Pico Holdings Inc v Voss - [2004] VSC 263

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 7324 of 2001

PICO HOLDINGS INC.	Plaintiff
v
PETER DAVID VOSS	Defendant

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JUDGE:	Mandie J
WHERE HELD:	Melbourne
DATE OF HEARING:	21 - 25, 28 - 31 July 2003
DATE OF JUDGMENT:	2 August 2004
CASE MAY BE CITED AS:	Pico Holdings Inc. v Peter David Voss
MEDIUM NEUTRAL CITATION:	[2004] VSC 263

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TRADE PRACTICES – misleading and deceptive conduct – whether company falsely represented that shares provided as security for loans were not encumbered – whether director knowingly concerned in, or party to, contravention by company pursuant to Trade Practices Act 1974 (Cth) – whether director liable as principal for misleading conduct under Fair Trading Act 1999 (Vic)

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M. R. Pearce	Gilbert + Tobin
For the Defendant	Mr J.C. Simpson	Mallesons Stephen Jaques

HIS HONOUR:

The plaintiff, Pico Holdings Inc. (“Pico”) is a diversified holding and investment company incorporated in the State of California, USA. Pico alleges that, in September and December 2000, it made two loans to an Australian company called Dominion Capital Pty Ltd (“Dominion Capital”) and that Dominion Capital defaulted in payment of these loans. Pico brings this proceeding against the defendant, Peter David Voss (“Mr Voss”), who was the holder of 99% of the shares in and Managing Director of Dominion Capital. Pico claims that Mr Voss was involved, within the meaning of the Trade Practices Act 1974 (Cth), in misleading and deceptive conduct by Dominion Capital, or was himself liable as a principal for such conduct under the Fair Trading Act 1999 (Vic). The misleading conduct is said to be constituted by false representations that certain shares, offered to Pico as security for two loans by Pico to Dominion Capital, were not encumbered.

Statement of Claim

The Amended Statement of Claim (“the Statement of Claim”), in paragraph 4, alleges that Dominion Capital is and was at all material times registered as the owner of approximately 750,000 shares in Dominion Wines Ltd (“the Dominion Wines shares”) (this allegation is admitted). Paragraph 5 of the Statement of Claim alleges that in or about late August 2000, Dominion Capital requested a loan of US$1M from the plaintiff. The particulars of the request are that the request was oral and made by Mr Voss on behalf of Dominion Capital to Max Webb (“Mr Webb”) on behalf of Pico in conversations in the home of Mr Voss in Scottsdale, Arizona. Mr Webb was the Chief Financial Officer of Pico. The allegation that Mr Voss made such a request is denied by Mr Voss in his Third Further Amended Defence (“the Defence”), and a very different version of certain conversations is therein alleged by Mr Voss.

Paragraph 6 of the Statement of Claim alleges that on or about 29 August 2000, Dominion Capital represented to Pico that the Dominion Wines shares were unencumbered and available to be offered as security to Pico for the loan with Dominion Capital requested (“the Representation”). The particulars provided of the Representation are the same as those provided as to the request of the loan in the previous paragraph. Again, this is denied by Mr Voss in his Defence.

Paragraph 7 of the Statement of Claim alleges that on or about 8 September 2000, Pico agreed to lend Dominion Capital US$1M. The particulars of the alleged agreement which are provided are that it was evidenced by a non-negotiable secured promissory note issued on 8 September 2000 (“the September Promissory Note”). Mr Voss does not deny that the September Promissory Note was issued, but says that it was never to be repayable or called upon having regard to the content of conversations which he alleges occurred.

Paragraph 8 of the Statement of Claim alleges that there were terms of the September Promissory Note: express terms that the loan was to be repaid on 8 September 2001 bearing interest at the rate of 8% per annum and terms, “partly express and partly to be implied”, that Dominion Capital’s obligations were to be secured by the delivery to Pico of a certificate or certificates for 350,000 Dominion Wines shares (the “September Mortgaged Shares”) and that Dominion Capital warranted that it was the beneficial owner of the September Mortgaged Shares and was able to mortgage them free of prior encumbrances in the manner required by the September Promissory Note (“the September Warranty”) and that upon breach by Dominion Capital of any term of the September Promissory Note, the plaintiff was entitled to declare the entire unpaid principal amount and all interest thereon due and payable.

Paragraph 9 alleges that in reliance on the Representation and the September Warranty, Pico lent US$1M to Dominion Capital.

Paragraph 10 of the Statement of Claim alleges that in or about late December 2000, Dominion Capital requested from Pico a further loan of US$1.2M. The particulars provided of this request are that it was oral and made by Mr Voss on behalf of Dominion Capital to John Hart (“Mr Hart”) of Pico in a telephone conversation. Mr Hart is the Chief Executive Officer of Pico.

Paragraph 11 of the Statement of Claim alleges that on or about 22 December 2000, Pico agreed to lend Dominion Capital US$1.2M. The particulars provided of this agreement are that it was evidenced by a non-negotiable promissory note issued on 22 December 2000 (“the December Promissory Note”). I note that Mr Voss admits this allegation and further admits part of what is alleged in paragraph 12, namely, that the loan was to be repaid on 5 January 2001 and interest was payable thereon at the rate of 12% per annum. However, Mr Voss denies what is alleged in paragraph 12(c) of the Statement of Claim, namely, that there was term, partly express and partly to be implied, that Dominion Capital’s obligations were to be secured by delivery to Pico of a certificate or certificates for 400,000 Dominion Wines shares (“the December Mortgaged Shares”).

Paragraph 12(d) of the Statement of Claim alleges that it was a further term of the December Promissory Note, partly express and partly to be implied, that Dominion Capital warranted that it was the beneficial owner of the December mortgaged shares and was able to mortgage them free of prior encumbrances in the manner required by the December Promissory Note (“the December Warranty”). That allegation is denied by Mr Voss. Paragraph 12(e) alleges the same terms as to the right to entire payment upon breach as is alleged in relation to the September Promissory Note.

Paragraph 13 of the Statement of Claim alleges that, in reliance on the Representation, the September Warranty and the December Warranty, Pico lent US$1.2M to Dominion Capital.

The Statement of Claim (paras 14 and 15) goes on to allege variations of the December Promissory Note, extending the date for payment to 30 April 2001 and then to 31 May 2001. Paragraph 15(b) refers to an alleged variation “substituting for the December Mortgaged Shares as additional security” certain real estate in Queensland (“the Queensland Property”), and obliging Dominion Capital to deposit with Pico the duplicate certificate of title to the Queensland Property.

Paragraphs 16 and 17 of the Statement of Claim allege that, on or about 9 October 1996, Dominion Capital had granted a fixed and floating charge over all of its assets and undertakings to the National Australia Bank Limited (“the NAB charge”) and that the NAB charge subjected the Dominion Wines shares to a fixed charge and prohibited the creation of subsequent encumbrances on the Dominion Wines shares without the chargee’s prior written consent. I note that Mr Voss, while admitting the existence of the NAB charge, denies, for a number of reasons that it had the effect alleged.

Paragraphs 18 and 19 of the Statement of Claim allege that, by virtue of the NAB charge, the Representation, the September Warranty and the December Warranty (which were given in trade or commerce) were false. Paragraph 20 alleges that accordingly, Dominion Capital engaged in “false or misleading” conduct in contravention of s.52 of the Trade Practices Act 1974 (Cth).

Paragraphs 21 to 25 of the Statement of Claim allege in effect that Dominion Capital neither provided the security for the September Promissory Note nor paid the September or December Promissory Notes and that, accordingly, Pico has suffered loss and damage by Dominion Capital’s conduct in contravention of s.52 of the Trade Practices Act. The damage alleged is the amounts due under the Promissory Notes and the costs of enforcing them.

Paragraph 26 of the Statement of Claim alleges that Mr Voss was directly or indirectly knowingly concerned in, or a party to, Dominion Capital’s said contravention.[1] Pico provided particulars of this allegation, namely, that Mr Voss was a director and majority shareholder of Dominion Capital, that he made the representation on behalf of Dominion Capital and that he signed the two promissory notes. Neither the pleading nor the particulars allege anything as to Mr Voss’s state of mind at the relevant time and, importantly, they do not allege what it was that Mr Voss knew as a result of which he was “knowingly” concerned in, or a party to, the contravention.
[1]This pleading, of course, invokes s.75B(1)(c) and s.82(1) of the Trade Practices Act 1974 (Cth).

Paragraphs 27 and 28 of the Statement of Claim allege that, accordingly, Mr Voss was involved in Dominion Capital’s contravention and that Pico may recover its loss or damage from Mr Voss.

Paragraphs 29 of the Statement of Claim alleges that Mr Voss “is a person ordinarily resident in Victoria.”[2]
[2]This is a reference to s.6(2)(b) of the Fair Trading Act 1999 (Vic).

Paragraph 30 of the Statement of Claim alleges that, by making the representations and signing the Promissory Notes, Mr Voss engaged in trade and commerce.

Paragraph 31 of the Statement of Claim alleges that Pico acted in reliance on Mr Voss’s said conduct.

Paragraphs 32 and 33 of the Statement of Claim allege that by reason of the matters aforesaid, Mr Voss’s conduct was misleading or deceptive in contravention of s.9 of the Fair Trading Act 1999 (Vic) and Pico had thereby suffered loss and damage.

Finally, in paragraph 34 of the Statement of Claim, Pico claims damages from Mr Voss pursuant to s.159 of the Fair Trading Act 1999 (Vic).

Defence

In relation to the September Promissory Note, the essence of Mr Voss’s defence is that Pico represented or promised Dominion Capital that the Promissory Note was not repayable, would never be called upon by Pico and was required only to satisfy Pico’s auditors in relation to the payment of US$1M by Pico to Dominion Capital (see paragraph 8(c) of the Defence). The alleged nature of the transaction is described at length in Mr Voss’s Defence. In essence, Mr Voss alleges that Dominion Capital received the US$1M only as a nominee for another company, Dominion Capital Japan Inc. (“Dominion Capital Japan”) and for the purposes of, and conditional upon, the payment of (1) the sum of US$500,000 to defray expenses incurred by CC Johnson International Co Limited (“CC Johnson”) in relation to a certain joint venture and (2) the payment of the sum of US$500,000 to provide for a loan by way of promissory note from Dominion Capital to another company, Solpower Corporation Inc (“Solpower”).

The Defence seeks to refer to the commercial background to the above transaction, which, so it is alleged, included a sale on or about 29 August 2000 by Pico to Dominion Capital Japan of Pico’s rights in a joint venture in China. The Defence seeks to explain that Pico’s interest in the joint venture was held through an 83% holding of the shares in Conex Continental Inc. (“Conex”), a US corporation which in turn was the parent of CC Johnson, which in turn owned 60% of the joint venture. The Defence says that Dominion Capital Japan ultimately acquired 228,148,343 common shares in Conex from Pico and/or its related entities for a nominal consideration. The Defence says that the reason for Pico (and its related entities) divesting their interest in Conex was “based on the continuing cash requirements of the said joint venture and its inability to achieve profitability.”

