Pilmer & Ors v The Duke Group Ltd (in liq)

[2000] HCATrans 139

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A46 of 1999

B e t w e e n -

ANGUS CLAYMORE PILMER

First Appellant

ALAN ROBERT CRAWFORD

Second Appellant

DOMENIC VINCENT MARTINO

Third Appellant

PETER JOHN MESSER

Fourth Appellant

PETER LAWSON MUNACHEN

Fifth Appellant

PAMELA ANNE ROBINSON and JOHN RICHARD LANGFORD as executors of the estate of GEOFFREY JAMES STOKES deceased

Sixth Appellants

ROBERT JOHN GRAY

Seventh Appellant

and

THE DUKE GROUP LIMITED (IN LIQUIDATION)

First Respondent

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Second Respondents

HAROLD ABBOTT

Third Respondent

KEVIN CLARENCE SOMES  and SIR ERNEST LEE‑STEERE

Fourth Respondents

RONALD WILLIAM EDWARD ARNOLD and OTHERS (as per attached schedule)

Fifth Respondents

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Sixth Respondents

HAROLD ABBOTT, KEVIN CLARENCE SOMES and SIR ERNEST LEE‑STEERE

Seventh Respondents

McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 7 APRIL 2000, AT 10.21 AM

Copyright in the High Court of Australia

________________

MR A.J. MYERS, QC:   May it please the Court, I appear with MR P. ZAPPIA on behalf of the appellants.  (instructed by Phillips Fox)

MR T.A. GRAY, QC:   May it please the Court, I appear with my learned friends, MR R.J. WHITINGTON, QC, MR S.J. LIPMAN and MR S.J. DOYLE, for the respondent.  (instructed by Fisher Jeffries)

McHUGH J:   Before you commence, Mr Myers, in this matter I hold a certificate from the Senior Registrar of the High Court which indicates that she has been informed by Messrs Johnson Winter & Slattery that Francis Anthony Quilty, the firstnamed second respondent, does not intend to appear or make submissions on the hearing of this appeal.  Messrs Johnson Winter & Slattery are no longer instructed by Keith Daniel Singleton, the secondnamed respondent.  No appearance has been filed on behalf of Harold Abbott, the third respondent.

The Senior Registrar has been informed by Mr Alden Halse, the trustee of the bankrupt estate of Harold Abbott, that he will not be represented at the hearing of this appeal and will submit to the orders of the Court, save as to costs. 

The Senior Registrar has been informed by Messrs Hume Taylor & Co that Kevin Clarence Somes and Sir Ernest Lee‑Steere, the fourth respondents, will not be appearing at the hearing of this appeal.

The Senior Registrar has also been informed by Messrs Phillips Fox that there will be no appearance for the fifth respondents at the hearing of the appeal.  However, Messrs Phillips Fox have been unable to obtain instructions from Gordon Maxwell Tremain, the thirty‑seventh named fifth respondent.

Yes, Mr Myers.

MR MYERS:   Thank you.  Your Honours, the central facts in this appeal can be stated very succinctly.  There are just a few figures which the Court might have in

mind.  Before the takeover, which is the subject of the appeal, Kia Ora had assets of $56 million – I am using approximate figures, but they are true within one million – and had 68 million shares on issue.  In the takeover it paid out $26 million in cash and it issued 68 million new shares.  So the number of shares doubled, within a few hundred thousand, and it got assets which the Court below found were worth $6 million.  Before the takeover, Kia Ora was a cash box; its assets were cash for all practical purposes.

McHUGH J:   Having regard to its share price, it was quite an investment as a cash box company as at that point of time.

MR MYERS:   Well, as at that point of time, your Honour, cash box companies were a bit of a drug on the market.  What had happened was that shortly before the share crash, a great number of companies had been capitalised with cash to exploit the boom – one may say it has even happened again recently – and then with the crash, you could not do anything with them.  Many of them were simply wound up and the cash distributed and others, of course, the cash was dissipated.

The decision of the Full Court below awarded $20 million plus $56 million for the shares.  The $20 million is easy to understand:  it is the difference between the $26 million that is paid out in cash and the $6 million that remains.  But, in addition, there was an element of the award of damages for the shares.  Thus, before the transaction, the company had about $56 million in assets and 68 million shares.  After the transaction, its assets were doubled and its shares were doubled.  The transaction reduced the net assets of the company by about $20 million, yet the company got $76 million, this is before interest, by way of compensatory damages.  The takeover transaction, by doubling the number of shares on issue, maybe one can say, approximately, would have halved the value of each existing share before the transaction, so that each existing shareholder suffered a loss equal to one half of the value of each existing share.

One assumes that the effect of the decision below is that none of those shareholders would be entitled to sue for that loss.  It is almost inconceivable that they would be so entitled otherwise, on any view of things, there would be double compensation.  The next thing that one can point out is that the persons who benefit from the award of damages so far as it relates to the issue of shares include the persons who benefited when they got too much for their Western United shares in the original transaction.

We know that they to some extent, probably a very large extent, but I can say to some extent are not only people who benefited twice or potentially benefited twice but they are the very wrongdoers, that is the directors who were incompetent or dishonest, who took the company into this transaction.

McHUGH J:   Well, these are your points of prejudice, but do they really advance the legal analysis any more than Mr Gray’s argument that if you had issued these shares for cash and then purchased the shares in Western Mining you would have no complaint?

MR MYERS:   Your Honour, this is one of those cases in which I want to say that the result is so startling and it brings about such an injustice that it must be wrong and that is the purpose of saying that.  The case that was pleaded below is worth looking at at this point.  It is at page 348 of volume 2 of the appeal book.  The pleadings occupy two volumes of the appeal book and they are somewhat discursive, but at page 348 in paragraph 98 one sees this pleading:

In consequence of the breach of contract and negligence of Nelson Wheeler particularised above Kia Ora paid consideration in implementation of the takeover.

The consideration comprised cash of $25,696,129 and 67,951,751 shares in Kia Ora valued at $1.10 per share being the price assessed by Nelson Wheeler as the price of Kia Ora’s shares at the date of preparing their report.

In consequence of the matters referred to in paragraph 98 above, Kia Ora has suffered the following loss and damage which was within the contemplation of Nelson Wheeler at all material times:

the amount of $85,443,058 being the difference between the amount of $100,443,058 paid by Kia Ora for all of the issued capital…..and the value of Western United at the date of the takeover……$15,000,000.

Well, in fact, the value was ultimately assessed to be $6 million and the $100 million is made up of the cash plus the 68 million shares multiplied by $1.10 each.  That is how it was pleaded.  The trial judge, Mr Justice Mulligan, awarded, in respect of the issue of shares, $30 million being 45 cents per share.  It is explained in our outline of argument how his Honour calculated this.  In fact, 45 cents per share, on the evidence, was the price of the shares on the stock market on 31 December, being the date at which his Honour assessed the loss.  The Full Court ‑ ‑ ‑

McHUGH J:   The full transaction was not completed until after that date, was it?

MR MYERS:   No, it was not, but that was the date as at which his Honour assessed the damages.

McHUGH J:   Yes.

MR MYERS:   The full transaction was not completed until towards the end of January.

McHUGH J:   I do not think it matters, but was there any material difference in the share price at the time of the compulsory acquisitions?  There was a compulsory acquisition for the remaining couple of per cent.

MR MYERS:   Yes, there was.

McHUGH J:   I do not think it makes much difference.

MR MYERS:   I will have a look, your Honour.  I do know that in the judgment the 45 cents is referred to and I thought I had written down the reference and my learned junior might find it in a moment.  Yes.  This is in Justice Mulligan’s reasons for decision.  At page 399 at line 48 at 31 December 1987 the “share market price is 45 cents.”  And then his Honour goes on to calculate a price in a manner that is set out at the bottom of 399 and the top of 400 which arrives, one might say, coincidentally, I am not sure, at the same value.

The Full Court took a different approach.  The Full Court divided the cash or the assets of Kia Ora as determined by Mr Easton, an accountant, by the number of shares before the takeover transaction occurred and that resulted in a value of 82 cents per share.  That is arithmetic that one can easily do in an approximate way by dividing 56 million by 68 million.

