Sullivan v Trilogy Funds Management Ltd
[2017] FCAFC 153
•25 September 2017
FEDERAL COURT OF AUSTRALIA
Sullivan v Trilogy Funds Management Limited [2017] FCAFC 153
Appeal from: Trilogy Funds Management Limited v Sullivan (No 2) [2015] FCA 1452 File number: NSD 379 of 2016 Judges: ALLSOP CJ, FARRELL AND GLEESON JJ Date of judgment: 25 September 2017 Catchwords: APPEAL AND NEW TRIAL – procedural fairness – whether miscarriage of justice has occurred – whether findings made against appellants that they did not have an opportunity to address – where findings made against appellants that went beyond the pleaded case – where ultimate findings can be supported without reference to findings involving procedural unfairness – no miscarriage of justice – whether trial judge failed to address appellants’ case theory – where aspects of appellants’ case theory complained about did not respond to the pleaded case of the plaintiff below – no error shown – whether delay between cross-examination and judgment contributed to any error by trial judge in credit findings – no error found – whether findings within trial judgment inconsistent – no inconsistency shown – whether trial judge’s reliance on contemporaneous documents misplaced in circumstances where certain other documents were shown to be backdated and contain forgeries – no error shown – appeal dismissed
PRACTICE AND PROCEDURE – whether leave should be granted to amend notice of appeal in the course of the hearing of the appeal – where additional contention lacks merit – leave refused
CORPORATIONS – breaches of duties of directors of a responsible entity under s 601FD of the Corporations Act 2001 (Cth)
Legislation: Corporations Act 2001 (Cth) ss 601EB, 601FC, 601FD 601GA, 601HA, 1317S, 1318, Ch 5C, Pt 7.9
Evidence Act 1995 (Cth) s 27
Federal Court of Australia Act 1976 (Cth) ss 28, 24
Cases cited: Ali v The Queen [2005] HCA 8; 79 ALJR 662
Australian and Overseas Telecommunications Corporation Ltd v McAuslan [1993] FCA 958; 47 FCR 492
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2010) 75 ACSR 1
Banque Commerciale SA (En Liquidation) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279
Betfair Pty Ltd v New South Wales [2010] FCAFC 133; 189 FCR 356
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424
Browne v Dunn (1893) 6 R 67
Clampett v Attorney-General (Cth) [2009] FCAFC 151; 181 FCR 473
Conway v The Queen [2002] HCA 2; 209 CLR 203
Crampton v The Queen [2000] HCA 60; 206 CLR 161
Expectation Pty Ltd v PRD Realty Pty Ltd [2004] FCAFC 189; 140 FCR 17
Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80
Gould v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490
GPI Leisure Corporation Ltd v Herdsman Investments Pty Ltd (No 3) (1990) 20 NSWLR 15
Lego Australia Pty Ltd v Paraggio [1993] FCA 575; 44 FCR 151
Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd (1998) 3 VR 133
Monie v Commonwealth [2005] NSWCA 25; 63 NSWLR 729
Moore v Wilson [2006] FCA 79
Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; 53 NSWLR 116
NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98
Nudd v The Queen [2006] HCA 9; 80 ALJR 614
Patel v The Queen [2012] HCA 29; 247 CLR 531
R v Birks (1990) 19 NSWLR 677
Rondel v Worsley (1969) 1 AC 191
Stead v State Government Insurance Commission [1986] HCA 54; 161 CLR 14
Suresh v The Queen [1998] HCA 23; 102 A Crim R 18
Tully v The Queen [2006] HCA 56; 230 CLR 234
Vale v Sutherland [2009] HCA 26; 237 CLR 638
White v Overland [2001] FCA 1333
Wilde v The Queen [1988] HCA 6; 164 CLR 365
Windoval Pty Ltd v Donnelly [2014] FCAFC 127; 226 FCR 89
Quartermaine v The Queen [1980] HCA 29; 143 CLR 595
Heydon JD, Cross on Evidence (10th ed, LexisNexis Butterworths Australia, 2015)
Date of hearing: 14, 15 and 16 November 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 513 Counsel for the Appellants: Mr P King with Mr C Alexander Solicitor for the Appellants: Bransgroves Lawyers Counsel for the Respondent: Mr AS Martin SC with Mr SM Nixon SC Solicitor for the Respondent: Maurice Blackburn Lawyers ORDERS
NSD 379 of 2016 BETWEEN: PHILIP KEITH SULLIVAN
First Appellant
THOMAS WILLIAM SWAN
Second Appellant
IAN WILLIAM DONALDSON
Third Appellant
AND: TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383 679) AS THE RESPONSIBLE ENTITY OF THE PACIFIC FIRST MORTGAGE FUND (ACN 088 139 477)
Respondent
JUDGES:
ALLSOP CJ, FARRELL AND GLEESON JJ
DATE OF ORDER:
25 SEPTEMBER 2017
THE COURT ORDERS THAT:
1.Leave to file the third further amended notice of appeal be refused.
2.The appeal be dismissed.
3.Within seven days of the date of this order, the parties submit draft orders to give effect to the Court’s reasons in relation to costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THE COURT:
The appellants are former directors of City Pacific Limited (“City Pacific”), which was the responsible entity of the fund now known as the Pacific First Mortgage Fund (“Fund”). The trial judge found the first appellant, Mr Sullivan, liable to pay compensation in the sum of $37,214,088.28 and the second and third appellants, Mr Swan and Mr Donaldson, liable to pay compensation in the sum of $6,245,974.93 in respect of their conduct as directors of City Pacific in connection with loans to Atkinson Gore Agricultural Pty Ltd (“AGA”). These amounts are the losses found to have been suffered by the Fund as a result of the appellants’ contraventions of s 601FD of the Corporations Act 2001 (Cth) (“Act”). Section 601FD specifies duties of an officer of a responsible entity.
At the relevant times, Mr Sullivan was the managing director and chief executive officer of City Pacific and Mr Swan and Mr Donaldson were non-executive directors of City Pacific. Mr Donaldson was chairman of the board of directors. He has died since the appeal was heard.
The amount of $37,214,088.28 represents the total amount advanced to AGA during the period 28 April 2006 to 1 July 2007 less repayments of $5,275,000. The amount of $6,245,974.93 represents the total amount advanced to AGA during the period 11 January 2007 to 1 July 2007 less repayments of $5,275,000. These amounts were lost by the Fund after AGA defaulted on its loans in late 2008.
The appellants’ primary complaint is that they were not afforded a fair trial. They contend that they were unfairly required to meet a case which ranged well beyond the pleadings and included unpleaded allegations of “fabricated” documents made without notice in cross-examination. The appellants also contend that the trial judge unfairly made findings against them, particularly against Mr Sullivan, that they were not given an opportunity to answer.
The appellants’ complaints are made in the context of facts which emerged before, during and since the trial, about the dishonest conduct of City Pacific’s lending manager, Mr McCormick, in connection with the AGA facility. Mr McCormick was self-represented at the trial and was not a party to the appeal. An important premise of the appellants’ argument on the appeal is that the trial judge unfairly found that Mr Sullivan (and perhaps Mr Swan and Mr Donaldson) either colluded in or was knowingly involved in Mr McCormick’s frauds. Another important premise is that the trial judge failed to engage with the appellants’ “case theory” that Mr McCormick had deceived them and that they were ignorant of Mr McCormick’s fraud at the time.
Whether or not it is accurate to say that the trial judge made findings of fraud and collusion against the appellants (which is an issue discussed below), his Honour undoubtedly made serious adverse findings concerning all of them. The appellants complain that those findings were made despite the fact that Trilogy Funds Management Limited (“Trilogy”), the responsible entity of the Fund since 2009, did not plead any case of fraud, collusion or wilful blindness. However, the appellants themselves raised the issue of their honesty: they pleaded that they should be relieved from any liability for any contravention of s 601FD because they acted honestly in all the circumstances of the case. By this pleading, the appellants exposed themselves to scrutiny about the honesty of their actions, and to the possibility (which eventuated) that the trial judge would reject their case that they had acted honestly in all the circumstances of the case. The appellants must have appreciated that this was a significant risk where they had each executed a backdated loan approval document (the “9 August” loan approval) and Mr Sullivan had executed other backdated documents. The “9 August” loan approval recorded the appellants’ approval of an increase in the AGA loan facility from $26 million to $44.87 million, an increase of almost $20 million. The appellants signed it between late December 2006 and early January 2007, but dated 9 August 2006 next to each of their signatures (and, in the case of Mr Swan, with the additional handwritten words “ratified 11/01/07”).
The appellants’ complaint that they were denied a fair trial must also be understood in the context of the trial judge’s extensive and unchallenged findings about the appellants’ non-compliance with the obligations imposed upon them and designed to protect the Fund and its members. The appellants complain that they did not appreciate the extent to which they were deceived by Mr McCormick, but any such deception occurred in circumstances where, on the trial judge’s findings, the basal facts showed that the appellants failed glaringly to take steps that a reasonable person would have taken in their respective positions to discharge their respective statutory obligations and failed to take steps that a reasonable person would have taken to ensure that City Pacific complied with its regulatory obligations.
Mr Sullivan and Mr Swan now seek a re-trial. In the case of Mr Donaldson, it was argued that the proceeding should be dismissed because he was too ill to participate in a re-trial.
In order for the appellants to obtain the orders they sought, they were required to satisfy the Court that any errors made by the trial judge gave rise to a substantial miscarriage of justice: s 28(1)(f) of the Federal Court of Australia Act 1976 (Cth) and Windoval Pty Ltd v Donnelly [2014] FCAFC 127; 226 FCR 89. Accordingly, an issue on the appeal is whether the trial judge may not have found that the appellants are liable to compensate the Fund (either because they did not contravene s 601FD or because they should be exonerated because they acted honestly in all the circumstances of the case) if his Honour had fully appreciated the extent of Mr McCormick’s deceit, or if his Honour had not made the findings said to involve procedural unfairness.
For the reasons that follow, we are satisfied that the trial judge’s findings that the appellants contravened the Act were inevitable, as were his Honour’s conclusions that the appellants should not be exonerated from those contraventions in the circumstances of the case.
We also conclude that there was no procedural unfairness in the conduct of the trial.
Further, there was no procedural unfairness in the findings made by the trial judge against Mr Donaldson and Mr Swan.
Findings which should not have been made against Mr Sullivan
We accept, however, the submission made on behalf of Mr Sullivan that the trial judge made findings against Mr Sullivan which he did not have an opportunity to address in his evidence and that this involved procedural unfairness. The particular findings which should not have been made appear at [407], [432], [483], [521], [551], [620], [639], [642] and [690] of the trial judge’s reasons. It would be counter-productive to reiterate them at this point in the judgment. The findings went further than was necessary in order to address the case put by Trilogy.
However, those findings do not affect the trial judge’s reasons for his Honour’s conclusions that Mr Sullivan contravened s 601FD. As his Honour found, Mr Sullivan’s contraventions arose from his failure to ensure compliance with the regulatory framework that existed to protect the Fund. Most graphically, the contraventions were based upon Mr Sullivan’s failure to ensure that the land provided as security for the AGA facility (“Saddleback land”) was adequate security for the increases to that facility. The trial judge found that valuations obtained in March 2006 and December 2006 were “not worth the paper they were written on”. That finding was not challenged on the appeal.
