus should be a five times multiple of the average performance bonus of the three preceding financial years and that Mr Kirby replied, without hesitation, that that would be fine and that Mr Burke said that he agreed.

1. According to Mr Ziegler, Mr Kirby then asked in what circumstances the termination bonus would be payable prior to 30 June, 2001.  Mr Ziegler replied in words to the effect that:

"Obviously, in addition to termination occurring because of my death, because I don’t think anyone else from my side can then provide the services, if VRL wishes to terminate the agreement earlier than 30 June, 2001, the termination bonus will then become payable.  Also, if VRL is taken over and the consultancy agreement is terminated early by new management, the more so if the two of you and John are no longer involved in the business, I would expect the termination bonus to be paid."

1. For emphasis, Mr Ziegler said that he added that "you could all decide to retire or you could get shot:  anything is possible."  Mr Burke commented that the traditional example was being run over by a bus.

1. According to Mr Ziegler, Mr Kirby then said that he thought that early termination was remote and that he thought that a termination bonus seemed reasonable overall if Mr Ziegler was prepared to give a five year commitment to VRL.  Mr Ziegler then said that obviously the termination bonus would not be payable if the new five year agreement had to be terminated by VRL because of his company’s or his "gross misconduct" and that Mr Kirby replied that "Naturally this would be the case."

1. Both Mr Kirby and Mr Burke disputed Mr Ziegler's evidence that they had agreed that the termination bonus would be payable at the end of the five year period.  Mr Kirby said that "there was no discussion about what might happen at the end of the five year period."  Mr Burke said that Mr Ziegler "never said that he was seeking a payment upon the expiration of his agreement."  I examine this dispute further when I come to deal with the question of whether a termination bonus is payable.

1. According to Mr Ziegler, Mr Kirby then concluded the discussion, saying that he looked forward to a continuation of his long and happy association with him, that "VRL and Mr Ziegler both stood to gain a lot through this new arrangement" and that he recognised what a significant commitment Mr Ziegler was prepared to make.  Mr Ziegler replied that "Hopefully this will be the case."  Mr Kirby then again said that, because of that commitment, the termination bonus which they had just agreed to was "fair, reasonable and appropriate."

1. Mr Ziegler said that the meeting concluded with handshakes all round and the customary "brotherly" hug from Mr Burke who then asked Mr Ziegler to send him, as VRL’s Managing Director, a memorandum outlining what had been agreed and that he copy it to Mr Kirby.

1. As requested, Mr Ziegler wrote to Mr Burke (with a copy to Mr Kirby) the following letter dated 2 October 1995:

"Re:Continuation of Peter Ziegler & Co Pty Ltd Consultancy Agreement with Village Roadshow Limited ("VRL") July 1, 1996 – June 30, 2001

I refer to our meeting of September 26, 1995 with Robert Kirby in connection with the continuation of my consultancy arrangements with VRL post-June 30, 1996.

As requested, by this memo I outline my understanding of the revised arrangements, and confirm my acceptance of the same for a five year period to commence on July 1, 1996 and ending June 30, 2001, and subject to the terms of this letter.

Before doing so, I would like to say how pleased I am with my offer of appointment as an Alternate Director of VRL.  This appointment should enable me to better represent the VRL Group in seeking to achieve its objectives.  At the same time, it demonstrates career progression from a personal perspective – an attribute to which I accord high priority.

Secondly, I am still exploring for a new job title more reflective of the increasing commercial/strategic role envisaged for me within VRL, with less emphasis on straight tax/legal matters.  I will revert back to you in this regard.

In terms of the discussed remuneration arrangements, please come back to me if any of the following points are not in keeping with what is envisaged, or cause any concerns.

Consultancy Fee Retainer

Initial $400,000 basic package for the financial year July 1, 1996 to June 30, 1997 (able to be taken by cash, employee share scheme arrangement, motor vehicle, superannuation etc.) by way of retainer to my consultancy company, with this fee to be formally reviewed at the expiration of each 12 months period in light of my performance, then prevailing conditions within VRL, and the broader market place.

Ability for PAZ to request reconsideration of retainer (and other aspects of total package) if material change in present circumstances, with parties to discuss any proposal in good faith to determine a fair and reasonable outcome.

The agreed per annum retainer to be payable in monthly instalments, and (subject to increase in line with the above terms) adjusted annually for inflation over the previous 12 months period.

Four weeks holiday per annum plus declared public holidays, sick leave, etc. with the same able to be accumulated and taken as circumstances permit/require.

Allocation of Share Options

All future allocations of VRL share options to PAZ to be determined by applying PAZ’s existing VRL option holding as a percentage of the average number of options presently held by RGK, JRK, and GWB in VRL, with these options to be issued to PAZ on the same terms (in all respects including financing) and at the same time as further VRL option issues are made to RGK, JRK, and GWB.

The parties acknowledge that for this purpose PAZ has a proportionate interest of 40% of the average number of VRL options issued to RGK, JRK, GWB (calculated and ignoring past exercise of options, as 800,000 VRL options issued to PAZ divided by 2 million VRL options, being the average number of options issued to RGK, JRK, and GWB.)

Likewise in the event of any allocation/issue of share options in companies other than VRL (e.g., Austereo, etc) a similar percentage proportion of options (40% of the average number of options allocated to RGK, JRK, GWB) would be issued to PAZ, and so forth.  (In other words, 'we are all of the same bus', albeit in different proportions.)