In our submission, the Full Court’s decision was wrong.  The question for the court was whether the company, by the issue of shares, suffered a loss.  One asks:  what is the loss?  Not its monetary amount, but how does the loss arise?  How does one describe it?  What is its identity?  It could be a loss of the assets of the company, meaning the net assets of the company.  That is one candidate.  It could be a loss of opportunity that the company had.  It could be a loss of expectation.  It could conceivably be something else, but they are the three candidates that have been examined thus far.

McHUGH J:   One thought that occurred to me – and perhaps it assists you more than your opponent – is that the real loss here is a loss of shareholders’ funds when one works out the total transaction.  Let me give you an illustration.  Supposing you have a company with $100,000 worth of assets and issued capital, shareholders’ funds on the other side of the balance sheet of $100,000,  You then have an issue of 100,000 shares in return for assets of 100,000, so nominally shareholders’ funds are 200,000, and on the assets side you would have $200,000 worth of assets.  But let us assume that the assets that were obtained for that extra issue are only worth 10,000, so realistically you have $110,000 worth of assets after making the appropriate write‑down and shareholders’ funds necessarily also come down by the equivalent 90,000.  So the net result is that the shareholders’ funds are now 110,000 and the assets are 110,000, but I think you would say that the change in the shareholders’ funds or the writing down has nothing to do with the company as such.  It is the shareholders’ interests in those funds which are affected, not the company’s assets.

MR MYERS:   The writing down does not have any effect, yes, I would say that.  We are not contending in this case that if a company has suffered a loss the company should not be able to recover that loss.  What we are saying is that merely by the issue of shares the company does not suffer a loss.  What we are saying is that where, as here, the shareholders’ capital has been doubled and there has been no compensating asset acquired, just looking at it from the point of view of a loss, the company has not suffered a loss.  The company’s assets have not changed but the value of each of the shareholders’ assets has halved.

We go further, and I will go back to the question of justice.  We say that justice requires that the shareholders should be able to sue.  It is not the company that should sue because it is the shareholders who suffered a loss.  They did not just suffer a derivative loss.  It was not a loss that the shareholders suffered by virtue of the company suffering a loss.  This is a loss that the shareholders suffered because the number of shares was doubled.  Instead of having the whole of the interest in the company, instead of having the whole of the shareholders’ funds, for example, as Mr Justice Dixon might have said in Archibald Howie, they have only half the shareholders’ funds.

McHUGH J:   Yes, their shareholding is diluted.

CALLINAN J:   Mr Myers, say that there were another company other than Western, which was truly worth what Nelson Wheeler said Western was, in fact, worth, say there was such a company, then by doing the deal, as it were, that Kia Ora did, Kia Ora lost the capacity to do a deal which would have put it in the position that it would have been in had Western been of the value that Nelson Wheeler said it was.  Is that not a loss to the company?

MR MYERS:   That is a loss of an opportunity case.  May I just say something ‑ ‑ ‑

CALLINAN J:   It might be more than that, it might be a loss of value to the company.  It may not be a loss of opportunity.  It may be something you can value.

MR MYERS:   The value of the company before the transaction is the value that one needs to look at, in my respectful submission, because the question is:  what is the loss to the company by this transaction?

CALLINAN J:   It is a loss of leverage, in a sense, is it not?  The company loses that leverage that it had to do other remunerative deals.

MR MYERS:   It has lost the capability, if you want to call it that, but it is capability in a commercial sense only, it is not capability in a legal sense; it can continue to issue shares as it wishes.

CALLINAN J:   Well, why should not the law give value to that capability, or capacity?

MR MYERS:   Maybe the law does give value to that capability, but there are some things in this case that mean that it does not arise.  First of all it was not pleaded.  I have read the pleading.  It was not a case that was run.  There is no basis for it in the evidence.  I will just take you to one passage of evidence.  But we dealt with it in our outline at paragraphs 69 and following ‑ ‑ ‑

CALLINAN J:   But that depends upon my accepting – you say you deal with it in your outline – it depends upon your characterisation of this as a loss of opportunity being correct.  I am not sure that that is correct at the moment.  I am not saying it is wrong, but I am not satisfied that it is simply a lost opportunity.

HAYNE J:   And it also invites attention, if you are to embark on the loss of opportunity analysis, to identify the loss.  What is the hypothesis for the loss?  Is the hypothesis for the loss no recompense for the cash paid out?  What are the hypothesis against which you are assessing whether some opportunity has been lost?

MR MYERS:   Precisely, your Honour.  These matters simply were not examined.

McHUGH J:   Also, Mr Myers, the fact that something may constitute consideration does not mean that there is a loss in a reliance sense.  For example, you may say to me, “I will pay you $10,000 if you will consent to your daughter marrying me”. 

MR MYERS:   I have two daughters, your Honour, which ‑ ‑ ‑

McHUGH J:   And you do not go ahead with the transaction.  Now I have suffered no loss except in an expectation sense, but I am no worse off immediately after your repudiation of the agreement in terms of what I was before.  What I have lost is the expectation that you would be paying me $10,000, but I have suffered no loss in a reliance sense.

MR MYERS:   We respectfully agree with your Honour’s remarks and one of the things that I was going to go on and point out is that where the Full Court speaks of consideration, and my learned friends adopt the same terminology in their outline, consideration is not the same thing as loss.  Consideration can be a benefit conferred as well as a detriment suffered.  It is so plain that it hardly bears repeating, yet there is a constant emphasis on the value of the consideration, as it were.  If I could just ‑ ‑ ‑

McHUGH J:   Just on this point perhaps you can help me.  The Full Court placed emphasis on the fact that upon – and they used the term “the issue” of the shares - but is “issue” the relevant term as opposed to “allotment” and is there any distinction?  I mean, do the shares have any value before they are actually allotted and at that stage is the value that of the allot owned by the allottee?

MR MYERS:   In my respectful submission, no.  One can get into rather scholastic arguments about the difference between issue and allotment and one knows that the terms are not always consistently used and so on, but until there is a shareholder, that is someone registered, there is no person who has the right which the share constitutes.  It is sometimes said that the shares exist as soon as the authorised capital is created and in a sense they do, but not in the sense that one is talking about them, as I apprehend your Honour is now, in the sense of describing a bundle of rights, a fasciculus of rights that exist between shareholders and between the company as a separate legal entity and shareholders.

Can I go back just to the loss of opportunity and, your Honour Justice Callinan, I accept that a word or a tag like “loss of opportunity” can sometimes be a blunt instrument to describe a particular set of facts, but in the instance that your Honour is putting to me, in my respectful submission, it near enough does the job for common discourse because what one is saying is that by issuing these shares one could not go out and issue some more shares to take over a valuable company.

CALLINAN J:   Well, not only that.  The company itself is a much less valuable commodity and would lose attraction to the extent of what it has paid out to another company that might want to take it over.

MR MYERS:   Well, in a sense the company may be a much less valuable commodity but the company’s assets have not been reduced.  The company’s assets have increased.  What the company has is more share capital, issued share capital.

CALLINAN J:   Does not that make it a less attractive takeover target?

MR MYERS:   Well, that would be a matter for the market to determine and really this is what Justice Hayne is referring to.

HAYNE J:   And for the market to determine in relation to the position of the shareholder.  A shareholder may have something of greater or less value according to the transaction.

MR MYERS:   Yes.

McHUGH J:   We have got to be very careful here not to treat this as if it was a partnership which was selling an interest.

MR MYERS:   Quite so.  You either recognise the existence of the company or you do not.  Once you recognise the existence of the company, some consequences follow and one also cannot get too enmeshed in the conceptions of nominal capital either.  I accept that for the purposes of my argument.  May I just refer your Honours to pages 14 and 15 of the outline where the loss of opportunity is dealt with.

I would just like to draw your Honours’ attention to just a few of those paragraphs.  We say in 69 a claim for loss of opportunity was not pleaded, nor conducted, nor proved.  The following reasoning of the Full Court demonstrates its error in deciding the question on the basis of Kia Ora having suffered a loss of opportunity.