TRILOGY’S CASE AGAINST THE APPELLANTS
Trilogy has been the responsible entity of the Fund since July 2009. By an originating application filed in April 2012, Trilogy claimed orders that each of the appellants and Mr McCormick compensate the Fund for damage suffered by the Fund by reason of their contraventions of sub-sections 601FD(1)(b), (d) and (f) of the Act.
Section 601FD relevantly provides:
(1)An officer of the responsible entity of a registered scheme must:
(a)act honestly; and
(b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; and
(c) act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; and …
…
(f)take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the responsible entity complies with:
(i)this Act; and
(ii)any conditions imposed on the responsible entity’s Australian financial services licence; and
(iii)the scheme’s constitution; and
(iv)the scheme’s compliance plan.
(2)A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1.
(3)A person who contravenes, or is involved in a contravention of, subsection (1) contravenes this subsection.
On the appeal, Trilogy emphasised that fraud was no part of its case against the appellants. At all relevant times, Trilogy’s case was put primarily on the basis that the appellants had breached their respective duties to take reasonable steps to ensure that City Pacific complied with the Fund’s constitution (“Constitution”) and its compliance plan (“Compliance Plan”), and to exercise reasonable care and diligence. There was no allegation of contravention of s 601FD(1)(a).
The alleged contraventions concern the approval or purported approval of increases to the AGA loan facility in August 2006 and December 2006 or January 2007, and the failure to take appropriate steps to prevent the making of advances beyond facility limits from late April 2006 to 1 July 2007.
One of the appellants’ complaints is that the trial judge denied them procedural fairness by finding that a letter from City Pacific to the Australian Securities and Investments Commission (“ASIC”), signed by Mr Sullivan and dated 8 February 2006, was misleading in relation to the AGA facility and that Mr Sullivan knowingly or recklessly misled ASIC in this letter. Trilogy did not plead a case of breach of duty in connection with this letter.
At [224] of the trial judge’s reasons, his Honour identified eight key issues for resolution. The following five issues were directed to questions of contravention:
(1)Did Mr Sullivan and Mr McCormick contravene s 601FD(1)(b), (c) or (f) of the Act in purporting to approve an “interim” increase to the AGA facility limit to $26 million in July or August 2006?
(2)Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in failing to prevent advances being made to AGA that were above the approved facility limit in the period 28 April to 23 August 2006?
(3)Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in failing to prevent advances being made to AGA that were above the approved facility limit in the period 24 August 2006 to 10 January 2007?
(4)Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b), (c) or (f) in approving an increase to the AGA facility limit to $44.87 million or $55 million in December 2006 or January 2007?
(5)Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in failing to prevent advances being made to AGA that were above the approved facility limit in the period 11 January 2007 to 1 July 2007?
The remaining three issues concerned causation and loss, mitigation of loss and whether the appellants or Mr McCormick should be exonerated in respect of any proven contraventions pursuant to ss 1317S or 1318 of the Act.
CONTRAVENTIONS FOUND BY TRIAL JUDGE
Increase of AGA facility limit to $26 million (Issue 1)
The trial judge found (at [459], [460] and [462]) that Mr Sullivan and Mr McCormick contravened s 601FD(1)(b), (c) and (f) of the Act in purporting to approve an increase of the AGA facility to $26 million and in offering that facility to AGA on or about 23 August 2006 by a backdated letter referred to as the “28 April” letter of offer. However, at [683] his Honour found that no loss directly resulted from those contraventions because advances up to just under $26 million had been made prior to 23 August 2006 (which largely explained his Honour’s finding, at [425], that issue 1 was “somewhat of a red herring”).
At [459], the trial judge identified the following compliance failures by Mr Sullivan and Mr McCormick in connection with issue 1:
(1)they failed to ensure that the purported approval of the increase in the AGA facility was supported by an acceptable “as is” valuation based on current zoning;
(2)they failed to ensure that the facility limit met the requirement of an 80 per cent loan to valuation ratio (“LVR”) (or the requirement of a “prudent lending ratio”);
(3)they failed to ensure that the Saddleback land provided adequate security for the increased facility; and
(4)they failed to ensure that a proposal for the increase in the AGA facility limit was put to and approved by the credit committee of City Pacific (“Credit Committee”) as required by the Compliance Plan and City Pacific’s mortgage lending manual (“Lending Manual”).
At [460], his Honour found that Mr Sullivan and Mr McCormick failed to exercise the required degree of care and diligence, as demonstrated by the following matters:
(a)their purporting to approve the increase to the AGA facility limit in circumstances where they knew that advances up to that limit had already been made in the absence of any reference to or approval by the Credit Committee;
(b)their purporting to approve the increase to the AGA facility limit in the absence of any acceptable valuation and in circumstances where, on the existing valuation, the balance of the loan was outside an LVR of 80 per cent;
(c)their purporting to approve the increase to the AGA facility limit in circumstances where both Mr Sullivan and Mr McCormick knew that SV Partners Pty Limited (“SVP”), an external expert, had recommended that the AGA facility be repaid or refinanced by 31 December 2005 if it had not been confirmed that the Saddleback land had been included in the Urban Footprint of the South East Queensland Regional Plan, and that another valuation be obtained from a different valuer to assess the analysis of land values in the Canungra area based on permitted uses (which recommendation, we interpolate, had not been implemented);
(d)their creation of false and misleading documents to suggest that AGA had been formally offered, and had accepted, the loan facility of $26 million on 28 April 2006; and
(e)their failure to take any steps to ensure that the procedures in the Compliance Plan and the Lending Manual were followed in relation to the offer of the $26 million facility, including all the failures referred to earlier in the context of the contravention of s 601FD(1)(f) of the Act.
Trilogy did not allege any contravention by Mr Swan or Mr Donaldson in relation to issue 1.
Advances to AGA above approved facility limit in the period 28 April to 23 August 2006 (Issue 2)
The significance of 28 April 2006 is manifold. It is the date of the backdated “28 April” letter of offer mentioned above. It is also the date of a backdated file note (referred to as the “28 April” file note) signed by Mr Sullivan and Mr McCormick. The trial judge found that all advances made after 28 April 2006 exceeded the AGA facility limit of $17.89 million, which was agreed at trial to have been approved by the appellants (as members of the Credit Committee) in October 2005. As will appear below, on the appeal the appellants sought to resile from their previous agreement that the $17.89 million facility limit was approved in October 2005. His Honour also found, at [424], that at all times from 28 April 2006 onwards the balance owing by AGA to the Fund exceeded the value of the land which secured the AGA loan facility.
The significance of 23 August 2006 is that this was the date on which Mr Sullivan and Mr McCormick purported to offer to increase AGA’s loan facility to $26 million (by the “28 April” letter of offer).
At [494], the trial judge found that Mr Sullivan and Mr McCormick contravened s 601FD(1)(b) of the Act in failing to prevent advances being made to AGA that were above the approved facility limit in the period 28 April 2006 to 23 August 2006. At [495], his Honour considered that this contravention was demonstrated by the same matters which gave rise to the contravention of 601FD(1)(b), in connection with the approval and offer of the $26 million facility to AGA. His Honour referred to the following matters in particular:
(1)They permitted advances to be made to AGA during this period in circumstances where the AGA facility limit had been exceeded and no proposal had been put to the Credit Committee.
(2)They also knew that SVP had raised issues concerning the AGA facility and that SVP had made recommendations concerning the AGA facility that had not been complied with; and
(3)“[P]erhaps most importantly”, they knew that City Pacific did not hold an acceptable “as is” valuation for the Saddleback land that would support any increase to the existing facility limit.
It is implicit in these findings that the advances made during this period did not comply with the Constitution, the Compliance Plan or the Lending Manual.
The trial judge found no contravention by Mr Swan or Mr Donaldson in relation to the advances in the period 28 April to 23 August 2006.
Advances to AGA above approved facility limit in the period 24 August 2006 to 10 January 2007 (Issue 3)
For the same reasons (recorded at [526]), at [525] the trial judge found that Mr Sullivan and Mr McCormick contravened s 601FD(1)(b) of the Act in failing to prevent advances being made to AGA that were above the approved facility limit in the period 23 August 2006 to 10 January 2007.
The trial judge found no contravention by Mr Swan or Mr Donaldson in relation to the advances in the period 23 August 2006 to 10 January 2007.
Increase of AGA facility limit to $44.87 million in December 2006 or January 2007 (Issue 4)
At [611], [616] and [625], the trial judge found that each of the appellants and Mr McCormick contravened s 601FD(1)(b),(c) and (f) of the Act in relation to approving the increase of the facility limit to $44.87 million (or $55 million) in December 2006.
In relation to Mr Sullivan, the trial judge referred to the following matters in support of his Honour’s finding concerning s 601FD(1)(b) (at [612]):
(1)He well knew that the proposal was not supported by any remotely acceptable “as is” valuation and was only really being pushed through the Credit Committee to cover up the fact that advances well beyond the AGA facility limit had already been made. He knew that, putting aside valuations which the trial judge found were “not worth the paper they were written on”, the “as is” valuation based on the actual zoning and current permitted uses of the Saddleback land was $24.975 million, which was well less than the new loan limit the subject of the proposal.
(2)It could not possibly be suggested on the basis of the information known to Mr Sullivan that the Saddleback land provided adequate security for the proposed loan or that the proposed loan maintained a prudent lending ratio.
(3)Mr Sullivan well knew that the proposed increase to the AGA facility flew in the face of the SVP report recommendations concerning the AGA loan and was, on almost any view, highly imprudent if not reckless in all the circumstances.
In relation to Mr Swan and Mr Donaldson, the trial judge referred to their “almost complete failure” to conduct any independent analysis or scrutiny of the proposal (at [613] and [614]). He identified the following things that a reasonable person would have done, but which were not done by Mr Swan and Mr Donaldson:
(1)They would have conducted at least some analysis and scrutiny of the proposal. Had Mr Swan and Mr Donaldson conducted even the most cursory analysis or scrutiny of the proposal, the inconsistencies and deficiencies would have been readily apparent, as would the fact that the proposed facility increase was, to say the very least, most imprudent.
(2)They would have read, analysed and cast a critical eye over the detail of the proposal. That alone would have put the reasonable person on notice of a number of significant discrepancies and inconsistencies in the proposal itself.
(3)They would have inquired as to the current balance of the loan.
(4)They would have refrained from approving the proposal until the lending manager gave the required certification in relation to the valuation as required by the Lending Manual (and as recommended by SVP).
(5)Even if that certification was forthcoming, a reasonable person, in all the circumstances, would have asked to see the valuation or valuations referred to in the proposal and questioned the lending manager in relation to that valuation or those valuations. That is particularly so having regard to the very large increase in the valuation of the property reflected in the figures in the proposal.
(6)They would have ensured that the valuations were based on the current zoning and permitted uses of the Saddleback land.
(7)They would have questioned the lending manager about why the proposal was backdated.
For similar reasons, the trial judge found that the appellants contravened s 601FD(1)(c) and (f).
Advances to AGA above the approved facility limit in the period 11 January 2007 to 1 July 2007 (Issue 5)
At [644], the trial judge found that Mr Sullivan contravened s 601FD(1)(b) of the Act in failing to prevent advances being made to AGA that were above the approved facility limit in the period 11 January 2007 to 1 July 2007.