Performance Bonus

Performance bonus elements (a) (b) and (c) below are the same as within my existing contract with VRL, and are restated for completeness.  Element (d) is a new provision reflecting our discussion of September 26 (and the change in emphasis in finance raising to remove any residual tax risk from VRL).

(a)5% of tax savings made for the Village Roadshow Group in terms of income tax, customs duty, sales tax, payroll tax, stamp duty, etc. with negotiation in good faith to determine a fair and reasonable outcome given the somewhat subjective nature of these savings.

(b)5% of tax refunds (income tax, customs duty, sales tax, payroll tax, stamp duty, etc.) obtained for the Village Roadshow Group.

(c)5% of 'non/limited recourse' financing raised by the Village Roadshow Group in the event that existing Village Roadshow Group tax losses are utilised (permanently or temporarily) in the raising of the finance.

For example, the previous Clipsal and ASQA Partnership, and Perth Pay TV, transactions, fall within this category.

The parties acknowledge that these transactions, as presently structured, are now unlikely to occur in the future as third party tax losses, or off-shore structures, are expected to be utilised in the raising of finance (covered by (d) below).

The quantum of the bonus payable under scenario (c) reflects the fact that the balance of any taxation risk associated with this type of transaction resides with the Village Roadshow Group.

(d)An agreed percentage of ‘non/limited recourse’ financing raised by the Village Roadshow Group where existing Village Roadshow Group tax losses are not utilised in the finance raising.

An example of this type of transaction would be Austrian equipment financing, where no VRL tax losses are utilised as the profit component within the transaction does not give rise to Australian (or other) assessable income.

It is understood that all parties agree that this basis is now the desired approach for fund raising as there will be either no taxation liability resulting for the Village Roadshow Group as a consequence of the finance raised, or any residual tax risks will reside with non-Village Roadshow Group entities.

Left unresolved at our meeting of September 26 is the exact percentage performance bonus applicable in the circumstances covered by scenario (d).  What percentage do you have in mind?

I believe that the percentage bonus figure for scenario (d) should reflect the fact that the financing benefit raised for the Village Roadshow Group will not rely on the use of the Group’s taxation attributes, or risk capital.  Rather, the Village Group is a beneficiary of the finance raised in much the same way that Michael Lake produces profit for the Studios as a result of his creative endeavours with VRP Production Services without the further commitment of VRL capital, resources, etc..

Bonus element (a) to be determined and paid annually after the preparation of the Village Roadshow Group financial statements, and elements (b) (c) and (d) to be paid as received.

Termination Bonus

PAZ to receive a termination bonus of 5 times his average performance bonus over the three preceding financial years upon the termination of this contract for any reason (including death) other than, of course, gross misconduct resulting in termination.

Reimbursement of Other Outgoings

The following provisions are the same as within my existing contract with VRL, and are restated for completeness.

Reimbursement of all out of pocket expenses reasonably and properly incurred in the course of the business of the Village Roadshow Group, including travelling costs and entertainment expenses.

Reimbursement of all motor vehicle running costs (including insurance, registration, maintenance, petrol, car parking, etc.)

***

Graham, I have truly enjoyed my time to date with the Village Group – both personally and professionally – and I am confident that I will continue to do so well into the future.  I look forward to contributing to the Group’s long term growth and success.

Please confirm/advise your thoughts on the above matters."

1. Just what entitlements paragraphs (c) and (d) of the performance bonus provision gave rise to, will be examined when I come to deal with the meaning of the term "non/limited recourse" financing.

1. Mr Ziegler said that he did not receive any immediate response from either Mr Burke or Mr Kirby, no doubt because they both went away shortly after 2 October 1995.   He was, however, appointed an alternate director of VRL on 3 October 1995.  Mr Ziegler said that eventually he met with Mr Kirby on either 23 or 24 November 1995.  According to Mr Ziegler, at that meeting Mr Kirby said that the letter of 2 October 1995 fully recorded what they had discussed and agreed at their earlier meeting, but that having thought about it further he wanted to change the agreed termination bonus multiple from five times to three times the average performance bonus of the preceding three years, because five times would be too much and "could be a large amount of money payable on termination."  Mr Ziegler said that Mr Kirby told him that he should bear in mind all of the agreed performance bonuses together with the entitlement to be issued options.  Mr Kirby added that as he wanted Mr Ziegler to agree to reduce the multiple payable on termination he would throw in death and disability insurance.  Mr Ziegler agreed to the reduction of the multiplier from five to three. 

1. Mr Ziegler stated that at this meeting Mr Kirby also said that with all of the incentives already provided, a 5% fee for finance falling within scenario (d) was adequate compensation.  Mr Ziegler agreed with that percentage figure.  He said that he then told Mr Kirby that he wanted his new job title to be "Director, Fiscal, Legal and Strategic Objective", to which Mr Kirby agreed and Mr Ziegler was subsequently given that title. 

1. In his witness statement, Mr Kirby said that Mr Burke also attended the meeting with Mr Ziegler after the letter of 2 October 1995 was received.  Mr Kirby said that Mr Ziegler did not point out the differences in the wording of the performance bonuses between the 1993 and the 1995 letters.  He said that he did not notice them at the time.  He believed that performance bonuses (c) and (d) continued to refer to the tax based financing arrangements Mr Ziegler was putting in place.  Mr Kirby said that he recalled saying something about being happy to share creative new sources of profit for the Group.