Another way of expressing the same point is to say that in the events that happened Kia Ora lost the opportunity to exploit or to receive the value of the shares that it allotted in itself.  That was certainly an opportunity that it had.  The ability to exploit or receive that value from the shareholder in Western United has now been irretrievably lost. 

All that means is that you cannot issue the same shares again.  So?

A loss of opportunity case was neither pleaded nor conducted by Kia Ora.  Moreover, a claim based on loss of opportunity was not established on the evidence.  The findings of the trial judge and the Full Court were unequivocal in this respect.  The trial judge found:

There is no evidence to suggest that Kia Ora would, or even might have issued the shares otherwise than for the takeover of Western United.  It is very unlikely that it would have done so.

CALLINAN J:   Well, just stop there for a moment.  Why would you need evidence of that.  You have a company that is a cash box.  It is either a very attractive target or it has leverage because it has got cash to do this sort of transaction.  It does not have to be a transaction with Western United.  I am not saying that what I am putting you is an answer necessarily to your argument against this being a lost opportunity, but I am just challenging the proposition that you need evidence that the company would have entered into some other transaction.

MR MYERS:   No.  If you were going to run a case like this, you would want a lot of evidence about the history and prospects of this company:  the nature of the stock market, the whole commercial milieu in which the transaction occurred.

CALLINAN J:   No, not necessarily.  You can just look at the transaction in question and premise, instead of a fraudulent transaction of that kind, a legitimate transaction of that kind, and compare what happened with what would have happened had the transaction not been fraudulent, but had been legitimate.  Why would that not be evidence?

MR MYERS:   If the transaction had been legitimate in the sense that this report had not been written, and this is the case, there would have been no transaction.  The whole argument  ‑ ‑ ‑

CALLINAN J:   Well, it would not have been a transaction at that time of this kind, but there might have been a transaction of exactly this kind a day later or a month later.

MR MYERS:   But there was no evidence that there was any ability or inclination to do that. 

CALLINAN J:   But that there was an inclination is to be found in the fact of the transaction which was a fraudulent transaction.

MR MYERS:   What the Full Court found, your Honour, in a sense, deals with this, I think.  The Full Court found:

a claim based on a lost opportunity would require a finding that had this transaction not proceeded, Kia Ora would have raised capital in some other way.  No such finding was made…..As we have mentioned, no such finding was made, and it has not been established that such a finding should have been made.

They go on:

The only basis, in our opinion, for an award under this head would be a finding that if the takeover of Western United had not proceeded, Kia Ora would have allotted shares for cash, and thus raised funds that would have been invested profitably, presumably by placing them on deposit with Western United or by acquiring some other profitable asset…..The judge found that Kia Ora would not have made such an allotment.  We agree.  In the prevailing climate, we consider it unlikely that Kia Ora could or would have made an allotment of shares for cash.

Mr Easton, some of whose evidence is reproduced in the ‑ ‑ ‑

CALLINAN J:   Let me immediately accept that for present purposes, Mr Myers, but what about its attractions as a target?

MR MYERS:   Well, the thing is that the case was not conducted this way.  There was not an examination in the evidence about that, not to any degree.  There was a little bit of evidence.  In the appeal book at pages 537 to 538, there is one particular passage, that is volume 3.

I think I can say to your Honours that the passage of cross-examination of Mr Easton by Mr Mansfield begins at page 537.  If one reads from “Question Allowed”, but I will cut immediately to the chase and get to where the real answer is made.  On page 538 at line 22:

Q.  What I’m putting to you –

and we can ignore the words in parentheses-

is that as a fact, on the evidence you have given as to the impact of the stock market crash, it is in the highest degree unlikely that Kia Ora, between October and December 1987, would have been able to place into the market, by issuing for cash, 57.95 million shares and receive cash of 75 cents for them.
A.  Yes, put that way, I agree with that.

So, so far as the evidence exists, it does support the holding of the Full Court that I have read, that it is unlikely that Kia Ora could have made an allotment of shares for cash even at 75 cents, let alone 82 cents.  One might think of any amount because cash boxes were a drug on the market.  Unless you had a business, all you could do was wind up your company and return the cash to the shareholders.

The other way in which it might be put is that some expectation that Kia Ora had was defeated in the transaction and this has a value of 56 million dollars for which compensatory damages should be given.  No such case was put below and it has not been advanced on the appeal.  In fact, it is disavowed in paragraph 16.6 of the outline.  That leaves one with the question, what is this loss?  It is not a loss of opportunity.  It is not an expectation loss.  What is it?  It certainly is not a loss of net assets.  The answer, in our respectful submission, is to be found in the reasoning of the Full Court and if I could take your Honours to paragraph 202, which is at page 262 of the reasons, this is what underlies everything that followed hereafter:

There is no perfect solution here.  But, in our opinion, requiring individual shareholders to sue is an unattractive means of remedying the injustice, if one acknowledges that there is one.

So this is a surrogate for having individual shareholders sued.

GUMMOW J:   I am sorry, what paragraph was that?

MR MYERS:   Paragraph 202 on page 262.

GUMMOW J:   Yes, I see.

MR MYERS:   I have the Australian Corporations and Securities Reports which I understood the Court was going to look at.

GUMMOW J:   Yes, we have it here.  We do have it.

MR MYERS:   But I will refer to paragraph numbers as well.  Now, with respect to the learned judges below ‑ ‑ ‑

GUMMOW J:   That is not what the legal system is about really.  It is all about giving effect to rights, not inventing them.

MR MYERS:   In our respectful submission, so.  But I say this with the utmost respect to the judges of the Full Court below.  It is very difficult to grasp exactly what it is that the loss is said to be.  I have counted up the conceptions of value that are referred to, sometimes in the same sentence or paragraph.  Transaction value is referred to – I will not give your Honours references to it, it does not matter – market value; monetary value; net asset backing; expected value; value according to each Western United Ltd shareholder and simply value at various points.

The main paragraphs in which the reasoning is elucidated appear to us to be paragraph 433 - I hesitate to say main paragraphs but these seem to state the conclusions - and that is on page 299, your Honours.  In our opinion the argument advanced there, and this is an argument advanced in a learned article in the Law Quarterly Review by Mr Oditah and which the judges rightly say had some considerable similarity to the argument advanced by the appellants here.

In our opinion the argument there advanced fails to pay sufficient attention to the fact that, upon allotment of shares, a consideration moved from Kia Ora that was equal to the transaction value of the shares, and that this consideration was irretrievably lost. 

There is a confusion of consideration and loss.  Again, with respect, it is difficult to conceive what is meant by the “consideration was irretrievably lost”.  Certainly, the company gave consideration but it did not thereby lose anything.  If you are talking about value, in the sense of economic value, the persons who lost something were the shareholders, not the company.  The court below is confusing an economic concept with a legal concept.  They are just different.  That is all.

McHUGH J:   That is part of the problem with that paragraph 202, that although justice may be done in the sense that the wrongdoers are required to disgorge, that nevertheless the fact is that it does not necessarily mean that the true sufferers of the loss are compensated because the shareholders will not be the same, or will not necessarily be the same at a later stage.

MR MYERS:   There is no evidence upon which one could found the proposition that a single shareholder who suffered loss is compensated as a result of this.  One does not know how many shares were held by the directors, that is to say how many of the Western United shares were held by the Kia Ora directors or their associates.

McHUGH J:   I thought there was a figure, somewhere around 75 per cent.

MR MYERS:   There are a lot of figures but they range from 15 per cent to 85 per cent.

McHUGH J:   Yes.

MR MYERS:   Things were a bit murky in these companies, and there was a Mr Schneider‑Paas who passed away before the action came to trial, a German gentleman who did not reside in Australia who had a very big interest in these companies as well as the directors, and he was an associate of the directors.  I think the evidence establishes that he really put the directors up.

But, in any event, one does not know how many of the shares belong to the wrongdoers or their associates.  One does not know how many shareholders in Kia Ora decided to hang on to their shares and not sell them.  If one is a shareholder of Kia Ora and one gets the 3J(3) report, what you do is decide you go with the transaction on the basis of the 3J(3) report, or if you do not like it, then you sell your shares.

Now, it is only the persons who – I am putting it colloquially – decide to hang on to their shares in Kia Ora on the basis of the report, who should be able to recover.  It is not the wrongdoers.

