Timothy Paul Hopwood v R Martin Francis Byrnes v R Nos. SCCRM 93/312 and SCCRM 93/314 Judgment No. 4518 Number of Pages 48 Criminal Law and Procedure Companies Code (1994) 13 Acsr 219
[1994] SASC 4518
•21 April 1994
COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA COURT OF CRIMINAL APPEAL LEGOE(2), MOHR(3) AND BOLLEN(1) JJ
CWDS
Criminal law and procedure - Companies Code ss 229(4) and 564(1) - "Improper use of position as a director" - mental elements - Chew v The Queen (1991-1992) 173 CLR 626.
Furnish misleading information (2 counts) - sufficiency of evidence. Companies (South Australia) Code ss 229(4), 564(1) and (4). Chew v The Queen (1991-1992) 173 CLR 626 at 634, applied.
HRNG ADELAIDE, 17-18 November 1993 #DATE 21:4:1994
Counsel for appellant Hopwood: Mr K V Borick with
Mr G B Hevey
Solicitors for appellant Hopwood: Stephen Haarsma
Counsel for appellant Byrnes: Mr S W Tilmouth QC
with Mr S J Haarsma
Solicitors for appellant Byrnes: Hume Taylor and Co
Counsel for respondent: Mr D J Chapman
Solicitors for respondent: Director Of Public
Prosecutions (Cwlth)
ORDER
Appeals against conviction allowed as to counts 1 and 3 but rejected as to count 2.
JUDGE1 BOLLEN J These are appeals against conviction imposed in the District Criminal Court.
2. The trial started as a trial before a jury. During the trial two jurors were excused. The accused made "late" election to be tried by judge alone. The trial proceeded. The circumstances in which all this happened appear in the Ruling of Judge Lunn delivered on 4th May 1993, judgment number D2810.
3. It was a very long trial. It lasted a little over two months. The facts were complex. The learned trial Judge made, if I may say so, a masterly summary of the facts. It was necessarily a long summary. I incorporate into these reasons that summary. It is pages 1 - 62 of the reasons of the learned trial Judge. If any reader wishes to check what I have incorporated from the Appeal Books it is pages 70-131 of Volume One. The summary is:-
4. "The accused, Martin Francis Byrnes and Timothy Paul Hopwood, stand charged before this court on the following three counts:
'Count 1: Improper use of position as a director to gain
advantage. (Section 229(4) Companies (South Australia)
Code)
PARTICULARS OF OFFENCE MARTIN FRANCIS BYRNES and TIMOTHY
PAUL HOPWOOD between about the 12th day of December, 1988
and about the 1st day of February, 1989, at Adelaide in the
said State, being directors of Magnacrete Limited,
("Magnacrete") made improper use of their positions as
directors by (a) executing for Magnacrete a Shareholders
Agreement and an Agreement to Guarantee relating to a joint
venture between Magnacrete and Baron Fund Managers Limited;
(b) executing for Magnacrete a Deed of Guarantee whereby
Magnacrete guaranteed to the Commonwealth Bank of Australia,
the repayment of a loan made by the said bank to Vicksburg
Pty Ltd;
(c) authorising the term deposit of $2,000,000 of the funds
of Magnacrete with the Commonwealth Bank of Australia to
support the guarantee referred to in paragraph (b) herein;
to gain an advantage for Jeffcott Investments Ltd.'
5. The following particulars of this count were given:
'The conduct particularised in paragraphs (a), (b) and (c)
of Count 1 of the Information ("the conduct") constitutes
the use of position as director of Magnacrete Ltd. That use
of position was improper because: (1) the purpose, or the
substantial purpose, of the conduct was a purpose other than
that of Magnacrete Ltd, namely to enable an issue of
Jeffcott Investment Ltd convertible notes to be fully
subscribed and thereby cause an advantage to Jeffcott
Investments Ltd; (2) the conduct occurred without the
authority of the Board of Directors of Magnacrete Ltd and
occurred without the knowledge of the members of the Board
of Directors of Magnacrete Ltd, except Martin Francis Byrnes
and Timothy Paul Hopwood; (3) (Each accused) was a director
of Jeffcott Investments Ltd and by engaging in the conduct,
he put himself in a position where his interest in, and duty
to, Jeffcott Investments Ltd and his duty to Magnacrete Ltd
were in conflict or potential conflict. The use of position
was improper for each and every one of these reasons (1) to
(3) separately and also in any combination of them.'
6. Byrnes was also charged with two further counts as follows:
'Count 2: Furnish misleading information. (Section 564(1)
Companies (South Australia) Code)
PARTICULARS OF OFFENCE MARTIN FRANCIS BYRNES on or about the
3rd day of February 1989 at Adelaide in the said State being
a director of Magnacrete Limited ("Magnacrete"), by written
memorandum furnished information to directors of Magnacrete
concerning a proposal for a joint venture called Vicksburg
Pty Ltd ("Vicksburg") between Magnacrete and Baron Partners
Limited which, to his knowledge, had omitted from it various
matters, namely:
(a) that the joint venture had already been formed;
(b) that Magnacrete already held 45 percent of the issued
shares in Vicksburg;
(c) that a Shareholders Agreement between Magnacrete, Baron
Fund Managers Limited ("Baron") and Stephen John Chapman had
already been executed;
(d) that an Agreement to Guarantee between Magnacrete and
Vicksburg had already been executed;
(e) that a Loan Facility Agreement between Vicksburg and
Baron had already been executed;
(f) that a Deed of Guarantee between Magnacrete, Vicksburg
and the Commonwealth Bank of Australia had already been
executed;
(g) that $2,000,000 of Magnacrete's funds had already been
lodged on term deposit with the Commonwealth Bank as
security for the guarantee referred to in para (f) above;
(h) that Vicksburg had already agreed to allow Baron to draw
up to $1,700,000 under its Loan Facility Agreement with
Vicksburg for the purpose of purchasing Jeffcott Investments
Limited convertible notes ("Jeffcott notes");
(i) that, under the Loan Facility Agreement, Baron could
satisfy its obligation to repay the money loaned to it by
Vicksburg 4 by transferring to Vicksburg the beneficial
ownership of the Jeffcott notes;
(j) that Baron had already executed a Deed of Assignment in
respect of the Jeffcott notes;
the omission of which rendered the information misleading in
a material respect.' 'Count 3: Furnish misleading
information. (Section 564(1) Companies (South Australia)
Code)
PARTICULARS OF OFFENCE MARTIN FRANCIS BYRNES on or about the
8th March 1989 at Adelaide in the said State being a
director of Magnacrete Limited, furnished information to the
Australian Stock Exchange Limited, relating to an
incorporated joint venture called Vicksburg Pty Ltd
("Vicksburg") between Magnacrete and Baron Fund Managers
Limited ("Baron") which, to his knowledge, had omitted from
it various matters, namely
(a) that under the loan facility agreement between Vicksburg
and Baron, Baron could satisfy its obligation to repay the
money loaned to it by Vicksburg by transferring to Vicksburg
the securities purchased by Baron with the loaned money;
(b) that Baron had purchased Jeffcott Investments Limited
convertible notes for $1,631,717 with the loaned money; the
omission of which rendered the information misleading in a
material respect.'
7. Two additional counts which were included in an earlier information were withdrawn. I ignore them.
CORPORATIONS AND PERSONS INVOLVED
8. Before going into the complex background of the charges the following introduction to the principal corporations and persons involved is probably helpful.
9. ROBERT DOUGLAS-HILL is an industrial chemist and an experienced businessman. His research led to the discovery and development of a product known as magnacrete which was promoted as being a substitute for Portland cement.
10. AUSMINTEC LIMITED ('Ausmintec') is a company which was incorporated by Hill and his family in June 1985. It became listed on the Stock Exchange. Hill remained a director of it from its incorporation until June 1989. During this period Hill and his family retained effective voting control over it. Ausmintec took over a number of businesses from other companies in which Hill had been involved which related principally to the production and sale of mineral fertilisers. Early in its life it obtained the patents and rights to the magnacrete product. It gave Hill a large number of options over its shares as consideration for him agreeing to work for it for four years.
11. MAGNACRETE LIMITED ('Magnacrete') In late 1989 it changed its name to Jeffcott Holdings Limited, but I will refer to it throughout these reasons as Magnacrete. Hill promoted its incorporation in August 1986. Article 62(1) of its Articles provided:
'Subject to the Code and to any other provisions of these
Articles, the business of the Company shall be managed by
the Directors, who ... may exercise all such powers of the
company as are not, by the Code or by these Articles,
required to be exercised by the Company in general meeting.'
12. With reference to the common seal of the company Article 80(2) provided:
'(2) The seal shall only be used by authority of the
Directors, or of a committee of the Directors authorised by
the Directors to authorise the use of the seal, and every
document to which the seal is affixed shall be signed by a
Director and be countersigned by another Director, a
Secretary or another person appointed by the Directors to
countersign that document or a class of documents in which
that document is included.'
13. Hill was a director of Magnacrete from its incorporation until June 1989. In August 1986 Ausmintec sold to Magnacrete the Australian rights for Magnacrete but retained the world rights for itself. The price paid by Magnacrete was $2.5 million and the issue of 15 million of its shares to Ausmintec. This technology was shown in the accounts of Magnacrete at $7 million. In 1987 Magnacrete became listed on the Stock Exchange and raised about $7 million in cash from the investing public for subscriptions for its shares. Hill borrowed $1.3 million to buy shares in it. By early 1988 Ausmintec held about 28.6% of the issued shares in Magnacrete, Hill and his family about 20% and the investing public about 51%. Magnacrete had acquired about 9% of the shares in Ausmintec.
14. DAFYDD LLEWELYN was appointed as the secretary of Magnacrete on 26 September 1988, and a little earlier had become the secretary of Ausmintec. He did secretarial and accounting work for both companies.
15. DR TIMOTHY HOPWOOD, the second accused, is a highly qualified geologist who had experience in working for exploration and mining companies in developing mineral resources.
16. MARTIN BYRNES, the first accused, is a solicitor who practised with a prominent Adelaide legal firm until 30 June 1988. During the course of litigation in which he was retained in the early 1980s he met Hopwood who was employed by a party to litigation for whom Byrnes was acting.
17. JEFFCOTT INVESTMENTS LIMITED ('Jeffcott') is a company which was incorporated in early 1987 at the instigation of Hopwood. It was intended that Jeffcott would become an Adelaide based mining house which would acquire interests in a number of different mining projects. It became listed on the second board of the Adelaide Stock Exchange. Hopwood was always a director of it. He and his family companies held about 50% of its issued shares. The remaining shares were held by the investing public. Byrnes became a director of Jeffcott in September 1987. He had no significant shareholding in it. As from 1 July 1988 Byrnes left legal practice and commenced full time employment with Jeffcott.
18. SEDIMENTARY HOLDINGS LIMITED ('Sedimentary') held a substantial interest in the Cracow Gold Mine in Queensland. Hopwood had been instrumental in developing this mine. Upon the incorporation of Jeffcott he had transferred to it about a 20% interest in Sedimentary which he and his family companies had previously acquired. From the proceeds of the sale of gold from the Cracow mine Sedimentary was paying significant dividends to Jeffcott which gave it its major cash flow. In March 1988 Jeffcott launched a takeover offer for the other shares in Sedimentary. It thereby succeeded in increasing its holding by the end of June 1988 to about 40% of Sedimentary's issued capital which gave it effective control of Sedimentary. Hopwood and Byrnes were directors of Sedimentary, and Hopwood was apparently its chairman of directors.
19. VENTURE EXPLORATION LTD ('Venture') is a company which had a kaolin mine in North Queensland. Kaolin is a clay which is used in putting the glossy coating on high quality paper. Hopwood had been involved in the development of this kaolin mine. By early 1988 Jeffcott had acquired about 19% of the shares in Venture.
20. THE NORMANDY GROUP OF COMPANIES ('Normandy') is a large Australian mining house whose chairman is Mr Robert De Crespigny ('De Crespigny') who is an experienced and astute accountant in the mining industry. Normandy was retained by Jeffcott in 1987 to be its financial adviser. It acted as a merchant banker for it in its takeover offer for Sedimentary. Normandy also acted as a banker for Jeffcott and provided the necessary finance for the takeover of Sedimentary. In June 1987 De Crespigny became a director, and the chairman of directors, of Jeffcott, but he was not involved in its day-to-day activities.
21. STEPHEN YOUNG is an accountant practising in Adelaide. He was known to, and was reasonably friendly with, Byrnes. He had a reputation as being a successful 'company doctor' for assisting companies in difficulties. He was not employed by Jeffcott, and apart from a small shareholding, had no interest in it.