1. At the request of Mr Kirby, Mr Ziegler then sent to Mr Burke (with a copy to Mr Kirby) the following letter dated 27 November 1995:

"Re:Continuation of Peter Ziegler & Co Pty Ltd Consultancy Agreement with Village Roadshow Limited ("VRL")

I refer to my letter of October 2, 1995 and subsequent discussions, following our meeting of September 26, 1995 with Robert Kirby, in connection with the continuation of my consultancy arrangements with VRL post-June 30, 1996.

As requested, this memo updates my letter of October 2 in three significant aspects, and thereby confirms the agreed arrangements between us.  (Subject to this letter, all other provisions are as specified in my letter of October 2, 1995.)

As discussed with Robert and you, I am pleased to be going forward on the basis of being truly, to quote your words, 'one of us.'  This gives me both personal and financial comfort for my future.

1.      Performance Bonus

Element (d) to be fixed as to 5% of ‘non/limited recourse’ financing raised by the Village Roadshow Group (where existing Village Roadshow Group tax losses are not utilised in the finance raising.)  Accordingly, elements (a) (b) (c) and (d) are all fixed at the 5% level.

2.      Termination Bonus

PAZ’s contract termination bonus to be 3 times his average performance bonus, rather than 5 times as specified in my letter of October 2.

3.      Death & Disability Insurance

PAZ to be provided with $5 million death and $5 million disability insurance – a similar policy to that of GWB/RGK/JRK.

Other Details

Having had an opportunity to consider my letter of October 2, 1995, the following refinements/clarifications (which do not impact the agreed commercial deal) have suggested themselves.

Issue of Options

In the event that, for whatever reason, further issues of options, as outlined in my October 2 letter, cannot be easily accommodated for me bearing in mind Corporations Law approvals, perceptions, etc., I am just as happy with a ‘notional’ allocation of options in the agreed percentage, with the profit arising paid to me on the relevant option exercise dates. (This is, in effect, what presently happens with our existing VRL options.)

Village Roadshow Creative Trust

My letter of October 2 omitted to confirm my present entitlement to 4% of the net profit of the Village Roadshow Creative Trust (i.e., 1% of VRP’s net profit) and I mention this for the avoidance of doubt.

Job Title

Finally, in terms of the required new job title, I confirm the following:

'Director,

Fiscal, Legal & Strategic Objectives'

I look forward to the next five years together."

1. Mr Ziegler said in his witness statement that shortly after he sent the letter of 27 November 1995, Mr Burke came into his office with Mr Foo and that Mr Burke said that Mr Foo wanted a few further small changes to the letter of 2 October 1995.  Mr Foo gave Mr Ziegler the original of that letter on which he had made a few handwritten comments.  Mr Foo had written "subject to tax requisit'ns, who bears risk" on page 1 at the start of the topic "Consultancy Fee Retainer", "excludes Roc’s share" on page 2 in respect of the topic "Allocation of Share Options" and "5% net after costs apportioned" at the bottom of page 2 relating to Performance Bonus (d).  Mr Ziegler said that Mr Foo explained the first handwritten annotation by saying that in the event of a change in the tax system, the manner in which the retainer and bonuses were packaged might have to be revisited.  The other two annotations are self-explanatory.  At Mr Foo’s suggestion both Mr Burke and Mr Ziegler initialled (with a black pen) those three amendments which Mr Foo had made (with a blue pen).

1. In his witness statement Mr Foo said that he had made these annotations after he first received a copy of Mr Ziegler's letter of 2 October 1995 from Mr Burke.  Mr Foo further said that it was he who had negotiated the three unresolved issues with Mr Ziegler.  Given the wording of the letter of 27 November 1995 this appears to me to be unlikely and I prefer Mr Ziegler's evidence on this latter point.

1. More importantly, a photocopy of the letter of 2 October 1995 had two further handwritten additions made by Mr Foo (with a blue pen) at some time.  In his witness statement, Mr Ziegler said that before the three amendments were initialled, Mr Foo explained that:

"the handwritten reference to '*RGK' on page 2 and to '5%' on page 3 was a reference to what he understood that Robert Kirby and I had already agreed upon a few days earlier as the percentage fee for scenario (d) finance raising."

1. This cannot be correct, in my opinion.  It is obvious from the documents themselves, which were tendered in evidence, that the two additions just described were made after the three amendments had been initialled and that document photocopied.  When asked about this when giving his evidence, Mr Ziegler said that he could not really explain it but speculated that they were made by Mr Foo during further discussion at that time after the original letter of 2 October 1995 had been initialled and photocopied.  As will be seen, Mr Foo’s evidence was that these two additions were made in about September 1997 when he faxed a copy of the letter to Mr Kirby in New York prior to Mr Kirby tackling Mr Ziegler about a performance bonus of US$10 million, being 5% of the US$200 million to be raised by an arrangement known as Project Ballarat.

1. At the end of the meeting with Mr Burke and Mr Foo, Mr Ziegler asked Mr Burke to confirm in writing that the letters correctly recorded the terms of the agreement.  Accordingly, Mr Burke wrote to Mr Ziegler, in his inimitable style, a letter dated 30 November 1995:

"It is with great pleasure that I acknowledge your letters of October 2 and November 27 confirming our new pact together as outlined in those letters.  Everything is agreed including the alterations required by Peter Foo that you and I initialled.