The Defence further says that there were terms and conditions of this agreed divestment of Pico’s interest in Conex which included Dominion Capital Japan acquiring the whole of the interest in Conex for US$1, Pico providing adequate funds to manage the administrative operations of Conex relating to the joint venture for 6 months, Pico forgiving all debts due to it (and any related entities) by Conex, subject to certain licences granted to Conex being cancelled and Dominion Capital Japan holding 20,000,000 Conex shares for Pico, or for certain individuals connected with Pico, and Pico making the $1M payment to Dominion Capital Japan and/or its nominee, which was to be payable in the manner which I have mentioned above and which was in fact, so the Defence alleges, disbursed as required.

Paragraph 8(ca) of the Defence alleges that, prior to executing the September Promissory Note, Pico further represented to, or promised, Mr Voss that the 350,000 shares (described in the Promissory Note as “Common Shares of Dominion Wineries[3] (“Pledged Stock”)”) would not be required to be delivered to Pico, would not be relied upon by Pico as security and that the reference to them was inserted in the Promissory Note “to satisfy [Pico’s] auditors in relation to the payment by [Pico] to the aforesaid nominee of Dominion Capital Japan of the said amount of US 1 million.” The Defence goes on to plead an estoppel against Pico.
[3]The correct name of the company is Dominion Wines Limited. However, as will be seen throughout, Pico persisted in referring to it as “Dominion Wineries”.

Paragraph 9 of the Defence, inter alia, denies that the September Promissory Note was enforceable by Pico and alleges further that it was not delivered by Dominion Capital to the plaintiff and was inchoate and incomplete.

Paragraph 10 of the Defence, inter alia, denies that Pico relied on the Representation and/or the September Warranty and further alleges that Pico did not demand possession of either the original of the September Promissory Note or the certificates for the September Mortgaged Shares and, further, that the value of the September Mortgaged Shares was only A$350,000.

As I have noted,[4] paragraph 11 of the Defence admits that, on or about 22 December 2000, Pico agreed to lend Dominion Capital US$1.2M.
[4]See paragraph [8].

Paragraph 13 of the Defence, inter alia, denies that the December Promissory Note was enforceable and says further that it was not delivered by Dominion Capital to the plaintiff and was inchoate and incomplete. Paragraph 13 further alleges that the value of the December Mortgaged Shares was A$400,000.

Paragraph 14 of the Defence, inter alia, denies that Pico relied on the Representation, the September Warranty or the December Warranty and further alleges that Pico did not demand possession of either the original of the December Promissory Note or the certificates for the December Mortgaged Shares before advancing the sum of US$1.2M. Paragraph 14 of the Defence further alleges that, on or about 25 April 2001, Pico claims to have unilaterally amended the December Promissory Note by purporting to substitute replacement collateral security in the form of certain real property.

Paragraphs 15 and 16 of the Defence deny the variations of the December Promissory Note alleged by Pico.

Paragraphs 17 and 18 of the Defence admit the NAB charge, but deny the Dominion Wine Shares were the subject of a fixed charge and further allege that the Dominion Wines shares were “Marketable Securities” acquired by Dominion Capital for the purpose of disposal in the ordinary course of the ordinary business of Dominion Capital within cl. 4.1(f) of the NAB charge and that the Bank held no equitable or other interest as chargee in the Dominion Wines shares.

Succeeding paragraphs of the Defence deny the allegations in paragraphs 18 to 28 of the Statement of Claim.

Paragraph 27 raises a number of defences, in particular, that Mr Voss cannot be a person “involved in a contravention” under s.75B of the Trade Practices Act.

Paragraphs 30 to 33 of the Defence say that the alleged conduct of Mr Voss was engaged in in the United States of America (“the extraterritorial conduct”) and that the Court had no jurisdiction to entertain Pico’s claims under the Trade Practices Act.

Paragraph 34 of the Defence says that, by an instrument of consent dated 13 January 2003 given under s.5(3) of the Trade Practices Act, the Parliamentary Secretary to the Treasurer consented to Pico relying upon the extraterritorial conduct for the purpose of claims under s.82 of the Trade Practices Act. Paragraph 35 of the Defence alleges that the said instrument was executed improperly and by reason of an abuse of power, ultra vires and is ineffective.

Paragraph 36 of the Defence does not admit that Mr Voss is a person ordinarily resident in Victoria as alleged by paragraph 29 of the Statement of Claim.

Succeeding paragraphs of the Defence deny all aspects of Pico’s claim under the Fair Trading Act and, in particular, deny that Mr Voss engaged in “trade or commerce” by “the mere signing of the December Promissory Note.”

Witnesses

The main witnesses were Mr Hart, Mr Webb and Mr Voss. They were all less than satisfactory witnesses who, it seemed to me, deliberately slanted their accounts to suit their case. In particular, I found Mr Hart to be evasive at times and aspects of Mr Voss’s account I found to be evasive, highly subjective and contrived.

Facts

Pico has its principal executive offices in La Jolla (pronounced “La Hoya”), California. Pico has interests in companies engaged in owning and developing land and related mineral and water rights, property and casualty insurance, medical professional liability insurance and “long-term value based investments” in other public companies. In March 2002, Pico had shareholders’ equity of US$210M and a market capitalisation of US$160M. Mr Hart is the CEO, President and a director of Pico.

From 1996 to August 2000, Pico had acquired an 83% shareholding in Conex. Conex’s only asset was its wholly owned subsidiary, CC Johnson. In turn, CC Johnson’s only asset was a 60% interest in a joint venture in China, known as the Guizhou Jonyang Machinery Industrial Co. Ltd (“the Jonyang joint venture”). The Jonyang joint venture produced wheeled and tracked excavators for the Guizhou government. Mr Hart was also a director of Conex and CC Johnson until September 2000. Mr Webb, the Chief Financial Officer[5] of Pico, was also a director of Conex until 8 September 2000. Conex was incorporated in Delaware, USA and listed on the CDNX (the Canadian Venture Exchange). Conex had consistently been making losses since at least 1997.
[5]Mr Webb has been employed by Pico since November 1993. In November 1997, he was appointed Vice-President, Investments and in May 2001 he became Pico’s Chief Financial Officer.

Mr Voss was educated at the Orbost State Primary School and the Orbost High School, where he completed his Leaving Certificate in 1963. He then attended a business course as a trainee postal clerk for the PMG, for which he worked for about two years. From about 1966 to 1975 (except for a period of two years leave of absence), he was a member of the Victoria Police. When he resigned in 1975, he was a senior constable. From 1976 to 1987, he was employed in senior managerial positions by a number of well-known corporations involved, inter alia, in manufacturing and distribution, sales and marketing and import and export of consumer products. In about late 1987, Mr Voss commenced his own consulting business and he became involved with various business activities, including domestic and international trade, corporate restructuring, product development, environmental technologies and investment share trading.

Dominion Capital was formed and utilised by Mr Voss as an investment company. It became interested in the commercial development of various environmental technologies from 1992 onwards, including fuel efficiency enzymes, alternative refrigerant gases, fuel filter technologies and water and effluent treatment. Dominion acquired licenses from the various inventors of these technologies and transferred them to Solpower and in exchange, acquired 30% of the shares of Solpower. From 1995, Dominion Capital’s capital was involved in the buying and selling of shares in numerous North American corporations. According to Mr Voss, from around early 1998, Dominion Capital’s share trading focussed on Solpower.

In October 1996, Dominion Capital gave National Australia Bank Limited the NAB charge which was a charge over all the undertaking, property and assets of Dominion Capital, a fact which is relevant to the issues in dispute in this proceeding. I note here the relevant provisions of the NAB charge. Clause 4 deals with the nature of the charge and provides, so far as relevant as follows:

“4.1 Fixed Charge

The charge created by this Deed is a fixed charge on all the present and future estate, right, title and interest of the Mortgagor in and to:
(a)Land…
(b)buildings…
(c)plant and machinery (other than any which is stock-in-trade)…
…
(f)Marketable Securities[6] (including all shares of the Mortgagor in any Subsidiary of the Mortgagor), not being Marketable Securities acquired by the Mortgagor for the purpose of disposal in the ordinary course of the ordinary business of the Mortgagor, …
[6]“Marketable Securities” are defined by cl. 1.1 as having the meaning given by s.9 of the Corporations Law (which includes shares of any body corporate).
…
4.2Floating Charge

The charge created by this Deed is a floating charge over all the Mortgaged Property which is not charged by way of fixed charge under Clause 4.1, and
(a)the Mortgagor may not without the consent of the Bank do or permit, or agree or attempt to do or permit, any act, matter or thing which, if completed, would result in a contravention of Clause 4.3, and
(b)in addition to becoming fixed by operation of law or pursuant to any other provision of this Deed, the floating charge created by this Deed becomes fixed immediately and automatically without any further act, matter or thing being required of the Bank or of the Mortgagor:
(i)on the Floating Charge Property concerned:
(A)upon the Mortgagor or any other person commencing any act, matter or thing which, if completed, would result in a contravention of Clause 4.2(a) in relation to that Floating Charge Property, …

…
4.3Limitations on Dealing with the Mortgaged Property

Without the consent of the Bank, the Mortgagor may not:
(a)dispose of, part with or deal with the whole or any major part of its undertaking; or
(b)dispose of, part with or deal with any Floating Charge Property except in the ordinary course of, and for the purposes of carrying on, its ordinary business; or
(c)create or permit to exist any Encumbrance whatsoever over any Mortgaged Property except…”

Mr Hart first met Mr Voss in or around June-July 1998. According to Mr Hart, between mid-1998 and June 2000, representatives of Pico and Mr Voss “engaged in discussions to explore potential business opportunities and synergies between Pico and the group of companies controlled by Mr Voss.” In late 1998, Pico and Dominion Capital exchanged technical information relating to water treatment technologies.

In November 1998, Mr Voss received certain information brochures from Peter Wood (“Mr Wood”), the Chairman of Conex. The brochures related to the Jonyang joint venture, in which Pico was interested through its shareholding in Conex.

On 21 December 1998, Mr Voss sent a fax to Judson Hill (“Mr Hill”), Executive Vice-President of Pico, outlining what he saw as areas of mutual interest between Dominion Capital and Pico, including the development of the business of Solpower and the possibility of an Australian market for Pico construction equipment.

In February 1999, Jim Hirst (“Mr Hirst”), the President and Chief Executive Officer of Solpower, forwarded information to Mr Hill of Pico concerning Solpower’s products. In March 1999, Mr Hirst forwarded a due diligence package regarding Solpower to Mr Webb of Pico.