GUMMOW J:   Now, what was the basis on which these damages were being awarded and assessed?  What was the wrong, on the part of your clients?

MR MYERS:   The wrong was writing an incompetent ‑ ‑ ‑

GUMMOW J:   Was it in tort?

MR MYERS:   Tort and contract.  Contract is relied upon now.  There was also breach of fiduciary duty.  I understand that what is relied upon here now is contract because of Austrust v Astley.

GUMMOW J:   See, I mean, take the Regal (Hastings) problem, for example, where the directors have to hand over the profits.  It has always been said to be curious that the people who got the advantage out of that were the new batch of shareholders.

MR MYERS:   Yes.  That is because there was a wrong done to the company.

GUMMOW J:   Yes.

MR MYERS:   Here, I am contending there is really wrong done to the ‑ ‑ ‑

GUMMOW J:   By the making of the profit?

MR MYERS:   Yes, by the making of profit, yes, your Honour.

McHUGH J:   It was the company’s profit.

MR MYERS:   Yes, it was the company’s profit.  What I am really saying here is that the loss that is suffered is not the loss that the company suffers.  A loss is an economic conception we are talking about here.  It is not the company’s loss.  It is the shareholder’s loss, whose shares have been diluted, and those who should be able to recover are those shareholders whose shares were diluted and who decided to stay on in the company on the basis of the 3J(3) report.

Yet there is no evidence that there is a single one of them, not a single one.  But what happened is that undoubtedly there were shares owned by the wrongdoing directors.  They got too much for their Western United shares by a very large margin and then when the company is compensated, they get a second lick.  So it is not a just result.  Those who suffer the loss are precluded from suing, those who caused the loss get a double benefit and the persons who have to compensate for the loss pay a sum of money which is far and away too large, or it might be far and away too large; we do not know.

Could I just take your Honours to another passage.  It is in paragraphs [475] to [476] on page 306.  This again seems to be the summation of some reasoning.  Paragraph [475] starts on page 305.  Perhaps it is best to read it, although it is the end of the paragraph that is most important:

It has to be remembered that the purpose of the award of damages is to put Kia Ora in the position in which it would have been had the wrong not occurred.

It certainly does not do that.  It puts it in the position where it has $56 million more worth of assets than it had before.

This requires the court to assess the difference between the price paid and the value of what was received.

So price paid is a consideration concept again.

For present purposes the price paid has two components.  They are the cash component of $26,178,135.81, and the shares allotted to the vendors of shares in Western United.  A monetary value has to be attributed to those shares.

One asks rhetorically why?

The judge has found that the value of a share in Kia Ora, prior to the allotment of further shares, was 82c.

HAYNE J:   Value to whom?

MR MYERS:   Quite so, your Honour, and that is the consideration point again.

It seems to us that Kia Ora entered into the transaction on the basis that in return for the shares allotted, it would receive a consideration at least equivalent to the value of the existing shares in Kia Ora.

That is an expectation loss.

Harking back to what Lord Green MR said in Osborne v Steel Barrel Co Ltd, what Kia Ora gave up was the right to call on the allottees of shares for payment of an amount equal to the then value of a share in Kia Ora.

It is not clear whether their Honours are using “right” in the sense of a legal right or an opportunity.  By entering into the transaction, certainly Kia Ora accepted that it would get, instead of cash for the shares, some shares in Western United.  To say that it gave up that right is, in one sense we say, not strictly correct.  One has to take the transaction as a whole.  One has to look at what was on offer.  What was on offer, and it was the only thing that was ever on offer, was a takeover on certain terms.  Then their Honours go on in [476]:

Arriving at the value of the shares allotted is complicated by the fact that the value of those shares, after the transaction is completed, is affected by and reflects the value of the assets acquired by Kia Ora.  But, in our opinion, for the purposes of assessing damages it is proper to take the approach that we have taken.

Which is to say shares are worth 82 cents.

Indeed, unless such an approach is taken, the paradoxical result is reached that the consideration provided by Kia Ora diminishes with the value of the assets acquired.

Again, ideas of consideration are not relevant.  One is trying to determine what is the loss to the company.  As your Honour, Justice Hayne, has just remarked, it is loss to whom?  One has to identify what is the company’s loss.  The question is not:  “What could the company have got?”  It is not even:  “What did it give up?”, because of the way the case was run.

CALLINAN J:   Mr Myers, do you say, then, the correct result would have been that there should have been an assessment of damages for the actual cash paid, the money?  I think you accept that, do you not?

MR MYERS:   Yes.

CALLINAN J:   And then cancellation, perhaps, of the shares that have been allotted to Western and a return of the Western shares to Western.  That would restore the parties to the position they were in.

MR MYERS:   If the Court were in a position to do perfect justice, that is what it would have done.  But that was not the matter that came before the court, and one does not ‑ ‑ ‑

HAYNE J:   Could it have been done in any event?

MR MYERS:   It could have been done, your Honour, yes.  In my respectful submission, it could have been done, and it was not done.

GUMMOW J:   The courts have that sort of rescission with the shares coming back and then being cancelled?

HAYNE J:   And cancelled, could you?

GUMMOW J:   Without a reduction?

HAYNE J:   Do you not encounter a number of corporate problems at that point?

MR MYERS:   If the shares have been issued as a result of fraud, in my respectful submission, they could be cancelled.  This was a case where one could have possibly mounted a case of fraud.

GUMMOW J:   Who would be the plaintiff?

MR MYERS:   The company would have to be.

HAYNE J:   Absent fraud, and there is no finding of fraud, is there - - -?

MR MYERS:   No, there is not and it was not pleaded in this case.

HAYNE J:   So absent fraud, could you have unpicked the transaction in the way we have just been discussing?

MR MYERS:   No, I do not submit that you could have, your Honour.

HAYNE J:   It would seem to me that you could not.

MR MYERS:   I am sorry, I am not as well armed.  There are authorities that deal with these things, but my recollection of them is that they amount to fraud.  It is only, if there is fraud, that you can rescind, yes.  But, in any event, it is purely hypothetical because it did not happen and the course that was taken was that which you see.  It was a decision simply to sue by the company.  Another thing that could have happened is that if there were any shareholders who suffered any loss by reason of this, they could have sued.  They did not.  Maybe they did not want to exercise their rights or there were not any.  We do not even know whether there was a single shareholder who suffered a loss.  In any event, though it is a difficult passage, that does seem to be another crucial passage in the court’s reasoning.  In our respectful submission, it is again based on this notion of consideration.  The court is not asking the question, “Did the company suffer a loss?”  They are asking, “What is the value of the consideration the company gave?”  And it is simply the wrong question.

Your Honours, I started by saying that the result is unjust.  I do not wish to repeat myself.  The result of the decision, however, is that it seems to have the effect of depriving existing shareholders who might have suffered a loss of an action.  It benefits those who ‑ ‑ ‑

HAYNE J:   I do not understand how or why that would be so.

McHUGH J:   Yes.  Neither do I.

MR MYERS:   Well, it does seem a corollary of the – if you say that the company has suffered the loss, then the shareholders’ loss must simply be derivative.

HAYNE J:   That is not self‑evident to me.  I am afraid you will need to explain it.

MR MYERS:   I am arguing against that.  I am arguing against that proposition.  That certainly is not derivative, but if you accept that the company suffered the loss, how is that the shareholders could then sue, in effect, for the same economic loss?  You would have a position where the company gets $56 million and all the shareholders, who perhaps sold their shares after the transaction had occurred, come and sue again.

HAYNE J:   Sue whom?

MR MYERS:   Sue Nelson Wheeler.  In any event, we say that the existing shareholders are the ones that suffered the loss and I do not want to set up an Aunt Sally and they should be able to sue.  It benefits those who did wrong and it imposes an unfair burden on the professional advisers.  This really is a case of disproportionate liability and it, in effect, gives or imposes upon them the consequences that would follow if they warranted to the company the value of the shares purchased.  If your Honours please, they are the submissions that I wish to make.

McHUGH J:   Yes, thank you.  Yes, Mr Gray.

