Vines v Australian Securities and Investments Commission
[2007] NSWCA 75
•4 April 2007
NEW SOUTH WALES COURT OF APPEAL
CITATION: Geoffrey William Vines v Australian Securities & Investments Commission [2007] NSWCA 75
This decision has been amended. Please see the end of the judgment for a list of the amendments.
FILE NUMBER(S):
40490/06
HEARING DATE(S): 10, 16 & 17 November 2006
JUDGMENT DATE: 4 April 2007
PARTIES:
Geoffrey William Vines (Appellant)
Australian Securities & Investments Commission (Respondent)
JUDGMENT OF: Spigelman CJ Santow JA Ipp JA
LOWER COURT JURISDICTION: Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S): 3138 of 2001
LOWER COURT JUDICIAL OFFICER: Austin J
LOWER COURT DATE OF DECISION: 22 August 2005
LOWER COURT MEDIUM NEUTRAL CITATION:
ASIC v Vines [2005] NSWSC 738
ASIC v Vines [2005] NSWSC 1349
ASIC v Vines [2006] NSWSC 760
COUNSEL:
B Oslington QC, Andrew Bell SC (Appellant)
S Robb QC, R Beech-Jones SC, E Collins (Respondent)
SOLICITORS:
Geoffrey Pike, Sparke Helmore (Appellant)
Georgina Hayden, ASIC (Respondent)
CATCHWORDS:
Corporations – Management and administration – Duties and liability of officers of corporation – Statutory Duty of Care and Diligence – Standard of care for contraventions under the statutory provisions equivalent to the civil standard – s232(4) Corporations Law
Corporations – Management and administration – Duties and liability of officers of corporation – Statutory Duty of Care and Diligence – The statutory duty set out in s232(4) Corporations Law is a duty owed to the corporation
Corporations – Management and administration – Duties and liability of officers of corporation – Procedural fairness is informed by the context of civil penalty proceedings
Corporations – Management and administration – Duties and liability of officers of corporation – s1317 & s1318 Corporations Act – Appellate intervention in discretionary judgments
Procedure – Judgments and orders – Effect of delay in delivering judgment.
LEGISLATION CITED:
Companies Act 1958 (Vic), s107
Companies (NSW) Code, ss229(1), 229(7)
Corporate Law Reform Act 1992
Corporations Law 1991, ss232(4), 232(11), 232(8), 670A, 1001A, 1317EA, 1317EB, 1317ED, 1317FA, 1317GF, 1317GH, 1317 JA, 1317 HB, 1317HD, 1317JA, 1318, 1324
Uniform Companies Act 1961, s124(1)
CASES CITED:
Adler v ASIC (2003) 46 ACSR 504
Akerele v The King [1943] AC 255
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1
Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419
AMP General Insurance Ltd v Victorian Workcover Authority [2006] VSCA 236
Andrews v DPP [1937] AC 576
Australian Securities Commission v Gallagher (1993) 11 WAR 105
ASIC v Adler (2002) 41 ACSR 72
ASIC v Maxwell (2006) 59 ACSR 373
ASIC v Vines [2003] NSWSC 1116
ASIC v Vines [2005] NSWSC 738
ASIC v Vines [2005] NSWSC 1349
ASIC v Vines [2006] NSWSC 760
AWA Limited v Daniels (t/a Deloitte Haskins & Sells) (1992) 7 ACSR 759
Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279
Blackburn v Allianz Australia Insurance Ltd (2004) 61 NSWLR 632
Briginshaw v Briginshaw (1938) 60 CLR 336
Browne v Dunn (1893) 6 R 67
Buller v Black (2003) 56 NSWLR 425
Byrne v Baker [1964] VR 443
Callaghan v The Queen (1952) 87 CLR 115
Clout v Hutchinson (1950) 51 SR (NSW) 32
Coal and Allied Operations Pty Ltd v AIRC (2000) 203 CLR 194
Dabholkar v The King [1948] AC 221
Daniels v Anderson (1995) 37 NSWLR 438
Dare v Pulham (1982) 148 CLR 658
Darvall v North Sydney Brick & Tile Co Ltd (1987) 16 NSWLR 212
Clout v Hutchison (1950) 51 SR (NSW) 32
Figliuzzi v Yonan [2005] NSWCA 290
Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134
Gould v The Mount Oxide Mines Limited (in liq) and Ors (1916) 22 CLR 490
GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Pty Ltd [2001] FCA 1761
Greek Herald Pty Ltd v Nikolopoulos (2002) 54 NSWLR 165
House v The King (1936) 55 CLR 499
Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666
Martin v Rowling [2005] QCA 128
Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580
Mernhard v Salmon 249 NY 458 (1928)
Monie v Commonwealth of Australia [2005] NSWCA 25
Murphy v Overton Investments Pty Ltd [2002] FCAFC 129
Neat Holdings Pty Limited v Karajan Holdings Pty Limited (1992) 67 ALJR 170
Norbis v Norbis (1986) 161 CLR 513
Palmer v Dolman [2005] NSWCA 361
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41
Provident International Corporation v International Leasing Corporation [1969] 1 NSWLR 424
R v Bateman (1925) 19 Crim App R 8
R v Birks (1990) 19 NSWLR 677
R v D [1984] 3 NSWLR 29
R v Maxwell (1998) 217 ALR 452
R v Minister for Immigration and Multicultural and Indigenous Affairs: Ex parte Lam (2003) 214 CLR 1
R v White (1951) 52 SR (NSW) 188
Re City Equitable Fire Insurance Co [1925] Ch 407
Re HIH Insurance Ltd (in prov. liq); ASIC v Adler (2002) 41 ACSR 72
Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051
Rich v Australian Securities & Investments Commission (2004) 220 CLR 129
Russo v Aiello (2003) 215 CLR 643
Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219
Sheahan v Verco [2001] SASC 91
Singer v Berghouse (1994) 181 CLR 207
Thomas v Van Den Yssel (1976) 14 SASR 205
Townsville City Council v Chief Executive, Department of Main Roads [2005] QCA 226
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Warren v Coombes (1979) 142 CLR 531
Water Board v Moustakas (1988) 180 CLR 491
Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559
Wyong Shire Council v Shirt (1980) 146 CLR 40
DECISION:
1 Appeal from the judgment of Austin J, being ASIC v Vines [2005] NSWSC 738, allowed in part
2 Declarations 6, 8, 9, 10 and 11 set aside
3 Appeal dismissed with respect to Declarations 1, 2, 3, 4, 5 and 7
4 Appeal from the judgment of Austin J, being ASIC v Vines [2005] NSWSC 1349, dismissed
5 Direct each party to file further submissions on the issue of penalty within three weeks of the date hereof
6 No order as to the costs of the appeal.
JUDGMENT:
- 298 -
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40490/06
SPIGELMAN CJ
SANTOW JA
IPP JAWednesday 4 April 2007
Geoffrey William VINES v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
In these proceedings ASIC alleged breaches of s232(4) of the Corporations Law by the Appellant. This section requires officers of the corporation to exercise care and diligence in the performance of their duties. The Appellant, a chartered accountant and former auditor, was the Chief Financial Officer of the GIO Group, but not a director, when a hostile takeover bid for GIO was launched by AMP Limited in 1998. The Appellant had general responsibility for the financial affairs of the GIO Group and undertook specific responsibilities with respect to GIO’s response to the takeover, co-ordinating the work of the Due Diligence Committee set up for this purpose.
The alleged contraventions related to the calculation of, and communication concerning, a profit forecast for the year 1998-1999, which included a profit forecast for the reinsurance division of GIO Insurance Ltd, GIO Re. GIO Re was exposed to significant claims as a result of Hurricane Georges, which struck North and Central America a month after the takeover bid was announced. Consideration of the impact of exposure to claims from Hurricane Georges on the profit forecast involved three elements: the magnitude of exposure; the possibility, ultimately not realised, of GIO Re obtaining a “retrocession policy” with another reinsurer effective to protect the profit forecast; and the reassessment of reserves maintained to provide for other risks to which GIO Re was exposed, which was achieved. This issue arose during the period in which GIO was preparing its Part B Statement in response to the AMP takeover bid.
The conduct of Mr Vines found by Austin J to have contravened the Corporations Law commenced on 9 November 1998 and continued up to, and after, the publication of the Part B Statement on 16 December 1998. At issue was the inclusion of an $80 million profit forecast for GIO Re in the GIO profit forecast at a time when, on ASIC’s case, the Appellant knew or ought to have known of facts that should have led him to advise it was improbable that the company would achieve that forecast.
Encompassed within the seven contraventions was:
A profit forecast of 9 November 1998;
A report and media release of 17 November 1998;
An email of 22 November 1998;
A management sign-off and draft Part B Statement of 8 December 1998;
Advice to the Due Diligence Committee of 8 December 1998;
Advice to the Auditor of 8 December 1998;
Conduct after 8 December 1998.
The Appellant sought relief from liability under s1317JA or s1318 of the Corporations Law.
Both the Appellant and ASIC appealed from the penalty imposed by Austin J.
HELD
A Standard of negligence(1) Per Spigelman CJ, Santow & Ipp JJA agreeing
The standard of care applicable to the statutory duty is of a generally similar character with respect to the identification of the standard of care as under the director’s or officer’s common law duty and does not call for a higher order of negligence to be established. The civil penalty regime does not attach serious consequences to a finding of contravention without an additional element of seriousness being established. [134], [142]-[143], [146], [150]-[151], [587], [779], [805]
Rich v Australian Securities & Investments Commission (2004) 220 CLR 129 considered.
Re City Equitable Fire Insurance Co [1925] Ch 407; Byrne v Baker [1964] VR 443; Vrisakis v Australian Securities Commission (1993) 9 WAR 395; Daniels v Anderson (1995) 37 NSWLR 438 explained.