Conex reported a loss of approximately US$3M for the 9 months ended 30 September 1998 and a loss of US$849,000 for the 3 months ending 31 March 1999. In the Conex consolidated financial statements for the two years ending 31 December 1998, it was reported that the ultimate recovery of Conex’s investment in China was subject to a number of risks and uncertainties, that Conex had incurred substantial operating losses since inception and had an accumulated deficit and that the recoverability of assets and discharge of liabilities was dependant upon future operations.

On 26 April 1999, Mr Wood of Conex sent a fax to Mr Voss indicating that he was very interested in selling excavators and custom-made construction equipment in Australia.

On 28 April 1999, Dominion Wines Ltd, a wholly owned subsidiary of Dominion Capital, was incorporated in Australia. Mr Voss’s son, Carl, was the Managing Director. Dominion Wines wished to attract potential investors for a new winery business located in the Strathbogie Ranges, approximately 200km north of Melbourne.

In and around May 1999, there were communications between Dominion Capital, Pico and Conex in relation to a possible joint venture involving Solpower products. In this regard, I note that Mr Hart testified that in late 1999, he reviewed a “public filing” (on the Internet) of Solpower, a publicly listed corporation with headquarters in Scottsdale, Arizona, which indicated that Mr Voss owned and controlled Solpower. Mr Hart further testified that, in or around November 1999, Pico had acquired 500,000 shares in Solpower.

Mr Voss testified that on or about 29 November 1999, Pico and Dominion Capital entered into a joint venture agreement, whereby Dominion Capital sold the said 500,000 shares in Solpower to Pico for US$200,000. Mr Voss deposed that the vehicle for this joint venture, “TLHL China”, would manufacture, distribute and market Solpower products in China. Mr Voss deposed that Pico undertook to provide funds of US$1.8M to Solpower for business development, subject to satisfactory due diligence to be conducted by Pico and that Dominion Capital was to supply the technology and licensing rights for the products. Mr Voss said that Pico was to provide funding, manufacturing and distribution infrastructure for the marketing of Solpower products in China through Conex and that Mr Hart was to become a director of Solpower. Mr Hart testified that the Solpower joint venture was “never consummated.” However, Mr Voss had a different version. The precise events are irrelevant for present purposes. It is sufficient to note that the evidence shows that there were a number of business ventures or proposed business ventures between Pico or related companies and companies in which Mr Voss was interested.

In or about December 1999, Mr Hill of Pico came to Australia and visited the winery owned by Dominion Wines.

On 10 January 2000, Mr Hart sent a fax to Mr Voss saying that he was looking into similarities between Pico’s burgundy wine operation and Dominion Wines’ operation.

In February 2000, Mr Voss proposed a joint venture between Pico, Dominion Capital and another company, called Technology Licensing Limited (“TLL”), to further the operations of TLHL China. In cross-examination, Mr Hart said that this joint venture also “never happened.”

In or about March 2000, Mr Voss deposed that Mr Hart asked him for financial information on Dominion Wines, and that in response to this, Carl Voss (Mr Voss’s son) provided Mr Hart with the requested information by letter on or about 27 March 2000. In his evidence, Mr Hart denied that he had ever made such a request or received the letter. I prefer Mr Voss’s evidence on this point. It is apparent that Mr Hart had some degree of interest in looking at the Dominion Wines operations from a business point of view.

Between 12 April and 15 April 2000, Mr Hart, Mr Webb, and Mr Wood of Conex, travelled to Australia at Mr Voss’s invitation. The purpose of the visit appears to have been to explore mutual business opportunities and to see Mr Voss’s business operations. During that visit, Mr Hart went with Mr Voss to the winery and adjoining vineyards of Dominion Wines and had a tour thereof. Pico had already been involved in an investment in a winery and vineyard in France and Mr Hart thought that the Dominion Wines facility was reasonably modern and production seemed busy.

Mr Voss told Mr Hart and Mr Webb that he had bought the land cheap a few years ago, had brought in some business partners who had built the winery using their own and neighbouring grapes, was about to expand into production of its own brand of wine, that the winery would be worth about A$30M if a public company and that he was the majority stockholder in Dominion Wines. Mr Hart thought that the value of the physical assets which he saw, if not encumbered, was about US$8–10M.

Mr Voss testified that Pico (Messrs Hart and Webb) “conducted due diligence of Dominion Wines to assess the value of the business as a potential investment.” Mr Voss further deposed that, at some time in June or July 2000, Mr Hart conveyed to him that Pico would not invest in Dominion Wines. On the other hand, Mr Hart said that he could not recall that Mr Voss had “solicited” Pico to invest in Dominion Wines in the first place. I have no doubt that Mr Voss solicited Pico to invest in Dominion Wines and that Mr Hart decided not to do so. However, I am not satisfied that any “due diligence” was conducted by or on behalf of Pico.

On 15 May 2000, Conex announced it had made part payment of US$500,000, being part of its third tranche financing commitment to the Jonyang joint venture.

In or about May 2000, Mr Voss attended a meeting with Pico representatives at the Marriott Hotel in Los Angeles. Mr Voss deposed that one of the issues discussed was the problems facing Conex and that this topic was often raised between himself and Pico representatives in May, June and July 2000.

On 8 June 2000, the Corporate Finance Branch of the Ontario Securities Commission sent a letter to Conex saying that it failed to file annual financial statements for its financial year ended 31 December 1999, and as a consequence, all trading in the shares of Conex was suspended. Conex filed its annual financial statements a week later, and trading resumed.

Mr Hart testified that in or about mid-2000, he was not satisfied with Conex’s performance and that, as a result, he, Mr Webb and others at Pico “were considering effective options that would allow Pico to exit Conex.” He added that “Pico’s only exposure to Conex was in terms of share price and an unsecured loan for about US $1.2 million which Pico had provided to Conex.”

In or about August 2000, Mr Hart testified, and I accept, that Mr Voss telephoned him, seeking a loan from Pico for Solpower and that there were several telephone discussions concerning this request.

In late August 2000, Mark Robinson (then Financial Controller of Dominion Capital) and Mr Voss attended meetings at La Jolla to discuss arrangements for a further joint venture by which Pico and Solpower would acquire a Canadian company called Protocol Resource Management (which was, in fact, acquired on 28 August 2000).

On 27 August 2000, Mr Hart and Mr Webb met Mr Voss in La Jolla. Mr Hart testified that Mr Voss asked him to think about making a further investment in Solpower, and that he asked Mr Voss how much he needed. Mr Hart deposed that Mr Voss replied that Solpower needed half a million right away, and Mr Hart said that Pico could look into it and that Mr Webb would go to Scottsdale tomorrow and look into it. Mr Webb corroborated this conversation in his evidence. Mr Hart added in his evidence that Mr Voss told him that he was tired of putting money into Solpower, and needed more money to fund its activities, and thus Mr Hart offered Solpower a loan. Mr Hart then instructed Mr Webb to go to Scottsdale, review Solpower’s finances with Mr Robinson of Solpower, and determine how the proposed loan was intended to be used. I accept this evidence of Messrs Hart and Webb.

Mr Hart further testified that, at the same meeting, he, Mr Webb and Mr Wood mentioned to Mr Voss that they were thinking of liquidating Conex and that Mr Voss then asked whether it made sense for him to buy Conex for a nominal amount, saying that with his Japanese contacts and with his other potential manufacturing operations, he could better utilise Conex’s operation. Mr Hart deposed that he responded by saying that they would need to work out the financial impact to Pico of selling rather than liquidating Conex. According to Mr Hart, he discussed the proposal further with Mr Webb after the meeting. Mr Webb told him that that financial impact of Mr Voss buying Conex for US$1 would be the same as a liquidation – namely a loss of US$2.5M – and that the he, Mr Hart, said they should go ahead with it.

Mr Hart testified that in or around the end of August 2000, after the meeting with Mr Voss in La Jolla, he had a short conversation with Mr Voss as follows:

“Voss: It makes no difference to Pico’s bottom line whether it liquidates Conex or sells its Conex shares to me. You’ve already said so. I’ll give you a dollar for all Pico’s Conex shares. I’ve got contacts in Asia. I think I can make a go of Jonyang and Conex. If not, I can wind Conex up and it won’t have cost me much. Pico will be able to write off its loss on the Conex shares as a tax deduction. This is a good deal. It benefits both of us.
Hart:Okay. We will sell all of Pico’s Conex shares to you for [US] $1. That will give you the controlling interest in Conex. Conex has sufficient working capital to cover its expenses for the next 6 months. Pico will forgive the debt Conex owes to it – that is about [US] $1.2 million.
Voss:The shares should be transferred to Dominion Capital Japan.
Hart:I [sic] speak to Max [Webb], Jim [Mosier] and our lawyers and have them prepare the documents.”

Mr Voss deposed that on the evening of 27 August 2000, he had dinner with various representatives of Pico in La Jolla and at this dinner, he and Mr Hart came to an in-principle understanding that Dominion Capital Japan (the Japanese arm of Dominion Capital) should purchase the Conex shares from Pico for a nominal fee, say US$1. He deposed that Mr Hart told him that Pico “would cover Dominion for any contingencies.” In oral evidence, Mr Hart denied this, saying “That conversation never took place. We were never in great distress with Conex, given that it was a relatively small investment for the overall company; and we certainly wouldn’t look to Mr Voss to help us find a solution.” Later Mr Hart said in cross-examination that he did not recall having a conversation with Mr Voss, but did not deny that he might have had one.

In my opinion, the evidence given by Mr Voss (para [70] above) concerning a conversation, relates to the same conversation and the same occasion as Mr Hart’s evidence (para [69] above). In fact, there is considerable convergence between the two of them. In essence, it is clear that Mr Hart and Mr Voss agreed in principle that Dominion Capital Japan would purchase the Conex shares from Pico for US$1 and that Pico would forgive the debt that Conex owed to it of about US$1.2M. It is possible that Mr Hart did tell Mr Voss that Pico would cover Dominion Capital for any contingencies, but whether he did or not does not determine any of the real issues in this case. However, there is nothing in Mr Voss’s witness statement about any request or discussion prior to 28 August 2000 in relation to a loan from Pico to, or for the benefit of, Solpower, save that Mr Voss testified that Mr Hart said to him something about the need “to accommodate both situations…so long as we can satisfy the requirements of the auditors of Pico/Conex.” In this respect, I found the evidence of Mr Hart and Mr Webb to be more credible. I am satisfied that Mr Voss did seek a loan from Pico for Solpower and that Mr Hart despatched Mr Webb to Scottsdale for the purpose, inter alia, of reviewing Solpower’s finances and the purposes of the loan.

On 28 August 2000, Mr Robinson and Mr Voss went to Mr Voss’s house in Scottsdale, Arizona.

On the morning of 29 August 2000, Mr Webb came to Scottsdale, Arizona. Mr Webb there met Mr Robinson, the CEO of Solpower. According to Mr Webb, Mr Robinson informed him of Solpower’s capital requirements, which were about US$895,000 and indicated that, ideally, Solpower needed funding of US$1M. Shortly after this, according to the Pico evidence, Mr Hart and Mr Webb had a telephone conversation in which the use of the proposed loan by Solpower was discussed.