22. ALEXANDER PAIOR is a solicitor practising in Adelaide and specialising in corporate work. In June 1988 he was appointed to be a director of Magnacrete before Jeffcott had obtained any interest in it. He regarded his role in that company as being to represent the interests of minority shareholders. At the end of 1988 he left the firm of Johnsons, where he had been a partner, and as from 1 February 1989 he became a partner in the firm of Thomson Simmons and Co. As a director of Magnacrete he was paid a director's fee of $6,000 per annum and in addition he charged the company for legal work which he did for it.
23. GARY WATTS is a solicitor practising in Adelaide who specialises in corporate work. Up until about March 1989 he was a partner in the firm of Thomson Simmons and Co, although he left that firm soon after Paior joined it. He acted for Magnacrete in the transactions in question in this matter.
24. BARON PARTNERS LTD ('Baron') is a company which operates as a merchant bank. Its head office is in Sydney, but at the relevant time it had a branch office in Adelaide. It was involved in transactions relevant to the present charges through its director Stephen Chapman.
25. JARDEN MORGAN AUSTRALIA LIMITED ('Jarden') was a sharebroker in Adelaide. It had been the sponsoring broker for the flotation of Jeffcott in mid 1987. It was closely connected with the legal firm in which Byrnes had been a partner. In its involvement in the matters relevant to the present charges it was represented principally through its director David Patterson.
26. ERNST VAN REESEMA was an Adelaide businessman and was a well known litigant. He was associated with Tennyson Turner, a struck off solicitor, and Brian Warming, another Adelaide businessman. They all had interests in Ausmintec. No witness had anything good to say about Van Reesema or Turner, and their reputations are unsavoury. Neither Van Reesema or Turner gave evidence. However, in fairness to Van Reesema it must be said that at least in some respects there was more substance to some of his allegations than he was given credit for at the time. General background The contents of this general background are largely taken from matters which were not in dispute at the trial, but in any event they are all primary facts proved upon the evidence. Hill's problems prior to 30 June 1988 These matters were only touched upon in evidence as they were not directly relevant, but they are part of the necessary background to the matters relevant to the charges. Hill wanted to dispose of part of his holdings in Ausmintec and Magnacrete. Although it was never explicitly stated, it would appear that there were financial pressures compelling him to do so. He held a large number of options over Ausmintec shares which were due to expire on 30 June 1988. By early 1988 there were ten directors of Magnacrete, but antipathy had developed between the majority of them and Hill so that Hill did not effectively control the affairs of Magnacrete. Magnacrete had instituted legal proceedings against Ausmintec and Hill ('the technology proceedings') seeking to set aside the purchase of the Australian rights to the magnacrete technology by Magnacrete, but those proceedings were never brought to trial. Hill had entered into an agreement to sell Ausmintec options to some Victorian interests represented by Goodenham and Shelbourne, but then believing that he had been deceived by them, he refused to complete the sale. After legal proceedings were instituted he negotiated a settlement whereby he had to pay Goodenham and Shelbourne $240,000 upon their withdrawal from the purchase. As a result of these experiences Hill appointed First National, a Victorian merchant banker, to represent Ausmintec and himself for the purposes of further dealings in his shares and options. In early 1988 Magnacrete launched a takeover offer for the shares in Ausmintec which Hill successfully resisted. In March 1988 Hill entered into some agreements with Magnacrete for it to purchase much of his interest in Ausmintec, but later he refused to settle on the agreements claiming that they were invalid by reason of him having been induced to enter into them through economic duress. Magnacrete bought proceedings against Hill for specific performance of the sale agreement and there was a protracted trial before the Honourable Justice Perry in the Supreme Court during June 1988. The judgment is reported as Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 567, which will be referred to later in these reasons for other purposes. Not all of the history set out by Perry J in his judgment was proved in the evidence in this case and I ignore in my findings of fact what was not the subject of evidence before me. In an effort to thwart this litigation in June Ausmintec called a special general meeting of the shareholders of Magnacrete and at that meeting succeeded in removing many of its directors who were hostile to Hill. Also in an effort to protect himself against an unsuccessful defence of the Magnacrete court action against him Hill caused Ausmintec in June to launch a takeover offer for Magnacrete. That offer was still pending as at 30 June. Justice Perry delivered his judgment on 7 July 1988 finding for Magnacrete, but legal effect could not then be given to the orders for specific performance made in favour of Magnacrete because shortly afterwards it became a subsidiary of Ausmintec as a result of the takeover which legally precluded it from then acquiring shares in its parent company. Negotiations in June 1988 between Hill and Jeffcott During the frenzy of the trial and the takeover offer in June 1988 Hill was still trying to find a buyer for at least part of his interests in Ausmintec and Magnacrete. Hopwood was a director of another company, Redweaver Investments Pty Ltd ('Redweaver'), and that company through its managing director, Allan Webber, made an approach to Jeffcott to be part of a joint venture of Redweaver, Sunvest Ltd and Jeffcott which might purchase shares and options from Hill. In the end result Redweaver and Sunvest did not proceed with any purchase and Jeffcott proceeded alone, although it was not clear that Sunvest would not be involved until shortly after the purchase was completed. In June there were several meetings between representatives of First National, Hill, Byrnes and Hopwood and others to negotiate an acquisition of interests in Ausmintec and Magnacrete by Jeffcott. Neither Byrnes or Hopwood had previously met Hill and had little knowledge of him. They were strongly attracted by the proposal because they believed that 10 the shares in Ausmintec and Magnacrete were significantly under valued in the market by reason of the continuing litigation between Hill and Magnacrete. While under law Jeffcott could not acquire more than a 20% interest in either Ausmintec or Magnacrete without making a full takeover bid for all of the shares in the company, the pending takeover offer by Ausmintec for Magnacrete produced an anomaly whereby Jeffcott could trade the shares which it acquired in Magnacrete for shares in Ausmintec pursuant to the takeover offer and thus obtain substantially more than a 20% interest in Ausmintec without having to make a bid for all of its shares. Byrnes and Hopwood believed that they could impose a resolution of the litigation on the parties and thus increase the market value of the shares. They were aware that Magnacrete held cash in the vicinity of about $5 million and thought that this in itself was sufficient to justify the offer that Jeffcott was to make even if the other assets of Ausmintec and Magnacrete turned out to be worthless. There was a deadline of 30 June for any purchase to be completed because the Ausmintec options held by Hill, which Jeffcott wanted to purchase and exercise, would expire on that day. Byrnes and Hopwood were induced to have Jeffcott purchase Hill's shares and options in the belief that Ausmintec had no debts and a projected profit of $1.2 million for the 1988 financial year which would give a cash flow to Jeffcott to enable it to service its borrowings necessary to effect the purchase. It was not established that such representations were made by Hill, but in any event it is clear that Hopwood and Byrnes both acted on these expectations in making Jeffcott's decision to purchase. However, they did not have sufficient time available to them to check the accuracy of these matters. They needed the approval of De Crespigny as another director of Jeffcott and they also sought Normandy's agreement to fund the purchase. De Crespigny and Normandy's executives had serious misgivings about the proposed purchase but at the last minute De Crespigny did give his approval for it. What the Jeffcott directors did not know at 30 June was that Van Reesema, Turner and their associates were also exercising other options over Ausmintec's shares in the belief that that would give them control of Ausmintec and thereby of Magnacrete's large cash reserves. If this had been known, it is unlikely that Jeffcott would have proceeded with its purchases. The transactions on 30 June 1988 Jeffcott entered in to the transactions through a wholly owned subsidiary, Bahlaka Pty Ltd ('Bahlaka'), because at that stage it was still possible that Redweaver and/or Sunvest may have taken an interest in Bahlaka. Late on 30 June a number of agreements were entered into between the parties. Firstly, Hill and his wife agreed to sell to Bahlaka 4,888,718 shares in Magnacrete at 21 cents each. Secondly, by another purchase agreement Hill and his wife agreed to sell a further 5,599,425 shares in Magnacrete to Bahlaka at 21 cents each. The reason for there being two separate purchase agreements are not material for present purposes. As it was anticipated that hostile directors on the Magnacrete board may have attempted to impede the registration of these share transfers the agreements provided that Bahlaka was not obliged to pay for its shares until the transfers had been registered. Thirdly, Hill sold 1,037,000 options over Ausmintec shares to Bahlaka upon terms that it would pay Hill 20 cents for each option exercised. Fourthly, by an indemnity agreement Hill indemnified Bahlaka against any loss which it might suffer through adverse circumstances in the position of Ausmintec or through a challenge to Hill's title to the shares or options being sold, but no claim was ever made under this indemnity. Fifthly, Jeffcott guaranteed to Hill the payment of the moneys due by Bahlaka. At the settlement the transfers for the shares were crossed by a broker from Jarden because they were marketable securities. Jeffcott on behalf of Bahlaka paid $183,200 into the trust account of Hill's solicitors for the purchase of the options in Ausmintec. Immediately afterwards Bahlaka gave notice of the exercise of its newly acquired 1,037,000 options for Ausmintec shares and tendered cheques totalling $1,037,000 to Ausmintec. The effect of the exercise of these options was that after 30 June Jeffcott held 20% of Ausmintec, Hill and his family held about 35%, Magnacrete held 6% and the public held the balance. Financing of the purchase by Jeffcott As at 30 June Jeffcott had no means to pay for the Ausmintec options and Magnacrete shares which it had bought. It was obliged to borrow the necessary money. Byrnes and Hopwood believed that it was appropriate to borrow these moneys, but in hindsight Byrnes recognised that that had probably not been a good decision. In the days leading up to 30 June Byrnes had anticipated that Normandy would provide the necessary funds to Jeffcott, but on 1 July De Crespigny intimated that Jeffcott 'should not rely on Normandy to fund this matter'. While Byrnes and Hopwood continued to hope that Normandy might possibly provide the funds it never did so. Because of the haste in which the purchase had been completed Jeffcott had not arranged any source for the necessary funds before Bahlaka executed the documents. In order to pay the amounts totalling $1,220,200, which were necessary to effect settlement on 30 June, and to exercise the options for the Ausmintec shares, Jeffcott borrowed $1.25 million from Sedimentary without any formality, documentation or security. In order to pay for the shares which it had recently acquired in Sedimentary as a result of its takeover offer Jeffcott had shortly beforehand borrowed about $3.5 million from Normandy. The terms of that loan required Jeffcott to give Normandy a mortgage over all of the shares which it acquired in Sedimentary, and, if necessary, to provide additional security if the market price of its Sedimentary shares fell below twice the amount borrowed. Jeffcott also entered into a covenant not to incur any liability in excess of $500,000 during the term of the loan without the consent of Normandy. The documents giving effect to these terms were not finalised and executed until 12 July 1988, but their terms had been agreed in March 1988. Normandy apparently became aware on 1 July that Jeffcott had borrowed this $1.25 million from Sedimentary because that money had then been on deposit with Normandy from Sedimentary. On 1 July the finance director of Normandy communicated to Byrnes that he believed the advance may have been a breach of the Companies Code because of the recent takeover of Sedimentary. Normandy was not pleased with this borrowing and wanted it paid back immediately, but Jeffcott was unable to comply.
27. By about the end of July the Ausmintec takeover offer for Magnacrete had closed and had been about 70% successful. Jeffcott had accepted the offer for all of the shares which Bahlaka had bought in Magnacrete. After this takeover Jeffcott had about 32% of the expanded capital of Ausmintec, Hill and his family had about 25%, Van Reesema and his associates had about 11% and the balance was held by the investing public. The transfers of the shares from Hill and his wife to Bahlaka were registered by Magnacrete in about August 1988, which meant that the purchase price of $2,242,286 was then due for payment by Bahlaka. However, neither Jeffcott nor Bahlaka then had the means to make such payment. On 8 August De Crespigny had written to Hopwood saying, 'I am extremely concerned about the current finances of Jeffcott especially in view of the Magnacrete/Ausmintec transaction.' In fact the incurring of the liability to purchase the shares, and the borrowing of the $1.25 million from Sedimentary, each constituted an apparent breach of the covenant with Normandy not to incur liabilities of over $500,000 without its consent. On 12 August 1988 Normandy gave formal notice to Jeffcott that it was in breach of its covenant under the mortgage over its Sedimentary shares and required it to reduce its borrowings by $750,000 within seven days. Jeffcott could not comply. Normandy also advised Jeffcott that the value of the Sedimentary shares held had fallen below the necessary minimum and that additional security to the value of $1,342,290 was required to be lodged within three days. Byrnes thought that Normandy might be able to be prevented from acting on any breach about incurring liabilities of over $500,000 because it had been aware of the relevant transactions when they occurred, but this was by no means clear cut. The demand for additional security led to Jeffcott in October having to give a mortgage to Normandy over its shares in Venture which was its last remaining unencumbered major asset. At some stage which is not clear on the evidence, but which was probably close to 30 June, Jeffcott had arranged a 'put option' with Jarden over Bahlaka's shares in Ausmintec so that they could be sold up until mid December 1988 with a maximum loss to Jeffcott of about $600,000, but this did not satisfy the concerns of Normandy. There was growing personal antagonism between Hopwood and Steven Dean, a senior executive of Normandy, in this period. Overall Jeffcott's relationship with Normandy steadily continued to deteriorate. By August/September Jeffcott had discovered that the financial position of Ausmintec was not as good as it had previously been led to believe and there was little prospect of it paying any dividends which could be used to service any borrowings by Jeffcott.