MR GRAY:   May it please the Court, could I just start with talking a little about the facts of the transaction.  This was a case where Nelson Wheeler had a contract in regard to giving professional advice in regard to a proposed initially valuation and then takeover.  That gave rise to a relationship in contract between Nelson Wheeler and Kia Ora.  In addition, the courts below, the intermediate court, found there were duties in tort and fiduciary duties that were breached.

In the result, the judgment that has come forward is in contract because that led to the larger sum of money, the court below taking the view that contribution was available in tort and breach of fiduciary duty, but not contract.  So the matter before this Court relates to the contractual measure of damages and then that is limited purely to the question of whether a loss was sustained.  The issue of how one might evaluate that loss or what it is worth is was a matter on which there has been no grant of special leave.  The issue of special leave was confined purely to the question of whether a loss was suffered or not.  Now ‑ ‑ ‑

HAYNE J:   Where do I find that, Mr Gray?

MR GRAY:   That is in book 3 at page 686.  There is the appeal following leave and the grant of leave is at 659 to 661 and the limited grant of leave in particular at page 660.  That, with respect, is a very important consideration because the Court simply does not have before it all of the materials that relate to the wider issues of loss.  For example, the Court does not have before it the evidence of Mr Easton in which he deposed to the fact that cash boxes were very attractive targets at the time or, for that matter, that although he agreed with Mr Mansfield that Kia Ora was unlikely to place its shares cash, it was well advantaged to place its shares for assets because, in particular post-crash, there was a great liquidity problem.  None of that evidence is before this Court because the issue of how one evaluates the loss, if one is sustained, is not a matter of leave.  So the question is purely one of, was a loss sustained by the company in respect of the shares that were issued?

McHUGH J:   In respect of the issue and allotment of shares, is it?

MR GRAY:   Yes.  Could I come to that dichotomy of terms a little later, just to put some submissions on that.  We deal with that in the authorities - in footnote 14 we trace the authorities, if your Honour pleases, that deal with the cases that discuss those varying terms.

Now, if the Court pleases, what my client had in regard to the professional contract with Nelson Wheeler was an expectation that Nelson Wheeler would perform its professional obligations in contract properly, but it failed to do so.

GUMMOW J:   Well, you had a term.

MR GRAY:   Had a term, and it had an expectation that that term would be complied with and it was not.  But the consequence of that was that the takeover proceeded and had the proper advice been given, the takeover could not and would not have proceeded.  So, in that sense, the takeover contract is a consequential event, and it is a question of, in that sense, to pick on the wording of the Chief Justice Mason and Justice Dawson, Amann Aviation, the question of, was there some wasted expenditure, and if so, how it is to be evaluated.  That leads to the subsidiary question, “Was there a loss to the company through the issue and allotment of shares?”

Now, the takeover involved offers to the shareholders of Western, not to the company itself and, as the Court has noted, ultimately, that ended in a compulsory acquisition of the final shares.  But for practical purposes, 31 December 1987 was taken as the date on which to assess loss.  Now, if the Court pleases, there has been considerable discussion in the cases, in particular in the United Kingdom, that deal with the detailed analysis of exactly what happens when a company issues and allot shares and either either pays for them or does not get adequate consideration.

The reasoning of the intermediate court entirely accords with that line of authority.  I do want to go to that in a little detail because some of the passages of those cases do put the point very succinctly.  Before doing that could I just take the Court in the judgment of the intermediate court?  It is page 295, paragraph [418].  There, in a sense, the court poses the issue as it saw it.  It is in the second sentence:

But if the shares allotted by Kia Ora have a monetary value, and are properly to be regarded as constituting consideration paid –

that is expenditure incurred –

represented by that value, principle requires that that value be taken into account in determining the price paid.

McHUGH J:   That is the question, is it not, as to whether or not that is the issue?

MR GRAY:    Yes, that is the issue.

HAYNE J:   There are about three terms that you have used, each of which, at least for my part, would require some careful identification about the manner of their use.

MR GRAY:    Indeed.  That is the way the question has been posed.  It is answered in at least the following five paragraphs or, essentially, the following five paragraphs – [425] to [427] both inclusive, and then [433] and [436].  If one goes to [425], the court said this:

However, the bundle of rights represented by a share, once it is issued, has a monetary value that the allotting company can realise.

And in the event of this case, attempted to realise by the takeover contract.  It has been executed and, with respect, cannot be undone and could not have been undone.  It has all happened and the question is, can it be said that in the process of issuing or allotting shares, has Kia Ora suffered a loss?  And here it is, on this reasoning, it actually has expended that capacity to realise consideration, and that has occurred.

McHUGH J:   Yes, but that is a loss of opportunity, is it not, or a loss of expectation?  It is not an actual loss itself.  The shares have no value at any point of time to the company except as a bargaining chip for which they can get some other asset or property in consideration of the issue.

MR GRAY:   At a point of time the company has the ability through issue allotment to use those shares, those precise shares, as a medium of exchange.

McHUGH J:   Yes, but that does not mean that they suffer a loss when what they get back is not equivalent to the nominal value or the issued value of the shares.

MR GRAY:   Well, we would say that what they have lost is they have lost the receipt of, not the expectation of the contract or the expectation damages, but of the value of what passed.  Expectation ‑ ‑ ‑

HAYNE J:   Value to whom?  Value of what passed, value to whom?

MR GRAY:   Value of the consideration passing by Kia Ora to Kia Ora because my friend conceded Kia Ora passed consideration.

McHUGH J:   There is no doubt about that.

MR GRAY:   And the question was, did it have an entitlement to receive something in return, and the answer is it did, by the terms of the takeover, by terms of the Nelson Wheeler contract.

McHUGH J:   My difficulty at the moment, Mr Gray, is that in answer to your question, “Was it entitled to something in return?”, the answer is yes.  But what it was entitled to was an expectation that it would receive value and if it did not get that value then it suffered expectation damages.

MR GRAY:   We would say that that, with respect, is not the correct analysis, that what it was entitled to was the consideration.

McHUGH J:   Well, it does not make any difference.

MR GRAY:   It had an expectation it could get what Nelson Wheeler had said it was worth, but it lost the value which was a lesser figure.

HAYNE J:   It had an expectation to get a bit of paper, some shares, and it thought that bit of paper gave it some rights, some rights which others might be prepared to pay some money for.

MR GRAY:   We would say, more correctly, that it was entitled to receive consideration to the value of $96 million for its consideration, because that was the difference ‑ ‑ ‑

HAYNE J:   Again, you have slid between two transactions, have you not?

MR GRAY:   Indeed.

HAYNE J:   You have slid between a transaction between acquiring company and selling shareholder and a transaction that has occurred between the acquiring company and its adviser.

MR GRAY:   We do, in fact, say there is a great danger in sliding between the two and one is asking the question:  as a result of the Nelson Wheeler breach of contract, did Kia Ora suffer an expenditure loss, to pick up the Amann Aviation description?  The answer is yes, it did.  What did it do?  It expended cash and it expended an ability to use those shares as a medium of exchange.

McHUGH J:   That does not mean it suffered loss.

MR GRAY:   That then comes down to the question ‑ ‑ ‑

McHUGH J:   I mean, if an estate agent enters into a contract under which a person - the estate agent says, “I will secure a purchaser for you if you agree to pay me X dollars”, and the vendor repudiates the agreement, I have not suffered any reliance damage.  I have suffered expectation loss, which is to say that consideration and loss are not the same thing.  That is to say, reliance loss and expectation loss are two quite different concepts.

MR GRAY:   With respect, in a simple contract case where there is a failure of consideration, the normal measure of damages is the difference between consideration paid and consideration received, and that would be trite.  In this case we are, as it were, one step removed because the relevant contract is with Nelson Wheeler and the issue to be asked is in regard to the consequential event, that is this contract was entered into as a consequence of Nelson Wheeler’s breach of contract.

McHUGH J:   Yes, I know, Mr Gray, but what we must be very careful of is not to treat this case as if it was a partnership case.  If five partners in a law firm agree to sell an interest to another person and they get a consideration which is less than what they bargained for, each of them has suffered a loss.  They have transferred an interest they have to the purchaser and got something less in return, but in a limited liability situation you have to draw a careful line between the shareholders and the company, and the shareholders’ funds are not an asset of the company.