At 4 pm on 29 August 2000, there was a meeting at Mr Voss’s house in Scottsdale, Arizona between Mr Voss, Mr Robinson, Mr Webb and Naoya Yoshikawa, a director of Dominion Capital Japan and of Solpower. Mr Hirst of Solpower later joined the meeting. According to Mr Webb, the Conex deal was discussed around this time at the conclusion of which Mr Voss took out a US$1 note, put it on the table and said “There’s consideration, mate. Good deal, mate.” According to Mr Webb, while at Mr Voss’s house in Scottsdale, he told Mr Voss that Pico could provide a line of credit for Solpower and Mr Voss said he wanted it to be a loan to Dominon Capital, to which Mr Webb replied that he would check with Mr Hart. Mr Webb says that he then telephoned Mr Hart using “the telephone loudspeaker to enable Mr Voss to hear the conversation” and Mr Hart agreed to advance the money to Dominion Capital as an upfront loan. Mr Webb testified that Mr Hart proposed a twelve month loan, with Pico having the ability to call it on 30 days notice, and Mr Voss indicated that he was not happy with the 30 day aspect (Mr Voss didn’t want to have to pay it back earlier than 12 months later).

In relation to the above conversations, Mr Hart testified that he spoke by telephone on the loudspeaker (in the office of Mr Sharpe, Pico’s Chief Operating Officer) to Mr Webb and Mr Voss. During the latter telephone conversation, Mr Webb said that Solpower needed closer to a million rather than half a million, and that Mr Voss wanted it as a loan to Dominion Capital rather than a line of credit to Solpower. Mr Voss said he wanted it all pretty much immediately as an upfront loan – “A line of credit won’t work. I need the flexibility of a note from Dominion Capital.” Mr Webb said the use of the proceeds would be relatively immediate, Mr Hart offered an upfront 12 month loan to Dominion Capital at 8% callable on 30 days notice, with the bulk of the proceeds flowing into Solpower as indicated by Mr Webb’s Schedule. Mr Voss agreed except that he wanted a 12 month not callable on 30 days notice.

Mr Hart and Mr Webb thus alleged that Pico merely assented to Mr Voss’s proposal that Dominion Capital obtain Pico’s interest in Conex for nominal consideration of US$1 and that it was independently agreed that Pico advance US$1M to Dominion Capital. Mr Hart deposed that the question of the US$1M advance to Dominion Capital was entirely separate to the question of Conex, and that it was in the nature of a loan to the Solpower business. Mr Webb also deposed that it was clear that this amount was a loan.

On the other hand, Mr Voss testified that:

“The September advance was not a loan transaction made between Pico and Dominion [Capital] repayable upon the terms alleged. Rather, the September advance was a fee payment or commission made by Pico to Dominion Capital Japan, by its nominee, Dominion [Capital], in return for the Dominion Capital Japan acquiring the whole of Pico’s investment in the Jonyang joint venture under an agreement that was concluded on 29 August 2000…”

Mr Voss further testified, in this regard, that he “requested that Pico provide a fee commission for transacting the Conex deal, the amount of wish was open for negotiations.” Mr Voss deposed that the next thing that happened was:
“Mr Webb said that Mr Hart would agree sell the Conex shares for US$1 and that Pico would offer to pay US$500,000 to Dominion [Capital] as well as help out Solpower. I said that I was thinking of an amount to the order of US$1 – 1.5 million to be paid by Pico. Mr Webb phoned Mr Hart on a private line…He returned to the meeting to advise that Mr Hart would not go over US$500,000, which I said was not acceptable. I told Mr Webb “It is pretty simple, if we don’t get the US$1 million then there’s no deal.” This caused him to place another call to Mr Hart at which time I spoke directly to Mr Hart and said that the Conex deal was not “doable” and left Mr Webb to explain the reason why. Mr Webb returned to the meeting and said that Mr Hart would do the Conex deal by paying Dominion [Capital] the US$1 million as requested conditional upon US$500,000 being paid to Solpower to assist it with capital funding and the balance being used to fund outstanding operating expenses of Conex. At that moment I shook hands with Mr Webb and pulled out a US$1 note from my wallet, placed it on the coffee table in front of him…and said “Here’s your dollar, I now own Conex and you owe me US$1 million.””

Mr Webb testified that after the telephone conversation with Mr Hart had concluded, his conversation with Mr Voss continued. Mr Webb said that he asked Mr Voss what security he could give for the loan and Mr Voss replied that he could give them shares in Dominion Wines. Mr Webb asked how he could know that that was adequate collateral and Mr Voss replied that Mr Webb had seen the winery and that “in my estimation the block I’m giving you is worth at least 3 million dollars.” Mr Webb testified that he then asked “Is it encumbered?”, and that Mr Voss replied “No it’s unencumbered.” Mr Voss testified that he never had any such conversation with Mr Webb “concerning the provision of Dominion Wines shares as security for the September advance.” The alleged conversation concerning security is inconsistent with Mr Webb’s fax to Mr Voss and Mr Robinson dated 2 September 2000 in which, in relation to security, Mr Webb said “I look to you for guidance on what would be appropriate security.” This sentence, it seems to me, is quite inconsistent with Mr Webb’s version of what occurred four days earlier.

I generally prefer the version of Messrs Hart and Webb, save and except that I find that there was no mention of or concerning Dominion Wines shares at this stage and therefore there was nothing on this topic for Mr Webb to convey to Mr Hart (see next paragraph).

Later in the evening of 29 August 2000, according to Mr Hart’s witness statement, Mr Webb phoned Mr Hart and said that he had discussed with Mr Voss what security would be put up for the US$1M loan, and Mr Voss agreed that Dominion Capital would put up some 300,000 of its shares in Dominion Wines. Mr Webb then referred to their visit to Dominion Wines (“there are plenty of assets”) and conveyed that Mr Voss said the shares were worth about US$3M. Mr Hart asked whether there was any liability attached to the shares, and Mr Webb told him Mr Voss said they were unencumbered, and Mr Hart said, OK prepare the note for Dominion Capital. The whole of this evidence about an evening conversation by Mr Hart with Mr Webb was not recalled by Mr Hart in the witness box. Mr Hart swore that “I don’t recall, as I sit here, that specific conversation. I know the numbers, because we discussed the valuation and we had a report from our securities [sic] on the purchase price of the asset or valuation of the asset.” Later, in response to a question from the Bench as to whether Mr Hart recalled that Mr Webb had said anything about the Dominion Wines shares, Mr Hart replied “We would have discussed the collateral”, from which I would infer that he did not specifically recall whether it had been discussed. This damaged Mr Hart’s credit in swearing to the truth of his witness statement in this respect. I find that there was no discussion of Dominion Wines shares as between Mr Webb and Mr Hart as alleged.

On 30 August 2000, Mr Voss went to Canada.

On or about 1 September 2000, Dominion Capital faxed to Pico and Pico received a letter addressed to Mr Webb. The letter was signed by Vivienne Wise for Mr Voss (with a copy to Mr Voss) and stated:

“Loan facilities – Dominion Capital Pty Ltd
Further to our agreement, please find herewith Dominion Capital’s US banking facilities…
Please transfer US$1 million as detailed. As I will be travelling overseas, please forward loan documents to me via my office in Australia as follows…
Your sincerely,
PETER VOSS
CHAIRMAN & MANAGING DIRECTOR
cc Peter Voss”

The Dominion Capital letter of 1 September 2000 is inconsistent with Mr Voss’s version that the US$1M advance was not truly a loan, unless the alleged conversation in which Mr Voss was told that it would be recorded as a loan, but would never be called upon occurred prior to 1 September 2000. Moreover there is nothing in Mr Voss’s witness statement (prior to paragraph 93 which refers to the letter of 1 September 2000) to suggest that there was any conversation of this kind. Further, Mr Voss was emphatic that it was never suggested to him that the advance would be a loan until 5 September 2000. I am satisfied that the September advance was agreed to be a loan and I do not accept Mr Voss’s evidence that it was not a loan, or that he received assurances that it would never be called up. I would add that I do not think it likely that Mr Voss’s assistant (Ms Wise) would have used the words “loan facilities” or the words “loan documents” without clear instructions from Mr Voss.

In evidence is a fax of 2 pages dated 2 September 2000 from Mr Webb to Mr Voss and Mr Robinson (at Sheraton Gateway Hotel in Canada) reading as follows:

“Dear Peter and Mark,
As always, it was good to see you and thanks for taking the time to go through in detail your strategy and requirements for Solpower. The next few months are clearly critical and I am glad we are able to provide support to your efforts. I have no doubt you will achieve your objectives.
To complete our transaction, we have to 1. Execute the trade for C. shares and 2. Sign the loan agreement to Dom Cap.
Execute the trade
The trade is exempt from a requirement to bid for other shares. The paperwork will probably be limited to a filing with the Ontario Securities Commission (material change report) and press releases by C. and buyer and seller…
Loan agreement
Simultaneous to executing the trade, we will wire US$1 million funds to Dom Cap (I have the wire instructions). The paperwork can, I think, be limited to a Promissory Note which I will forward to you ASAP. The draft terms of the loan are:
·     US$1 million
·     8% interest
·     Demand loan
·     Covenant: detailed use of proceeds to be provided
·     Security: I look to you for guidance on what would be appropriate security.
I think that covers everything but please call me if there are any gaps.”

The above fax is relevant for a number of reasons. If received by Mr Voss on or about its date (and I think that it probably was), it provides evidence of a loan. Whether or not received by Mr Voss, it indicates that the specifics of the security had not been discussed before 2 September 2000 (contrary to Mr Webb’s evidence). The contents of the fax also suggest that the two transactions (the transfer of the Conex shares and the provision of money to Dominion Capital) were linked and I think that they were, but it does not follow that the September advance was a fee rather than a loan.

On 4 September 2000, Mr Voss left Canada and went to London.

On 5 September 2000, Mr Voss (in London) received a telephone call from Mr Webb. Mr Voss testified by his witness statement that Mr Webb told him that Mr Hart had:

“real concerns as to how Pico’s auditors would perceive the Conex deal involving a fee/payment of US $1 million by Pico to Dominion [Capital]. Mr Webb asked would I mind signing a promissory note that would never be called upon. During this first telephone discussion no mention was made of any collateral required to secure repayment under the promissory note.”

Mr Voss said that this was the first time that a promissory note had been mentioned to him. Even if this was the first time that a promissory note was mentioned, the allegation that it was said that the promissory note “would never be called upon” is, as I have said, inconsistent with Mr Voss’s letter of 1 September 2000 referring to loan documents and the absence of any evidence of an earlier conversation that it would be called a “loan” but that it would never be called upon. I do not accept Mr Voss’s evidence.