The important thing now, Dear Brother, is let’s go punch a hole in the sky."

I refer to this agreement hereafter as "the 1995 Agreement."

1. The 1995 Agreement was not reproduced in a formal document.  Nor was it referred to VRL's Remuneration Committee for its consideration or approval.  This is despite the fact that VRL's Annual Report for the financial year ended 30 June 1996 contained the following statement about the Remuneration Committee:

"A Remuneration Committee of the Board has been in operation since 1994.  The Committee's terms of reference provide for the review of remuneration packages and policies including the remuneration of non-executive directors.  The Committee also obtains independent advice from external consultants and utilises benchmarks from comparable organisations."

Project Ballarat

1. In his witness statement Mr Ziegler said that he outlined his proposed new financing model for VRP at a meeting of the VRP Board on the Gold Coast on 18 and 19 November 1995.  Present were the two Kirbys, Mr Burke, Mr Foo and a number of other senior executives including Ms Raffe.  Mr Ziegler suggested that VRP should consider undertaking a Hollywood style film business in conjunction with studio partners (most likely Warner Bros., but also other film studios) utilising a film portfolio – rather than a film-by-film approach - in order to gain film industry average financial returns, and to mirror film industry economics, with a non/limited recourse financing facility to be established to cater for this business model.  This would avoid VRP having to pre-sell its films in order to finance them.

1. Mr Ziegler said that Mr Kirby said at the meeting that it was essential that any financing facility should be on terms that limited the lender's right of recourse to VRL.  He said that VRL could not continue funding VRP productions on a full recourse basis.  Mr Ziegler said that he explained that structures could be adopted to make the proposal attractive to lenders whilst at the same time limiting recourse to VRL.  Mr Ziegler said that at the meeting the VRP Board decided to pursue the new business model as an adjunct to its existing film presale business model.  He gave evidence that Mr Kirby asked him to explore this non/limited recourse financing alternative as a matter of urgency.

1. Mr Ziegler said that on 20 November 1995 this proposal was also discussed at meetings of the VRL Executive Committee and the VRL Board on the Gold Coast.  At Mr Burke’s suggestion the new VRP financing model and business plan was given the name "Project Ballarat."

1. Mr Ziegler thus embarked on a task which over the next 20 or so months took him overseas for approximately a third of his time.  He travelled the world negotiating with insurance brokers, insurance companies, bankers, other financial institutions and eventually lawyers.

1. By a memorandum dated 24 January 1996 Mr Burke invited Mr Ziegler to become the Chairman of VRP and "the Executive in charge of Village Roadshow production from the Home Office."

1. Mr Ziegler said that, as a first step in implementing Project Ballarat, he contacted Mr Stephen Streeter, then at Ernest & Young in Los Angeles and subsequently a principal at his own firm, Montecito Investments Inc.  Mr Ziegler said Mr Streeter and he had previously discussed the usefulness of film revenue insurance policies in the financing of films.  They formulated a financial model that was able to demonstrate to insurance companies that, on the basis of a sufficiently large portfolio of films, the risks involved could be readily quantified on a portfolio, rather than a film-by-film, basis.  The model demonstrated that the probability and severity of loss could be priced so that it was a risk that could prudently be underwritten by insurance companies.  Mr Ziegler agreed in cross-examination that the idea for the model was in fact Mr Streeter's.

1. Mr Ziegler then approached insurance brokers to place the risk in the insurance markets.  The brokers identified multiline insurance companies that might be interested in writing this type of insurance cover in conjunction with others.  Mr Ziegler approached many multiline insurance companies in all major insurance centres – London, New York, Los Angeles, Zurich and Sydney – to provide film revenue insurance to partially cover a portfolio of Hollywood films' production and releasing costs.  Ultimately, on 27 May 1997 an insurance policy known as "Ballarat I" was placed on behalf of Village Roadshow Films (BVI) Limited ("VRF").  It had a limit of indemnity of US$55 million.  Subsequently, other film revenue insurance policies with increased limits of indemnity were also placed on behalf of VRF.

1. The Ballarat I insurance policy provided that five "qualifying films" had to be produced or acquired and then released in accordance with pre-agreed criteria before the insurer was "on risk" for payment of a claim.  The criteria included a total budget per film of between US$15 million and US$50 million;  release by a major studio in the US and Canada on a minimum number of screens;  a certain minimum level of prints and advertising expenditure in the international territories based on box office results achieved in the US and Canada;  and release in a minimum number of international territories within a specified time period.  If five qualifying films were not acquired and released in the agreed time period, the insurer was not at risk for any claim.

Well, you don't know that it had, do you?---I believe it had, that is why I rendered the invoice.

I suggest that is not the case at all, that you rendered the invoice because the facility had been put in place, isn't that so?  That's so, isn't it?---No, I rendered the invoice because I thought the facility had been drawn down, and the precondition had been satisfied under the 21 June agreement.

And what do you mean by drawn down in that sentence?---As in there had been a subsequent draw of the facility after it had been upsized from 500 million to 750 million.

The whole 250 million?---So there had been a, sorry, not a drawdown of the whole 250 million, but there had been a drawdown of the facility which was now in total $750 million."