At [643], the trial judge gave the following reasons:
Even if Mr Sullivan’s evidence on this issue was to be believed, and it is accepted that he did not read the board papers or take any other step to ascertain the balance of the AGA facility during 2007, it almost goes without saying that his failure to take such steps in all the circumstances amounted to gross negligence. In all the circumstances, no reasonable person in Mr Sullivan’s position would have failed to take steps to keep track of the balance of the AGA facility to ensure that no advances beyond the facility limit were made. Mr Sullivan was plainly on notice of serious issues in relation to the AGA facility and serious issues in relation to Mr McCormick’s activities in relation to it. Given Mr McCormick’s past history in relation to the AGA facility, that Mr Sullivan was well aware of, Mr Sullivan had no basis for relying on or trusting Mr McCormick in relation to the AGA facility. A reasonable person in his position, acting with even a modicum of care and diligence, would have closely monitored the balance of the AGA facility throughout 2007 to ensure that no further advances were made and the approved balance was not exceeded. On Mr Sullivan’s version of events, he did nothing.
At [652], his Honour found that Mr Swan and Mr Donaldson also contravened s 601FD(1)(b) of the Act in failing to prevent advances being made to AGA that were above the approved facility limit in the period 11 January 2007 to 1 July 2007.
Concerning Mr Donaldson and Mr Swan’s contraventions, the trial judge made the following findings:
[646]… by reason of the events of late December 2006 and early January 2007, both Mr Swan and Mr Donaldson had good reason to more carefully scrutinise the board papers generally and the AGA loan balance specifically. In short, they were on clear notice that they could no longer trust or rely on Mr Sullivan, Mr McCormick and others in the lending department, such as Mr Gillam, in relation to the AGA facility.
[647]Mr Donaldson and Mr Swan had, in December 2006, been presented with and asked to sign a backdated loan proposal in relation to AGA, with the only explanation for the backdating being that the proposal had “slipped between the cracks”. Even putting aside the backdating, the proposal itself was not only fairly extraordinary, but contained obvious signposts or “red flags” in relation to serious issues and problems with the AGA facility. The increase to the facility was in excess of $20 million. The supposed increase in the valuation of the Saddleback land which purportedly supported the increase to the loan facility was, on one view, about $40 million and, on another, almost $80 million. There were obvious discrepancies and deficiencies in the information in the proposal, including information about the approved limit, the present position and the basis of the supposed valuation. The AGA facility had earlier been specifically identified in the SVP report as a potentially problematic loan. All of those matters would, or should, have put Mr Swan and Mr Donaldson on notice that they needed to keep a very close eye on the AGA facility throughout 2007. In all the circumstances, they could not simply rely on Mr Sullivan or Mr McCormick to bring any issues concerning the AGA facility to their attention.
[648]Within a matter of weeks of signing-off on the backdated proposal, Mr Swan and Mr Donaldson, both men with extensive qualifications and experience in accounting, commerce and corporate governance, received board papers that revealed that the AGA facility was already $2 million over the limit they had just approved. Within two to three months, they had received board papers that revealed that the AGA facility was between $9 million and then $10 million over the facility limit they had so recently approved. That information was not in any sense difficult to identify or decipher from within the board papers. Any suggestions to the contrary by either Mr Swan or Mr Donaldson are rejected as implausible and not credible. It would not have been in any sense onerous for them to have analysed the loan schedule, particularly given their qualifications and experience. If they had looked at the list of loan balances, and the AGA loan balance specifically, it could not seriously be suggested that the information would not have “register[ed] any concern”, as may have been the case before December 2006.
[649]In all the circumstances, there are only two alternative factual findings available. The first is that, contrary to their evidence, both Mr Swan and Mr Donaldson did read the board papers, and the list of the Fund’s loans specifically, and did see and appreciate that the AGA facility was operating outside its limit, but for whatever reason did nothing about it. In that scenario, the failure by Mr Swan and Mr Donaldson to take any step to prevent further advances being made to AGA was a failure to exercise the care and diligence that would be expected of them given their positions. In their positions as directors and members of the Credit Committee, plainly Mr Swan and Mr Donaldson were in a position to prevent further advances being made to AGA above the facility limit.
[650]The second and alternative finding is that Mr Swan and Mr Donaldson either did not read the list of the Fund’s loans in the board papers or did not see or appreciate that the AGA facility was operating well outside its limit. As a result, they failed to ascertain that further advances were being made to AGA that took the facility beyond its approved limit, and as a result failed to take any steps to ensure that did not occur. In that scenario, given the events of December 2006 and the features of the AGA facility that must have been apparent to both Mr Swan and Mr Donaldson by this time, the failure by Mr Swan and Mr Donaldson to read and analyse the AGA loan balance in the board papers was a failure to exercise the care and diligence that would have been expected of them given their positions.
[651]Both Mr Swan and Mr Donaldson called in aid the fact that they were non-executive directors, the fact that they relied on management and the fact that City Pacific’s activities were also the subject of scrutiny by a compliance committee and external auditors. In all the circumstances, and particularly given that they had been party to the backdating of the December 2006 proposal, they were not entitled to call in aid reliance on management or external persons or bodies, such as the auditors. For the reasons already given, the explanations given by both Mr Swan and Mr Donaldson in their evidence concerning the backdating of the December 2006 proposal were most unsatisfactory. At the very least, they had every reason to suspect, if not believe, that the backdating of the proposal was intended to paper over a problem in the AGA loan file that would otherwise be apparent to anyone, including external parties, who inspected the AGA loan file.
[652]Those factual findings support the conclusion that, in failing to prevent the further advances to AGA during the period 11 January 2007 to 1 July 2007, both Mr Swan and Mr Donaldson contravened s 601FD(1)(b) of the Corporations Act. They failed to exercise the degree of care and diligence that a reasonable person in their positions would have exercised. In all the circumstances, a reasonable person in the position of Mr Swan and Mr Donaldson, exercising care and diligence, would have ascertained that the AGA facility had exceeded its approved limit and thereafter done everything in their power to ensure that no further advances to AGA beyond the approved limit were made. Whilst they were non-executive directors, they were members of the Credit Committee and, in any event, would have been in a position to stop the making of advances in the circumstances.
TRIAL JUDGE’S REJECTION OF CLAIMS FOR EXONERATION
At the trial, the appellants argued that any contravention or contraventions should be excused under either or both of ss 1317S or 1318 of the Act because the contraventions were not serious, were mere errors of judgment, and because in all the circumstances it would be unjust and oppressive to order them to pay the amount of compensation sought by Trilogy. Exercise of the powers in either of these provisions requires findings that the person seeking the benefit of the provision had acted honestly and that, having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention.
The trial judge’s reasons for rejecting the appellants’ claims for exoneration did not require consideration of the extent of Mr McCormick’s deception. They appear at [875]-[879] (Mr Sullivan), [884]-[892] (Mr Donaldson) and [893]-[897] (Mr Swan) of the trial judge’s reasons. The trial judge gave further reasons at [898]-[905]. His Honour observed that the contraventions of s 601FD were serious. His Honour referred to the prescriptive requirements of Chapter 5C of the Act and observed that “[t]he tightly regulated and highly prescriptive statutory scheme all amounts to nought…if officers of responsible entities do not comply with their duties under s 601FD”. His Honour concluded:
[900]… There is, for example, little point in having a comprehensive constitution and compliance plan if the officers of the responsible entity effectively ignore their provisions, or do not take reasonable steps or act with care or diligence to ensure that they are complied with.
[901]That is effectively what happened here. The actions of Mr Sullivan and Mr McCormick, in particular, but also Mr Swan and Mr Donaldson, made a mockery of the statutory scheme.
[902]Mr Sullivan and Mr McCormick thumbed their noses at the Constitution and the Compliance Plan and other policies and procedures put in place under them. They ignored them and dealt with the Fund’s assets as they saw fit.
[903]Mr Swan and Mr Donaldson turned a blind eye to Mr Sullivan’s and Mr McCormick’s disregard of the constituent documents. Even on their own evidence, they did not attentively read important parts of board papers that were provided to them for the purposes of board meetings. More significantly, they simply signed and thereby approved major loan proposals without giving them any independent scrutiny or analysis. If their evidence concerning their scrutiny of loan proposals was to be accepted, it is difficult to see the point of them sitting on the Credit Committee. Indeed, it is difficult to see the point in them being directors.
[904]Significantly, all this occurred in circumstances where the Fund’s assets, held on trust for its members, were valued at around $1 billion. Messrs Sullivan, Swan, Donaldson and McCormick seemed to have forgotten or ignored the fact that they were making decisions about other people’s money. It is doubtful that they would have acted in the same way if it was their money that was being advanced to AGA.
[905]In all these circumstances, the seriousness of the respondents’ contraventions can be readily appreciated. Relief under either s 1317S or s 1318 of the Corporations Act would be wholly inappropriate in the case of any of the respondents.
None of these reasons were challenged on the appeal.
COMPLAINT THAT TRIAL JUDGE FAILED TO ENGAGE WITH APPELLANTS’ CASE THEORY
When the basal facts that underpin the trial judge’s findings of contravention are recognised, it becomes obvious that those findings are unaffected by questions of whether the appellants were deceived by Mr McCormick and the extent of any such deception. Put another way, even if the trial judge had fully appreciated the extent of Mr McCormick’s deceit as claimed by the appellants, his Honour would nevertheless had made the same findings of contravention. Further, a full appreciation of the extent of Mr McCormick’s deceit as claimed by the appellants could not gainsay the trial judge’s reasons for concluding that they should not be exonerated for those contraventions.
Put simply, the appellants’ case theory missed the point of Trilogy’s case. Equally, the complaint that the trial judge failed to engage with that case theory misses the point of his Honour’s conclusions. As articulated on the appeal, the case theory was expressed at a high level of generality: for example, the appellants submitted that it was “far more plausible” that “Mr McCormick was acting alone and had simply deceived the others and kept them in the dark”. The trial judge was only required to address the appellants’ case theory to the extent that it engaged meaningfully with the case propounded by Trilogy. Accordingly, and contrary to the appellants’ submissions, the question of delay is not relevant to the extent of the reasons that the trial judge was required to give in addressing the appellants’ case theory.
UNCONTESTED FACTS AND FINDINGS
Regulatory framework for assessing the appellants’ conduct
The following detailed and uncontested facts and findings underpinned the trial judge’s conclusions.
Roles of the appellants and Mr McCormick
Mr Sullivan was the managing director and chief executive officer of City Pacific from August 1997 to November 2008.
Mr Swan was a non-executive director of City Pacific from 8 August 1997.
Mr Donaldson was a non-executive director of City Pacific, and chairman of the board of directors, from 25 May 1998 to 16 December 2008.
Each of the appellants was also a member of the Credit Committee of City Pacific at all relevant times from April 2006 to December 2007.
Mr McCormick was at all material times a senior manager of City Pacific. From around March 2005 to around 30 June 2006, he occupied the position of lending manager. Thereafter, and until 31 July 2009, he occupied the position of Group Executive – Property Development. In both these roles, he was essentially in charge of the lending department at City Pacific. He was a member of the Credit Committee at all relevant times from April 2006 to December 2007.