According to Mr Voss, he received a second phone call from Mr Webb on 5 September 2000. Mr Voss testified that Mr Webb apologised for requesting the use of a promissory note and said that, based on discussions with Mr Hart (who in turn had discussed it with Pico’s lawyers), the promissory note was required to satisfy the auditors of Pico. Mr Voss said that he expressed concern that Dominion Capital “not be placed at risk under such an arrangement” and that once again “Mr Webb apologised and requested my assistance in agreeing to the promissory note upon his assurance that it would never be called upon.” Mr Voss said that he arranged with Mr Webb to send him the promissory note so that he could review it. Mr Voss further deposed that during this second conversation he discussed with Mr Webb the options for collateral, that Mr Webb suggested Dominion Wines shares and that he (Mr Voss) said that he had a block of 350,000 shares available. I am satisfied that it was at or about this time that the security for the loan was nominated. However, I do not accept Mr Voss’s evidence concerning what was said about the promissory note.

On or about 5 September 2000, on Mr Hart’s instructions, Mr Webb sent Mr Voss a fax (at the hotel in London) attaching a list of shareholders in Conex (showing Pico as holding 83.28% of the shares), a list of the current directors of Conex (showing Mr Hart as Chairman, Mr Webb as director and Chief Financial Officer and Mr Wood as director, President and CEO). A schedule of net current assets of Conex as at 5 September 2000, showing expected cash disbursements for the next 6 months totalling US$69,952 and a current asset of a loan from Mr Wood of $115,858, leaving net current assets of $45,906, and a trading history since 1 January 1999 showing the share price as fluctuating and as being as low as 1c and as high as 8c. After referring to the attached documents, the fax continues:

“The schedule of net current assets shows the current assets and actual liabilities as of today. We have also shown anticipated expenses for the next six months but most of these will obviously be at your discretion. We are available to carry on reporting for Conex but if you have the resources it would be our preference for you to take it over. We can transfer the books and records at your convenience.
At the date of the trade, John, Peter Wood, Jim Mosier and myself will resign all positions with Conex and affiliates. Please advise me as to how you want to proceed with appointing new directors and officers.
Do you want to provide details about Dominion Capital Japan (for example: brief description of company, intentions etc.) in the required press release for the trade. If so, please let me know and I will incorporate this in a press release. However, please note, I do not believe we are any obligation to disclose anything other than a factual account of the trade.
Finally, I enclose a draft promissory note for your review. We have shown the note being payable on demand (with 30 days notice) and payable no later than 12 months from the date of the note but it is our intention not to call it prior to the expiry of that 12 month period.”

Pages 6 – 8 of the fax are the draft promissory note for US$1M which provides that, for value received, Dominion Capital promises to pay to Pico the principal amount together with interest at the rate of 8% per annum on a number of terms and conditions. Condition 1 provides that the principal and accrued interest should be repayable at the demand of the Payee following 30 days written notice to the maker and, in any event, to be repaid no later than September 8 2001. Condition 3 deals with events of default, which include a failure to pay any principal or interest owing, an assignment for the benefit of creditors and the appointment of a receiver of Maker’s property. Condition 4 provides that the obligations under the note “are secured by the delivery by Maker to Payee of 350,000 Common Shares of Dominion Wineries (“Pledged Stock”) held by Maker. The draft promissory note was received by Mr Voss and bears his written annotations. Against the due date of September 8 2001, Mr Voss wrote “12 months only. Never.” In condition 3 as to events of default, he inserted in the phrase “assignment for the benefit of creditors” after the word “assignment” the words “of the pledged security.” The following proposed condition was also written by Mr Voss on the draft note: “Should the Payee exercise its rights to take ownership of the Maker’s Pledged Stock in the event of default, this promissory note will be deemed to have been paid in full and the Payee will have no further claim against the Maker.”

It seems to me that overall the above annotations do not corroborate Mr Voss’s case that he was promised that the note would never be enforced and was simply for Pico’s auditors. If that were so, he would not have been contemplating a provision dealing with the consequences of the Payee taking ownership of the Pledged Stock. On the other hand, the note “12 months only. Never” might point in the contrary direction and the idea that the Pledged Stock, if taken, would be the full payment for the note suggests that some sort of assurance may have been given to him, but what it was is hard to say. The evidence is equivocal but I am satisfied, having regard to Mr Voss’s suggested amendments, that it was not suggested by Mr Webb that the note was not intended to be enforceable at all.

Mr Voss testified that he had a further telephone conversation with Mr Webb either late on 5 September 2000 or early on 6 September 2000 in which Mr Webb reiterated the essential matters which were required to be specified in the promissory note in order that it “look credible.” Mr Voss deposed that he told Mr Webb that he remained uncomfortable about the whole situation, that they had a transaction involving the Conex deal, with no promissory note, that required Pico to pay Dominion Capital US$1M from which they had now moved to a promissory note about which he knew nothing at the time of concluding the Conex deal, together with collateral security. According to Mr Voss, Mr Webb replied that it was not going to make any difference “because it’s never being called upon.” Again, I do not accept Mr Voss’s version.

On 6 September 2000, Mr Webb of Pico sent a fax to Mr Voss in London enclosing a draft press release dealing with the Conex share purchase and some other matters concerned with Conex, and then stating: “I also attach a revised promissory note which I have attempted to reword on the basis of our discussions. If you are happy with it and sign it I will immediately get the funds wired to Dominion Capital’s account per the instructions Vivienne sent me.” The attached revised promissory note apparently responded to some but not all of Mr Voss’s suggestions, but it is unnecessary to go into detail. Condition 1 as to repayment and Condition 4 as to the Dominion Wines shares were both retained.

Mr Voss signed the revised promissory note as Chairman and director of Dominion Capital. On 7 September 2000, Mr Voss went to Jersey in the Channel Islands. and, on or about 7 September 2000, Mr Voss (from a hotel in Jersey) sent a fax of 13 pages to Mr Webb of Pico, including a copy of the executed promissory note. The first page of the fax said “Please find attached returned signed documents…need to discuss other matters. Pete Wood could hand deliver shares and docs to me in H.K. …” The shares and documents presumably related to Conex, as Mr Wood was the Chairman of Conex.

On 8 September 2000, Mr Voss went to Hong Kong to look at the plant for the Jonyang joint venture. Also on 8 September 2000, Pico completed the transfer of its shares in Conex to Dominion Capital Japan for US$1 and Pico’s forgiveness of the debt Conex owed to Pico. Mr Hart and Mr Webb resigned as directors of Conex, and Mr Mosier resigned as Company Secretary.

On or about 11 September 2000, Mr Hart arranged for the transfer of US$1M from Pico into Dominion Capital’s bank account. Mr Hart said that the decision to lend US$1M to Dominion Capital was his decision and that he did so based upon: (a) the execution of the Promissory Note; (b) his visit to Dominion Wines and inspection of its assets; and (c) his conversation with Mr Webb regarding Mr Voss’s assurance that the Dominion Wines shares exceeded the value of the loan and that those shares were unencumbered. I find that Pico has failed to prove reliance on any alleged representation or assurance by Mr Voss regarding the Dominion Wines shares in respect of the September advance, because I am not satisfied that any such representation or assurance was made by Mr Voss. Indeed, I am satisfied to the contrary.

On 13 September 2000, Mr Voss transferred $500,000 from Dominion Capital to Solpower.

Mr Webb deposed that he instructed Mr Mosier in mid-September 2000 to obtain the Dominion Wines shares and financial statements of Dominion Wines from Mr Voss. There is no evidence that Mr Mosier did so and it seems doubtful that Mr Webb gave those instructions.

On 28 November 2000, Mr Voss wrote to Mr Mosier, reminding Pico that it had not completed the corporate resolutions necessary to transfer the Conex shares to Dominion Capital Japan. Mr Mosier replied on the same day, indicating that this would be done and also asking for the delivery up of the 350,000 Dominion Wines shares Certificate being security for the September Promissory Note. This was the first time that Mr Mosier requested the Share Certificates.

During December 2000, Conex was renamed Dominion International Inc, but for the purposes of lessening confusion, I will continue to refer to it as Conex. Conex was continuing to suffer financial problems, and Mr Voss deposed that he found these problems to be deeper than he had supposed.

On 8 December 2000, Mr Voss wrote to Pico to express concern about various liabilities of Conex. Mr Webb replied, saying that Dominion Capital had been fully informed of Conex’s liabilities.

By letter dated 18 December 2000, Pico (Mr Mosier) forwarded the corporate resolutions as requested and this time asked Dominion Capital (Mr Voss) to have his attorney acknowledge that 350,000 shares of Dominion “Wineries” had been set aside as security for the September Promissory Note.

On 20 December 2000, Mr Voss replied by fax to Mr Mosier, stating: “In regard to Dominion Wines 350,000 common shares, please speak to John Hart. The shares are held in a solicitors trust account who will provide you with a letter saying that they are held in trust.”

On or about 22 December 2000, Mr Voss telephoned Mr Hart and requested that Pico lend Dominion Capital US$1.2M which he said was needed for a settlement on 28 December 2000. According to Mr Hart (and confirmed by Mr Voss in examination-in-chief) Mr Voss suggested the use of a note “similar to how we did it in September.” Mr Hart phoned back later and said that Pico would lend Dominion Capital that amount, and Mr Voss replied saying that he would get the money back by 5 January 2001.

According to Mr Hart’s witness statement, Mr Hart said to Mr Voss that they would need some more shares as security and Mr Voss suggested 400,000 more shares in Dominion Wines, to which Mr Hart agreed. This testimony was also confirmed by Mr Voss in examination-in-chief.

By handwritten letter faxed to Pico and dated 22 December 2000, Mr Voss faxed to Mr Hart at Pico, Mr Voss wrote as follows:

“…Re:- USD 1,200,000 – short term loan facilities to Dominion Capital Pty Ltd
I apologise for the handwritten note…
To confirm our understandings I have set out the following points.
(1)USD 1,200,000 will be loaned to Dominion Capital on the following basis.
(A)The loan will be repaid by January 5^th 2001.
(B)Dominion Capital Pty Ltd will pay all costs and fees associated with the preparation of the loan documentation (promissory note or whatever).
(C)Dominion Capital Pty Ltd will pay interest on the loan equivalent to 12% per annum…
(D)Dominion Capital Pty Ltd will provide a letter from Prime Mortgage Group confirming Dominion Capital Pty Ltd will be in a position to repay the short term loan within the set period of the loan.
…

John, I cannot express my thanks enough for you and Ron assisting me at such short notice. As explained I was let down badly and was caught temporily [sic] between a rock and a hard place. Prime Mortgage are true professionals and you and Ron are real troopers and mates.
As explained I have to settle things by 28^th Dec which means the funds will probably have to be T.T. tomorrow…”

In his witness statement Mr Hart deposed that the above fax summarised much of the substance of his discussion with Mr Voss, except that it did not refer to what they had agreed concerning the Dominion Wines shares.