MR GRAY:   If the Court pleases, we do not wish to quarrel with that.  We put the point differently.  There is no question of the shareholders suing on this contract.  They were not parties to the contract.  There was no contractual duty owed to them.  The question is, with respect, what loss followed on this contract to Kia Ora?  We take your Honour’s point that we have to identify a loss to Kia Ora.  What we say, and we say this is well supported by authority, is that when it is analysed, what Kia Ora has is the right and the power to issue – allot shares.  That is not a conventional asset one finds in a balance sheet but, notwithstanding that, it remains as an asset.  A right and a power is an ability to be used.

So there is the asset in the most widest terms, not a balance sheet asset but plainly a right and powers - Ngurli v McCann establishes that.  What does it do, as a result of Nelson Wheeler’s conduct, is that it exercises that right and it proceeds to allot and issue those shares, so it has expended that capacity, it has gone, it has occurred.  Those shares are out; they cannot be in this transaction returned.  That is what happened and the question is:  how do you value that right and capacity expended, used, utilised in regard to these particular scrip?

HAYNE J:   With its boundless capacity to create more capital.

GUMMOW J:   Yes, that is right.

HAYNE J:   It is magic pudding, is it not?  They can keep issuing shares, upping their capital.

MR GRAY:   With respect, no.  In theory they can but they have to have somebody to be prepared to take those shares, and that will depend on the financial profile of the company.  But they certainly cannot issue these shares again.  These particular mediums of exchange have gone.

McHUGH J:   But test the position with an issue to the existing shareholders.  The company does not lose anything.  The value of the shareholders’ shares are diluted.  If there is a two to one issue, then the value of each share is 50 per cent.  The company may have expended – in one sense it has lost the power to issue that issue of shares but it has not lost anything in any relevant sense.

MR GRAY:   That is in the case of a bonus issue, because the company there is not expecting to receive anything by way of consideration.

McHUGH J:   Exactly.

MR GRAY:   That is a very different case.  That is very much like the Lowry decision where there was the issue of shares to employees at par where they were worth more than par and the balance was held to be in the nature of simply a gratuity or a gift to the employees.  It was never intended to be received as consideration.  So those cases are an entirely different situation to a circumstance where the company is electing to use that right with a mind to receiving consideration for it.  Can I put the matter this way, if the Court pleases ‑ ‑ ‑

McHUGH J:   But your argument must be that the issuing by the company deprives it of a power to issue those shares for their face value in cash.

MR GRAY:   Well, in fact, they were worth less and so the fact that they struck a bargain where they were going out at par would have an expectation element in it from the bargain and that is why the plaintiff below did not seek the difference between real value and par.

KIRBY J:   Are you going to take us to the English cases that have looked at this?

MR GRAY:   Yes, if the Court pleases.  Could I just before doing that just indicate this to the Court, that if one looks at it from an accounting point of view this rather odd result arises because on this transaction – well, take a transaction, for example, where Nelson Wheeler have said, “Well, it is all worth $100 million.”  But, in fact, 50 million of value is received.

McHUGH J:   Yes, but that is because in an accounting sense the share capital is treated on the liability side as an actual liability of the company.  For legal purposes it really is not.

MR GRAY:   Yes, but from the point of view of it, in that situation the net assets of the company would have increased by $50 million because on their argument you have got 50 million of value as consideration and in a share swap case, for example, to put the matter at its highest, it has cost you nothing and so your net assets have increased by 50 million, although viewed objectively you have paid 50 million too much.  So that is the danger.  When one reverses my learned friend’s position and one takes that situation, the net assets would change dramatically to improve the company’s position.

HAYNE J:   And in the share swap case you have just identified you used the expression “you have paid out too much” may lead to the key to this, that what you have paid out, it is not the company’s money, you have paid out the value of the shareholder.  The shareholder value has been diminished and that has been paid away.

MR GRAY:   In that example, if the Court pleases, I was wishing to take up the suggestion about the net asset position has not changed because one takes this reasoning and one says that the issue of the shares cost the company nothing in a transaction where, leave aside the accounts, one would look at it and say, “Nelson Wheeler got this transaction completely wrong.”  They said it is worth 100 million, pay 100 million, pas     t consideration of 100 million and you get 50 back.  According to the books, the company – according to my friend’s argument, it has been a wonderful result.  The net assets have increased by $50 million.

McHUGH J:   Yes, but that is because your argument does not distinguish between the company and the shareholders.  When the two steps are taken that Mr Easton deposed to and the loss is written off, then it has a consequential effect on the shareholders’ funds and the value of their shares.  It is the shareholders who have lost, not the company.  The company in terms of its own assets in this particular case increased – well, no, it has not because the cash went out but ‑ ‑ ‑

MR GRAY:   Well, critically, that is not, with respect, the complete picture because the company’s balance sheet would show now retained losses of the company and Mr Easton’s evidence is that, in fact, from an accounting perspective a loss to the company is taken on this transaction and does reflect right through to the balance sheet and does affect the financial health and wealth of the company.

McHUGH J:   Yes, but that is because the object of the accounting exercise is to determine what the value of the company is to the shareholders, what are the shareholders’ funds.  It is not concerned with the determining what are the assets of the company in a legal sense.

MR GRAY:   But to make the balance sheet balance, it has to include an entry dealing with retained losses of the company, not of the shareholders, of the company.  One works through the Companies Code approved accounting standards.  To have all this to be accounted for, it does actually take a loss in the company and reflects right through the balance sheet, not only in an increase in shareholders’ capital, but in the company reflecting retained losses arising from this transaction in the company.

HAYNE J:   Accounted for and accounts prepared for reporting to shareholders.

MR GRAY:   Indeed, but relatively for this purpose, identifying the loss in the company, not in the shareholder, recognising, with respect, the reality of it, that the company did take a loss in the transaction because it did not get consideration for its consideration. 

McHUGH J:   Yes, but to some extent the problem is clouded over by historical accounting, by the fact that one does not look at true values of assets – although that is not the case at the present time, there have been changes, of course. 

HAYNE J:   At least not in some companies.

MR GRAY:   We accept those difficulties, but at the level of principle, if one is looking at leaving aside those variations, the level of principle, what Mr Easton does when he takes one through the accounting standards and then puts them into the adjusted accounts is to identify, as a matter of principle, a loss in the company from this transaction and he then takes that through and reflects that ultimately in the balance sheet as a loss to the company.  At the same time, he reflects the increased capital of the shareholder.  But without having the balancing item of reflecting the loss taken by the company, it would not balance.

McHUGH J:   I know, but if it was a partnership, the accounts would be set out in the same way, except instead of having shareholders’ funds, you would have partners’ funds.

MR GRAY:   Indeed.

McHUGH J:   And there is a world of difference between the two entities.

MR GRAY:   With respect, in both circumstances, partnership or company, the retained losses are in the company or partnership, not in the individuals.  We say, with respect, that the point about the retained losses, the balance sheet is the way in which one can see from the accounting standards point of view, the way in which they deal with the transaction. 

Could I just show that to the Court in the exhibit?  It is at page 561 to 563 of the appeal book, No 3.  There are some very detailed footnotes and notes that explain each of the steps being taken.  But at page 561 one is looking at the impact in the profit and loss account of this acquisition.  Critically, it is the line “Extraordinary items” where the two writedowns occur.  There are two writedowns because the first thing from an accounting perspective one does is to recognise that the Kia Ora shares that were being passed as consideration were not worth $1.  In this particular example, they are worth 66 cents, finally it is 82 cents.  The second aspect is then to write down the investment, that is the value for consideration received, and that is to recognise that there is a writedown in this particular example of 66 million.  Ultimately, it is 75 million, because the ultimate value is ‑ ‑ ‑

GUMMOW J:   What is the providence of this document?

MR GRAY:   This document, your Honour, was proved in evidence as being a working through of the accounting standards as required by the Companies Code.  Mr Easton then gave evidence and this part of his evidence was not challenged in regard to this working through of this process.  There is the profit and loss account and there it is taking the writedown.  The footnotes explain exactly why that is so and reference to the Code and the standards are set out.  On page 563 one has ‑ ‑ ‑

McHUGH J:   But it really demonstrates, does it not, an expectation loss.  It demonstrates that the company did not get what it expected to get.