1. There is a further reason why I consider that Orrong was entitled to a fee of 1% of the amount of any increase in the facility beyond US$500 million, regardless of how much of the extra US$250 million was drawn down.  Unless that was what was agreed, there was a very real possibility that disputes could occur about how much had actually been drawn down, as repayments were made and advances were drawn down from time to time.  It seems to me that paragraph 8 of Mr Foo's memorandum was inserted to avoid this situation.  Thus, the 1% fee was to be calculated "on the facility increase" and not "the rolling of the facility balance."

1. Thus, my conclusion is that VRL's claim to repayment US$1,104,229, being that part of the advance payment which Orrong was not entitled to, fails.  It is therefore not necessary to go on to consider which, if any, of the numerous causes of action pleaded by VRL would have formed the legal basis for the recovery of the amount in question.

The Valuation of the Termination Bonus

1. Although I have held in the above reasons for judgment that no termination bonus was payable to Orrong on the expiration of the 1995 Agreement on 30 June 2001, and that even if such termination bonus was payable the Court would not enforce the contractual obligation because no shareholder approval of the 1995 Agreement, or of that particular payment to a related party, was ever obtained, it is appropriate to briefly consider the conflicting evidence about the value of the claimed termination bonus in case I am wrong in one or more of my conclusions. 

1. The calculation of the amount of the termination bonus claimed by Orrong depends upon the value of the 5.25% ownership interest in VRP as at 31 October 1997 and the 2.25% ownership interest in VRP as at 31 December 1999.  I note in passing that I have held that the financial year ended 30 June 1998 was not one of the "three preceding financial years" within the meaning of this term of the 1995 Agreement so that in any event the giving of the 5.25% ownership interest in VRP was not a performance bonus which should be taken into account.  Nevertheless, the expert valuation evidence addressed the question of the respective values of Orrong's interest in VRP at the two dates referred to above.

1. Mr Paul Lom was the expert forensic accountant called by Orrong.  In his report dated 24 February 2005, Mr Lom calculated that the value of VRP was:

(a)as at 31 October 1997 the amount of $501.7 million or $1,408.8 million, depending on whether VRL or VRP gearing was used, and

(b)as at 31 December 1999 the amount of $1,750 million or $5,515.9 million, again depending on which gearing was used.

1. Mr Lom then calculated that the value of Orrong's interest in VRP was:

(a)as at 31 October 1997 the amount of $26.34 million or $73.96 million, or after a 40% discount for minority interest/lack of marketability the amount of $15.8 million or $44.38 million, depending in both cases on which gearing was used, and

(b)as at 31 December 1999 the amount of $39.37 million or $124.11 million, or after the 40% discount the amount of $23.63 million or $74.46 million, again depending in both cases on which gearing was used.

1. Mr Cullimore Gower was the expert accountant called by VRL.  He was an impressive witness.  In his report, Mr Gower calculated that the value of VRP was:

(a)as at 31 October 1997 the amount of $24.59 million, and

(b)as at 31 December 1999 the amount of $146.8 million.

After a 75% discount for minority interest/lack of marketability Mr Gower calculated that the value of Orrong's interest in VRP was:

(c)as at 31 October 1997 the amount of $0.32 million, and

(d)as at 31 December 1999 the amount of $0.83 million.

1. Both Mr Lom and Mr Gower used the discounted cash flow method of valuation.  That is, they both sought to determine what future cashflows of VRP would have been reasonably forecast as at 31 October 1997 and 31 December 1999.

1. VRL made submissions extremely critical of Mr Lom's independence.  First, it pointed out that it was clear from Mr Lom's evidence that his principal report did not reflect his opinion as to the value of VRP.  When asked why he put forward the two different values depending on the gearing used, Mr Lom said that he was "instructed to adopt... two particular gearings which produced widely different results".  He said that he had never stated in his report that it was his opinion that it was correct to use the VRP gearing.  He considered that it produced "commercially nonsensical" results.  Mr Lom conceded in cross-examination that this meant that he had breached the provisions in the Expert Witness Code of Conduct ("the Code") requiring him to state his opinion[148] and not to withhold from the Court matters of significance which the expert regarded as relevant.[149]  VRL submitted that these matters also meant that Mr Lom had breached the Code by not assisting the Court impartially[150] and by acting as an advocate for Orrong.[151]  Further, it submitted that he had not arrived at his opinion "independently" contrary to paragraph 11.2 of Practice Note No 4 of 2004 (Commercial List).  VRL also submitted that this conduct breached paragraph 19 of APS11 – Statement of Forensic Accounting Standards published by the Institute of Chartered Accountants in Australia and CPA Australia, because Mr Lom's report omitted material information.

   [148]See para 3 of Form 44A in the Supreme Court (General Civil Procedure) Rules 2005.

   [149]Para 3(h) of the Code.

   [150]Para 1 of the Code.

   [151]Para 2 of the Code.

1. Secondly, VRL submitted that similar criticisms applied to Mr Lom's handling of the issue of the minority discount.  In his report, Mr Lom stated that he had been instructed to value Orrong's interest on the basis that no minority discount applied and on the basis that a minority discount, of whatever size he considered appropriate, applied.  This, he did.  However, nowhere in the report did he state which of these alternative bases he considered to be correct.  In cross-examination Mr Lom eventually conceded that he had not stated his opinion on this question, which was that a minority discount should be applied, and that he had known that his report was going to be used by Orrong to argue against a minority discount. 