28. Soon after the price of the Magnacrete shares became due for payment there were negotiations about Hill granting vendor finance to Bahlaka. Byrnes was not happy with the way these negotiations proceeded, and claimed that Hill had reneged on various aspects of what was agreed, but the points were not pursued in detail in Hill's cross-examination. Ultimately an agreement was reached. By a contract dated 2 September 1988 Bahlaka borrowed $2 million from Hill and his wife at 1.5% per annum interest above the bank rate and for a term expiring on 15 December 1988. The money outstanding was secured by a mortgage also dated 2 September 1988 over the shares of Bahlaka in Ausmintec. Jeffcott paid to the Hills on 2 September the balance of the moneys owing, after the principal of the loan was deducted, of $243,486. The transactions on 2 September gave Jeffcott until 15 December to find $2 million plus accrued interest to pay Hill out. Other events in July/September 1988 After 30 June Byrnes and Hopwood encountered a hostile reception from the Magnacrete board other than Hill. The balance of the board suspected that Jeffcott was a front for Hill and its investment was another stratagem by Hill to regain control of Magnacrete. At a directors' meeting of Magnacrete on 15 July a proposal from Jeffcott that Young be appointed to the board was accepted and he was so appointed. However, the board at that stage would not appoint Byrnes and Hopwood as directors, but 14 three days later on 18 July at an adjourned meeting they were so appointed. Hopwood then set about familiarising himself with the technical aspects of the research into magnacrete. He discovered for the first time that there were major problems with magnacrete because it was soluble after significant exposure to water and it reacted with water to produce hydrochloric acid which meant that it could not be used in conjunction with steel. Arrangements were continued for Amdel and Techsearch to perform technical audits on the magnacrete technology and to attempt to overcome these difficulties. However, no magnacrete, other than samples, was ever produced or sold. Magnacrete continued to incur substantial expenditure in research and in setting itself up for anticipated production, but it derived no income in return. Byrnes and Hopwood began to doubt whether there was any profit to be made in the short term from magnacrete and began to look for alternative roles for the company and its large cash reserves.
29. Part of the negotiations leading to the vendor finance granted by Hill on 2 September 1988 revolved around the representation of Jeffcott on the board of Ausmintec. Young had previously been appointed to the board of Ausmintec in his capacity as a 'corporate doctor'. On 2 September Byrnes and Hopwood were appointed to its board and Mrs Hill resigned. This meant that the Jeffcott appointees could effectively control the board of Ausmintec.
30. In September Greg Harris, the manager of Ausmintec's fertiliser business, came to see Byrnes and alleged that the business of Ausmintec was not as profitable as Byrnes had been led to believe and that in various ways Hill was profiting himself out of that business. Hill denied various of these allegations. It is not necessary to make findings about them, but these disclosures and the arguments following from them were significant steps in the souring of the relationship between Hill and Jeffcott. At the same time Young was experiencing a lack of co-operation from Hill in his attempts to investigate the accounts of Ausmintec and to make recommendations about its activities which antagonised both him and Byrnes.
31. In about mid September Byrnes and Hopwood decided to seek financial advice about the problems of Jeffcott from other than Normandy with which they were becoming more and more disenchanted. They were recommended to Stephen Chapman of Baron whom they did not previously know, but he was known to Young and Paior through previous dealings which they had had with him. On 22 September Baron wrote to Hopwood advising that the best course for Jeffcott was to seek to raise a substantial sum through a convertible note issue to its existing shareholders and making proposals for it. A convertible note is 15 an unsecured loan to a company at interest which can at the option of the holder be redeemed by an issue of shares in the company in lieu of a cash repayment. Baron indicated that its fees for advising on a convertible note issue for Jeffcott would be a transaction fee of 1% of the funds raised or $50,000 whichever was the greater. This meant that if the issue raised $6 million Baron would get a fee of $60,000.
32. At a meeting of the board of Magnacrete on 26 September 1988 Byrnes was elected as the chairman of directors. Prior to this meeting most of the other directors had resigned. On a date which is not clear from the evidence Byrnes had asked Paior, in conjunction with the other directors apart from the Jeffcott appointees and Hill, to resign. Shortly afterwards Young approached Paior and asked him to continue as a director, and he agreed to do so. From that meeting until June 1989 the board of Magnacrete was comprised only of Byrnes, Hopwood, Young, Paior and Hill. The genesis of the reverse takeover At about the beginning of October 1988 Byrnes began to consider in detail the possibility of a reverse takeover of Jeffcott by Magnacrete. This meant that Magnacrete would offer to buy all of the shares in Jeffcott so that, if successful, Jeffcott would become a wholly owned subsidiary of Magnacrete, although it was the directors of Jeffcott who would control both companies. I reject Hopwood's evidence that it was first suggested by De Crespigny. Patterson of Jarden thought that the possibility of a reverse takeover was obvious to him and other market watchers from the time that Jeffcott first became involved with Magnacrete. It was a means of Jeffcott getting its hands on the large cash reserves of Magnacrete, but, as will be discussed later, this was not in itself improper. There were also good commercial reasons why each of the two companies could operate better as, in effect, a single entity. By a memorandum of 4 October Byrnes laid out a proposal for such a reverse takeover based on Magnacrete offering one of its shares for each issued share in Jeffcott. He discussed the proposal with each of Paior and Young during October, and Paior and Young discussed it between themselves when they accidentally met in Hong Kong. They indicated approval in principle, but subject to the necessary independent experts' reports being obtained justifying the price offered. Byrnes also prepared a draft Part A statement for such a takeover at about this time. He gave copies of the relevant papers to Hill and discussed them with him in October, but asked him that he keep them confidential. The response of Hill to this proposal was disputed, but, even if he gave some indication of general assent, Byrnes did not really believe him. Advice from Watts in October On 13 October Byrnes and Chapman consulted Watts in his capacity as the solicitor for Magnacrete. The notes of Watts, which I accept, concerning this meeting stated:
'The basic proposal was to take $4,000,000 from cash funds
held in Magnacrete. $2,000,000 to be used for other
purposes, a further $2,000,000 to be used to get rid of the
vendor finance arrangement whereby Douglas-Hills were owed
money for their shareholding.'
33. Watts raised legal difficulties about this proposal based on several grounds being that the directors of Magnacrete had a duty to act honestly and in good faith in the use of Magnacrete's funds, S230 of the Companies Code, which prohibited a direct loan from Magnacrete to Jeffcott because Hopwood was a director of Magnacrete and owned 40% of Jeffcott, and S129 of the Code which prohibited a company from indirectly financing any purchase of its own shares. A further proposal was then discussed along the lines that Magnacrete would deposit $2,000,000 with Baron 'on authorised money market dealer fund' which would then seek an assignment of the loan to Bahlaka from the Hills for $2,000,000. Watts indicated he would consider the proposal and advise subsequently.
34. This was the first suggestion of any involvement by Baron in making use of Magnacrete's funds. There was apparently no mention of the proposed reverse takeover at this meeting. On 26 October Watts sent a draft letter of advice to Byrnes advising against the proposals made on 13 October and suggesting an alternative course of action. There was a discussion about this alternative on 27 October. On 28 October Watts wrote a letter to Byrnes concerning a further revised proposal relating to Jeffcott raising money through its bank, Standard Chartered, to pay out Hill, but the details are of no importance as they were not pursued. However, part of the proposal was as follows:
'A joint venture company (JVC) will be formed. Shareholders
will be:
8.1 Magnacrete - 45%.
8.2 Baron Partners Limited - 45%.
8.3 Third Party - 10%.
9 JVC will arrange for an overdraft facility of $4,000,000
to be made available to it with the Commonwealth Bank. This
will be possible because Magnacrete will guarantee 17 this
facility. The guarantee will be supported by the funds
which Magnacrete has upon deposit with the Commonwealth
Bank. JVC will pay Magnacrete a guarantee fee (say 1% =
$40,000) as consideration for the grant of the guarantee.
JVC will employ standard overdraft facility to purchase from
Jeffcott's bank (Standard Chartered) the receivables from
Jeffcott, namely the newly created overdraft facility for
approximately $4 million.
In due course it will be open to JVC to negotiate with
Jeffcott to convert the debt owed by Jeffcott to JVC into
convertible preference shares with other securities in
Jeffcott.'
35. Watts advised that this proposal would not breach SS129 or 230 of the Code. However, it was then not pursued by Jeffcott. At about this time Byrnes produced a timetable showing the steps for a reverse takeover of Jeffcott by Magnacrete commencing in late October and being completed on 10 January 1989. Swiss Partners, a sharebroker, was retained to advise as an independent expert on the proposal in order to comply with Stock Exchange listing requirements about such a report being provided for the minority shareholders of Magnacrete. It reported soon after with a tentative approval, but it wanted further information. However, after the end of October no steps were taken by Jeffcott to pursue the takeover with any urgency although it remained a live issue. The pursuit of a reverse takeover at that stage would not in itself have made Magnacrete's cash available to Jeffcott in time for Jeffcott to use it to meet its obligation to Hill on 15 December 1988. Van Reesema's attempt to control Ausmintec In early October 1988 Van Reesema and his associates convened a general meeting of Ausmintec which was held at the Walkerville Town Hall at which they unsuccessfully attempted to remove the directors and to appoint their own nominees. Jeffcott remained aware that Van Reesema had not given up his attempts to gain control of Ausmintec and Magnacrete. Byrnes was concerned that if Hill was to side with Van Reesema Jeffcott might not win a proxy war in any battle for the control of Ausmintec. In view of the continuing deterioration of the relationship with Hill this became an increasing danger for Jeffcott.
FURTHER DEALINGS WITH NORMANDY
36. On about 28 October there was a directors' meeting of Jeffcott which was attended by De Crespigny and other representatives of Normandy. At that meeting De Crespigny tabled a memorandum which stated, inter alia, that:
'Over the past six months Normandy has been increasingly
concern (sic) about the way in which the business of
Jeffcott has been conducted and the apparent reckless and
misguided manner in which commitments are made by management
... It is necessary to address these concerns and act upon
them now before a financial disaster occurs.'
37. The proposed reverse takeover had previously been raised with De Crespigny and apparently some proposal for a temporary restructuring of Jeffcott's debt in relation to the purchase of the Ausmintec shareholding, but it is not clear whether that was a reference to the convertible note issue or not. The memorandum summarised Normandy's position as being:
'(a) Normandy is extremely concerned about the current and
future position of Jeffcott.
(b) Normandy do not want to be involved in the company under
the current management style.
(c) A restructuring is proposed which Normandy regards as
having some risks.
(d) If Normandy's future involvement is required then the
steps stated above, together with commitments both
financially, physically and morally, by Hopwood are
necessary.'
38. Elsewhere in the memorandum De Crespigny stated:
'Normandy's preferred course is to cease its involvement
with Jeffcott ... Robert De Crespigny does not want to be
involved in a business whose management philosophies are so
different from his own. Under the current style of
management we believe Jeffcott will always be insolvent and
management errors will continued on a regular basis.
Hopwood and Normandy ... are not compatible.'