Fund and its constituent documents
The Fund is a unit trust established by a trust deed made on 23 June 1998, as amended from time to time, which serves as the constitution of the Fund (“Constitution”). The Fund is, and has been since 13 July 1999, a managed investment scheme registered under s 601EB of the Act.
At [283], the trial judge noted:
… A managed investment scheme cannot be registered under the Corporations Act if it does not have a constitution and compliance plan which comply with the detailed requirements in ss 601GA and 601HA of the Corporations Act respectively. Relevantly, the constitution must make adequate provision for the powers of the responsible entity in relation to the making of investments of, or otherwise dealing with, scheme property. The compliance plan must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Corporations Act and the scheme’s constitution. Plainly the contents of both documents are fundamentally important to the proper operation of the statutory scheme and the protection the statutory scheme is intended to afford to members of managed investment schemes.
City Pacific was the responsible entity of the Fund from 23 June 1998 until about 7 July 2009. As the responsible entity of the Fund, City Pacific was required to operate the Fund as a managed investment scheme and perform the functions conferred on it by the Constitution and the Act. During the time it was the responsible entity, City Pacific was the manager of the Fund under the Constitution.
Relevant provisions of the Constitution are set out [28] to [39] of the trial judge’s reasons. As his Honour noted, and as required by s 601GA(1)(b) of the Act, the Constitution contained a number of provisions dealing with the powers of City Pacific, as the responsible entity, in relation to making investments of, or otherwise dealing with, the Fund’s property.
Product disclosure statements
At [40] of the trial judge’s reasons, his Honour referred to Product Disclosure Statements (“PDS”) issued by City Pacific in respect of the Fund as required by Pt 7.9 of the Act. The PDS which were current in the period April 2006 to August 2007 included statements that:
(1)City Pacific had determined and documented lending guidelines for the approval and management of all loans;
(2)City Pacific would limit the investments of the Fund to first mortgages and cash investments;
(3)City Pacific only made investments that provided adequate security for the Fund;
(4)prudent lending ratios were maintained for lending by the Fund;
(5)the Constitution allowed advances up to 80 per cent of security property values as determined by an independent valuer; and
(6)all loan applications were carefully considered by the Credit Committee whose members have substantial credit and property development experience.
Compliance Plan
The trial judge noted that the Fund was required to have a compliance plan that met the requirements of s 601HA of the Act. Section 601HA provides that the compliance plan must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Act and the scheme’s constitution. The responsible entity was required to comply with the scheme’s compliance plan: s 601FC(1)(h) of the Act.
At [41] to [45] of the trial judge’s reasons, his Honour set out matters concerning the Compliance Plan.
At [43], the trial judge noted that the Compliance Plan set out procedures that were required to be followed in the period 11 August 2005 to 19 July 2007 in respect of all investments made by the Fund. The mandated procedures included that:
(1)all investments of the Fund had to be invested in accordance with the Constitution and the PDS;
(2)the lending manager of City Pacific was responsible for supervising the investment strategy of the Fund and undertaking the initial assessment of each “Mortgage Investment”;
(3)investments must only be made in “Authorised Investments”;
(4)before any “Mortgage Investment” was made, a valuation had to be obtained;
(5)the Credit Committee was responsible for approving all “Mortgage Investments”; and
(6)a “Mortgage Investment” should be made in accordance with the “Manager’s” mortgage lending guidelines.
Lending Manual
At [46] to [48] the trial judge set out details concerning the City Pacific Lending Manual.
Credit Committee
At [49] to [52], the trial judge made the following findings concerning the Credit Committee, of which the appellants and Mr McCormick were members:
[49]As indicated earlier, under the Compliance Plan, the Credit Committee was responsible for approving all mortgage investments. The PDS also stated that all loan applications were carefully considered by the Credit Committee and represented that the members of the Credit Committee had “substantial credit and property development experience”. The Lending Manual provided that all loan proposals, together with supporting information, including the valuation report, were to be given to the Credit Committee, and that it was the role of the Credit Committee to determine whether a loan proposal should be approved or declined. Each of the respondents was a member of City Pacific’s Credit Committee.
[50]The role of the Credit Committee was further explained in City Pacific’s Credit Committee Charter. The Credit Committee Charter was lodged with ASIC as part of City Pacific’s compliance material. The Credit Committee Charter contained the following statements:
1. INTRODUCTION
…
The Credit Committee of the Company (“Committee”) has the ultimate responsibility to the investors in the Schemes for which City Pacific Limited acts as Responsible Entity and Manager.
The Committee is dedicated to fulfilling these duties in a lawful and professional manner, and with the utmost integrity and objectivity.
Good credit assessment policies and procedures are critical for ensuring that the Committee carries out its duties effectively and efficiently to the benefit of the Company and the investors as a whole.
This document outlines the Company’s credit assessment policy, which is a written policy document that defines the respective roles, responsibilities and authorities of the Committee, both individually and collectively. As such, it establishes the guidelines within which the Committee members are to operate as they carry out their respective roles. …
3. THE ROLE OF THE COMMITTEE
The Committee is ultimately responsible for all matters relating to the credit assessment procedures of the Company.
The Committee has responsibility for ensuring that the Company’s lending practices are consistent and that all loans and transactions are correctly processed.
The Committee meets as and when required to review loan proposals together with the supporting information. Loan proposals to be considered must be given to the Committee for review. The decision to approve or decline a loan rests with the members of the Committee in accordance with the Credit Committee Approval Policy (refer Appendix 3). Loan applications are carefully considered by the Committee whose members have substantial credit and property development experience.
(Emphasis added.)
[51] The central importance of the Credit Committee could not be doubted.
[52]On or around 11 November 2005, the board of City Pacific resolved to adopt a Credit Committee Approval Policy, which provided that the following delegated authorities would apply to all new loans:
(a) Less than $5 million: any two members of the Credit Committee;
(b)From $5 million to $20 million: any three members of the Credit Committee;
(c)From $20 million to $50 million: all members of the Credit Committee;
(d)More than $50 million: all members of the Credit Committee plus the board members of City Pacific.
Relevant loan criteria
80 per cent LVR requirement
For reasons set out at [290] to [296] of his Honour’s reasons, the trial judge accepted Trilogy’s contention, based upon the Constitution read with the PDS, that the Fund could only invest its funds in “Mortgage Investments” where the total of the money advanced did not exceed 80 per cent of the value of the security property as valued by an approved valuer.
Valuation requirement
Trilogy contended before the trial judge that, by reference to the Compliance Plan, read together with the PDS and the Lending Manual, that loans were required to be approved by the Credit Committee and that, before approving a loan proposal, the Credit Committee was required to receive and consider a valuation of the security property from an approved valuer which was no more than three months old.
At [297], the trial judge recorded the appellants’ apparent acceptance that all investments, including extensions or increases to existing investments, had to be approved by the Credit Committee; and that the process of approval involved the provision of a loan proposal to the Credit Committee, together with supporting information.
His Honour did not make an express finding about the requirement to provide a valuation to the Credit Committee, but concluded (at [300]):
In any event, in the particular circumstances of this matter, the duty of care and diligence owed by each member of the Credit Committee would almost certainly have required them to take at least some steps to check or verify, if not carefully consider, the valuation or valuations that were said to support the proposal to increase the AGA facility limit that was put to the Credit Committee in December 2006. ... It is sufficient to note at this stage that this plainly did not happen.
This finding of breach of duty, which affects all of the appellants, was not challenged on the appeal.
Uncontested chronological facts and findings
The following section sets out both findings made by the trial judge that were not contested on the appeal, as well as other uncontested matters relevant to an assessment of the appellants’ case on the appeal.
Prior to 28 April 2006
In early March 2004, AGA obtained a valuation from PRP Valuers and Consultants Gold Coast Pty Ltd (“PRP”) in relation to approximately 394 hectares of land in the area known as “Saddleback” in the Gold Coast hinterland near the township of Canungra. The valuation of $5.9 million was based on the fact that the highest and best use of the land was for “rural pursuits as a holding proposition pending future subdivision approval”.
AGA first applied for a loan from the Fund on 30 June 2004.
On 14 July 2004, City Pacific, as responsible entity of the Fund, wrote to AGA and offered a total facility of $3.25 million to AGA secured by a first registered mortgage over land that was to be acquired at “Saddleback”. That offer was accepted by AGA on 9 September 2004.
In December 2004 and February and April 2005, the initial loan facility was increased to enable AGA to purchase additional parcels of land in the Saddleback area.
On 9 December 2004, City Pacific, as the responsible entity of the Fund, offered to provide a facility to AGA (apparently in an amount of $9.29 million) secured by registered mortgages over the existing lots owned by AGA and 15 additional parcels of land to be acquired. The offer was accepted, the funds were advanced and the additional parcels were subsequently purchased by AGA on 21 December 2004.
On 18 February 2005, ASIC wrote to the directors of City Pacific expressing concerns about the liquidity of the Fund. The letter enclosed a written notice issued under s 912C(1) of the Act that required City Pacific to give ASIC information about its financial services to assist ASIC in forming a view about the liquidity of the Fund.
On about 24 February 2005 City Pacific, as the responsible entity of the Fund, offered to provide a total facility to AGA of $8.8 million secured by registered mortgages over the Saddleback land already owned by AGA, and also over a further property, which was to be acquired by AGA. The offer was accepted by AGA on 25 February 2005 and the additional property was subsequently acquired.
On about 28 April 2005, PRP, under instructions from City Pacific, provided a valuation of the Saddleback land that had been acquired by AGA on a current market value basis. PRP expressed the opinion that the current market value of the land (comprising approximately 694 hectares) was $19.075 million, on the basis that its highest and best use was for “rural pursuits as a holding proposition pending future subdivision approval”.
In May 2005, following correspondence between ASIC and City Pacific, ASIC advised City Pacific in May 2005 that it had two options available to it. It could either immediately follow the “Non-Liquid Scheme redemption process”, or it could engage external experts to review “firstly the loan book and underlying mortgages in the scheme and secondly the liquidity of the scheme”.
Also in May 2005, the AGA facility was increased to $10.6 million and in June 2005, the facility was increased to $13.35 million. Based on the April 2005 valuation, these facility limits represented an LVR of 52.8% in May 2005 and 61.1% in June 2005.
On 20 June 2005, City Pacific engaged SVP to conduct the review required by ASIC, including a review of the Fund’s loan book. The review of the loan book was to involve, for every mortgage loan made by the Fund, an assessment of whether City Pacific had complied with the valuation and security requirements of the Constitution, the Compliance Plan and the Lending Manual. The directors of City Pacific approved the terms of SVP’s engagement.
On 21 June 2005, ASIC notified City Pacific that its Australian Financial Services Licence (“AFSL”) had been varied to add a condition that City Pacific must engage an external expert, approved by ASIC, to, amongst other things, “comprehensively review the assets of [the Fund]” and provide a report that included “any specific or general recommendations or comments that the [e]xpert may have in relation to the findings of the review”. At [73], the trial judge found:
That development was undoubtedly a most serious issue for City Pacific. City Pacific was required by s 912A(1)(b) of the Corporations Act to comply with the conditions of its AFSL. ASIC had the power under s 915C(1)(a) of the Corporations Act to suspend or cancel City Pacific’s AFSL if it did not comply with its obligations under s 912A. The holding of an AFSL was a prerequisite under s 601FA of the Corporations Act for City Pacific to be the responsible entity of the Fund.