1. Thirdly, VRL submitted that Mr Lom's evidence was seriously compromised as a result of both his extensive contact with Mr Ziegler and the instructions he received from Mr Ziegler and his solicitor.  Prior to Mr Lom finalising his principal report on 24 February 2005, he met with Mr Ziegler on at least 16 occasions, according to Mr Ziegler, or between 15 and 20 occasions, according to Mr Lom.  In addition, Mr Lom said that he spoke with Mr Ziegler on the telephone on another 15 to 20 occasions. 

1. VRL drew attention to the numerous differences between Mr Lom's first draft of his principal report dated 5 February 2005 ("draft 1(a)") and the final version.  The changes to the inputs used by Mr Lom in his valuation of VRP as at 31 October 1997 included the surplus cash available to VRP;  the corporate tax rate used in the calculation of the discount rate;  the beta used in the calculation of the discount rate;  the terminal value;  and the net present value of VRP's projected future cash flows.  The result was that Mr Lom's valuation of VRP as at 31 October 1997 increased from $227 million in draft 1(a) to $501.7 million or $1,408.8 million in his final report.

1. The changes to the inputs used by Mr Lom in his valuation of VRP as at 31 December 1999 included the corporate tax rate;  the beta;  the gearing (debt/equity) ratio used in calculating the discount rate;  the weighted average cost of capital ("WACC");  the terminal value;  and the net present value of VRP's projected future cash flows.  The result was that Mr Lom's valuation of VRP as at 31 December 1999 increased from $1,136.6 million in draft 1(a) to $1,750 million or $5,515.9 million in his final report.

1. Mr Lom gave evidence that draft 1(a) was not a "draft" but a working document that did not record his opinion.  He also said that although draft 1(a) was dated 5 February 2005, it incorporated changes made by him up until 17 February 2005.  A copy of draft 1(a) was discussed with Mr Ziegler at a lengthy meeting on 18 February 2005.  Mr Lom and Mr Ziegler also had lengthy meetings on 17, 23 and 24 February 2005.  Mr Lom agreed that his addition of $80 million to the surplus cash available to VRP in his final 1997 valuation came about because of something Mr Ziegler told him "at some time between the two drafts."

1. VRL pointed out that Mr Lom's time records showed that between 25 October 2004 and 16 February 2005 Mr Lom had spent 125.3 hours on this matter.  In the period between 17 and 24 February 2005 he spent a further 47.8 hours on it.  VRL submitted that this meant that draft 1(a) was not an insignificant "working document" prepared prior to Mr Lom having properly considered his valuation.  It said that draft 1(a) was not really a first draft.

1. In its response, Orrong pointed out that Mr Lom's reduction of the growth rate for terminal value, reduced the value;  and that the changed corporate tax rate and beta were the same as those used by Mr Gower.  It therefore submitted that these changes were non-controversial.  It further submitted that experts are entitled to be informed about factual matters and that provided the facts and assumptions on which an expert's opinion was based were stated, and established by the evidence, it did not matter how the expert had been informed.

1. I agree with the general thrust of this submission.  I also consider that experts should be entitled to think through the issues and change their mind without being castigated for giving into pressure from the client or lawyers.  Nevertheless, the changes in the amount of the valuations are extraordinary.  If this particular criticism stood alone I would be more prepared to accept Mr Lom's evidence that the earlier figures did not represent his opinion.  But it does not stand alone.

1. In my opinion, the first two criticisms of Mr Lom's lack of independence are devastating.  I do not understand how a person of Mr Lom's standing could have allowed his report to go forward without any qualification to, or expression of his opinion about, the values obtained using the VRP gearing.  As it stood, the report was quite misleading and the true picture only emerged during cross-examination.  Equally, I consider that Mr Lom was derelict in not stating in his report that it was his opinion that a minority interest/lack of marketability discount should be applied in valuing Orrong's interest.  Once again, the true picture only emerged during cross-examination.  My concerns about this situation are confirmed by Mr Lom's frank evidence that he "was very unhappy about the instructions at the time" and that he "seriously considered refusing to issue the report".

1. VRL also submitted that Mr Lom did not have the relevant expertise.  Mr Lom acknowledged that he had no experience in valuing film cash flows or film production companies.  He said that he raised this matter with Orrong's solicitor and was told that "there was sufficient material available" and that Mr Ziegler could provide the explanations needed to put him "in a position to complete the required valuation". 

1. Mr Gower also said that he did not have the expertise to project the cash flows from films.  He said that another expert was needed to perform the task of valuing the "Film Exploitation Business".  Mr Gower confined his work to what he called the "Non Film Exploitation Business".  In his report Mr Gower made a number of criticisms of Mr Lom's valuation.  Mr Gower was particularly critical of the "fundamentally flawed" way in which Mr Lom had derived his valuations of VRP as at 31 December 1999.  Further, he pointed out that at that date the value of VRL was approximately $1.25 billion based on the price of the ordinary and preferential shares quoted on the Australian Stock Exchange.  Yet Mr Lom's valuation of VRP alone, which was only one of the five main divisions of VRL, was between $1.75 billion and $5.5 billion.  These valuations of VRP therefore represented between 140% and 440% of the equity value of VRL itself.  In my opinion, this important comparison casts doubt on the validity of Mr Lom's methodology.