MR GRAY:   With respect, no.  We would say that this is recognising the loss taken on the transaction.

McHUGH J:   I notice in your submissions you use the term “loss on the transaction”, but that is not the issue.

Now, he goes on to expand on that in his other evidence and we would say, with respect, from a commercial point of view, from an accounting point of view, from a common sense point of view, absolutely correct and we would say that the Court would be giving great weight in accordance with those authorities to that formidable body of evidence anchored, as it is, back to the Companies Code requirements and, again, we have set out – those references are in the appeal book in the evidence of Mr Easton.  Mr Easton then takes up the exhibit I referred to earlier and uses that as a vehicle to demonstrate the application of the standards and there is a need for reconciliation from that document with the final judgment and it is primarily brought about by using majority value for the Kia Ora shares with the minority value.

Now, if the Court pleases, in terms of the tax cases, there are other cases that I do not propose to go to that are identified from paragraph 93 of our outline, but we do address the question of the shareholder loss and the proper plaintiff from paragraphs 103 forward and, with respect, if one looks at the whole body of law in this area now, and it is considerable, it seems to very much hinge on Newman’s Case and come back to Newman’s Case, whether it be Esanda, whether it be Caparo, whether it be Hercules, eventually the reasoning seems to anchor back to the remarks from

Prudential Insurance v Newman and we have quoted in particular from some pertinent parts in that regard and it is identifying when the loss in law is within the company, if the company makes the claim and the shareholders are protected through the derivative claim.  May it please the Court.

McHUGH J:   Thank you, Mr Gray.  Yes, Mr Myers.

MR MYERS:   Thank you, your Honours.  A few matters in reply in the order in which they arose.  Your Honours asked me some questions this morning about the right to rescind and I was at first inclined to say, yes, there would have been a capacity to rescind the share issue in this case and then perhaps on further reflection said that that is only a right that arises if the shares were allotted as a result of fraud.

Fraud is too narrow a way to put it.  If I can refer your Honours to what I was able to look at during the day.  In Pennington’s Company Law, 4th edition, at pages 152 and 153, it is neatly set out.  One of the occasions on which a company is entitled to rescind a share issue is where the shares were made by the directors in breach of fiduciary duty, which is this case.  In that event the company is entitled to give back whatever it got and the shareholder is then given the option of either paying cash for the shares or paying full value or having the shares rescinded.

GUMMOW J:   A difficulty might arise if the shareholders have on‑sold.

MR MYERS:   Yes, it may do.  There are some Australian authorities that are gathered together and there is a discussion of the provisions of the Corporations Law affecting the matter.  They are conveniently gathered together in the CCH loose leaf thing, Australian Corporations and Securities Law Reporter, at paragraph 70‑260 and following.  Without going further and subject to the question that might arise if the shares have been passed on, this is a case on the authorities in which there could have a rescission.

The second matter concerns Mr Easton’s evidence regarding these accounts to which my learned friend has referred to.  That evidence is largely contained in volume 3 of the Court book.  I refer your Honours, without reading it, in particular to pages 527 and 536 of the Court book where Mr Easton discusses the effect of the accounting treatment.

My learned friend, both before and after the luncheon adjournment, was inclined to suggest to your Honours that there may have been other bases upon which the matter was put to the Full Court which would justify, in the event that the appellant is successful, the matter being sent back to the Court for some sort of further determination.  Perhaps my friend has forgotten the way the matter was put in the Full Court, but there is certainly no mistake about how it is written in paragraph 32 of his outline, the last sentence:

Kia Ora has only ever sought what it was awarded by the Full Court, namely the difference between the consideration paid and the value received in the takeover transaction.

That accords with my memory, if not my learned friend’s memory, of what happened in the Full Court. 

The next matter is this:  my friend said in substance shortly before the luncheon adjournment, “The shareholders have rights against the company, therefore the company has suffered a loss equal to the value to the shareholders of those rights”.  It is the “therefore” that simply does not follow, and that is at the heart of this case.

On the matter of Ord Forrest and St Helens, we say that those cases are of no assistance in the resolution of the matter before your Honours, except that there are, with respect, correct statements of what a share is and how a share is issued and allotted, particularly in the judgments of Chief Justice Barwick – although he was in the minority in both cases – and in the judgment of Justice Aickin in the St Helens Case. 

The majority in each case agreed with what Chief Justice Barwick said there about the nature of a share and the way it was allotted.  My friend made a point about the way in which the case was put below and said it was unfair that the appellant should in this Court argue that the shareholders had a right to sue because that was never put below.  He referred to some portion of the pleading.

Three things about that.  The pleading itself is, to say the least, highly confusing.  It is a pleading in a claim by the company that a duty was owed to the company and to its shareholders.  If your Honours were to take the trouble, you would see that that formula is repeated again and again through the hundreds of pages of this statement of claim.  What in fact happened was that there was at first an admission that a duty of care was owed to the company.  There was an application to withdraw that admission after a change in counsel which occurred just before final addresses before Justice Mulligan.  That was refused, but nonetheless the argument was put before Justice Mulligan and before the Full Court that the shareholders would in effect be denied a right of action and that was unjust if one said that the company was entitled to sue.  I have put that in a little bit of an awkward way perhaps.

CALLINAN J:   Mr Myers, would there not be some record of this in the record of the proceedings?

MR MYERS:   Yes, there is and I was going to refer your Honours to it.

CALLINAN J:   What I was going to suggest – I do not know what the other members of the Court think, but surely you and Mr Gray should be able to agree upon this, with references.  We should not be troubled with arguments about what did or did not happen in the court below.

MR MYERS:   Your Honour, all I wanted to do is say in Justice Mulligan’s judgment at page 350 he recites the argument put and it is set out there.  In the Full Court’s reasons in paragraph 137 it is recited there.  I simply invite your Honours to look at it.  It is as plain as day.  I certainly do not want to let your Honours be involved in some sort of contention about what was put.  I simply rely upon what Justice Mulligan said was put and what the Full Court said was put.

GUMMOW J:   What is the Full Court reference again?

MR MYERS:   Paragraph 137.  It is most clearly put in Justice Mulligan at page 350 in the middle of the page:

In essence, it is the submission of the first defendants that, given the law relating to the decision making of the company and the purpose of the listing rule, they did not owe a duty of care to Kia Ora but only to the unassociated shareholders of Kia Ora.

CALLINAN J:   Mr Myers, could I ask you one other question.  I am sorry, I am not familiar with the pleadings in South Australia.  Is there a prayer for relief anywhere in a writ or in a statement of claim which summarises precisely what the plaintiff ‑ ‑ ‑

MR MYERS:   Yes, there is a prayer for relief.  I will ask my learned junior to see if it is in the Court book.  Two other things that I want to say by way of reply, just two.  The first is this.  My learned friend referred to an extraordinary general meeting of the company.  It was a meeting at which only associated shareholders could vote.  It was not an extraordinary general meeting of the company.  Regulation 58 of the articles, which is at page 595 of volume 3 of the Court book says:

every member shall be entitled to be present at every general meeting of the Company and to vote on any question put before any such meeting.

So it was not such a meeting.  It was a meeting at which only the so‑called unassociated shareholders could vote.  So that the so-called EGM was not a meeting of the company; it did not constitute an organ of the company.  In any event, all that that meeting purported to do was authorise the directors to enter into the transaction.  It was the directors who had the power to enter into this transaction.  They were the organ of the company that entered into the transaction and what happened is that to comply with the listing rule which is part of a contract between the company and the stock exchange, a meeting was held which was not a meeting of the company at which certain persons, for the purposes of the stock exchange rule, authorised the directors to proceed with the transaction if they thought fit.  All that is set out in the judgments.  The prayer for relief is at page 414 of volume 2 of the court book.  It claims damages, compound interest, a declaration and costs.

KIRBY J:   414?

MR MYERS:   I beg your pardon.  I am sorry, your Honour, 454.  I have looked at the wrong page – 414 of the pleadings.  Anything you want to find is in these pleadings.  It is page 454.