39. I accept that De Crespigny meant what he said in that memorandum, and it was not, as was alleged by Hopwood, a negotiating ploy to make Hopwood lose his temper. It may be that Byrnes and Hopwood were correct in believing that Normandy was setting Jeffcott up so that it could plunder its assets on its collapse. Normandy was seeking as best it could to extricate itself from its involvement with Jeffcott without prejudicing its ability to recover the substantial moneys which it was then owed by Jeffcott. In the days following this meeting there was a flurry of correspondence from Jeffcott to Normandy seeking that Normandy waive any breach of the loan agreement of 18 July. If Normandy did not waive this breach, and assuming that it had not previously done so by its conduct, it could call up the moneys owed for repayment immediately and realise its security over the Sedimentary and Venture shares of Jeffcott. While that possibility remained it was impossible in practice for Magnacrete to pursue a reverse takeover of Jeffcott. On 7 November Normandy wrote to Jeffcott advising that it would waive the breach provided it could be assured of repayment in full on a specified date. It apparently orally agreed shortly thereafter to Jeffcott's proposals for repayment through the convertible note issue and the reverse takeover. Also on 7 November De Crespigny wrote a letter to Hopwood and Byrnes indicating that he intended to resign as a director of both Jeffcott and Sedimentary at the earliest possible opportunity but not so as to embarrass Jeffcott. This in fact occurred on 8 December. The setting up and underwriting of the convertible note issue In about late October Byrnes contacted Patterson about the proposed convertible note issue. At the time the market was difficult for such issues. Patterson regarded Jeffcott as a good company which had a few problems but which was asset rich. The timetable for such a note issue was tight because the first subscriptions had to be available within six weeks in order to discharge Bahlaka's liability to Hill. In view of the continually deteriorating relationship between Hill and Jeffcott the practical reality was that Hill was unlikely to extend the the term of the loan further after the due date. If he exercised his powers as a secured creditor over the Ausmintec shares of Jeffcott, he could wreck the contemplated reverse takeover. By November Byrnes believed that he could not continue in a relationship with Hill and that it was urgent to remove him from the boards of Ausmintec and Magnacrete. However, this could not be done unless and until a reverse takeover was successful. Jarden was requested by Jeffcott to underwrite the note issue which meant that insofar as shareholders did not take up their note entitlements in relation to their shareholdings Jarden would either have to take them up itself or have arranged sub-underwriters to do so. The note entitlements were to be non renouncable which meant 20 that the rights could not be traded by members of Jeffcott independently of their shares. Jarden agreed to investigate the proposal, but it did not at that stage commit itself to underwriting the note issue. On 1 November 1988 Byrnes on behalf of Magnacrete wrote to the manager of the Stock Exchange in Adelaide foreshadowing proposals for Magnacrete's takeover of Jeffcott and seeking various dispensations from the Listing Rules for it. Byrnes believed that this letter would be treated as confidential by the Stock Exchange, but in fact it was not. The Stock Exchange declined to give the exemptions.
40. On 3 November Baron wrote to Hopwood setting out detailed advice and proposals for a convertible note issue. It advised that it was unlikely that Jeffcott could raise the moneys which it required from a traditional financier and that it would be desirable for a note issue to raise sufficient moneys for Jeffcott to discharge all of its existing borrowings. It proposed an issue of notes to shareholders for just over $6 million which was sufficient to discharge those existing borrowings. The term of the notes was proposed to be for three years and they were to be repayable on 31 December 1991. The letter stated:
'We believe justification for such an issue is also
supported by proposals being considered for a restructuring
of the overall Jeffcott group (such restructuring made
easier as a result of the convertible note issue that would
allow borrowings to be retired.).'
41. This was an oblique reference to the proposed reverse takeover and that the notes could become redeemable upon the completion of any successful takeover prior to 31 December 1991. The undoubted expectation was that in the event of a successful reverse takeover the cash reserves of Magnacrete would be applied to repay those notes where the holders so requested. The letter proposed a tight timetable for the launching and completion of the note issue. It also raised the need for underwriting and sub-underwriting and suggested the possibility, subject to legal advice, of Magnacrete and/or Ausmintec being either underwriters or sub-underwriters for the issue. It was not suggested in the letter that Baron itself should be involved in the underwriting.
42. Jeffcott decided to proceed with the convertible note issue as a matter or urgency. It believed that it could fund its interest commitments under it from its cash flow. Jarden surveyed the major shareholders of Jeffcott to see which were prepared to take up their entitlements on a note issue, and thus to determine what would be the likely extent of its liability for a shortfall under an underwriting agreement. As at 21 November Jarden expected that the shortfall, which would not be taken up by shareholders, would be in the vicinity of $1.2-1.5 million. It had not been able to find any likely sub-underwriters at that stage, and it was not prepared itself to take up anything like over a million dollars of notes. Jeffcott was about to announce the proposed note issue publicly on 21 November which it had to do if it was to meet the tight timetable. However, Jarden was not at that stage prepared to agree to underwrite the issue. Underwriting by a sharebroker was important in creating a public perception of confidence in the issue. In a discussion between Patterson and Byrnes on 21 November, which was confirmed by an exchange of correspondence between them, Jarden agreed to underwrite the issue upon Jeffcott 'unconditionally agree(ing) to procure, if necessary, 100 per cent sub-underwriting of that issue'. The issue was thereafter publicly announced that day as being underwritten by Jarden, but the commitment by Jeffcott to procure sub-underwriting was not disclosed. Hopwood raising his subscription for the note issue For the note issue to be successful Hopwood, through his family company Arminga Geological Research and Exploration Pty Ltd ('Arminga') as the major shareholder in Jeffcott, had to take up his entitlement to the notes. It was also required that Hopwood should subscribe for the notes almost as soon as the issue opened, and in any event by no later than 15 December, so that the moneys received from him could be used by Jeffcott to pay out Hill on the due date. For this purpose Hopwood applied to his bank, the Standard Chartered Bank ('Standard'), for an increase in Arminga's overdraft facility by $2.4 million. The bank officer principally concerned in dealing with this application was Thomas Bowen. I accept his evidence as it is based almost entirely on contemporaneous bank records. It is clear that the proposal for the borrowing was put to Standard on the basis that there was to be an imminent reverse takeover of Jeffcott by Magnacrete, and that at the conclusion of that takeover, if successful, the borrowings, or a substantial part of them, could be repaid by used of the cash reserves of Magnacrete. On 15 November Mr Bowen spoke to each of Paior, Young and Chapman about the proposals for the takeover and received positive responses, but he did not seek to speak to Hill. He also sought advice about what was proposed from Mr Sallis of Fisher Jeffries and Co to confirm its legality. He was told by Hopwood that the issue was to underwritten by Jarden. He was not told of the requirement for Jeffcott to procure 100% sub- underwriting. However, on 17 November the general manager of credit control of Standard informed the State manager in a memorandum that the loan appeared to be a high risk transaction because there was no guarantee that Jeffcott could get access to Magnacrete's cash to repay the convertible notes and he recommended that it not be granted. However, the State manager in a memorandum of 18 November to head office took a more optimistic view and thought it safe to assume that the reverse takeover would be successful. He was prepared to recommend lending $2.5 million, (but he said, 'We are also happy to review our proposed pricing in view of the high risk perceived.') On 22 November Standard approved the loan application and made a formal offer to Arminga to extend its overdraft facility by $2.5 million to $4.2 million for the purpose of it acquiring Jeffcott notes, but subject to receiving security of a mortgage of shares to the value of $6 million and of unregistered mortgages over properties owned by Arminga and Hopwood to a minimum value of $2 million, and on terms that the facility would be reduced to $1.7 million by 31 March 1989 and to $70,000 by 30 June 1989. Those reductions in the overdraft were predicated upon representations by Byrnes and Hopwood to Standard that the reverse takeover would be completed well before 31 March 1989. A successful reverse takeover was the only means that Hopwood could have had to make such repayments without selling off large amounts of shares or realty. Arminga formally accepted its offer of finance on 8 December 1988. Hopwood and his wife personally guaranteed repayment by Arminga to Standard. On 24 November Hopwood wrote a memorandum to Byrnes in which he stated, inter alia:
'The following points need to be addressed for the bank to
back Arminga for the issue:
(1) That the amounts taken up by the underwriters and each
sub-underwriter be listed.
...
(4) That there is a discussion between Martin Byrnes,
Margaret Hopwood, Tom Bowen and myself to agree that the
Magnacrete takeover timetable from mid January 1989 to 31
March 1989 is realistic and achievable, i.e. Convertible
notes will be redeemed before 31 March 1989, and be repaid.
(5) That Hopwood will reduce his subscription to $2.4
million so that there is sufficient to cover in OD for
interest payments should there be an overrun.
(6) It is absolutely imperative that the payments and
interest payments dates are realistic, are achievable and
are met.'
43. On 28 November 1988 there was a meeting between Bowen, Byrnes and Mr and Mrs Hopwood. A proposed timetable for the note issue and the reverse takeover was discussed in detail. That timetable provided for the convertible note offer to close on 13 January 1989 and for the takeover offer to be announced immediately thereafter. In discussing the proposed underwriting of the note issue Bowen was told that it was expected that Jarden would take $1 million and Baron would take the balance, but this was not correct. It was confirmed that if the takeover was successful the note holders would thereupon be entitled to redeem their notes. Hopwood claimed that he gave security to the bank over real estate worth $5 million, but there was no corroboration of this valuation. The closing down of Magnacrete's operations As a result of recommendations from Young about cost cutting measures, on 1 December 1988 the directors of Magnacrete decided to terminate the services of all its employees other than Leon Bray who was transferred to Jeffcott's premises in the city. Magnacrete relinquished it lease of its premises at Hendon. Its cash reserves were being substantially depleted by continuing expenses without any corresponding replenishment by income. In the six months to 31 December 1988 Magnacrete paid out over $1 million for legal fees incurred in that period and previously. At the meeting of 1 December the directors apparently agreed to have the action by Magnacrete against Ausmintec and Hill seeking to set aside the technology transfer agreement discontinued. At about this time Llewelyn, who was situated in Ausmintec's offices at Hendon, gave the common seal of Magnacrete to Byrnes, and did not see it again. Attempts to arrange sub-underwriting In early December Jarden attempted to procure sub-underwriters for the note issue. Jarden was entitled to an underwriting fee of 5% of the total amount of the notes which was $6,029,808. It had a discretion to offer part of this fee to any sub- underwriters. It wrote to two of its overseas contacts offering them sub-underwriting at 3 or 3.5%. In such communications it made statements such as:
'A restructuring programme via the cash rich Magnacrete is
planned for February 89 which would see you out of the notes
at a small capital profit, plus the 15% interest amount.'
44. Clearly such representations resulted from Byrnes, who had most of the dealings with Jarden, discussing the proposed reverse takeover with Jarden. However, Jarden did not make such representations in the letters in evidence which it sent to Australian based proposed sub-underwriters. Overall Jarden was generally unsuccessful in obtaining much sub-underwriting for the issue. Its own wholly owned subsidiary, Goldsmith Securities Pty Ltd, agreed to accept underwriting for $150,000 of notes at 3.5%. The major shareholders such as Normandy, Legal and General and Arminga agreed to sub-underwrite to the extent of their entitlements as shareholders to take up notes so that they received a sub-underwriting commission of about 3.5% on the notes which they took up. Although there was some misunderstanding about the arrangements for it, Hopwood received a sub-underwriting fee of $120,000 for the notes taken up by Arminga. Normandy agreed to take up its entitlement of 919,847 notes and was allowed a sub-underwriting fee of 3.5% on this. Normandy only participated in the note issue because Jeffcott had promised it that its debt of about $4.2 million would be repaid out of the proceeds of the note issue. Normandy regarded it as commercially expedient to take up $919,847 of unsecured convertible notes in exchange for repayment of a secured debt of $4.2 million, but in the expectation that a successful reverse takeover would enable those notes to be redeemed within a few months. The setting up of Vicksburg In response to Jarden's request for sub-underwriting of the likely substantial shortfall in the note issue, in about early December Byrnes decided to attempt to use the joint venture structure which had been proposed by Watts in October, but which had not then pursued, to enable the shortfall to be underwritten through the indirect use of the cash reserves of Magnacrete. Magnacrete could not directly sub-underwrite the shortfall because of possible problems under SS129 and 230 of the Companies Code. Byrnes spoke to Chapman about the proposals. Baron agreed to become involved subject to it not incurring any liability on the loan and advice being obtained that the procedures were legal. In early December Chapman spoke to Patterson about Baron taking up the shortfall. On 7 December Byrnes consulted Watts for advice on the legality of the proposal and to set up the necessary corporate structure as a matter or urgency. These instructions were given in the context of the proposed joint venture being used to underwrite the shortfall on the convertible note issue. Watts advised that to protect the interests of Magnacrete it was desirable that a financial specialist such as Baron 'would effectively sign off on the commerciality of the investment and say it was a good and appropriate investment to make'. Watts arranged for a shelf company Vicksburg Pty Ltd ('Vicksburg'), which was held by his firm, to be made available as the joint venture vehicle. By 9 December he had drafted an agreement between Magnacrete and Vicksburg for Magnacrete to provide a guarantee, a loan agreement between Vicksburg and Baron Fund Managers Ltd ('Baron Managers'), a subsidiary of Baron, and a deed of assignment by Baron Managers to Vicksburg and had sent them to Baron. Baron obtained its own advice on the legality of the transactions from Mr Sallis of Fisher Jeffries and Co, who coincidentally had also been consulted by Standard about the transaction. On 12 December there was a meeting between Watts, Byrnes and Chapman to discuss the proposals and the draft documents. At that meeting Chapman prepared in handwriting two proposed letters. The first was from Baron to Magnacrete. In its draft form it stated:
'Baron Fund Managers Ltd has secured an offer of
sub-underwriting of up to $1.6 million of the Jeffcott Notes
from the underwriter Jordan (sic) Morgan Australia Limited.