1. Mr Roy Salter was the expert called by VRL to give evidence concerning the projected cash flows from the films acquired as a result of Projects Ballarat and Bendigo.  His company, The Salter Group, LLC, was based in Los Angeles in the USA.  It was described as an independent financial and strategic advisory firm which specialised in the entertainment and media industry.  Mr Salter said that he had valued and advised on over 90 media and entertainment projects with an aggregate value in excess of US$8 billion.  I accept that Mr Salter had the necessary qualifications and expertise to give evidence about the projected cash flows from the Ballarat and Bendigo films.

1. At the time of the hearing, Mr Leigh Butterworth was the senior business analyst for VRP and Mr Bryce Wolfe was the finance director of VRP.  They prepared two computer models which calculated on a quarterly basis how much of the projected cash flows from the Ballarat and Bendigo films (as determined by Mr Salter) accrued to VRP.  No challenge was made to the relevant qualifications and expertise of either Mr Butterworth or Mr Wolfe.

1. The result of the work by Messrs Salter, Butterworth and Wolfe was that Mr Gower placed a nil value on the Film Exploitation Business at both 31 October 1997 and 31 December 1999. 

1. Before dealing with some of the more important individual issues, I note for completion that after taking into account a number of matters raised during the course of his evidence, Mr Lom put forward recalculated valuations.  He valued VRP:

(a)as at 31 October 1997 in the amount of $495.28 million, and

(b)as at 31 December 1999 in the amount of $1,798 million.

It will be noted that these changes by Mr Lom resulted in a slight decrease in the valuation of VRP as at 31 October 1997 and a slight increase in the valuation of VRP as at 31 December 1999, using the VRL gearing.  After the 40% minority interest/lack of marketability discount, Mr Lom valued Orrong's interest in VRP:

(c)as at 31 October 1997 in the amount of $15.6 million, and

(d)as at 31 December 1999 in the amount of $24.73 million.

1. In making their calculation of the value of VRP as at 31 October 1997, both Mr Lom and Mr Gower started with a March 1998 business plan.  One of the importance differences between them was the upward adjustment made to these figures by Mr Lom in respect of the private investor income component of the projection.  In the March 1998 projection, private investor income of US$10.2 million was forecast for the year ended 30 June 1998 and US$3.5 million for the following year.  Thereafter, it was assumed that there would be no private investor income.  Mr Lom assumed additional private investor income of US$6.5 million (on top of the existing projection of US$3.5 million) for the year ended 30 June 1999 and an additional US$10 million for each of the subsequent years.  On the other hand, Mr Gower was instructed to assume that “by 31 December 1999 VRP had decided to cease activities generating private investor income” and that such activities had ceased in about June 1999.

1. Mr Lom said that based on the higher levels of private investor income (A$14.4 million and A$21.5 million for the years ended 30 June 1996 and 1997 respectively) and the advice to him by Mr Ziegler that there were as no plans by VRP to cease tax based financing activities, he decided on the above increases.  He said that he told Mr Ziegler of the adjustment he proposed to make and that Mr Ziegler told him that it was not unreasonable.  Orrong referred in its submissions to documents which it said supported Mr Lom’s position, but I am doubtful if they do much more than confirm the reliability of the projections in the March 1998 business plan for the 1998 and 1999 financial years.  Orrong also pointed out that private investor income in fact continued in 1999 and 2000 and possibly even 2001.  In my opinion, Mr Ziegler’s acceptance of Mr Lom’s figure as "not unreasonable" does not square with his evidence about what Mr Kirby said to him back in 1995.

1. Both Ms Raffe and Mr Foo gave evidence which supported the instruction to Mr Gower that activities generating private investor income ceased in about June 1999.  Ms Raffe said that only where there had been a commitment given prior to June 1999 did the activities continue after that time.  Ms Raffe also referred to an email from her to Mr Ziegler and others dated 13 August 2000 which showed ongoing private investor income of only A$4 million.  She said that the figure of A$4 million had been provided by Mr Ziegler.

1. In the circumstances, it seems to me that Mr Lom’s adjustments to the private investor income figures were not justified, apart perhaps from the addition of something approaching the US$6.5 million figured for the 1999 financial year.  Thereafter, there should been no adjustments, certainly not an addition of US$10 million per year.

1. Another importance difference between Mr Lom and Mr Gower was the rate of discount for the minority interest/lack of marketability. Both of them agreed that there should be a discount for such factors.  Mr Gower said that they should be viewed separately, whereas Mr Lom considered that they overlapped.  As I have said, Mr Lom’s combined figure was 40% and Mr Gower’s figure, which in the end he did not separate into the two components, was 75%.

1. Undoubtedly there would be difficulties for Orrong in attempting to sell its unusual interest in VRP.  Both of the experts appropriately recognised this in their discussion of this question.  As Mr Gower said in evidence in a difficult situation such as this it is a matter of "personal professional judgement".  Although I have been very critical of Mr Lom’s report I do respect his valuation expertise and I therefore pay due regard to his suggested discount rate of 40%.  On the other hand, I have found it difficult to fault Mr Gower’s evidence and I therefore pay due regard to his suggested rate of 75%.  If I had been required to decide the value of the termination bonus I believe that I would have used a discount rate of 60%, as 75% seems just a little too high in all the circumstances.