On 28 September 2005, SVP furnished its report (“SVP report”) to both City Pacific and ASIC. Each of the appellants was provided with, or saw, a copy of the SVP report on or shortly after 28 September 2005. At [76], the trial judge found:
The report contained a number of general recommendations, but only one loan-specific recommendation which related to a loan that did not comply with the Constitution and the Compliance Plan. That loan was the AGA facility. The SVP report included the following findings and recommendations concerning the AGA facility:
SVP has identified a loan where [City Pacific] has approved lending to 60% of the valuation but where SVP considers the loan is outside all current policy areas.
i.SVP’s analysis is again based on use of the loan funds, this time for rural land banking at Canungra prior to rezoning of lands from Rural – Regional Landscape & Rural Protection to (the attempted) inclusion in the urban footprint of the recently released South East Queensland Regional Plan. Under asset / non-conforming loans rural properties of not more than 10 hectares are considered acceptable as security. The properties (the [Fund’s] security) now total 832.5 hectares.
ii.The loan is to Atkinson Gore Agricultural Pty Ltd (Craig Gore / John Atkinson) and approved to $13.35 million (with interest capitalised from date of initial draw down).
Recommendation
The loan be repaid (refinanced) if it is not confirmed in writing from the relevant government planning authority that the land can be included under the urban footprint of the recently released South East Queensland Regional Plan by 31 December 2005. At the December review SVP also recommends obtaining another valuation from a different valuer to check the analysis of land values in the Canungra area based on permitted uses. This valuation must also be satisfactory for the loan to remain as part of the portfolio.
(Emphasis in original.)
SVP also noted that the Compliance Plan provided that the lending manager must certify to the Credit Committee that the valuation is acceptable before approval. SVP found, in effect, that this requirement was not being complied with. The SVP report stated:
As the lending manager signed off each lending proposal, SVP is advised that the members of the lending committee considered this to indicate the valuation was acceptable; but SVP sighted no specific evidence on file of separate certification.
SVP are advised that new processes being introduced will incorporate a specific certification.
At [80], the trial judge found that the “new processes” that SVP was advised were being introduced were in fact later implemented by City Pacific. On 27 October 2005, each of the appellants and Mr McCormick were advised that City Pacific had adopted and implemented a new practice note in relation to valuations. That practice note included a new form of credit proposal that was to be completed by the Lending Manager. The new proposal was required to include the following:
VALUATION CERTIFICATION
In recommending this proposal, the Lending Manager certifies that the accompanying valuation is acceptable, subject to any qualification listed above.
On 30 September 2005, PRP provided a valuation of approximately 832 hectares of land, apparently comprising the land the subject of the April 2005 valuation and six additional lots (“September 2005 Saddleback Land”). The valuation valued the September 2005 Saddleback Land at $24.975 million, again on the basis that the highest and best use was for rural pursuits as a holding proposition pending future subdivision approval.
On 6 October 2005, City Pacific wrote to AGA with an offer to increase the facility to $17.89 million. The offer, signed by Mr Sullivan and Mr McCormick, specified that the loan facility of $17.89 million was to be secured by registered mortgages over the September 2005 Saddleback Land, together with Lot 2 RP 78799 and a Deed of Cross-Collateralisation. AGA accepted that offer on the same day.
The trial judge found that the offer to increase the facility to $17.89 million was supported by an approval of the Credit Committee. That proposition was uncontested at the trial but the appellants sought to challenge it on the appeal.
On 5 October 2005, Mr Sullivan and Mr McCormick were sent a draft “matrix”, prepared by City Pacific’s lawyers, which summarised SVP’s recommendations. The draft matrix included SVP’s specific recommendation in relation to the AGA facility. The draft matrix also included a column into which was to be inserted the action City Pacific proposed to take in relation to each recommendation and the person or persons at City Pacific who bore the responsibility for taking that action (“the action plan”).
The draft matrix, including the action plan, was reviewed by Mr Sullivan and others. It was finalised and sent to ASIC on 11 October 2005. Copies of the final version of the matrix and action plan were sent to Mr Swan and Mr Donaldson on 11 October 2005.
At [82], the trial judge found, in effect, that each of the appellants was well aware of the SVP recommendations concerning the AGA facility and City Pacific’s action plan in relation to those recommendations from at least that time.
Between about September 2005 and January 2006, AGA made unsuccessful efforts to achieve the rezoning of the Saddleback land.
As at 31 December 2005, nothing had been done to implement SVP’s recommendations concerning the AGA facility. As at 31 December 2005, City Pacific had not obtained written confirmation that Saddleback had been included in the Urban Footprint area under the South East Queensland Regional Plan. Nor had it required the AGA facility to be repaid, or obtained a fresh valuation from a different valuer based on permitted uses.
On 27 January 2006, ASIC wrote to Mr Sullivan to request a report on the progress of City Pacific’s implementation of the SVP recommendations.
On 8 February 2006, Mr Sullivan sent ASIC a letter enclosing a “full progress report”. The letter had two attachments, a schedule (numbered at the trial “ITB213”) and a table described as a “matrix” (numbered “ITB214”). The letter and attachments were subsequently sent to Mr Swan and Mr Donaldson.
In his Honour’s reasons, the trial judge referred to the two attachments as a single “report”. The trial judge made the following findings about the report (at [93] to [95]):
[93]In relation to the AGA facility, a table in the enclosed report stated that “[o]n receipt of zoning gazettal and finalised valuation, both imminent, we will review [the] facility”. The basis of the statement that a zoning gazettal and finalised valuation were “imminent” is, at best, unclear. Given that the Council had refused AGA’s application to have the 1989 or 1992 rezoning applications gazetted, there would appear to have been no basis for the statement that gazettal was “imminent”.
[94]Perhaps more significantly, the progress report stated as follows in relation to the AGA facility:
A Draft valuation prepared by a different valuer (on panel), has been sighted at a substantially higher value. Legal opinion is held from an eminent QC that the 1989 rezoning to ‘Special Facilities’ is valid for this property. On receipt of zoning gazettal and finalised valuation we will review the facility. Advice that we have received is that the gazettal is now a formality and is imminent.
[95]That statement was unquestionably misleading, if not completely false. No valuation by a different valuer had been commissioned, let alone sighted by City Pacific. City Pacific did not hold an opinion from an eminent QC that the 1989 rezoning was “valid”. Nor did it hold any advice that gazettal was “a formality and … imminent”. Indeed, as already indicated, the Council had already refused AGA’s request relating to the approval and gazettal of the 1989 and 1992 rezoning approvals.
On the appeal, the appellants complained about the trial judge’s findings that Mr Sullivan misled ASIC in this letter. The issue was whether Mr Sullivan had acted dishonestly or otherwise wrongfully in sending the letter to ASIC: it was not suggested that the trial judge erred in finding that the letter itself was misleading in the manner that his Honour identified.
On 15 February 2006, AGA sent a report to Mr Sullivan and Mr McCormick which summarised the steps AGA had taken to pursue development approvals in relation to the Saddleback land. The report noted that the Council had refused AGA’s request to recommend to the Minister that rezoning approvals in 1989 and 1992 be gazetted and that the refusal was the subject of an appeal in the Planning and Environment Court of Queensland.
On 7 March 2006, City Pacific as the responsible entity of the Fund instructed PRP to prepare a valuation of the land valued in September 2005 together with an additional lot. It instructed PRP to value the land on the following basis:
Site Value AS IS (with current development approval if applicable). The valuation is to reflect the 1989/1992 ‘Special Facilities’ rezoning approval over the Original Saddleback lands. It is to also take into consideration the Canungra Development Control Plan which exists over part of the subject lands.
At [101], the trial judge noted that the instructions required an assumption that the 1989/1992 rezoning approval by the Council had been gazetted and was legally effective, despite the fact that the rezoning approval had never been gazetted, was legally ineffective and the Council had made it plain to AGA that it refused to revisit or gazette the earlier approvals.
On 20 March 2006, PRP provided a valuation report for the relevant land, together with two additional lots, totalling approximately 887 hectares. The report expressed the opinion that the current market value of the land was $64.1 million. There was no real dispute that this valuation report was provided to Mr Sullivan. The trial judge found ([at [547]) that this valuation was not worth the paper it was written on.
28 April to 23 August 2006
At [424], the trial judge found that from 28 April 2006 onwards the balance owing by AGA to the Fund exceeded the value of the Saddleback land. On this basis, his Honour concluded:
On any view the advances made to AGA after 28 April 2006, the purported approval of the “interim” increase to the facility limit to $26 million, and the approval of the increase to the facility limit to $44.87 million (or $55 million) were objectively imprudent and not in the best interests of the members of the Fund. They did not comply with the Constitution or the Compliance Plan. The only real question is whether the respondents knew that to be the case, or whether they would have known that had they exercised the required standard of care and diligence
As at 28 April 2006, the balance outstanding on the AGA loan facility was $17,744,965.64.
On 1 May 2006, capitalised interest of $318,801.68 was added to the principal outstanding under the facility, increasing the balance outstanding to $18,063,767.32.
On 10 May 2006, AGA requested a drawdown of $1 million. That request was made to Mr McCormick. A Funds Transfer Request form in respect of that drawdown was prepared and in due course signed by Mr Sullivan and Mr McCormick. That was despite the fact that the drawdown resulted in the AGA facility exceeding its approved limit (which the trial judge took to be $17.89 million). There was no Credit Committee resolution to increase the limit of the AGA facility to permit the making of that further advance. The further advance was made on 11 May 2006.
On 29 May 2006, PRP sent Mr McCormick an updated March 2006 valuation expressing the opinion that the current market value of the land the subject of the March 2006 valuation was:
(a)$64.1 million on an ‘as is’ basis “which reflects the 1989/1992 “Special Facilities” rezoning approval”;
(b)$102.4 million on the assumption that the land had been declared as State Significant; and
(c)$102.4 million on the assumption that the land had been included in the Urban Footprint area under the South East Queensland Regional Plan.
None of the assumptions on which these valuations were based reflected reality. As for the March 2006 valuation, the trial judge found ([at [547]) that the updated March 2006 valuation was not worth the paper it was written on.
Further significant advances were made of $592,000, $350,000 and $500,000 on 17, 25 and 26 May 2006 respectively. The latter two Funds Transfer Request forms were signed by Mr McCormick.
On 20 June 2006, each of the appellants was sent board papers in advance of a meeting of the board of directors on 22 June 2006. The board papers included a balance sheet for the Fund which recorded, under the heading “Significant advances – May”, that $2.4 million had been advanced to AGA in May 2006. The board papers also included a schedule of all loans made by the Fund. That schedule recorded that the balance of the AGA facility was $20.506 million. Similarly, the board papers for the July 2006 meeting of the board of directors included a schedule which recorded the balance of the AGA facility as being $20.691 million as at 30 June 2006, and the board papers for the August 2006 board meeting recorded that the balance of the AGA facility was $22,822,885.
On 11 July 2006, the Fund’s compliance auditors, KPMG, wrote to Mr McCormick requesting information in relation to the Fund’s mortgage loans. The letter included the following request:
We noted five instances (… Atkinson Gore Agricultural …) where the loan drawn at 31 May exceeds the facility limit per the LOO [letter of offer].
… Please review the loan files and provide details of the current situation.