On or about 22 December 2000, Mr Hart also received a fax from Prime Mortgage Group Limited advising that funding for Dominion Capital of US$1.2M had been approved and the draw down was expected on 5 January 2001.

On or about 22 December 2000, Mr Hart instructed Mr Webb and Mr Mosier to prepare a draft promissory note and, later that day, Mr Hart sent a fax to Mr Voss attaching a final version of the draft December Promissory Note for execution and return. Mr Hart says that “he did not retain a copy of this letter” and that this was not unusual. Mr Hart also wrote to Prime Mortgage Group Limited acknowledging receipt of its letter and stating that Pico had relied on its letter in deciding whether to make interim funds of US$1.2M available to Dominion Capital Pty Ltd until January 5 2001, and also requesting the acceptance and acknowledgment of Prime Mortgage Group Limited that US$1.2M would be wired to Pico on January 5 2001 with no contingencies. (The acknowledgment and acceptance signed on behalf of Prime Mortgage Group was received by Pico).

By letter dated 26 December 2000, Pico instructed its bank to wire US$1.2M to Dominion Capital’s bank in Melbourne. Mr Voss testified that on 26 December 2000 (in Melbourne), he telephoned Mr Hart and asked whether the funds of US$1.2M had been transferred to Dominion Capital and that Mr Hart told him that it had already been arranged to be sent. Mr Voss testified that at the time of this telephone conversation, he had not returned the signed promissory note. Later that day, Mr Voss faxed back a copy promissory note signed by him on behalf of Dominion Capital. The promissory note provided for the repayment of the principal of US$1.2M plus interest at 12% per annum no later than January 5 2001. Condition 4 of the note, entitled “Collateral”, provided that “[t]he obligations under this Note shall be secured by delivery to Maker of Share certificates of 400,000[7] common shares of Dominion Wineries Limited[8] representing 11.43%[9] of the total issued and outstanding shares of Dominion Wineries Limited” and further provided (in condition 4):

“Maker hereby represents to Payee that the share certificates of Dominion Wineries and the share certificates of Dominion [Winemakers] delivered to Maker [sic] are not otherwise encumbered to any third party and that there are no obligations or commitments outstanding on the share certificates to any third party.”

[7]The number is inserted in handwriting and initialled by Mr Voss.

[8]The word “Limited” is inserted in handwriting and initialled by Mr Voss.

[9]Also inserted by Mr Voss.

Despite the clumsy wording, the redundancy, the careless mistakes in the name of Dominion Wines and the erroneous reference “delivered to Maker”, there is in my opinion still in substance, contained in condition 4, a representation by Dominion Capital to Pico that the Dominion Wines shares were not encumbered.

In his witness statement, Mr Hart said this:

“32.On or about 26 December 2000, based on:
(a)the execution of the December Promissory Note by Dominion Capital;
(b)the express warranty in clause 4 of the December Promissory Note;
(c)my conversation with Mr Webb in or around 29 August 2000, regarding Mr Voss’ assurance that some 300,000 common shares in Dominion Wines exceeded the value of the US $1 million September loan and that those common shares were unencumbered;
(d)my visit to the plant of Dominion Wines and the inspection of the assets of that company;
(e)my conversation with Mr Voss that 400,000 common Dominion Wines shares would be provided as security for the loan; and
(f)the letter from Prime Mortgage Group dated 22 December 2000…and the executed letter agreement purportedly signed by Mr Goddard… .

I instructed Richard Sharpe, Chief Operating Officer, Pico, to arrange with Pico’s bank for the wire transfer of US $1.2 million into Dominion Capital’s bank account in Melbourne. On 26 December 2000 a bank transfer authorisation was created… .
33.The decision as to whether Pico would lend to Dominion Capital the further US $1.2 million was mine. Pico would not have agreed to lend Dominion Capital the US $1.2 million or forwarded the December Promissory Note for execution or have advanced the US $1.2 million loan to Dominion Capital, had Mr Voss:
(a)not made the statement that the shares in Dominion Wines would be provided as security for the December loan;
(b)stated that the shares were encumbered;
(c)stated that the shares were estimated to be of a value less than the amount of the loan; or
(d)stated that the loan was to be for anything other than a short term period, of more than 2 weeks.

34.Pico would not have advanced the US $1.2 million loan to Dominion Capital if Dominion Capital had not executed and completed the December Promissory Note.”

In cross-examination, Mr Hart confirmed that, in advancing the money, he had relied on a letter from Prime Mortgage saying that a loan from it had been approved and that the draw-down of funds was expected on 5 January 2001. Mr Hart said that it was “a riskless, supposedly a riskless transaction, with a significant interest rate” and he said that it was riskless because he had the acknowledgment and acceptance of another lender that funds were to be advanced on 5 January 2001 (ie, which would enable repayment of Pico’s loan). I am satisfied on the evidence that Mr Hart instructed Mr Webb to prepare the December Promissory Note and that Mr Webb inserted the relevant words in condition 4 at the request of Mr Hart. I am further satisfied that Mr Hart reviewed and approved the contents of the draft Promissory Note before it was despatched by Pico to Dominion Capital. The following exchange concerning condition 4 of the Promissory Note occurred in cross-examination:

“Q:Now, I put it to you that that was absolutely of no concern to you as to whether there was an encumbrance, or not, because you had the letter of comfort from Prime Mortgage, didn’t you?
A:That is inconsistent with this document. It is in the document so obviously it was important.
…
Q:And the fact of the matter is that you were prepared, meaning Pico was prepared, to advance these funds by way of loan to Dominion Capital, effectively on a nod and a wink, weren’t you?
A:Sir, Pico was prepared to deal with what the note says.
Q:And that was on the strength of a handwritten letter and two telephone calls on the 22^nd of December, correct?
A:It was on the strength of this agreement and the representations and warranties and everything else this agreement says. That is why we have agreements.”

I have rejected the evidence that Mr Voss gave any assurance in August 2000. Accordingly, the only “reliance” relevant to the December advance is reliance upon the contents of the executed Promissory Note.

By fax dated 27 December 2000 to Mr Voss, Mr Mosier on behalf of Pico requested the “assistance [of Mr Voss] as soon as possible on two matters, both involving Dominion Wineries.” The fax continued:

“The first involves 350,000 shares of Dominion Wineries which are required to be set aside as collateral for the September 8, 2000 note between Dominion Capital and PICO. The second involves 400,000 shares of Dominion Wineries which are collateral for the December 23, 2000 note between Dominion Capital and PICO. We need written assurance and evidence as soon as possible, in both matters, that the share certificates discussed above have been set aside as collateral in a trust account in PICO’s name.
Also, in anticipation of Deloitte & Touche’s year-end audit of PICO, could you please send me the most recent financial statements of Dominion Wineries?”

Dominion Capital did not repay the US$1.2M loan on the due date of 5 January 2001.

In a letter dated 6 January 2001 from Dominion Capital to Mr Mosier of Pico, Mr Voss said:

“Re:- Dominion Wines Limited Shares
Please find copies of Dominion Wines Limited Share Certificates No. 23 amount 349,900 ordinary shares and No. 24 amount 410,000 ordinary shares being held as security by Pico Holdings Inc against the two promissory notes to Dominion Capital Pty Ltd in the amounts of USD1,000,000 and USD1,200,000 respectively.
Rather than change original certificates to reflect the 350,000 and 400,00 shares total 750,000 as per the agreements I have left them as is which provides a grand total of 759,900.
At the end of the day its [sic] not going to make any difference anyhow because the origination of the transaction was to benefit both parties.
My solicitor returns from leave on Monday 8^th Jan and I will have him verify that the certificates are being held in trust for Pico Holdings Inc against the promissory note…”

Attached to the letter is a photocopy of Share Certificate No. 24 but there was no copy of Share Certificate No. 23.

Shortly after 5 January 2001, Mr Voss telephoned Mr Hart and said that he was going to Sydney to get everything resolved, meeting with his lawyers to get the $1.2M loan resolved and the funds should be on their way shortly.

In mid-January 2001, Mr Hart instructed Mr Mosier to execute an addendum dated 4 January 2001 to the December Promissory Note purporting to extend the repayment date to 30 April 2001, but he did not tell Mr Voss. It would seem that the amendment was simply to keep Pico’s auditors happy.

On 31 January 2001, Pico (Mr Hart) faxed Dominion Capital (Mr Voss), stating:

“Dear Pete,
Attached is a memo I received this morning from Max Webb. As you can see our investments with Dominion are becoming a problem with our auditors. With the exception of the unpaid loan the remaining items are merely administrative. Unfortunately, that isn’t how the auditors view it.
I don’t want the auditors stating in an audit letter that we have made reckless investments without proper documentation or equally as bad, requiring that we make some sort of provision.
We have always responded in a timely manner when we have made a commitment to provide funds. Unfortunately, despite repeated request [sic] for proper documents, the favor has not been returned which has now created a material problem for us.
The unpaid loan and these administrative items have become an embarrassment to me personally. I understand your difficulty with liberating your funds to repay the loan and have been patient but I see no excuse for these other issues.
We need to have these issues dealt with immediately and “nip this in the bud.” Please make this a priority. …”

Attached to the above fax was a memo from Mr Webb referring to the “audit of Pico’s 2000 financials” and stating that their biggest issue at that stage was back-up documentation for the investments and loans they had with the Dominion Capital Group. After noting that Pico had the share certificates and loan agreement for its investment in and loan to Solpower (US$1.7M), Mr Webb referred to a number of outstanding matters, including:

“Share certificates and most recent financial statements of Dominion Wineries that represents collateral for the two outstanding loans with Dominion Capital (total $2.2 million). It is possible that without demonstrating realizable collateral to the auditors that they may insist the loans be written off in the Pico accounts. …
My fear is that if we don’t have all the information for the individual pieces the auditors will lump all the investments together as one due to their related party nature and force us to make a provision against the entire balance.
Could you intervene and speak with Peter Voss and impress upon the urgency with which we need this information?”

On or about 8 February 2001, Mr Hart and Mr Voss had a telephone conversation in which Mr Voss said that he was really embarrassed. Mr Voss said that it was not as if he did not have the capital and that he had over US$10M in off-shore accounts which he could not access. Mr Voss said that he was going to Japan, but he could not get the money by agreement from the partnership in which Dominion Capital Japan was involved until October 2001, but he was going to amend that agreement so that he could pay Pico off sooner. Mr Voss said that he would come to La Jolla straight from Japan, and he would pay off the [December] loan and deliver the Dominion Wines Share Certificates.

On 8 February 2001, Mr Perri of Pico wrote to Mr Voss asking him to confirm the September and December advances to Dominion Capital and the collateral for those amounts.