1. The next importance difference between Mr Lom and Mr Gower was after tax WACC discount rate.  Mr Gower calculated a rate of 15% in relation to the 31 October 1997 valuation and a rate of 12% for the 31 December 1999 valuation.  Mr Lom’s rates were 12.1% and 10.8% respectively.  The main reason for this difference seemed to flow from their differing views at to whether VRP was a start up venture at 31 October 1997.  Mr Gower gave persuasive evidence as to why he considered that the "new VRP" should be regarded as a start up venture.  In my opinion, he correctly stated that:

"the Ballarat arrangements were not simply an 'upscaled' version of the old ‘theatrical’ business.  It was a new business that radically transformed and reorganised substantially loss making existing business operations of VRP into a Los Angeles based business…"

Mr Lom’s comments on this issued displayed, in my opinion, an inadequate understanding of the differences between the "old VRP" and the "new VRP".  I am therefore satisfied that Mr Gower’s discount rates are to be preferred.

1. In making their calculations of the value of VRP as at 31 December 1999 Mr Gower and Mr Lom used different source documents.  Mr Gower referred to a five year business plan projection dated 22 December 1999, which was circulated to members of the Executive Committee.  The document was entitled "Group Five Year Financial Plan – Executive Summary – Most Likely Case".  Mr Lom, on the other hand, used three projections prepared by VRL (a five year cash flow forecast, a five year profit and loss forecast and a five year balance sheet forecast).

1. The provenance of the documents relied on by Mr Lom was unclear.  Mr Ziegler believed that they were produced by VRL in April 2000 to be given to the Telemunchen Group and D G Bank.  Ms Raffe said that she believed that the document was prepared in August 2000.  She said that the underlying figures were prepared by staff under Mr Ziegler’s co-ordination and that she performed the mechanical task of putting them into a profit and loss, balance sheet and cash flow format.  What is clear about these documents is that Mr Lom did not know what assumptions underpinned the documents and whether or not they were reasonable.  I consider that the reliability of a valuation produced in these circumstances must be doubtful.  Thus, I would not be prepared to give any weight to Mr Lom’s valuation of VRP as at 31 December 1999.

1. Although criticisms were made of the December 1999 projection, I consider that the Mr Gower was correct in using it as his starting point rather than the undated three page document.  A document dated 22 December 1999 is, of course, contemporaneous with the stated dated of 31 December 1999.  A document produced in April 2000 is less relevant and even more so if it were not produced until August 2000.

1. Before leaving the 31 December 1999 valuation, I must refer to the criticism made by Mr Gower of Mr Lom’s method of deriving "annualised" VRP net profits for the year ending 30 June 2000.  I agree that it was simply not correct to take the difference between the actual results for the six months to 31 December 1999 and the forecast twelve months to 30 June 2000 as representing the expected results for the six months to June 2000 and then doubling that figure in order to reflect annualised expected results.  Mr Lom’s calculation assumed that earnings were at consistent levels in each of the two six month periods.  That was not correct, but if it were then the annualised figure could have been obtained simply by doubling the actual results for the first six months.  Obviously, this error had the effect of overstating the maintainable earnings.  However, as I have said, I am not relying in any way on Mr Lom’s 1999 valuation.

1. Thus, in deciding the value of the termination bonus, I would be prepared to accept Mr Gower’s calculations in his valuation of the "Non Film Exploitation Business" of VRP as at both 31 October 1997 and 31 December 1999, except in respect of the minority discount rate and to a small extent the private investor income, as discussed above.

1. In its final submissions, Orrong made a number of criticisms of the work of Messrs Salter, Butterworth and Wolfe both as to their overall methodology and particular issues.  I do not accept any of these criticisms and, in the circumstances, I do not propose to extend this already lengthy judgement by discussing each of the issues.   This is because even if I rejected the results obtained by Messrs Salter, Butterworth and Wolfe, that outcome would not assist Orrong because there is no other material before the Court which could be relied on in its place in respect of the valuation of VRP as at 31 December 1999.  And as I have said previously, it is only the valuation of Orrong’s 2.25% interest in VRP as at that date which would fall within the formula for calculating the termination bonus.

1. It is therefore unnecessary to revive the issue of whether or not I should have allowed Mr Salter to rely on the whole of a further witness statement filed just before he gave evidence at the end of hearing, when Orrong was objecting because it raised matters which had not been put in cross-examination to earlier witnesses.  Mr Salter’s further evidence was attempting to meet a criticism of his use of the figure of 20 films in his calculations rather than a possibly higher number.  But in the absence of any contradictory evidence, it was only speculation as to how a higher number of films would have altered the financial outcome.

Conclusion

1. I have previously held that subject to issues such as the defences raised by VRL under the corporations legislation, the following amounts would be payable to Orrong:

(a)$927,750 for its 7.5% profit share for the financial year ended 30 June 2000;

(b)$1,996,650 for its 7.5% profit share for the financial year ended 30 June 2002;

(c)$275,395 for its "taxes saved" performance bonus for the financial year ended 30 June 2001;  and

(d)$255,505 for its "taxes saved" performance bonus for the financial year ended 30 June 2002.

1. However, I then concluded that the Court should refuse to enforce the claims made by Orrong because they arose out of Agreements entered into in contravention of the applicable related party financial benefit provisions.  Further, I held that VRL was

1. entitled under its counterclaim to recover from each of Mr Ziegler, Orrong and Remut the sum of $12,020,849.  Because the Court is refusing to enforce Orrong's claims, it seems to me that no question of set-off arises.

1. The question of the appropriate orders and declarations can, however, be deferred until the parties have had the opportunity to read and consider my reasons for judgment.

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