The next day, Mr Sullivan and Mr McCormick signed a further Funds Transfer Request form in relation to the AGA facility that authorised a further advance of $475,000 under the facility. That was followed by further Funds Transfer Requests on 17 July 2006 for $750,000 (signed by both Mr Sullivan and Mr McCormick) and on 25 July 2006 for $500,000 and $19,820.75 (signed by Mr McCormick). Those advances were not the subject of any documented approval by the Credit Committee.
The backdated “28 April” file note
Trilogy’s case, as pleaded in its second further amended statement of claim (“statement of claim”) at para 84, was that Mr Sullivan and Mr McCormick gave approval for the AGA facility to be increased to $26 million on 28 April 2006. Separately, at para 121C of the statement of claim, Trilogy alleged that the advances made to AGA in the period 28 April to 23 August 2006 were made in circumstances where no letter of offer relating to the $26 million facility had been executed by AGA and City Pacific, and the approval of the Credit Committee had not been obtained in relation to the $26 million facility.
The particulars to para 84 referred to both the “28 April” letter of offer and the “28 April” file note. The file note included the following:
Following a meeting between the writer, CEO and Craig Gore provisional approval was given to increasing the facility to $50m once 1 or 2 above had been received, in the interim the facility would be increased to $36m, an LVR of 56.16%.
At [126], the trial judge found that there was no meeting on 28 April 2006, and no provisional or interim approval was given to a proposal to increase the AGA facility on 28 April 2006.
The trial judge noted (at [122]) that one version of the file note also included a handwritten note in the following terms:
Please prepare a short acknowledgment letter informing we will allow facility to go to $26m as an interim measure until formal LOO is issued.
In contrast with the position concerning the “28 April” letter of offer, the pleading did not allege that the “28 April” file note was backdated.
During cross-examination of Mr Sullivan, Mr Martin SC, senior counsel for Trilogy at the trial and on the appeal, asked (by reference to metadata for the “28 April” file note) whether the file note was created on 24 July 2006. Mr Sullivan denied that proposition but noted that he had not previously seen the metadata. The following day, Mr Sullivan conceded the accuracy of the metadata.
Subsequently, Trilogy tendered, without any objection by the appellants, metadata evidence which showed that the file note was created on 24 July 2006. At [121], the trial judge found that the file note, bearing the date 28 April 2006, was created by Mr McCormick on 24 July 2006.
The trial judge noted (at [426]) that Trilogy’s pleaded case hinged on the allegation that Mr Sullivan and Mr McCormick gave approval for the AGA facility to be increased to $26 million on 28 April 2006. However, his Honour observed, whilst Mr Sullivan and Mr McCormick initially claimed that the approval did in fact occur on 28 April 2006, the evidence clearly demonstrated that no such approval was given on 28 April 2006.
At [127], the trial judge found that the file note was “manifestly misleading”. His Honour inferred that:
it was prepared and signed to attempt to mollify the auditors and provide some justification for the fact that the AGA facility had been permitted to be drawn down well over its approved limit. It gave the false or misleading impression that an interim increase to the AGA facility had been approved and documented before the AGA facility had been permitted to exceed its limit.
The appellants contend that they were denied procedural fairness in connection with adverse findings made by the trial judge concerning Mr Sullivan’s role in the creation of the “28 April” file note.
Mr McCormick created a second file note on 24 July 2006, which was correctly dated. The 24 July 2006 file note referred to the “28 April” file note which noted, among other things:
Facility has been allowed to run on with additional draws approved as and when they are submitted. We are still awaiting the updated individual project costings which will enable a formal approval and Letter of Offer to be produced.
This is now expected by end of July.
On 25 July 2006, Mr McCormick wrote to KPMG in response to KPMG’s 11 July 2006 letter. The letter included the following:
Facility Drawn exceeds Facility Limit
Sickle Avenue Pty Ltd, Romsey Street Waitara Pty Ltd,
Atkinson Gore Agricultural Pty Ltd – These facilities fall within the exposure known as the ‘Gore Group’. These facilities are currently being restructured and all securities are cross-collateralised between facilities. Recent drawdowns on each facility reflect the cross collateralised position. In support, we have provisionally approved a restructure of the Atkinson Gore Group facilities that will bring all loans within the Group back into line with their respective Cost to Complete. This is expected to occur pre- 31 July 2006. As part of the restructure, Atkinson Gore Agricultural Pty Ltd will be increased to $50M to facilitate the necessary adjustments across the Group. Refer Diary Note on Atkinson Gore Agricultural.
At [130], the trial judge made the following findings concerning this letter:
(1)There was no evidence that the Gore Group facilities, including the AGA facility, were being restructured. No proposal to restructure the facilities had been put to and approved by the Credit Committee;
(2)No proposal to increase the AGA facility had been put to and approved by the Credit Committee.
(3)By referring KPMG to the diary note, Mr McCormick misled KPMG. The false impression was conveyed that provisional approval to increase the AGA facility to $50 million had been given on 28 April 2006.
On 28 July 2006, Mr Sullivan and Mr McCormick signed a further Funds Transfer Request authorising a further advance on the AGA facility in the sum of $200,223.02. That advance, when made, took the debit balance of the AGA facility to $23.231 million.
The loan schedule included in the August 2006 meeting board papers recorded that the balance of the AGA facility as at 31 July 2006 was $22.823 million.
Further advances of $500,000 and $202,641.91 were made on 1 August 2006. Mr McCormick signed the Funds Transfer Request in relation to the $500,000 advance. Still further advances of $1 million and $165,000 were made on 14 and 16 August 2006.
The trial judge’s findings that the advances made to AGA in the period 28 April to 23 August 2006 were made in excess of the AGA facility limit (whether that was $17.89 million, or some lesser amount as suggested by the appellants on the appeal) and in the absence of any proposal to the Credit Committee (in breach of the Compliance Plan) are not disputed on the appeal. Nor is the trial judge’s finding that Mr Sullivan knew that advances were being made during the period 28 April to 23 August 2006. Nor is the trial judge’s finding that Mr Sullivan permitted advances to be made during the period 28 April to 23 August 2006 in circumstances where the AGA facility limit had been exceeded and no proposal had been put to the Credit Committee.
Similarly, the appeal proceeds on the basis that the following findings are unchallenged:
(1)in the period 28 April 2006 to 23 August 2006, Mr Sullivan knew that SVP had raised issues concerning the AGA facility and that SVP had made recommendations concerning the AGA facility that had not been complied with;
(2)Mr Sullivan also knew that City Pacific did not hold an acceptable “as is” valuation for the Saddleback land that would support any increase to the existing facility limit; and
(3)careful and diligent officers in the position of Mr Sullivan (and Mr McCormick) would not only have prevented any further advances being made to AGA during the period 28 April to 23 August 2006, but would have taken steps to have the AGA facility repaid.
The advances made during this period totalled $6,945,561.17, all of which were ultimately lost to the Fund.
Increase of loan facility to $26 million
The backdated “28 April” letter of offer
On 23 August 2006, a company that was performing due diligence for a prospective purchaser of the Fund’s loan book requested access to a number of City Pacific’s loan files, including the AGA loan file. The trial judge found (at [134]) that the request for access to the AGA loan file prompted Mr McCormick to create a letter of offer in relation to the supposed interim increase.
On 23 August 2006, a letter dated 28 April 2006 was sent to AGA, offering to increase the AGA facility “as an interim facility” to $26 million. This is the “28 April” letter of offer. The offer was accepted by AGA on 24 August 2006.
At [453], the trial judge found, based on the unchallenged evidence concerning the metadata of the electronic version of “28 April” letter of offer, that the letter was first created on 23 August 2006.
City Pacific’s mandated loan approval process was not complied with in connection with the increase of the facility limit to $26 million because, amongst other things, the approval did not go to the Credit Committee.
When, in August 2006, City Pacific offered AGA an increase of its facility to $26 million:
(1)that offer was made in the absence of an acceptable “as is” valuation based on current zoning;
(2)the proposed facility limit did not meet the 80 per cent LVR requirement;
(3)the Saddleback land did not provide adequate security for the increased facility;
(4)a proposal for the increase of the AGA facility was not put to and approved by the Credit Committee;
(5)Mr Sullivan knew that advances up to that limit had already been made in the absence of any reference to or approval by the Credit Committee;
(6)Mr Sullivan knew that the increase was not supported by any acceptable valuation and, on the existing valuation, the balance of the loan was outside an LVR of 80 per cent;
(7)Mr Sullivan knew that SVP had recommended that the AGA facility be repaid or refinanced by 31 December 2005 if it had not been confirmed that the Saddleback land had been included in the Urban Footprint of the South East Queensland Regional Plan, and that, at the December 2005 review, another valuation had been obtained from a different valuer to assess the analysis of land values in the Canungra area based on permitted uses; and
(8)Mr Sullivan failed to take any steps to ensure that the procedures in the Compliance Plan and the Lending Manual were followed in relation to the offer of the $26 million facility.
The appellants contend that they were denied procedural fairness in connection with adverse findings made by the trial judge about Mr Sullivan’s role in the creation of the “28 April” letter of offer.
25 August to 20 December 2006
On 25 August 2006, Mr McCormick sent an email to Mr Swan and Mr Donaldson attaching a copy of a document recording the October 2005 Credit Committee approval of the increase of the AGA facility limit to $17.89 million. On the appeal, the appellants argued, by reference to new evidence, that this approval was fabricated. However, it was not disputed that the document was sent to Mr Swan and Mr Donaldson on 25 August 2006.
In their reply submissions, the appellants submitted that the Court should treat the fresh evidence of Mr Anderson as uncontested and supporting the appellants’ case of miscarriage of justice and denial of procedural fairness. They submitted that Mr Mackay has put on evidence that he did not sign the documents, corroborating the case of “massive fraud” by Mr McCormick. As noted earlier, Mr Anderson’s evidence was that Mr Mackay’s signatures on eight funds transfer request forms were identical (leading the appellant’s to submit that the signatures were forgeries) and that the funds transfer request forms and all signatures of them could have been sent to a forensic document analyst for examination, and may have revealed further forgeries or anomalies. In any event, the possibility contemplated by Mr Anderson’s evidence does not demonstrate error on the part of the trial judge. Without the evidence of Mr Anderson, the trial judge had no reason to have refrained from relying on apparently contemporaneous documents.
The appellants argued that the significance of the “eight Mackay forgeries” is, as set out in appeal ground 7(f), that the trial judge’s conclusion that Mr Sullivan was complicit in Mr McCormick’s fraud (at [407]), [454] and [468]) is inconsistent with Mr McCormick needing to go to the extraordinary lengths of forging Mr Mackay’s signatures.
The submissions do not explain how the trial judge relied on the “eight Mackay forgeries” in making adverse findings against any of the appellants, including at [451], [584] and [596] of his Honour’s reasons, being the paragraphs identified in ground 6 of the notice of appeal. Nor do they explain how the trial judge relied on those documents in making the findings at [407], [454] and [468], being the paragraphs identified in ground 7(f).
In those circumstances, these grounds of appeal are not made out.