The last matter that I wish to address in reply is the Banco de Portugal Case.  I see there that it took counsel about 11 days to persuade the House of Lords of the opinions that were expressed by the majority.  There are a couple of things:  my friend put a lot of emphasis on what Lord Atkin said at page 490.  The thing about what Lord Atkin said at page 490 is this:  regardless of whether one would agree with his Lordship or not, he equated the position of the banknotes to a widget that had been manufactured, some timber that had been bought to something that had been manufactured.  So he was treating the banknotes as an existing thing having a value which was equal to their face value.

GUMMOW J:   Like a cheque.

MR MYERS:   Like a cheque.  He was not dealing with something that is remotely like the present case where some rights are created by the issue and allotment.

KIRBY J:   But is that not self evident that currency is of the same nature?

MR MYERS:   Well, in my respectful submission, it is and that was the second matter that I was going to go to.  On that point I respectfully adopt what the Full Court said below at paragraph [440].  They distinguished the Banco de Portugal Case on the sort of basis that your Honour has just mentioned and his Honour Justice Hayne mentioned in argument with my learned friend.  If the Court pleases, they are the submissions on behalf of the appellants in reply.

GUMMOW J:   What do you say about those English revenue cases?

MR MYERS:   That is what they are, your Honour, English revenue cases.  They are concerned with – no, I am not wishing to be facetious about that but they are concerned mainly with questions of the valuation of trading stock and it would be astonishing if anything other than some commercial value was given to trading stock for the purposes of computing a person’s liability to tax of course and under our system, if you get trading stock by way of a gift or howsoever, as soon as it is trading stock it is given a particular value for the purposes of computing the amount upon which tax is exigible.

GUMMOW J:   Yes.  Now, could you just look a minute at paragraph 89 of Mr Gray’s outline.

MR MYERS:   Yes, your Honour, I will get it.  Yes, Gemstone v Grasso.

GUMMOW J:   Yes.

MR MYERS:   Gemstone v Grasso was a case where a share was issued partly paid.

GUMMOW J:   Yes.

MR MYERS:   Well, it is a completely different case.

GUMMOW J:   Why is that?

MR MYERS:   Because, there the share has been issued partly paid and there is a right by contract to payment of the balance.  What was lost in that case was the right to payment of the balance.

GUMMOW J:   Well, the debt was not paid.  It quotes a debt.

MR MYERS:   But the debt was not paid, yes.

GUMMOW J:   But what about the other one, the Privy Council one?  That is a case of unauthorised issue at a discount, is it not?

MR MYERS:   Yes, it is.

GUMMOW J:   Is that quite in the same league as Gemstone?

MR MYERS:   No, it is not quite the same as Gemstone v Grasso, but, on the other hand, it does not, in my respectful submission, really assist in determining what is a loss for these purposes that your Honours are considering.

GUMMOW J:   Well, it says there was a loss to the company occasioned by the directors getting less than the par value, at least.

MR MYERS:   Well, for the purposes of determining whether the directors ‑ in a case where the question was whether the directors were in breach of their fiduciary duty.

GUMMOW J:   Yes.

MR MYERS:   Now, your Honour has raised at the very last minute an issue which may raise somewhat different considerations.  If there is a case concerning breach of fiduciary duties by directors, there may be different considerations operating, assessing or determining the quantum of damages.

GUMMOW J:   That is what I had been wondering, yes.  Is that discussed anywhere in this mound of paper?

MR MYERS:   No, it is not.  It has never really been advanced and my friend did not advance it to your Honours today.  It is mentioned in the written outline, but it is certainly not something ‑ ‑ ‑

McHUGH J:   This case is nailed to the contract, anyway – the breach of contract.

MR MYERS:   Yes it is, absolutely nailed to the contract.

McHUGH J:   Thank you.

MR GRAY:   Can I just mention three matters, if the Court pleases?  My friend referred to Mr Pennington’s work in regard to fiduciary.  Could I just correct one thing:  the court below found causes of action made out in tort, breach of fiduciary duty as Nelson Wheeler and contract.  The reason why the matter proceeded in contract was because that led to a higher ‑ ‑ ‑

GUMMOW J:   Yes, you said that this morning.

MR GRAY:   But if the Court pleases, if the Court set aside the award in contract, it would not follow for a moment that there could not be a claim for fiduciary duty.  That is one of the problems as we have seen it.  The issue has been whether the company suffered a loss.  If the Court says in fact that the court’s approach in contract is incorrect, we would wish to fall back on the reasoning in regard to fiduciary, because that might then produce a large wad of damages.  That would cause, with respect, a great injustice to my client.  We are only in contract because we lost an argument at contribution in fiduciary.  If the Court pleases, as my learned friend referred to Mr Pennington’s work, and spoke about the rights that arise in that circumstance, and the sharer’s obligation if it got back its consideration and the need to pay, then that would indicate a different approach in equity and there is a cause of action here made out in equity.

GUMMOW J:   What order would you seek us to make if the appeal was allowed?

MR GRAY:    If the appeal was allowed, if the Court pleases, on the basis that a loss in contract had not been shown on issue of shares, the Court should remit ‑ ‑ ‑

GUMMOW J:   Just on the basis that this figure could not be supported.

MR GRAY:    I am sorry, your Honour, that ‑ ‑ ‑

GUMMOW J:   Simply on the basis that this award here could not be supported.

MR GRAY:    Well, the matter should be remitted because it may well be it is supportable in regard to the breach of fiduciary duty against Nelson Wheeler.  There were findings of breach of fiduciary duty here against Nelson Wheeler and against the directors.

GUMMOW J:   There were findings of contributory negligence too.

MR GRAY:    Yes, and contribution, but if the Court pleases, if there was a recovery in regard to issue of shares in equity and still contribution, it would leave the plaintiffs substantially better off in dollar terms.  So it is a very material matter and, with respect, this problem has arisen because of the judgment in contract and leave was given, special leave, in regard to one, with respect, discrete aspect, and it did not go to all the other ways in which loss might be assessed.  The second point about it, if your Honour pleases, is that in the order sought, paragraph  2 on page 686 we challenge.  That would not be the correct order because that figure is only arrived at by putting the consideration received from Western United at 6.7 million dollars solely against the cash.

So that follows the argument I put before.  If one follows it through order sought 2 is not appropriate.  One would have to at the very least pro rata which would mean the bulk of the consideration received would go against the share issue.  The other matter I wanted to ‑ ‑ ‑

GUMMOW J:   What would be the right figure?

MR GRAY:   I cannot give your Honour a precise figure but it would be approximately ‑ ‑ ‑

GUMMOW J:   Well, someone will have to tell us.

MR GRAY:   Yes.  We would be happy to provide that to the Court.  It would be effectively about two‑thirds of the 6 million plus the interest that has to be added into that, so all told it might be about another $10 million, but I cannot be precise about it.  Perhaps $6 to $10 million.  The other matter was in regard to what your Honour Justice Callinan raised about the pleading and the pleading of damages.  In South Australia there is a – and I stand corrected – it is either by the Act, the Supreme Court Act or by the Rules, a direction compelling the court to give such relief as is appropriate providing the other party has not been taken by surprise regardless of how the matter is pleaded.

CALLINAN J:   Nobody should have been taken by surprise in a trial that lasted as long as this one did.

MR GRAY:   No.  So they are the matters I was seeking to raise.

McHUGH J:   Yes.  Mr Myers, is there anything you would like to say about the orders that should be made in the event that ‑ ‑ ‑

MR MYERS:   No, there is not, your Honour.  If my friend is going to put something in writing to the Court I would like to have an opportunity to look at that.  That is all.

McHUGH J:   Yes.  Do you propose to put anything in writing, Mr Gray?

MR GRAY:   If the Court pleases, we would put, if it assists the Court, the calculation of what the order should be – the order we say should be made if the Court is against us on the primary point.

McHUGH J:   How long will it take you to do that, seven days?

MR GRAY:   Seven days.

McHUGH J:   Yes.  You have seven days to reply.

MR MYERS:   Yes, thank you.

McHUGH J:   Yes.  The Court is indebted to counsel for their arguments in this case and the Court will now adjourn.

AT 3.49 PM THE MATTER WAS ADJOURNED