The sub-underwriting carries with it the full 5%
underwriting fee payable by Jeffcott. Given your
understanding of Jeffcott and the fact that your company is
in a liquid financial position, we would like to propose
that you participate with Baron in a joint venture for the
acquisition and financing of up to $1.6 million of Jeffcott
notes. We have already discussed this matter with Mr Byrnes
and this letter reflects those discussions.'
45. The letter was incorrect in saying that Baron Managers had secured the offer of sub-underwriting. Watts advised that it was undesirable that this letter should indicate that there was a pre-existing legal obligation between Baron Managers and Magnacrete that the money would be invested in a particular way because he advised that Vicksburg would not be independent of Magnacrete unless Baron Managers was the party which made the final decision as to how the resources of the joint venture would be used. Accordingly, that part of the letter was amended in its final form to read:
'Following our several discussions with your Mr Byrnes, this
letter sets out the basis for the establishment of a joint
venture between our company and Magnacrete whereby we can
effectively match the current surplus financial capacity of
your group with various investment opportunities that are
available to our group from time to time and may be of
interest to Magnacrete.'
46. There was no reference in this letter addressed to the directors of Magnacrete of the proposed investment in Jeffcott convertible notes, although that was clearly always the unstated primary intention of Byrnes and Baron Managers for the joint venture. Watts did not intend that the directors of Magnacrete should not be told of this proposal. There was nothing sinister qua the other directors of Magnacrete in this, but rather it was to obscure the real intention of the joint venture if it was subsequently called in question by allegations of breaches of SS129 or 230 of the Companies Code or of the Stock Exchange Listing Rules. This letter in its final form bore the date of 12 December, but it was probably only signed by Chapman at a later date. It would appear that the prospects of the extent of the shortfall on the note issue were then still growing because at this meeting the amount of the proposed facility was increased from $1.4 to $1.6 million. The other letter prepared by Chapman at the meeting was from Baron Managers to Vicksburg offering it sub-underwriting of $600,000, but that part of the proposal was subsequently varied and this letter was not used. On 12 December there was also a meeting of the previous members and directors of Vicksburg which transferred their shares, and allotted new shares, so that out of a new issued capital of 100 shares Baron Managers held 45, Magnacrete held 45 and Chapman held 10. Byrnes and Chapman were each appointed directors of Vicksburg and Byrnes as the secretary. An application under the common seal of Magnacrete, countersigned by Byrnes and Hopwood and dated 12 December, was made for 44 shares in Vicksburg and a share certificate, also dated 12 December, was issued for those shares. There was a further meeting in Watts' office on 13 December but there was no evidence about what occurred there. However, on that day there was a significant variation to the proposal which Chapman says was on legal advice, but Watts denied having advised upon it. Instead of Vicksburg taking up sub-underwriting of the convertible note issue Baron Managers offered to purchase up to 1.6 million Jeffcott notes from Jarden. On 13 December Jarden wrote to Baron Managers stating:
'Further to our discussions on the Jeffcott note issue this
letter is to confirm our understanding that Baron Fund
Managers Limited ('Baron') willingly agrees to purchase from
Jarden Morgan Australia Limited ... up to 1,700,000 one
dollar unsecured convertible notes to be issued by Jeffcott
Investments Limited pursuant to the current non-renouncable
issue.'
47. The letter then sets out the terms of purchase including a statement:
'(The) notes acquired shall only be those notes subscribed
for by Jarden Morgan Australia Limited from the balance of
general sub-underwriting which totals approximately 30% of
the issue.'
48. Jarden agreed to pay an execution fee of 5 cents per note, i.e. $85,000, on Baron Managers' execution of the agreement. This amount was payable irrespective of whether Baron Managers was required to purchase the whole, or indeed any, of the 1.7 million notes or not. Although Baron orally agreed to this proposal at the time, the notation of its acceptance on the letter of offer is only dated 12 January 1989. A consequential variation of the arrangement was that Vicksburg would lend to Baron Managers the moneys it required to purchase those notes from Jarden. The convertible note issue by Jeffcott The formal underwriting agreement between Jarden and Jeffcott for the note issue was dated 13 December 1988. It was in conventional terms and allowed Jarden to withdraw upon major adverse circumstances occurring, but none did. It did not contain the term set out in the correspondence of 21/22 November of Jeffcott providing 100% sub-underwriting. The documentation for the convertible note issue was also sent out to Jeffcott shareholders on 13 December 1988 offering them seven $1 notes for each 150 shares which they held as at 12 December 1988. Acceptances were required by 13 January 1989. The notes were to be for a period of three years maturing on 31 December 1991 and were to accrue interest at a rate of 15% p.a. Clause 7(b) of the conditions of issue of the notes provided that if any takeover offer for Jeffcott was 90% successful before the maturity of the notes a note holder could require repayment of his notes within sixty days. There was no suggestion in the documents for the note issue that any takeover was contemplated. At the time general interest rates were climbing quite markedly. In December 1988 it was possible to obtain 13-14% per annum interest on secured debenture stock in recognised finance companies. This probably explains why very few of the small shareholders of Jeffcott took up their note entitlements and why in early December 1988 there was an escalating estimate as to the likely shortfall. Arminga subscribed for 2.4 million notes as soon as the offer was made and authorised Standard to transfer $2.4 million from its increased overdraft facility to Jeffcott. Thus on 16 December Jeffcott paid $2,111,000 to Hill to satisfy the loan agreement and all outstanding interest.
49. The completion of the Vicksburg structure Watts completed the preparation of the necessary documents on 15 December and sent them to Baron and Byrnes. A number of these documents in their executed form are dated 12 December. This was done by Byrnes at some time in January 1989, but clearly that date is incorrect. These documents which gave effect to the Vicksburg joint venture arrangements are as follows: 1. An Agreement to Guarantee made between Magnacrete and Vicksburg whereby Magnacrete agreed to furnish and maintain for a period of not less than twelve months such guarantee or other securities as were required to procure an overdraft facility from the Commonwealth Trading Bank in favour of Vicksburg in a sum of not less than $1.7 million. Vicksburg was to pay a guarantee fee of $40,000 to Magnacrete irrespective of the extent to which Vicksburg drew upon the overdraft facility with the bank. 2. A Shareholders' Agreement made between Magnacrete, Baron Managers and Chapman which was to govern the operations of Vicksburg. It required the board of Vicksburg to be constituted of one director nominated by Magnacrete and one by Baron, but all decisions of the directors had to be unanimous. Baron and Chapman agreed to account to Vicksburg for any fees, commissions, rebates, etc. which they received arising out of any acquisition of investments for Vicksburg. Magnacrete had the right to require Baron and Chapman to sell their shares to it at par value if it so required, and they could not sell them to other persons without first offering them to Magnacrete. Both this Shareholders' Agreement and the Agreement to Guarantee referred to in 1. above were executed under the common seal of Magnacrete and that sealing was countersigned by each of Byrnes and Hopwood as directors of Magnacrete. It is unclear precisely when they did this, but it was probably on 15 or 16 December. Their executions of these two documents are referred to in para (a) of count 1. 3. A Loan Facility Agreement between Vicksburg and Baron Managers. This required Vicksburg to lend up to $1.7 million to Baron Managers for a term of twelve months. Baron Managers could apply the moneys borrowed only in the purchase of investments which were approved by all of the directors of Vicksburg. Baron Managers was required to pay interest on the moneys borrowed at the same rate as was charged by the Commonwealth Bank to Vicksburg. Baron Managers was entitled to discharge the loan by an assignment to Vicksburg of the securities acquired with the moneys advanced by Vicksburg, and it incurred no personal liability to Vicksburg to repay any sum in money. This term was referred to as a non-recourse loan. This document does not refer expressly to Jeffcott convertible notes. Although the document was dated 12 December, it was clearly not executed on that day but subsequently. 4. A Deed of Assignment between Baron Managers and Vicksburg whereby Baron assigned to Vicksburg the securities described in the schedule to secure moneys lent by Vicksburg to Baron. The schedule refers to 'unsecured convertible notes $1 face value. Up to $1.7 million.' This is clearly a reference to the balance of the Jeffcott convertible notes which were not taken up by the shareholders or the other sub-underwriters. This deed also provided that Baron Managers' liability was limited to the return of the securities. The deed was dated 12 January 1989 which was the date of its execution by Baron Managers, and which was probably correct. 5. The letter dated 12 December 1988 from Baron Managers to the directors of Magnacrete which is referred to above. However, this was not the letter of financial advice which Watts had recommended on 7 December. 6. An undated letter from Baron Managers to Byrnes as a director of Vicksburg proposing that Vicksburg provide finance of up to $1.7 million to Baron Managers for the purpose of acquiring all or part of the Jeffcott note issue. The letter said:
'We believe that the actual commitment required for the
purchase of Jeffcott notes will be around $600,000 to $1
million (due to the level of acceptances under the note
offer) and accordingly this transaction is unlikely to
utilise the majority of the current loan facility available
to Baron Fund Managers.'
50. However, that proved to be incorrect and from at least mid December onwards there was little prospect that the whole of the facility would not be taken up in meeting the shortfall on the Jeffcott note issue. There is on the bottom of that letter an undated handwritten notation by Byrnes, 'I agree and consent'.
51. On 14 December Vicksburg had applied to the Commonwealth Bank for accommodation of $1.6 million. This was approved by the bank on 16 December upon terms that Magnacrete give a guarantee for $2 million supported by the lodgment with the bank of term deposits for $2 million. This loan was arranged by Byrnes. Chapman was also in contact with the bank to ensure that the finance was to be available. Watts advised that the proposed transactions did not breach the Companies Code and were legal, but he did not put that advice into writing due to the haste in which the structure had to be finalised. He assumed that Byrnes had obtained the necessary approval from the Magnacrete board for the transaction. At this time he did not speak to any other director of Magnacrete with the exception of Hopwood. Although Paior was about to become a partner in the firm of Thomson Simmons and Co, there was tension between he and Watts who was about to leave that firm because Paior had been received as a partner. Neither Baron nor Chapman gave any written advice as to whether the use of the Vicksburg joint venture structure to underwrite the Jeffcott convertible note issue was in the interests of Magnacrete. Whether they gave any oral advice to this effect was a matter of dispute. The Van Reesema injunction Like a bolt out of the blue, and with no forewarning, on 16 December Magnacrete, Ausmintec, Hill and his family were served with an ex parte interim injunction obtained by Van Reesema in the Supreme Court restraining, inter alia, Magnacrete from making any takeover offer for Jeffcott. The affidavit of Van Reesema's solicitor filed in support of the application disclosed that the solicitor, Mr Wyly, had found a copy of the letter of 1 November 1988 from Magnacrete to the Stock Exchange about the proposed takeover on the file of Jeffcott at the Stock Exchange. The affidavit also referred to the Jeffcott convertible note issue and stated '... it is possible that the said underwriters could place all or a portion of any shortfall with Magnacrete, and if so then this could substantially diminish the immediate or short term availability of considerable cash funds to Magnacrete.' This was mere speculation. There was no evidence that Van Reesema had any knowledge of the Vicksburg arrangements. An informal directors' meeting of Jeffcott was convened on 16 December to discuss this development and to authorise solicitors to be retained to defend the proceedings. No notes or minutes were kept for this meeting. Nothing was said at this meeting about the Vicksburg transaction or the execution by Magnacrete of the agreements with Vicksburg and Baron Managers which presumably had only just occurred. Thereafter Byrnes was very busy contesting this litigation. The interim injunction was lifted on 11 January 1989.
52. Magnacrete's guarantee to the Commonwealth Bank On 3 January 1989 the Commonwealth Bank sent the documentation for the guarantee to Bray at Jeffcott's office. On 4 January Chapman sent the proposed form of guarantee to Baron's solicitors for advice and with a note, 'With litigation around Magnacrete do we need to tighten up the CTB-Vicksburg facility.' On 12 January Baron sent to Byrnes executed copies of the Loan Facility Agreement, the Agreement to Guarantee, the Shareholders' Agreement and the Deed of Assignment and asked for confirmation that Vicksburg had $1.7 million unconditionally available from the bank. There are minutes of a directors' meeting of Vicksburg held by telephone on 12 January resolving that Vicksburg execute the above documents and authorising Byrnes to implement arrangements with the bank for the provision of funds. The common seal of Magnacrete was affixed to a document of guarantee prepared by the bank and which is dated 18 January 1989. That affixation of the common seal was countersigned by Hopwood and Byrnes as directors of Magnacrete. It probably occurred on or just before 18 January. The sealing clause on the document reads, 'The common seal of Magnacrete Ltd was affixed under the authority of the directors in the presence of a director whose signature appears opposite hereto.' This is the document referred to in paragraph (b) of the particulars of count 1. Apparently at the same time the common seal of Magnacrete was affixed to another document, which was also dated 18 January 1989, which in effect authorised the bank to deduct from term deposits of Magnacrete, which were described in its schedule, moneys which may become owing to the bank as a result of the advances to Vicksburg. The common seal on this document was again countersigned by Hopwood and Byrnes. Although para (c) of the particulars to count 1 does not expressly designate a document, it refers to this document. On 18 January Byrnes on behalf of Magnacrete wrote to the Commonwealth Bank authorising it to repurchase bank bills of Magnacrete and to place the proceeds on term deposits in the name of Magnacrete in accordance with the schedule to the document previously mentioned. This duly occurred. On 19 January the bank advised Chapman that all the security documents were in place and it was prepared to fund the loan to Vicksburg. In the next few days there was some communication between Byrnes, Chapman and the bank in order to increase the amount of the facility to Vicksburg from $1.6 million to $1.7 million which the bank agreed to do without taking additional security.