INCONSISTENCIES AND ERRORS OF FACT (GROUNDS 1 AND 2(E))
Grounds 1(a) and 2(e) (Mr Sullivan)
Ground 1(a) is that the trial judge “erred at law in making inconsistent, contradictory and irreconcilable credit findings” in that his Honour:
(i)found that Mr McCormick was a fraudster who fabricated documents and who could not be believed;
(ii)accepted Mr McCormick’s evidence as against Mr Sullivan at [450] and [451]; and
(iii)later found that Mr McCormick was perjuring himself in order to protect Mr Sullivan,
despite the appellants’ case theory that Mr McCormick lied and misled all of them.
Ground 2(e) makes a further complaint of error in relation to [451], that the trial judge erred in recalling Mr McCormick’s evidence.
Trilogy did not dispute propositions (i) and (iii). At [350], the trial judge found that Mr McCormick was a dishonest and deceitful man, and an untruthful and unreliable witness. At [363], his Honour found that Mr McCormick was untruthful in his claim that he did not recall any conversations with Mr Sullivan about the AGA facility during 2006 concluding that “[t]he only reasonable inference to be drawn was that [Mr McCormick] was endeavouring to protect Mr Sullivan”.
The trial judge also formed a very negative view of Mr Sullivan saying, at [316], that he was “a most unsatisfactory and unimpressive witness”. At [320], the trial judge described Mr Sullivan’s demeanour during cross-examination as “at times most unimpressive”. His Honour described Mr Sullivan as trenchant and emphatic and often belligerent. At [321], the trial judge gave three examples to support his conclusion that Mr Sullivan’s evidence was unreliable in relation to a number of key matters. At [322] and following, his Honour gave examples of aspects of Mr Sullivan’s evidence which his Honour considered were “manifestly implausible”. At [327] and following, the trial judge assessed “important aspects of Mr Sullivan’s evidence” as “simply unsatisfactory”. At [330], the trial judge concluded:
Ultimately, it is not possible to conclude otherwise than that Mr Sullivan was not an honest or reliable witness in relation to the key factual issues concerning the conduct of the AGA facility during 2006 and 2007. Much of his evidence was self-serving and sought to deny or deflect responsibility onto others for his manifest failings in relation to the conduct of the AGA facility. He was a man prepared to lie about his knowledge of and involvement in key events so as to extricate himself from blame or responsibility.
As to (ii), at [450], the trial judge rejected Mr Sullivan’s claim that he only received the first page of Funds Transfer Request forms which, the trial judge found (at [449]), was “almost entirely bereft of any meaningful detail about the relevant loan facility such as to permit the authorising officer to determine whether the funds transfer should be authorised”. The trial judge did not only reject Mr Sullivan’s claim on the basis that it was contrary to Mr McCormick’s evidence, but also because it was implausible and entirely uncorroborated.
At [451], the trial judge referred to evidence given by Mr McCormick that he only advanced funds to AGA over the approved limit in the period prior to 23 August 2006 with Mr Sullivan’s approval. Mr King submitted that this was not Mr McCormick’s evidence, and referred to his Honour’s rejection at [363] of Mr McCormick’s evidence that he did not recall any conversations with Mr Sullivan concerning the AGA facility in 2006. Trilogy did not point to any evidence by Mr McCormick supporting the trial judge’s observation.
The trial judge observed that Mr McCormick’s evidence was “by no means implausible”, but also that it was supported by inferences flowing from the following documentary evidence:
(1)the funds transfer request dated 11 May 2006 which took the facility above its approved limit, and which was signed by Mr Sullivan;
(2)the “28 April” file note which was signed by Mr Sullivan; and
(3)the “28 April” letter of offer which was signed by Mr Sullivan.
There is no error in the finding at [450] which is based on both the implausibility of Mr Sullivan’s evidence, its lack of corroboration, as well as Mr McCormick’s evidence. The trial judge was not required to disregard entirely the evidence of Mr McCormick in making the finding at [450].
The finding in the first sentence of [451] appears to be based in part upon a misapprehension of Mr McCormick’s evidence. Mr McCormick’s evidence on this subject was as follows:
MR YOUNG: Other than Mr Sullivan being aware that there was a proposal to increase the facility to Atkinson Gore to 26 million, and Mr Sullivan was agreeable to that, apart from that, Mr Sullivan wasn’t aware, as far as you know, of you advancing funds to Atkinson Gore in excess of the approved limits; isn’t that right?---I don’t the answer to that [sic].
You certainly didn’t make him aware, did you?---Well, only through the drawdown requests that were being signed off.
However, the conclusion that Mr McCormick only advanced funds to AGA over the approved limit in the period prior to 23 August 2006 with Mr Sullivan’s approval is amply supported by the three other pieces of evidence to which the trial judge referred. Although Mr King seemed to suggest that the authenticity of the 11 May 2006 funds transfer request was brought into question by the further evidence, the evidence of Mr Finucan and Mr Mackay was not directed to that funds transfer request.
We do not accept that there is a necessary inconsistency or contradiction between the finding in the first sentence of [451] and the trial judge’s other findings. It was open to the trial judge to accept Mr McCormick’s evidence concerning the extent of Mr Sullivan’s approval of advances to AGA, particularly where there were contemporaneous records which corroborated or tended to corroborate the fact of approval. Thus, ground 1(a) is not made out.
We accept that the trial judge erred in his summation of Mr McCormick’s evidence at [451]. To that extent, the appellants have made out ground 2(e). However, the error is immaterial in the light of the trial judge’s conclusions, at [494] and [495], that Mr Sullivan contravened s 601FD(1)(b) in connection with the advances, based on his failure to prevent the advances, and his permitting the advances to be made in the context of other matters set out at [495]. The findings that Mr Sullivan knew of the advances made during the period 28 April 2006 to 23 August 2006 (at [449] and [467]), and permitted them to be made (at [495]) were uncontested. Accordingly, while ground 2(e) is made out, it has no consequence.
Ground 1(b) (Mr Donaldson and Mr Swan)
Ground 1(b) contends that Mr Swan and Mr Donaldson were adversely criticised by the trial judge about their response to the SVP report (at [400]-[404]) yet were later exonerated on the same issue (at [491]-[492]).
At [400], the trial judge found that the evidence of both Mr Swan and Mr Donaldson concerning the implementation of SVP’s recommendations concerning the AGA facility was in many respects unpersuasive and lacked credibility. His Honour then considered whether Mr Swan and Mr Donaldson were justified “in simply delegating responsibility for the SVP report and its implementation to management?”. At [401], the trial judge found that it was not sufficient for Mr Swan and Mr Donaldson to unquestioningly and uncritically rely on management to deal with SVP’s criticisms. At [402], his Honour noted that Trilogy did not allege any breach of duty on the part of the appellants and Mr McCormick in relation to the response to the SVP report. Even so, his Honour considered the evidence concerning the SVP report to be significant for the following reasons relevant to Mr Swan and Mr Donaldson:
(1)It revealed an almost complete absence of any oversight or scrutiny of management by the independent or non-executive directors in relation to that issue (at [403]).
(2)Mr Swan and Mr Donaldson must have known from the SVP report that the AGA facility was not just a regular loan amongst the many in City Pacific’s loan book. Rather, not only was it a large loan, but it was a loan that had been singled out by an independent expert as a non-complying loan. It had been the subject of specific and unequivocal recommendations (at [404]).
Mr King did not suggest that the trial judge was not entitled to make those findings.
Despite his Honour’s critical analysis at [400]-[404], at [491] and [492], the trial judge said:
[491]Whilst the SVP report was undoubtedly a serious matter that required some degree of oversight by the board, including the non-executive directors, it was open to Mr Swan and Mr Donaldson to accept the assurance of management that the issues raised by SVP had been properly responded to and that SVP’s recommendations were being implemented. The board approved the implementation of SVP’s recommendations. The non-executive directors, including Mr Swan and Mr Donaldson, would also have been aware that management had retained external lawyers to assist in City Pacific’s dealings with ASIC. Whilst the letter Mr Sullivan wrote to ASIC which reported on City Pacific’s implementation of SVP’s recommendations was unquestionably misleading insofar as the AGA facility was concerned, there is no evidence that Mr Swan and Mr Donaldson knew that to be the case. It is open to infer that they too were misled by this response.
[492]Mr Donaldson and Mr Swan had no good reason, at least at this stage, to second-guess Mr Sullivan’s assurances to ASIC and no compelling reason to conduct further specific investigations themselves into the state of the AGA facility. The situation may have been different if they were required to make a decision in relation to the AGA facility in their capacities as members of the Credit Committee during this period. During this period, however, Mr Swan and Mr Donaldson were not required themselves to make any decisions concerning the AGA facility. They were not specifically tasked with implementing, or overseeing the implementation, of SVP’s recommendations in relation to the AGA facility.
These reasons formed part of the trial judge’s conclusion that Mr Swan and Mr Donaldson did not contravene s 601FD in relation to advances made in the period 28 April 2006 to 23 August 2006.
The findings at [491] and [492] reveal that, when it came to considering whether Mr Swan and Mr Donaldson had contravened s 601FD, the trial judge may have taken a more lenient approach than revealed in his earlier consideration of the significance of their response to the SVP report. However, we do not accept that the findings demonstrate error on the part of the trial judge. They are reconcilable on the basis that his Honour considered that Mr Swan and Mr Donaldson were not entitled to delegate responsibility for the SVP report and its implementation to management and it was not sufficient for them unquestioningly and uncritically to rely on management to address the criticisms in that report. However, the Board having approved the implementation of the SVP recommendation, it was open to Mr Swan and Mr Donaldson to accept management’s assurance that the issues raised by SVP had been properly responded to and that SVP’s recommendations were being implemented. Acceptance of that assurance did not, without more, amount to a delegation of responsibility for the SVP report, or an unquestioning or uncritical reliance upon management. They had no good reason, at least during the period April to August 2006 to second-guess Mr Sullivan’s assurances to ASIC and no compelling reason to conduct further specific investigations themselves into the AGA facility where they were not themselves required to make any decision concerning the facility.
Thus, ground 1(b) raises no appellable error.
Ground 1(c) (Mr Donaldson and Mr Swan)
Ground 1(c) is that Mr Swan and Mr Donaldson were the subject of adverse findings (at [334], [335], [346]) on the basis of rejected evidence, where such evidence was later accepted ([478]-[483]).
At [334] and [335], the trial judge considered Mr Swan’s evidence concerning his supervision or oversight of the Fund’s loan book. His Honour found that Mr Swan’s evidence concerning information gleaned (or not gleaned) from the Board papers was not convincing and “at least open to doubt”.
At [346], the trial judge found Mr Donaldson’s evidence “implausible” concerning his lack of consideration of the loan balances that formed part of the financial reports included in the Board papers.
Even so, at [477]-[483], his Honour found that Messrs Swan and Donaldson had not ascertained the balance of the AGA loan facility from the Board papers and had not remembered that they had approved a facility limit for the AGA facility for $17.89 million. Accordingly, they had not perceived from the Board papers that the balance of the facility was over the approved limit.
Again, those findings are not irreconcilable. Although his Honour did not accept the evidence given by Mr Swan and Mr Donaldson concerning their respective lack of scrutiny of the Board papers, this did not necessitate findings that they knew the particular fact that the facility was over the approved limit in circumstances where the limit was not specified in the Board papers. Thus, it was open to the trial judge to make the findings at [473]-[483] despite the findings at [334], [335] and [346].
Ground 1(c) raises no appellable error.