On or about 9 February 2001, Mr Voss, on behalf of Dominion Capital, signed and returned to Pico’s auditors confirmation that Dominion Capital was indebted to Pico in the sum of US$1M under a promissory note of 8 September 2000 plus interest at 8%, secured by collateral of 350,000 in Dominion “Wineries” and the further sum of US$1.2M under a promissory note dated 22 December 2000 at an interest rate of 12% secured by collateral of 400,000 Common Shares in Dominion “Wineries.”

On 18 February 2001, Mr Hart faxed Mr Voss, referring to their conversation on 8 February, and noting that no funds had been received. The fax concluded: “Frankly, my patience is starting wear a bit thin as I find myself continually having to explain why the funds haven’t been wired and why the share certificates haven’t been sent. I need to hear from you as soon as possible.” It does not appear that there was any response to this fax.

By letter dated 26 March 2001, Dominion Capital (Mr Voss) said to Pico (Mr Hart) “as per our discussions, for audit purposes please find the attached.” Attached was a letter dated 24 March 2001 addressed to Pico from Stewart Green Mijovich Solicitors (“Stewarts”) of Manly, New South Wales, stating: “We confirm that this office holds, in trust, Dominion Wines Limited Share Certificates No. 23 & 24 for the sum of 549,00 and 410,00 shares respectively as security against Promissory Notes in the amounts of USD $1,200,000 and USD $1,000,000 respectively. The security shall remain in trust until otherwise instructed in writing by the parties to the agreement.”

In or about late April 2001, Mr Hart telephoned Mr Voss, saying that Pico had a continuing problem with its auditors and the $1.2M loan and the collateral. According to Mr Hart, Mr Voss said:

“Why don’t I give you my Turf Club property at the Gold Coast. It’s unencumbered. I will give you a recent valuation report. It’s worth at least double the value of the loan. It will be easier for the auditors to work out the value of the property than the winery. I will get the money to you shortly. There have been all sorts of administrative problems. Don’t worry. I will definitely get the money to you, if you can wait a little longer until the admin issues are cleared up.”

Mr Hart replied, saying that he would need more than the property to extend the due date for the loan. He mentioned a number of matters, including “the title deeds to the property and a recent valuation report on the property for our auditors.” Mr Voss agreed, and Mr Hart said that Pico would extend the repayment date for the December Promissory Note to 31 May 2001.

By letter dated 4 May 2001, from Dominion Capital (Mr Voss) to Pico (Mr Hart), Mr Voss said:

“This letter is to confirm that as consideration for PICO Holdings Inc agreeing to extend the maturity date for the US$1.2 Million loan to May 31^st, 2001, I will provide additional substitute collateral. The collateral is the deed for property described as Lot 2, Registered Plan 817782, County of Ward – Parish of Nerang, Local Government – Gold Coast (as described in Certificate of Title attached) with a valuation of $3.8 to $4.1 Million. This collateral is in substitute of previous collateral provided which will increase your security to effectively provide you with a loan value ratio of approximately 50%
My solicitors will immediately provide a letter confirming that the deed is held in trust for the benefit of PICO Holdings Inc as collateral. In addition, a copy of the most recent valuation report will be forwarded.”

A photocopy of the Certificate of Title was enclosed with the letter, which showed the registered owner as Turf Club Australia Pty Ltd (“Turf Club”).

In mid-May 2001, Mr Hart asked Mr Mosier to amend the December Promissory Note so that the repayment date was 31 May 2001.

Various discussions and negotiations between Pico and Dominion Capital took place, but no resolution was achieved and the December advance was not repaid.

In early June 2001, Pico retained its present solicitors, Gilbert + Tobin (“Gilbert”). On 14 June 2001, Gilbert wrote to Stewarts, noting that Stewarts held Share Certificate No. 23 as security for the December advance and that they were to hold the substitute security, the title to the Gold Coast property. Gilbert requested confirmation that Stewarts held the original Certificate of Title and for Stewarts to provide the valuation report as soon as possible. On 18 June 2001, Gilbert again wrote to Stewarts, this time requesting the original Share Certificate No. 23 for Pico to hold as security for the September advance. Stewarts replied to neither of the June letters and on 21 June 2001, Gilbert faxed Stewarts seeking a reply to their faxes and telephone messages. At some stage, there was a telephone response from Stewarts, but Gilbert again wrote to Stewarts by faxed letter dated 29 June 2001, demanding the original Certificate of Title. On the same date, Gilbert faxed a letter to Dominion Capital demanding payment of the principal and interest due under the December Promissory Note. By fax dated 2 July 2001 to Gilbert, Stewarts finally replied and advised that it held Share Certificates Nos. 23 and 24, but had no other knowledge of the matter, and had sought instructions from Mr Voss. Apart from a reference in the heading of the fax, there was no comment concerning the Gold Coast property.

By faxed letter of 17 pages dated 4 July 2001 from Gilbert to Dominion Capital and Mr and Mrs Voss (as directors of Dominion Capital), Gilbert addressed a number of issues concerning the non-payment of the December Promissory Note. The letter referred to the existence of the NAB charge (of which, I note, Pico had learned in late June 2001). The letter stated that, in the absence of authorisation from the Bank, the existence of the charge meant that there had been a breach of the conditions of both Promissory Notes. The letter alleged that Mr Voss had represented to Pico that the Dominion Wines shares were not encumbered to any third party. The letter made numerous demands, including payment of the December advance, the provision of the shares as security for the September advance and that Mr and Mrs Voss acknowledge personal liability to Pico in respect of both Promissory Notes.

The Gilbert letter also referred to a company search of Turf Club, the registered owner of the Gold Coast property, which revealed that there was two issued shares, one of which was held by a company controlled by Mr Voss and one of which was held by a company controlled by one Mark Howard, both individuals being directors of Turf Club. The letter queried whether Turf Club was aware of and consented to Dominion Capital providing Pico with a mortgage over the property.

On 9 July 2001, Pico filed a writ against Dominion Capital in the Supreme Court of Victoria and on 30 August 2001, Pico obtained summary judgment against Dominion Capital in respect of the US$1.2M loan. This judgment was never satisfied; in addition, the September advance was never repaid. The present proceeding was commenced by writ filed 28 August 2001.

On or about 5 October 2001, Pico commenced a proceeding in the Supreme Court of Queensland against Turf Club (then called “Wave Vistas Pty Ltd”) seeking an order for sale of the Gold Coast property. In or about February 2002, National Australia Bank Limited, which claimed an interest in the property, was joined as second defendant to the proceeding. Pico’s claim was dismissed by the trial judge, Helman J, on 26 March 2002.[10] Helman J found that Turf Club was not a party to the relevant agreement between Pico (Mr Hart) and Dominion Capital (Mr Voss). On 23 May 2003, the Queensland Court of Appeal dismissed Pico’s appeal from the judgment of Helman J.
[10][2002] QSC 86.

On 2 November 2001, Pico made application in the Federal Court for an order winding up Dominion Capital and on 7 December 2001, the Federal Court made a winding up order and Michael Humphris was appointed as liquidator. On the same date, National Australia Bank Limited appointed Peter Damian McCluskey and John Ross Lindholm as receivers and managers of Dominion Capital pursuant to the NAB charge. The shares in Dominion Wines were sold by the receivers.

The September advance

In relation to the September advance, I have found that there was no express representation made to Pico, in August 2000 or at all, by Dominion Capital or by Mr Voss that the shares in Dominion Wines were unencumbered. It was argued in the alternative by Pico that a warranty was to be implied in the September Promissory Note that the Dominion Wines shares were unencumbered. In my opinion, no such implication is open to be made. The suggested implied representation (or warranty) is neither obvious nor necessary to give business efficacy to the Promissory Note or the security supporting it. In any event, there was no evidence that Pico relied upon any such implied warranty. Accordingly, Pico’s claim against Mr Voss in relation to the September advance fails.

The December advance

The words in condition 4 of the December Promissory Note containing the statement that the Dominion Wines shares were not encumbered were frequently referred to during the trial as constituting a warranty, and probably they do. However the issue is not “whether the warranty in condition 4 constitutes a representation” because the language of representation is used. There is an express representation by Dominion Capital, as I read it, that the Dominion Wines shares are not encumbered to any other party. The question was not explored as to what Mr Hart understood by this representation. It was, I think, suggested, but not fully argued, that it was not possible to determine whether the representation was false in the absence of evidence as to what Mr Hart understood by it. However, it seemed to be assumed that everyone concerned knew what was meant by “encumbered.” That may be correct. I have looked at two American sources, given the location of the recipients of the representation. Merriam-Webster Dictionary[11] defines “unencumbered” as free from encumbrances and “encumbrance” as impediment or a claim (as a mortgagee) against property. Black’s Law Dictionary[12] defines “unencumbered” as without any burdens or impediments. Perhaps one is entitled to assume that Mr Hart understood “not encumbered” to mean, in the context, free of any claims by or impediments from other parties. If so, the next question is whether the representation was false and the conduct constituted by the making of the representation misleading or deceptive as a result.
[11]Free online version: edition, West Group, 1999.

In my opinion, the representation was false and the conduct of Dominion Capital constituted by the making of the representation was therefore misleading and deceptive. The Dominion Wines shares were at all relevant times subject to the fixed charge created by cl. 4.1 of the NAB charge. Mr Voss failed to make out a case that the Dominion Wines shares fell within the exception contained in cl. 4.1(f). On the contrary, I am satisfied that the Dominion Wines shares were not acquired by Dominion Capital for the purpose of disposal in the ordinary course of the ordinary business of Dominion Capital. I accept that it was part of the ordinary business of Dominion Capital to buy and sell shares, but I am satisfied that the shares in Dominion Wines were not acquired for the purpose of disposal in the ordinary course of that part of Dominion Capital’s business, but rather were acquired as a long term investment. The Dominion Wines shares were therefore encumbered. Given those conclusions, it is unnecessary to determine whether the Dominion Wines shares would in any event have been encumbered by the crystallisation of the floating charge contained in the NAB charge or by the floating charge itself.

The above conclusion accepts the way in which the matter was pleaded by Pico in paragraph 17(a) of the Statement of Claim. My conclusion is thus that Dominion Capital (subject to arguments about extraterritoriality) contravened s.52(1) of the Trade Practices Act by making the false representation contained in condition 4 of the December Promissory Note.

I am further satisfied that Pico was materially induced to make the December advance, in part, by the representation in the Promissory Note that the Dominion Wines shares were not encumbered, and I accept Mr Hart’s evidence in this respect. I am also satisfied that Pico (Mr Hart) would not have advanced the moneys if it (and he) had been aware that the Dominion Wines shares were encumbered by the NAB charge. It is inappropriate to speculate concerning whether Pico would have advanced the money upon some other security or not advanced it at all. I am satisfied that Pico suffered damage by the contravention, but, for reasons which follow, I do not consider that Mr Voss is liable for that damage.