53. Continuing difficulties with Hill In January 1989 Byrnes became aware for the first time that the account of First National owed by Ausmintec had not been paid and First National had sued Ausmintec in the Supreme Court of Victoria for $360,000. He then had to take on the tasks of organising the defence of these proceedings and investigating whether they could be resolved. He also then became aware for the first time that the half yearly accounts for Ausmintec to 31 December 1988 had been lodged with the Stock Exchange without prior reference to him, and that there were some difficulties about these accounts. He considered that all of these matters should have been raised with him by Hill much earlier and he was angry with Hill for not having done so. Arrangements for Baron to take up the shortfall on the Jeffcott notes On 26 January 1989 Jeffcott gave notice to Jarden that there was a shortfall on the note issue of $2,035,575. On 30 January Baron Managers wrote to Vicksburg requesting a draw down on the loan facility of $1.65 million so that it could take up $1.63 million of Jeffcott notes and indicating that the draw down should be arranged by 3 February. On 31 January Jarden wrote to Baron requiring it to purchase 1,631,717 convertible notes pursuant to the terms of its letter of 13 December 1988. On that day Baron wrote to Vicksburg with further details of the draw down and saying that it would occur on 9 February 1989. Other evidence suggests that there were oral arrangements made between the parties that payment of the $1.63 million would be made directly by the Commonwealth Bank to Goldsmith Securities Ltd, a subsidiary of Jarden, and that it would occur on 2 February. The blocking of the draw down by Hill Llewelyn, who knew nothing of the Vicksburg transactions, in the ordinary course of his duties for Magnacrete, enquired of the Commonwealth Bank towards the end of January about some commercial bills of Magnacrete which were due to be rolled over shortly thereafter. He was told that the bills had been repurchased by the bank and the amounts put on fixed deposit in the name of Magnacrete. When he enquired how this had occurred he was given a copy of the letter of 18 January from Byrnes to the bank which is referred to above. He immediately spoke to Hill about the matter. On 27 January Hill gave a written instruction to Llewelyn requiring him to obtain full information relating to the alleged 'bank security requirements relative to the Vicksbury (sic) Pty Ltd facility'. (quoting from letter of 18 January). In that memorandum Hill said:
'This matter has never been discussed at Magnacrete board
meetings, I have absolutely no knowledge of Vicksbury (sic)
Pty Ltd, and I am not aware of any reason for even
considering a security requirement to the bank.'
54. Llewelyn then spoke to Damien Wright of the bank who informed him that Magnacrete had given a guarantee for $2 million to support an advance of up to $1.7 million to Vicksburg in which the shareholders were Baron Managers, Magnacrete and Chapman and that the $1.7 million facility was to be drawn down on 2 February and credited to the account of Goldsmith Securities Pty Ltd. Llewelyn reported this to Hill in a letter of 1 February 1989. On 31 January, apparently before he had received the further report from Llewelyn, Hill had sent a fax to Byrnes referring to the letter to the bank of 18 January asking for immediate advice, 'if any significant transactions, which in the normal course of events would warrant discussion at board level, are contemplated.' At that time Byrnes was in Melbourne with Young conferring with solicitors about the proceedings brought by First National and attempting to negotiate a settlement of the claim. Early on 2 February Hill faxed a letter signed by himself and Llewelyn to the Commonwealth Bank stating that no meeting of the directors of Magnacrete had authorised the giving of the guarantee or its sealing and stating that Magnacrete could hold the bank responsible for any loss occasioned by reliance on the purported guarantee.
55. As Byrnes was away Hill had received no reply to his fax of 31 January. On 2 February he sent another fax to Byrnes containing the following:
'In view of your failure to respond to my Fax (31/1/89)
request (sic) for further information, I have no alternative
but to oppose any transaction which is not clear cut and
clearly in the company's interest. My opposition will be
withdrawn if I can obtain an opinion from the company's
auditors, Coopers and Lybrand, that your intended course of
action in dealing with the cash reserves of Magnacrete are
likely to bring additional benefits to Magnacrete Ltd.'
56. In that fax Hill did not refer to his fax sent earlier that day to the bank. As a result of the communication from Hill the bank decided not to allow Vicksburg to draw down its loan facility. Late on 2 February Byrnes arrived back in Adelaide, and without knowing of Hill's communication to the bank, sent a memorandum to Hill in which he stated:
'There is no proposal for anything to happen with
Magnacrete's cash reserves. I have put together a proposal
for a joint venture between Magnacrete and Baron Partners
Limited which is the Vicksburg project. I am sorry I
haven't been able to get it to you, but other matters have
intervened. I had, in fact, been working on it prior to the
Van Reesema litigation commencing, and I simply haven't had
a chance to get back to the proposal.'
57. On the morning of 3 February Byrnes sent a memorandum dated 3 February to all of the other directors of Magnacrete concerning the Vicksburg joint venture proposal. It is the memorandum which is referred to in count 2. It read:
'In conjunction with Steve Chapman of Baron Partners
Limited, I have been developing a proposal for a joint
venture between Magnacrete Limited and Baron Partners
Limited to enable Magnacrete to earn additional profits from
the fact that it has a large cash balance sitting in the
bank. In other words, I am proposing to utilise the
existence of the money without touching the money. I think
Steve Chapman is known to Stephen Young and Alex Paior. He
is managing director of Baron Partners Limited and Baron
House Limited, a public company listed in Sydney. Baron
Partners Limited is the merchant banking arm, and Baron Fund
Managers Limited the investment arm. Chapman was formerly
the managing director of Morgan Grenfell Australia Limited
in Adelaide and is extremely highly regarded in his
industry. Baron is corporate adviser to some of the biggest
companies and in some of the most complex transactions in
Australia. A profile of the company is enclosed. In the
course of its dealings, Baron encounters many investment
opportunities. some months ago I mentioned informally to
Chapman that Magnacrete had a large cash reserve, which
would require investing. This proposal is in response to
that comment, although it involves leaving the money in the
bank. Following my discussions with Chapman, he recorded
the proposal in a formal letter dated 12th December, 1988
(copy attached). I have since had further detailed
discussions with Chapman, and with Magnacrete's solicitors,
Thomson Simmons and Co., specifically Gary Watts. Watts has
advised that the proposal is perfectly acceptable and in no
way infringes any provisions of the companies code or
listing rules.
In essence, Magnacrete and Baron will form a joint venture
company, 45% owned by Magnacrete, 45% by Baron and 10%
directly by Chapman. A company, Vicksburg Pty Ltd has been
set aside for this purpose. Baron's contribution to the
joint venture will be to identify and make available to
Vicksburg opportunities which cross its path, which are
suitable for secure, short term gains. Magnacrete's
contribution will be to procure overdraft facilities for
Vicksburg. We have in mind 1.5 to 2 million dollars in
facilities. In return, Magnacrete will be paid a facility
fee. As you will see from the proposal, Magnacrete will not
provide any money to Vicksburg. Rather it will simply
procure that Magnacrete's bankers provide the facility to
Vicksburg. The fee is in effect a fee for Magnacrete
guaranteeing Vicksburg's overdraft. Obviously Magnacrete
continues to earn interest on its monies which are not
touched. The joint venture company will only invest in
opportunities specifically agreed to by both Magnacrete and
Baron. Thus there will be no investments or commitments
made unless both sides agree. Under the arrangement, Baron
will be obliged to account to Vicksburg for any fees or
commissions which it might receive in relation to any
transaction entered into by Vicksburg. It is useful to use
an example to describe the types of activities which may be
undertaken. As a corporate adviser, and as a group active
in the securities field, Baron on occasion has access to
commissions or discounts on securities issues. In this way,
Baron might make available to Vicksburg the opportunity to
participate in a share issue at 95% of face value (that is,
at a discount of 5%). If such investments are listed, they
can be subscribed for and sold on market within a month or
two of acquisition, for approximately face value. Thus
within (say) two months Vicksburg has earned 5% of funds
deployed, equivalent to a rate or return of 30% per annum,
simply because of its access to funds. Its costs of funds
might be (say) 15% per annum for the time deployed, so it
has made 15% clear. Magnacrete would earn its share of this
income on top of its normal interest income. I have
anticipated that the Magnacrete directors will agree, and
instructed the preparation of documentation necessary.
Would you please let me have any comments, and formal
authority to proceed.'
58. Attached to that memorandum was a profile of Baron and Partners which included the statement:
'In appropriate circumstances the Baron Group, which has
shareholders' funds in excess of $6.0 million may take a
financial interest in transactions in which Baron Partners
is advising, particularly in acquisitions and corporate
reconstructions.'
59. It gave a CV of the directors of Baron including Stephen Chapman. Also attached to the memorandum was a copy of the letter dated 12 December 1988 from Chapman to the directors of Magnacrete which has been referred to earlier. (That memorandum and its attachments is referred to hereafter as 'the memorandum P1'.) In about the middle of that day Byrnes faxed a further memorandum to Hill stating that he had just been shown a copy of the letter which Hill had sent to the bank and saying that he was appalled at it. That memorandum also stated:
'In view of the details which you have now received"
(presumably the memorandum P1) "I want you to fax the bank a
letter retracting your previous letter. In case you don't,
I am calling a Magnacrete board meeting for 3.30 this
afternoon.'