The trial judge referred to the delay in delivering judgment at [924]-[927] of his Honour’s reasons. His Honour recognised that the delay was relevant to a consideration of the credibility findings in his Honour’s reasons. The trial judge noted that the credibility findings were “primarily based on the recorded and documentary evidence” but acknowledged that the demeanour of the appellants and Mr McCormick did play a part in the credibility findings. The trial judge stated:
Despite the delay, there was no difficulty in recalling witness demeanour.
The appellants criticised this statement as unhelpful. However, they did not identify any particular error in the trial judge’s recollection of the appellants’ demeanour. The appellants’ case was that the trial judge should have accepted their case theory that they were victims of deception and should not have made particular adverse findings.
OTHER COMPLAINTS ABOUT CREDIT FINDINGS (GROUND 2(A) TO (D))
Grounds 2(a), (b) and (d) contend that the trial judge failed to give proper weight to the following matters in making adverse findings against the appellants including the findings referred to in ground 1 of the notice of appeal and those as to collusion and fraud:
(a)the fact that the allegations of fraud and fabrication were not made against the appellants until cross-examination;
(b)the possibility that the appellants’ apparent confusion in the witness box was most likely the result of the evolution of their understanding when first faced with allegations of fraud and fabrication of documents; and
(c)the passage of time between the events in question and the giving of the appellants’ evidence both in affidavit and in cross-examination.
Ground 2(c) contends that, in contrast to his Honour’s adverse findings at [136], [317]-[319], [336] and [345], the trial judge ought to have found that the concessions made by the appellants when faced with the allegations of fabricated documents were inconsistent with knowledge of or collusion on their part with Mr McCormick’s fraud.
Mr Donaldson and Mr Swan
As explained above, the trial judge did not make any finding of collusion or fraud against Mr Swan or Mr Donaldson. As to the critical findings of the trial judge concerning the response of Mr Swan and Mr Donaldson to the SVP report, there was no relevant allegation of fraud or fabrication. The same applies to the adverse findings at [334], [335] and [346] concerning their consideration of board papers. Thus, grounds 2(a) and (b) are based upon a false premise.
Ground 2(b) refers relevantly to the trial judge’s findings at [336] and [345]. At [336], the trial judge made the following finding concerning Mr Swan:
The main difficulty for Mr Swan, however, was his evidence concerning the proposal to increase the AGA facility which he signed in January 2007. Mr Swan’s attempt to explain his limited scrutiny of this backdated proposal lacked plausibility and credibility, as did his evidence seeking to explain why he did not ensure that it was correctly dated. His evidence in relation to that issue was such that it cast doubt on the credibility and honesty of his evidence generally.
Paragraph [345] of his Honour’s reasons concerns Mr Donaldson. It states:
Mr Donaldson also gave inconsistent and implausible evidence concerning another recommendation made by SVP. That recommendation, which was accepted and implemented by City Pacific, was that the Lending Manager be required to certify to the Credit Committee that the valuation received in relation to the loan proposal was acceptable. Mr Donaldson appeared to accept that he was aware of that requirement. Initially, Mr Donaldson claimed that he believed that the certification requirement was met if the Lending Manager simply signed the proposal. When it was pointed out to him that this was the very practice that had been criticised by SVP, Mr Donaldson then appeared to suggest that he was not required to ensure that the certification requirement had been satisfied. He appeared to claim that he, as a member of the Credit Committee, did not need to satisfy himself that the proposal had been certified because a requirement that the Credit Committee do something did not mean that every member of the Credit Committee had to comply. Rather, it was a “collective responsibility”, and independent directors, like him, were entitled to rely on the other members of the Credit Committee. When pressed further, however, Mr Donaldson said that he simply overlooked the change in practice. He claimed that most loan proposals included a certification, and that he did not notice it when the AGA loan proposal did not include a certification.
Mr King did not explain why the findings in [336] and [345] were not open to be made by the trial judge. By the time they entered the witness box, each of Mr Donaldson and Mr Swan was well aware that they would be challenged about whether they had exercised the degree of care and diligence that a reasonable person would exercise if they were in the positions of Mr Donaldson and Mr Swan in signing the “9 August” loan approval. Contrary to ground 2(d), there is no basis for a conclusion that the trial judge failed to make sufficient allowance for the passage of time between the disputed events and Mr Donaldson and Mr Swan’s evidence.
Accordingly, these grounds must be rejected in relation to Mr Swan and Mr Donaldson.
Mr Sullivan
The findings against Mr Sullivan of collusion and fraud have already been addressed.
There is no evidence that the trial judge failed to give proper weight to the matters identified in grounds 2(a), (b) and (d) in his Honour’s findings against Mr Sullivan. Mr Sullivan’s difficulty, as the trial judge observed at [317] and following, was that he had sworn “emphatically” to a particular version of events, namely the events of 28 April 2006, by reference to documents that he signed but which he turned out to have signed months later. The trial judge made a careful evaluation of Mr Sullivan’s credit (at [316] to [330]), ultimately finding that he was not an honest or reliable witness in relation to the key factual issues concerning the conduct of the AGA facility during 2006 and 2007. Mr King did not suggest that this finding was not open to the trial judge on the evidence.
Paragraph [136] (referred to in ground 2(b)) sets out findings concerning the “28 April” letter of offer which are now uncontested. Paragraphs [317]-[319] (also referred to in ground 2(b)) comprise the trial judge’s assessment of Mr Sullivan’s evidence concerning the “28 April” letter of offer. Mr King did not submit that these findings were not open to be made by the trial judge.
In their written closing submissions at the trial, the appellants acknowledged that Mr Sullivan’s evidence was “unsatisfactory”. The submissions put the following argument:
But Mr Sullivan was not to blame. It was the robust, and perhaps slightly hubristic confidence, of a skilled pilot who undertakes to bring a ship into harbour during a storm but who is left bewildered when he discovers the rudder is unresponsive to the helm.
The documents Sullivan thought would be his rock-solid reference points disintegrated at the trial and when he realised this he candidly told the court he had been misled.
In oral closing submissions, Mr Young SC submitted that important aspects of Mr Sullivan’s evidence were to be “taken with a grain of salt”, and that “both sides are contending that Mr Sullivan’s evidence is, to a very large extent, unreliable”. These submissions reinforce the conclusion that no error is disclosed by grounds 2(a) to (d) of the notice of appeal in relation to Mr Sullivan.
Trial judge’s ability to recollect demeanour (Ground 2(f))
Ground 2(f) contends that the trial judge erred in finding (at [927]) that the delay in delivery of his Honour’s judgment did not impair his ability to recollect demeanour.
Assessment of Mr Sullivan’s evidence
As an example of the trial judge’s difficulty recalling demeanour, the appellants referred to the trial judge’s observation) at [319] that Mr Sullivan was “forced to effectively concede” that his evidence concerning the date on which he signed the “28 April” file note and the “28 April” letter of offer was a reconstruction “and that he had no actual recollection of signing the documents on 28 April 2006”. The appellants contended that this concession was volunteered in re-examination. Assuming this is correct, the language used by the trial judge does not reveal a defective recollection of the circumstances of the concession. It is equally apt to describe the circumstances of the concession made in re-examination which was the consequence of the facts that emerged during cross-examination.
Mr King also contended that the trial judge “misremembered” in his Honour’s assessment that Mr Sullivan’s account shifted from adamant independent recollection to grudging acceptance of reconstruction. Mr King submitted that at all times Mr Sullivan proceeded upon the basis that he accepted the documents at face value and that his recollection was founded upon the documents. In support of that submission, Mr King referred at length to Mr Sullivan’s oral evidence. The oral evidence showed, among other things, that when presented with metadata for the “28 April” file note, Mr Sullivan asserted an adamant independent recollection, as follows:
I want to suggest to you, Mr Sullivan, that that file note, dated 28 April 2006 wasn’t created on 28 April 2006, it was created on 24 July 2006, as stated in the metadata in tab 3?—Mr Martin, all I can say is your metadata expert has got it wrong.
You didn’t create this document, did you?—Well, I signed it on the 28th.
Well?—I put the note on 28 April.
That adamant independent recollection is also illustrated by the evidence in Mr Sullivan’s April 2013 affidavit concerning the events of 28 April 2006 which was given after Trilogy’s statement of claim was amended to plead the creation of the “28 April” letter of offer in August 2006. The affidavit said nothing to the effect that Mr Sullivan’s recollection was founded upon the documents.
It is true that in cross-examination Mr Sullivan appeared to suggest that his recollection was based “purely” on the dates of the documents. However, he also maintained that he recalled “signing two documents on the same day”. The trial judge asked Mr Sullivan to explain how he could be “so emphatic that it was that date”, being 28 April 2006. Eventually, in re-examination, Mr Sullivan gave the following evidence:
HIS HONOUR: You’ve now looked at the metadata so the question is, having now looked at the metadata, what is the basis of your evidence that you signed those documents, that is the letter and the file note that bear the dates 28 April 2008, what’s the basis of your evidence that you signed them on that day? --- The basis of my previous statement was that on the understanding that the file notes of 24 July and file notes of 18 August were correct and they supported my statement that I signed them on the 28th. I now have confirmed the metadata with my solicitor this morning and the metadata provided by the applicant is correct, and it reflects that those two file notes were created on different days. I have to admit that because of that evidence no longer being available to me I have no real certainty as to what dates I signed the 28 April letter.
It is not obvious that Mr King accurately summarised the trial judge’s assessment of Mr Sullivan’s account, but on the material above it was plainly open to conclude that Mr Sullivan “shifted from adamant independent recollection to grudging acceptance of reconstruction”.
There is no apparent unfairness, or evidence of a failure of memory on the part of the trial judge in the findings at [319].
Finding that Mr Sullivan approved advances over the facility limit
This issue is addressed in relation to ground 2(e) above. In essence, the trial judge was mistaken in his recollection (at [451]) of Mr McCormick’s evidence concerning Mr Sullivan’s approval of advances to AGA over the approved limit in the period 28 April 2006 to 23 August 2006, but there was ample evidence to support his conclusion that the advances were, indeed, approved by Mr Sullivan.
In the context of his Honour’s careful and detailed reasons, this error does not provide a basis for a conclusion that there was any more widespread deficiency in his Honour’s treatment of the issues before him.
The appellants referred to two emails from Mr McCormick to Mr Gore as evidence of advances occurring without Mr Sullivan’s knowledge. Those emails are dated, respectively, 29 September 2006 and 9 November 2006. Accordingly, they do not provide a foundation for a conclusion that the trial judge erred in his ultimate conclusion that the relevant advances (at an earlier point in time) were approved by Mr Sullivan.
CONCLUSION
The appeal must be dismissed.
It is unnecessary to deal with Trilogy’s notice of contention.
Costs should follow the event. A costs order should be made against each of Mr Sullivan, Mr Swan and the estate of the late Mr Donaldson. The parties will be directed to submit draft orders to do all additional things necessary or appropriate to give effect to these reasons in relation to costs.
I certify that the preceding five hundred and thirteen (513) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop and Justices Farrell and Gleeson. Associate:
Dated: 25 September 2017
Key Legal Topics
Areas of Law
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Corporate Law & Governance
Legal Concepts
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Breach of Contract
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Causation
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Compensatory Damages
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Unconscionable Conduct
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Jurisdiction
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Contempt of Court
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Declaratory Relief
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