The vital question is whether Mr Voss was, within the meaning of s.75B(1)(c) of the Trade Practices Act, “knowingly concerned in, or party to,” the said contravention. I have noted[13] that the pleading and particulars do not identify the matters which Mr Voss knew for the purposes of this question. It has been authoritatively stated by the High Court in Yorke v Lucas[14] that for a person to be knowingly concerned in, or party to, a contravention the person must have knowledge of all the essential elements of the contravention.[15] Unfortunately, the Statement of Claim does not identify the elements of the contravention which Mr Voss is alleged to have known. Nor was it made clear in opening by Mr Pearce, who appeared as Counsel for Pico.
[13]See para [15] above.
[14](1985) 158 CLR 661.
[15]See too, among many cases, Richardson & Wrench (Holdings) Pty Ltd v Ligon No. 174 Pty Ltd (1994) 123 ALR 681, 693-5; ACCC v Michigan Group Pty Ltd [2002] FCA 1439 (26 November 2002); ACCC v IMB Group Pty Ltd [2003] FCAFC 17 (20 February 2003); Citibank Limited v Liu [2003] NSWSC 569 (25 June 2003) at [72]; Medical Benefits Fund of Australia Limited v Cassidy [2003] FCAFC 289 (16 December 2003) and cases therein cited.

Although it is fair to say that the defendant did not know exactly how Pico was putting its case in this regard, Mr Voss met the allegation that he was knowingly concerned in the contravention by evidence that he believed that the Dominion Wines shares were not affected by the NAB charge. In his witness statement, he said this:

“The charge was given by Dominion [Capital] in October 1996 over the whole of its assets and undertaking. Dominion Wines was incorporated in April 1999…Dominion [Capital] acquired approximately 1.1 million shares in Dominion Wines at the time of incorporation of Dominion Wines. At the time of acquisition, it was my intention, as managing director of Dominion [Capital], that the shares would ultimately be disposed of in order to produce a return on investment for Dominion [Capital], probably after a float of Dominion Wines. I held, and still hold, the view that Dominion [Capital] was free to deal with the Dominion Wines shares, at any time, in the ordinary course of its business. I did not, and do not, believe that the charge prohibited Dominion [Capital] from so acting.”

The matter was further touched upon in cross-examination as follows:[16]
[16]At transcript pages 557 – 558.

“Q:Alright, Mr Voss. Let me ask you this: it was your genuine belief at the time, that those shares were not caught by a fixed charge to the National Australia Bank, isn’t that right?
A:Absolutely.
Q:Yes. So that if Mr Webb, or, in fact, anyone at about that time, had asked you whether those shares were encumbered your honest answer would have been ‘No’?
A:It would have my belief, yes. But it wasn’t asked.
…
Q:Would you now answer my question again: had you been asked the question you would have said ‘The shares are unencumbered’?
A:Yes.”

It was further dealt with in re-examination as follows:[17]
[17]At transcript page 626.

“Q:Yes. Mr Voss, you were asked by my learned friend about your belief at the time of the September promissory note, as to whether or not the shares were caught by the fixed charge to the NAB. Do you recall that question?
A:Yes, I do.
Q:And if Your Honour pleases, volume 1, court book 295: Mr Voss, at 295 and 296, do you see Clause 4 headed "Nature of Charge"?
A:Yes, I do.
Q:What I want to ask you this: at any time prior to the December advance of $1.2 million, received by Dominion Capital on 27 December 2000, at any time prior to that date, had you read the content of Clause 4 headed "Nature of Charge" in this document?
A:No, I had not.
Q:At any time prior to that date had anyone explained to you the nature of charge in Clause 4 of that document?
A:No, they had not.
Q:At any time prior to that date were you aware how that nature of charge operated?
A:No, I did not.
HIS HONOUR: If that is so, Mr Voss, how did you come to believe that the charge didn't affect the shares, if you hadn't read the document?
A:The charge didn't affect the shares?
HIS HONOUR: Yes. It was your belief that the charge to the bank did not affect the Dominion Wine shares. How could you come to that view, if you hadn't read the charge?
A:Well, because, sir, at no point in time during all of the course of Dominion's dealing and its day-to-day business had – and the bank was fully aware of it - had they ever at any point in time restricted me in any way, shape or form of dealing with those, sir.”

I accept that Mr Voss believed that the Dominion Wines shares were not affected by the NAB charge – indeed, I did not understand Mr Pearce to contend to the contrary. I cannot accept, however, that he had any belief that the shares were not subject to a fixed charge based on some interpretation of cl. 4.1(f) when he had never read cl. 4 or had it explained to him. However, the real question is not what Mr Voss believed, but whether he knew the facts and matters constituting the essential elements of the contravention. Mr Pearce submitted that Mr Voss knew the following matters which constituted the essential elements of the contravention: that Mr Voss knew of the making of the representation by having signed and sent the Promissory Note and that Mr Voss knew of the existence of the NAB charge. I am satisfied that Mr Voss knew of the making of the representation, in that he had signed and sent the Promissory Note. Nor was it in issue that he knew of the existence of the NAB charge. I do not think that Mr Voss’s knowledge of the existence of the NAB charge is sufficient of itself.[18] In my opinion, it was an essential element of the contravention that the Dominion Wines shares were encumbered by the NAB charge and it is that matter which Pico had to prove was known by Mr Voss. I do not think that Pico has established that Mr Voss knew that the Dominion Wines shares were encumbered by the NAB charge. Mr Pearce submitted, in the alternative to his reliance on Mr Voss’s knowledge of the mere existence of the NAB charge, that Mr Voss should be taken to have constructive knowledge of the contents of the NAB charge. I cannot accept that submission. In my view, actual knowledge must be shown. In a given case, a reckless attitude concerning the existence of the relevant fact or matter might arguably be sufficient for the purposes of s.75B(1)(c),[19] but this was never suggested in the present case. I am therefore not satisfied that Mr Voss was knowingly concerned in, or party to, the contravention by Dominion Capital.
[18]I note in this regard that what Mr Voss actually knew about the NAB charge was not fully investigated.
[19]See Richardson & Wrench (Holdings) Pty Ltd v Ligon No. 174 Pty Ltd (1994) 123 ALR 681, 693-4.

Accordingly I conclude that Mr Voss is not liable to Pico pursuant to the provisions of the Trade Practices Act, and it is unnecessary to consider the arguments concerning the extraterritorial operation of that Act.

I turn now to Pico’s alternative claim, pursuant to ss.9 and 159 of the Fair Trading Act 1999 (Vic). This claim is made against Mr Voss as a primary contravener. It is contended by Pico that Mr Voss, by signing and despatching the December Promissory Note to Pico, engaged (in trade or commerce) in conduct that was misleading or deceptive within the meaning of s.9(1) of the Fair Trading Act.

I mention at the outset that it was contended on behalf of Mr Voss that because Pico was misled in California, where it received the Promissory Note, the Fair Trading Act was inoperative. However, it was accepted that, if s.6(2)(b) of the Fair Trading Act applied, this contention would fail. Section 6(2)(b) of the Fair Trading Act then provided that the Act applied to the engaging in conduct outside Victoria by persons ordinarily resident in Victoria. I am satisfied on the evidence that Mr Voss ordinarily resided at 7 North Road, Brighton during the period December 1997 to December 2001. I am satisfied that at all relevant times Mr Voss was ordinarily resident in Victoria. To the extent that it may at all be said that Mr Voss engaged in relevant conduct outside Victoria, the Fair Trading Act is still operative. I note that it was further argued that “outside Victoria” meant “outside Victoria but within Australia.” I do not accept this argument. I am not persuaded that the words bear anything other than their ordinary meaning, ie, anywhere in the world out of Victoria.

It was submitted on behalf of Mr Voss that the conduct (ie, the making of the false representation that the Dominion Wines shares were unencumbered) was conduct of Dominion Capital and not of Mr Voss. It was submitted that Mr Voss was acting on behalf of Dominion Capital and not in his personal capacity. He could be liable (if established) as an accessory,[20] but he could not be the primary contravener, citing Hamilton v Whitehead.[21]
[20]This was not alleged.
[21](1998) 166 CLR 121.

In Hamilton v Whitehead, s.169 of the Companies (Western Australia) Code prohibited a person from issuing to the public any prescribed interest and a section of a related Code provision made guilty of an offence any person who aided and abetted or was in any way directly or indirectly knowingly concerned in or a party to the commission of an offence under s.169.

The High Court (Mason CJ, Wilson and Toohey JJ) held that the liability imposed on a company by s.169 was direct, not vicarious. A person who had knowledge of all the material circumstances, even if that person’s conduct constituted the commission by the company of the offence, could be convicted as an accessory (ie, of being knowingly concerned in the offence). The Court said that the respondent, in placing an advertisement and in dealing with those who replied to it, was the company. The company was therefore liable as a principal. The respondent, as the actor in the conduct constituting the offences, had knowledge of all the material circumstances and hence was knowingly concerned in the commission of the offence. The Court approved of judicial statements that it was a logical consequence of the decision in Salomon’s case that one person might function in dual capacities. This decision was relied upon to support the proposition that Mr Voss could not be liable as a principal but only as an accessory, when what in fact the case decided was that a person could still be liable as an accessory even if his conduct was the very conduct for which the company was liable as a principal.

The present case is different but I think that Mr Voss is not liable as a principal for other reasons. This is not a case where the precise conduct of an alter ego of the company constitutes conduct both of the company and of the individual.[22] In this case, the representation is expressly made in writing in the Promissory Note by Dominion Capital and not by Mr Voss (“Maker hereby represents to Payee…”). Mr Voss did not make and did not purport to make that representation. The conduct of Mr Voss was participatory and was constituted by signing (on behalf of Dominion Capital) and sending (on behalf of Dominion Capital) the Promissory Note. It was the representation and conduct of the company and not of Mr Voss that was false and misleading. Unlike the case of Hamilton v Whitehead, the representation was not made by an individual in dual capacities; it was made by the company.[23] Furthermore, approaching the matter from the point of view of the inducement to Pico and Pico’s reliance on the representation, it seems to me that Pico was not induced by and did not rely upon any relevant representation or conduct of Mr Voss in advancing the money. What Pico relied on, and what Mr Hart said that he relied on, was the written terms of the document.[24]
[22]Compare the facts in Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR ¶40-940.
[23]Compare Citibank Limited v Liu [2003] NSWSC 569 (25 June 2003) at [47] – [53] and [70].
[24]See too paragraph 12(d) of the Statement of Claim.

I am therefore of the opinion that Pico’s claim against Mr Voss in relation to the December advance also fails.

For the foregoing reasons there will be judgment for the defendant with costs (including reserved costs).

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CERTIFICATE

I certify that this and the 47 preceding pages are a true copy of the reasons for Judgment of Mandie J of the Supreme Court of Victoria delivered on 2 August 2004.
DATED this second day of August 2004.

Aimee Kinda, Associate to Mandie J