60. Hill did nothing in response except to attend the board meeting. The board meeting of Magnacrete on 3 February The meeting, which was held in mid afternoon, was attended by Byrnes, Hill, Paior and Young, but not by Hopwood who was then interstate. Llewelyn attended as the company secretary. There is considerable dispute about what occurred at this meeting and I will make some further findings about it later. Llewelyn as the secretary and Byrnes as the chairman each independently prepared purported minutes for the meeting which vary in significant respects. Broadly speaking the meeting endorsed the general proposal for a Vicksburg structure along the lines set out in the memorandum P1 but without any express reference to Vicksburg being involved in taking up Jeffcott convertible notes. Immediately after the meeting Byrnes and Paior signed a letter to the bank stating that it had been resolved on that day, 'That Magnacrete ... confirmed to the Commonwealth Bank ... the arrangements which have been made to guarantee to the bank the liabilities of Vicksburg ... for up to $1,700,000 and the provision of security therefor.' A certified copy of Byrnes' minutes of the meeting was also sent to the bank on that afternoon. The bank then agreed to allow Vicksburg to draw down on its loan. Later on the evening of 3 February Hopwood arrived back from interstate. Bray and Byrnes told him of the meeting. He saw the minutes which Byrnes had prepared. He was surprised that those minutes showed that Hill had voted in favour of all of the resolutions recorded in those minutes. Settlement on the notes purchased by Baron Managers Jarden fulfilled its underwriting obligations to meet the shortfall of $2,035,575 firstly by issuing 1,631,717 notes to Goldsmith Securities Pty Ltd, its own subsidiary, which was to sell them to Baron Managers, secondly by having parcels of 144,322 and 19,134 taken up by its own subsidiary Aurifex Nominees Pty Ltd and thirdly by issuing two other parcels of 192,362 and 48,040 to other sub- underwriters which it had found. Baron Managers purchased the 1,631,717 notes from Goldsmith Securities on about 7 February and arranged for them to be held in the name of Aurifex Nominees Pty Ltd on its behalf. The $1,631,717 used by Baron Managers to pay Goldsmith Securities for the notes had come directly from the Commonwealth Bank, and had been debited against the overdraft facility of Vicksburg which was guaranteed by Magnacrete. Byrnes never formally or informally reported to any of the board of Magnacrete except Hopwood about this loan by Vicksburg to enable Baron Managers to take up the Jeffcott notes. Steps towards the reverse takeover of Jeffcott With the convertible note issue successfully completed the way was clear for Byrnes to implement the proposed reverse takeover. There was considerable pressure upon himself and Hopwood to do so. On 6 February Byrnes and Hopwood had met with Bowen of Standard. They had then indicated that the takeover would proceed as a matter of priority and that hopefully the offer could close by 3 April. Watts was instructed to prepare the necessary takeover documents. He was aware of the Vicksburg involvement in the Jeffcott notes. Byrnes was away overseas from about 8 to 16 February. During that period Watts was taking instructions from, and liaising with, Paior about the takeover, but there is no evidence that Watts ever mentioned the Vicksburg involvement in Jeffcott notes to either Paior or Young. On 13 February there were discussions between Chapman and some directors of Magnacrete about Baron acting as an adviser to Magnacrete for the takeover. The terms of Baron's appointment by Magnacrete for this purpose were confirmed in a letter of 24 February 1989. It was arranged that Baron was to report to Paior as an independent director of Magnacrete on the matter. On 21 February there was a meeting of the directors of Magnacrete at which the proposals for the takeover of Jeffcott were approved with Byrnes, Hopwood and Hill abstaining from voting. On the same day the takeover offer documents, signed by Paior on behalf of Magnacrete, were sent to the shareholders of Jeffcott offering them one share in Magnacrete in exchange for each share which they held in Jeffcott. The accompanying investigating accountant's report of Coopers and Lybrand on the affairs of Magnacrete showed the guarantee fee of $40,000 paid by Vicksburg as having been received prior to 31 December 1988 and a contingent liability of Magnacrete on that guarantee of up to $1.7 million. Under the Stock Exchange Rules it was necessary for a meeting of the shareholders of Magnacrete who were not associated with Jeffcott to approve of the proposed takeover. This meeting was convened for 9 March 1989. An independent expert's report from Swiss Partners, which had been procured by Byrnes in October 1988 and subsequently updated, was sent to those shareholders of Magnacrete to assist them in deciding whether to approve of the takeover offer. Opposition by Hill to the takeover On 13 February the Magnacrete board had authorised an advance of $160,000 to Ausmintec because it had run out of funds. There was a meeting of the directors of Ausmintec on 21 February which preceded the directors' meeting of Magnacrete of the same date. The Ausmintec board there agreed to a settlement of the claim by First National for the amount claimed by that company plus costs, but it sought a contribution from Hill and his wife personally as much of the work had been done for their benefit. The meeting discussed a possible basis for Hill to retire from the board of Ausmintec but nothing was agreed about it. On 22 February Hill instructed Ausmintec's accountants, Nelson Wheeler, to investigate the proposed takeover and to advise about whether it was in Ausmintec's interests. On 28 February Hill sent a memorandum to Byrnes apparently as a belated reply to Byrnes' memorandum P1. In it he purported to quote from statements made at the meeting on 3 February. He was still critical of the general Vicksburg proposal, but he gave no indication that he had any knowledge or belief that Vicksburg had been used to underwrite the shortfall on the Jeffcott convertible note issue. On 28 February Hill also sent a further memorandum to Byrnes stating:
was well aware of the situation of conflict. Their clear
duty was to allow the remainder of the board of Magnacrete,
which was independent of Jeffcott, to make the decision
whether it was in the best interests of Magnacrete to enter
into the Vicksburg transactions in the circumstances. It
was not for these accused to decide for themselves that they
were not prejudicing the interests of Magnacrete by doing
what was undoubtedly in the interests of Jeffcott. They
were not able to be sufficiently objective in their
viewpoints to be able to assess properly whether the risks
to Magnacrete of the guarantee and the non recourse loan
were outweighed by the financial benefits to it. (b) The
purpose of each accused in the transactions in question was
to maximise the chance for Jeffcott that it would obtain the
finance which it needed through the convertible note issue
by ensuring that the shortfall on that issue was fully taken
up;
(c) Under the Articles of Magnacrete they had no right to
act unilaterally and independently of the board as a whole
as they did; and
(d) The remainder of the board of Magnacrete had the right
to know what each accused was doing in the name of
Magnacrete, but they deliberately did not inform Hill and
Young of what they were doing."
80. This "reads" like particulars of negligence or of breach of duty as understood by the civil, the common law.
81. It is possible to read s229(4) as creating an absolute offence, one where intention is irrelevant, one where mens rea as such has no place. But the High Court denies that the section should be so read. The High Court finds a place for intention within the conduct aimed at by s229(4). In Chew v The Queen (1991-1992) 173 CLR 626 the majority of the High Court said (at p634):-
"The accused's state of mind is relevant not only to the
requirement of purpose but also to the element of improper
use of his or her position. If, for example, an accused
person reasonably but mistakenly believed that a particular
transaction which he or she authorised was genuinely for the
benefit of the corporation, that belief may, in an
appropriate case, be material in determining whether the
accused person can be held criminally responsible for using
his or her position in a manner which would objectively be
seen to be improper."
82. The learned trial Judge quoted some of this quotation but omitted the first sentence. I think that first sentence very revealing. The High Court tells us that the state of mind is here relevant to the element of improper use. It is relevant because it may determine whether a person is criminally responsible (ie guilty of the offence created by s229(4)) for conduct which is objectively seen as improper. That is to say, once the conduct which is objectively improper has been proved beyond reasonable doubt you turn to consider the intention of the actor to see if civil impropriety is translated into criminal impropriety.
83. The learned trial Judge correctly pointed to the fact that the High Court recognised that conduct could be improper even if the actor believed it to be in the interests of the company. But it depends on the circumstances. Belief is, as His Honour said, "only a matter to be taken into account in an appropriate case". This was without doubt, in my opinion, an appropriate case. His Honour had rejected the idea of a total "scam".
84. The learned trial Judge did not ignore intention. But, in my respectful opinion, he reached conclusions about intention which are inimical to conviction. I repeat the important fact that the idea that this was, as the Crown suggested, a total "scam" was rejected by the learned trial Judge. His Honour made these further findings, each vital to the result. His Honour said:-
(i) "While accepting that each accused believed that what
was done by him was not harming Magnacrete, and was likely
to be for its ultimate financial profit, I am satisfied that
each accused had significantly breached his fiduciary duty
to Magnacrete in executing the documents in question and
that in the light of that breach of fiduciary duty the
actions of each were sufficiently morally blameworthy when
assessed objectively to be properly categorised in law as
improper."
and (ii) "I accept that each accused believed that it would
be in the financial interests of Magnacrete to enter into
the Vicksburg transaction for the purpose of underwriting
the Jeffcott note issue because it would receive the $40,000
guarantee fee and 45% of the profit made by Baron Managers
on the execution fee on the purchase. They were reinforced
in such a belief by at least informal advice from Chapman.
However, their belief was undoubtedly coloured by their
expectations for Jeffcott to make good its financial
position and their determination to succeed in that without
giving proper objective consideration to the risks involved
in Magnacrete being called upon to honour its guarantee and
in the risk of Vicksburg being left with unsecured Jeffcott
notes if for other reasons Jeffcott should get into
financial difficulties. On the evidence I am not prepared
to find that Byrnes and Hopwood were mistaken in this belief
that at the time of the transaction it was a good thing for
Magnacrete. However, that does not go to the matters which
are set out in the preceding paragraph as the bases of the
breaches of duty. Magnacrete and Vicksburg were treated
very generously in the transaction, and certainly better
than the other sub-underwriters, because it would assist
Byrnes and Hopwood in justifying their actions if they were
ever brought to account. However, that could not cure the
breach of duty which existed."
(iii) Speaking of Hopwood -
"The fact that he expected that there would be a
subsequent board meeting before the money was taken by
Vicksburg from the Commonwealth Bank shows that he did not
then believe that there was proper formal approval of the
directors for what was being done. Rather he believed that
when it was ultimately put before the board Young and Paior
were likely to approve it even if Hill opposed it."
85. That is to say, Hopwood had a belief that a majority of the Board would ratify what had been done.
86. These findings including, as I repeat, the rejection of the idea of a "total scam" are, in my opinion, inconsistent with criminal intention on the part of either appellant. Intention is, I repeat, relevant. If we return to the first quoted finding above which begins "While accepting...", we see that His Honour has travelled to conclusion by the road of "moral blameworthiness". And he has assessed that objectively. In my opinion, both the use of that road and the assessing of moral blameworthiness (if it has any place here) was erroneous. The question was not whether there had been moral blame but whether, even granting the intention to do the relevant acts, either accused had the relevant mens rea, the relevant criminal intention. The finding that the transaction was not a total "scam", the belief that what was being done would not harm Magnacrete, the possibility that they were not mistaken and the belief on the part of Hopwood in likely ratification, together with the fact that any vice was said to have existed in how something was done and not what was done, all amount to an absence of criminal intent or at least to the reasonable possibility of that absence.
87. I do not think that either appellant should have been found guilty of an offence against s229(4). I would allow each appeal against the conviction in count 1. I would quash each conviction. I would substitute a verdict of acquittal for each conviction.
88. I speak now of the appeal against the conviction of the appellant Byrnes on count 2.
89. I can here see no fault in the reasoning of the learned trial Judge. There was evidence to support his findings. That evidence establishes an intention to omit information, which information the appellant, Byrnes, must have known rendered the information misleading in a material respect. He must, in all the circumstances, have so intended. I think that this appeal should be dismissed.
90. I speak now of the conviction of the appellant Byrnes on count 3.
91. I agree with Mr Tilmouth QC that this appeal stands differently to that relating to the conviction on count 2.
92. Mr Tilmouth pointed out that the charge was confined to a "narrow area" and the answers were given in a "narrow area".
93. This appellant furnished information to the Australian Stock Exchange in response to a question asked by the Exchange. That was the "narrow area" mentioned by Mr Tilmouth. Mr Tilmouth drew attention to s564(4). It is -
"Where information is made available or furnished to a
person referred to in paragraph 1(a), (b), or (c) or (2)(a),
(b) or (c) in response to a question asked by that person,
the question and the information shall be considered
together in determining whether the information was false or
misleading."
94. The learned trial Judge does not appear to have considered this subsection. Mr Tilmouth submitted that His Honour looked at the letter written by this appellant in response to the question from the Exchange and "at large objectively in the context of the whole Vicksburg affair and for the same reasons as he found that there were material omissions in relation to the memorandum to the Board (count 2) found material omissions in the letter written to the Exchange". That is to say, Mr Tilmouth submitted that His Honour travelled too far afield. Therefore, Mr Tilmouth concluded - "...Count 3 fails because (the learned trial Judge) didn't consider the very subsection with which it must have been concerned."
95. I think this submission sound. The question asked "by" the Exchange was asked on its behalf by word of mouth by an officer of the Exchange, Mr T.J. Thurgarland. The request which he made did not emerge from his evidence very clearly. He had retired since the relevant time (March 1989). His memory may have been adequately stimulated by looking at documents. During his evidence Mr Thurgarland said:-
"Q. On or about 8 March 1989 do you recall having any
conversations with Martin Byrnes.
A. Yes.
Q. Can you recall when you had the first conversation with
Martin Byrnes around that time.
A. By reference to Exhibit P56B, it appears that I would
have spoken to Mr Byrnes on the 7th of March because that
letter commences 'I refer to your enquiry yesterday', which
is an enquiry that I would have raised with him.
Q. Are you able to recall what that enquiry was concerning.
A. Yes, it concerned the subject matter of Vicksburg Pty
Ltd.
Q. Your enquiry, did that include making a request for
information.
A. Yes, it did.
Q. What information did you seek.
A. It was sought as to the business that was conducted by
Vicksburg Pty Ltd, the names of directors and shareholders
of that company, and the role that it was contemplated or
proposed to be played, and also as to whether it was a
wholly owned subsidiary of Magnacrete.
Q.
And the letter P56B, that was the reply you received to your
enquiry.
A. That's correct.
Q. Looking at P236, that document refers to discussions
that were had with you that morning.
Are you able to recall what those discussions related to.
A. By reference to that Exhibit P236 letter, it would
appear that I had expressed concerns as to whether the
report by Swiss Partners as prepared by them did not make
reference to Vicksburg and Vicksburg's transactions, and
hence I would have sought information from Mr Byrnes of
Magnacrete as to why Vicksburg or a reference to Vicksburg
was omitted from the report prepared by Swiss Partners.
Q. Are you able to say by looking at those documents
whether or not they were placed on the public file held at
the Stock Exchange, in particular the document marked P236
and P56B.
A. No, I can't say definitely whether they appeared on the
public file or not.
Q. The last document that you received that day from Mr
Byrnes was the document now marked P56C. Do you agree with
that.
A. Yes.
Q. That document appears to be an announcement to the
market, would you agree.
A. Yes.
Q. You agree that the letter indicates that the moneys
borrowed by Vicksburg from the Commonwealth Bank were on
loan to Baron, that appears on page 2.
A. Yes.
Q. It also indicates that Vicksburg and Magnacrete
considered that those moneys are fully recoverable as are
interests and additional fees payable, is that so.
A. Yes, that would be so.
Q. Do you also agree that none of those documents indicate
that moneys borrowed by Vicksburg and on loan to Baron were
used to acquire Jeffcott Investments convertible notes.
Would you agree with that.
A. I would, I would agree.
Q. Can I ask you, then, as at 8 March 1989 were you aware
that the moneys borrowed by Vicksburg from the Commonwealth
Bank and which had been used - sorry and which had been
guaranteed by Magnacrete, were ultimately used for acquiring
Jeffcott Investments convertible notes.
OBJECTION Mr Hevey objects.
QUESTION REPHRASED Q. Did you have any belief at that time,
namely 8 March 1989, as to what the funds which had been
on-loaned by Vicksburg to Baron were used for.
A. No."
96. Mr Thurgarland made some remarks about what appeared to emerge from documents. But they were deductions. They were not positive statements of facts which he knew or remembered. In seeking to consider the question asked together with the information given it is not easy to ascertain just what the question was. Certainly it does not seem to have been proved to have been a question which demanded the giving of the "omitted" information ("omitted" as suggested in count 3). 97. Despite other remarks and attempts by counsel to isolate the question or questions asked no precise evidence emerged. The best is (as appears above):-
"Q. What information did you seek.
A. It was sought as to the business that was conducted by
Vicksburg Pty Ltd, the names of directors and shareholders
of that company, and the role that it was contemplated or
proposed to be played, and also as to whether it was a
wholly owned subsidiary of Magnacrete."
98. And definition of the question asked by Mr Thurgarland was made no clearer by cross-examination. During cross-examination by this appellant (then acting for himself) this evidence was given by Mr Thurgarland:-
"Q. Could you tell the court what it was that was
specifically required, if you have that recollection.
A. That the Exchange required or I required of disclosure?
Q. What was the query on 7 March, you did talk earlier
about a query that was made of Magnacrete on 7 March by the
Stock Exchange.
A. Yes, that's right.
Q. What was the query.
A. The existence - suddenly the existence of Vicksburg and
that there was then the question of whether contingent
liability had arisen or not by the formation of Vicksburg.
Q. Were you talking about specifically for the purpose of
ensuring that the shareholders' meeting was properly
informed, that was the purpose of your enquiry, wasn't it.
A. That's right, to get such information to the market.
Q. In a nutshell, the outcome of the enquiry or the
response from Magnacrete was to make clear that that
contingent liability had arisen, that's the case, isn't it.
A. Yes.
Q. I think you said that the query was by telephone.
A. Initially, yes.
Q. I just want to put to you my recollection of what
transpired then. I suggest to you that I did come and see
you early on the morning of 8 March bearing with me one of
the exhibits you've already seen, Exhibit P56B.
A. Right.
Q. Do you agree or disagree or recall that.
A. I wouldn't make a comment as to whether you had this
letter with you or not.
Q. You do recall that you had a meeting with with me on
that morning.
A. Yes.
Q. And you do recall that the letter was received.
A. Yes.
Q. I want to suggest to you that the meeting between you
and I was actually quite early in the morning, say, about
first thing, 9 o'clock in the morning or thereabouts, do you
recollect that.
A. Yes, it was an early morning meeting.
Q. I note that the Exhibit P56B has a time stamp on it of
10.24 am, I want to suggest to you that I actually gave you
that letter at the meeting which was prior to 10.24 am but
that 10.24 may well reflect the time at which the meeting
ended.
A. I would consider that 10.24 was at the conclusion of our
meeting.
Q. In the course of the meeting you and I discussed the
matter generally and we then agreed that it would be a good
idea for Magnacrete to make a formal announcement to the
Exchange about the matters that we had discussed, didn't we.
A. The existence of Vicksburg?
Q. Yes.
A. Right.
Q. And my recollection of that is that we actually, you and
I actually sat down and penned out an announcement for that
purpose.
A. That's correct.
A. Quite clearly the letter, the 3 page letter that you've
already been given, P56B, wasn't the sort of letter you were
looking for for an announcement and I did say that I would
type up an announcement in the format that we had discussed
and send it to the Exchange, didn't I.
A. That's correct.
Q. And that's what became P56C, is that right, that actual
letter actually was sent to the Exchange later on that day.
A. Yes.
Q. And that's a formal announcement.
A. To the Exchange, which the Exchange received, yes.
Q. I think if you have a look at P236 it's clear that there
was an intermediate step, I suggest to you that what
happened was I went back to my office, typed up a draft
letter, a draft of P56C, and sent the draft, together with
this letter P236, to you, do you agree with that.
A. I'm not quite sure in regard to a draft.
Q. Could you read -
A. I haven't got a letter here.
Q. Could you read P236 please.
A. 236?
Q. Yes. 'Further to my discussions with you this morning,
I confirm' -
A. Just read it to yourself.
A. Right. WITNESS READS DOCUMENT
A. Right.
Q. The second to last paragraph on the first page refers to
an enclosure which is a draft announcement to the market.
A. Yes.
Q. I realise that there's no annexure to the document that
you've got and certainly the copy that I've got but that
does indicate that a draft announcement was sent with this
letter which you received at 12.11 on 8 March, do you agree
with that.
A. As I say, I couldn't comment because this exhibit
doesn't have an attachment to it.
Q. I realise that. But it's clear from the date stamp,
12.11 on 8 March, that that letter, P236, was received some
hour and a half prior to P56C, which was the formal
announcement, isn't it.
A. Yes.
Q. And the middle paragraph on the first page of P236 also
refers back to another letter which I had earlier given to
you, do you see that.
A. Which is Exhibit P56B?
Q. That's what I was about to put to you. I'd suggest that
that was the case.
A. Could be.
Q. In order to ensure that the meeting of Magnacrete
shareholders, which was to be held on 9 March, was fully
informed, I also agreed that I would get Swiss Partners to
come along to the meeting and to make a statement to the
meeting about these matters, didn't I.
A. Yes.
Q. And again, the purpose of that, as per our discussions
on 8 March, was to ensure that the contingent liability in
respect of Vicksburg was taken into account and that the
meeting was fully informed of Swiss Partners' view about
that, do you agree.
A. Well, that seems logical but I can't recall that segment."
99. The answer was given by letter, written by this appellant which became exhibit P56B. It is:-
"Dear Sir Re: Vicksburg Pty Ltd I refer to your enquiry
yesterday concerning Magnacrete's transaction in relation to
Vicksburg Pty Ltd, and advise as follows:- Vicksburg is a
joint venture between Magnacrete and Baron Fund Managers
Limited (a wholly owned subsidiary of the publicly listed
merchant bank Baron House Limited). Magnacrete owns 45% of
the joint venture, Baron 45%, and Mr Steve Chapman, the
Managing Director of Baron House, 10%. The proposal for
this joint venture first arose in about October 1988, when
Mr Chapman, who is known to me, proposed a method for
utilising Magnacrete's surplus liquid funds. It was
recognised that Magnacrete had substantial monies on deposit
which would be available for some time, and that it would be
worthwhile to maximise the return to Magnacrete Shareholders
from the use of those funds. Consequently, Baron proposed a
separate joint venture to be wholly debt funded, but for
which Magnacrete would procure the availability of those
debt facilities. Baron and Mr Chapman have expertise in
the securities investment area. The proposal was that
Vicksburg would utilise the availability of funds and
combine it with expertise provided by Baron and Mr Chapman
to achieve returns superior to the investment of funds in
debt securities, which was the previous pattern for
Magnacrete investments. The business of Vicksburg was to be
the acquisition of securities or the provision of investment
financing. There is a shareholders agreement in place,
under which Magnacrete has the right to nominate one of
Vicksburg's two Directors, and any decision of the Vicksburg
Board requires unanimous approval. Thus Magnacrete has a
veto over the use of Vicksburg's funds. The proposal was
put to a meeting of Magnacrete's Board held on 3 February
1989, and the Directors unanimously approved the proposal.
Mr Douglas-Hill attended that meeting and voted in favour of
the resolutions. Dr T Hopwood was absent. The terms of the
approval given by Magnacrete's Board were that Magnacrete
would enter into the joint venture agreement on the terms
proposed, and would guarantee to the Commonwealth Trading
Bank Vicksburg's finance facility. I was authorised to be
Magnacrete's representative on the Vicksburg Board, and as
such I had authority to agree to Vicksburg entering into the
transactions. Magnacrete agreed with the Commonwealth Bank
to provide a guarantee and security arrangement to
facilitate the establishment of the Vicksburg facility for a
period of not less than 12 months. The amount of the
facility is $1.7m. As consideration for the creation of the
facility, Vicksburg paid to Magnacrete a guarantee fee of
$40,000.00. Under the joint venture agreement, Baron and Mr
Chapman have agreed that they will account for any fees,
commissions, rebates or other benefits which Baron or Mr
Chapman or any associate or affiliate of Baron or Mr Chapman
receives arising out of any Vicksburg transaction. It was a
term of the joint venture agreement that the Vicksburg
shareholding would be as set out above.
To date, Vicksburg has purchased no securities. However it
has drawn down the overdraft facility, and loaned $1.7m to
Baron. This occurred on about 6 or 7 February 1989. This
loan has been made at a rate of interest in excess of
Vicksburg costs of funds, and in addition Baron is obliged
to pay to Vicksburg further consideration for the provision
of that loan. Vicksburg considers the principal, interest
and additional fees are fully recoverable. When the funds
were drawn down, they were transferred at the direction of
Baron Fund Managers to a brokers account. It has been
publicly suggested that Magnacrete has loaned money to
Vicksburg. That is not the case. Magnacrete funds are
still on deposit with the Commonwealth Trading Bank. The
contingent liability which has thus arisen has been publicly
disclosed. I refer in particular to the Part A Statement
registered by Magnacrete in respect of Jeffcott Investments
Limited, which was lodged on the Exchange as public file on
1 March 1989. The liability was also referred to in the
Investigating Accounts Report which forms an annexure to the
part A statement, and thus is a document on a public file.
Magnacrete has never considered the nature of these
transactions to be material. They were simply concluded to
earn a greater return on the company's available liquid
funds. If you consider that a formal announcement is
required to put an end to ill informed speculation and
rumour, then I would be happy to settle the terms of an
announcement with you. Yours faithfully sgd Martin Byrnes
Chairman"
100. All in all, it is impossible to marry question and information as required by s564(4). Impossible that is from the point of view of proof beyond reasonable doubt of the offence charged.
101. As I have mentioned, it appears that the learned trial Judge did not consider and apply s564(4). That alone is enough, in my opinion, to vitiate the conviction on count 3.
102. But a consideration of that subsection against the evidence shows that the offence charged was not proved.
103. It must be remembered, too, that the offence requires proof of "knowledge". What "knowledge"? The answer is given by s564(1). It is - knowledge that information given had omitted matters specified which omission the defendant knew rendered the information misleading in a material respect. Knowledge of omission and of effect of omission. The appellant knew what he wrote. So he must have known what he omitted. But what of knowledge that this was misleading?
104. The learned trial Judge came to this conclusion:-
"I am satisfied that Byrnes must have known that each such
omission rendered the announcement misleading in a material
respect. I appreciate that Watts had approved of documents
which were the predecessor of the announcement, and did not
advise that there were any problems about such omissions.
The fact that Watts did not advise that the failure to
disclose these matters could constitute a breach of s564(1)
is not an answer to the charge, although it will be relevant
on penalty."
105. I cannot agree with this conclusion. The evidence generally and the lack of the definition of the question asked does not justify this conclusion.
106. In his submissions, written when he was not represented, the appellant, Byrnes, wrote:-
"60. The evidence concerning the involvement of Watts is
relevant here. The letter to the Stock Exchange which forms
the basis of this charge was based on a letter drafted by
Watts (exhibit DB10). The judge found that Watts had
approved of the predecessor letter (p104.2). Watts knew all
of the details, but did not advise that Vicksburg's interest
in the convertible notes should be disclosed (p78.8). He
had specifically been briefed by Byrnes to advise on what
should be said to the Stock Exchange.
This matter is not, as found by the judge, only relevant on
the question of penalty. It is submitted that these facts
indicate that Byrnes had no knowledge that the letter was
likely to lead into material error. Byrnes was of the view
that the document would not lead into error. If Watts was
apparently of the same view, the Court should infer that
Byrnes did not have the required knowledge. Whilst it is
acknowledged that intent to deceive is not necessary, the
distinction between that and knowing that the document is
likely to mislead in a material respect is a fine one. It
must require at least a recklessness as to deception. That
has not been established in this case."
107. I agree. The advice given by Watts is important as this appellant suggested in his own written submission.
108. In my opinion, "knowledge" was not proved. In any event, in my opinion, there exists on the evidence a reasonable possibility that this appellant believed in the state of affairs which, if true, would render him not guilty of count 3. That is, that he believed that the information given was adequate to answer the question and was not misleading.
109. For these brief reasons I would allow the appeal against the conviction on count 3. I would quash the conviction. I would substitute a verdict of acquittal.
JUDGE2 LEGOE J I agree.
JUDGE3 MOHR J I agree.
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