Sheahan v Verco [2001] SASC 91; Australian Securities Commission v Gallagher (1993) 11 WAR 105; AWA Limited v Daniels (t/a Deloitte Haskins & Sells) (1992) 7 ACSR 759; R v Bateman (1925) 19 Crim App R 8; Andrews v DPP [1937] AC 576; Akerele v The King [1943] AC 255; Clout v Hutchinson (1950) 51 SR (NSW) 32; R v White (1951) 52 SR (NSW) 188; Callaghan v The Queen (1952) 87 CLR 115; Dabholkar v The King [1948] AC 221; R v D [1984] 3 NSWLR 29 referred to.
(2) Per Spigelman CJ, Ipp JA agreeing
The statutory duty set out in s232(4) of the Corporations Law is a duty owed to the corporation. It may be that further development of the law will identify a duty owed to creditors or shareholders or employees, but that does not arise in this case. [84]-[86], [805] S 232(4) is based on the common law duty. Other statutory duties are based on the fiduciary relationship of directors to the corporation. [85], [805]
GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Pty Ltd [2001] FCA 1761; Vrisakis v Australian Securities Commission (1993) 9 WAR 395; Daniels v Anderson (1995) 37 NSWLR 438; ASIC v Maxwell (2006) 59 ACSR 373 referred to.
Per Santow JA
The statutory duty set out in s232(4) of the Corporations Law while owed to the company must be accommodated to the overarching related duty to act honestly and in the interests of the company as a whole, meaning for the benefit of shareholders present and future. In so doing it provides a perspective to judge the conduct in question in the context of a hostile takeover where shareholders seek to be informed as to the choice they make whether or not to accept that takeover offer and do not want to be forced to sell on the cheap. [580], [603], [795viii]
(3) Per Ipp JA, Spigelman CJ and Santow JA agreeing
The duty of a director or officer cannot be defined without reference to the nature and extent of foreseeable risk of harm to the company as well as prospective benefit from the conduct in question. [310], [539], [600], [814]
B Denial of procedural fairness: findings outside of the pleaded case
(1) Per Spigelman CJ, Santow & Ipp JJA agreeing
The context of civil penalty proceedings, and the seriousness of the consequences of the orders sought, inform the content of the requirement of procedural fairness. Whether a denial of procedural fairness occurred if a finding of contravention departs from the pleaded case must be determined in the context of each contravention, subject to the fact, if it exists, that the parties have chosen to fight the case on a different basis: [55], [57], [59], [586], [805]
Gould v The Mount Oxide Mines Limited (in liq)and Ors (1916) 22 CLR 490; Dare v Pulham (1982) 148 CLR 658 applied.
Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279; Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666 considered.
Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559; Adler v ASIC (2003) 46 ACSR 504; Greek Herald Pty Ltd v Nikolopoulos (2002) 54 NSWLR 165; Water Board v Moustakas (1988) 180 CLR 491; R v Minister for Immigration and Multicultural and Indigenous Affairs: Ex parte Lam (2003) 214 CLR 1 referred to.
(2) There was no departure in the 12 October 2005 findings from the pleaded case, except with respect to the declarations relating to the sixth contravention. [240], [297], [301], [441], [449], [478]-[479], [485], [535], [586], [679], [706], [762], [773], [805]
C Denial of procedural fairness: failure to put matters during cross-examination
Per Spigelman CJ, Santow & Ipp JJA agreeing
Whether the rule in Browne v Dunn has been observed is a matter of fact and degree. It should be determined with respect to each particular contravention. However, a cross-examination which covered each possible contingency in the context of a number of uncertain variables was not only impractical, but would have been oppressive; [62], [409], [588], [805]. Also see [428].
R v Birks (1990) 19 NSWLR 677; Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219; Browne v Dunn (1893) 6 R 67; Thomas Van Den Yssel (1976) 14 SASR 205; Martin v Rowling [2005] QCA 128; Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134; Amalgamated Television Services Pty Ltd v Marsen [2002] NSWCA 419; Townsville City Council v Chief Executive, Department of Main Roads [2005] QCA 226 referred to.
D Effect of delay in delivery of contraventions judgment
Per Spigelman CJ, Santow & Ipp JJA agreeingThere was no substance in the contention that the findings of contravention were compromised by the delay in delivery of the contraventions judgment. The judgment was comprehensive and carefully reasoned: [26]-[27], [31], [588], [805]
Monie v Commonwealth of Australia [2005] NSWCA 25; R v Maxwell (1998) 217 ALR 452 distinguished.
E The relevance of Briginshaw
Per Ipp JA, Spigelman CJ agreeingA serious allegation may be proved by circumstantial evidence. [811], [539]
Briginshaw v Briginshaw (1938) 60 CLR 336 explained.
Neat Holdings Pty Limited v Karajan Holdings Pty Limited (1992) 67 ALJR 170; Palmer v Dolman [2005] NSWCA 361 referred to.
The Contraventions
(1) The First Contravention: 9 November Profit Forecast
Per Spigelman CJ, Santow & Ipp JJA agreeingThe Appellant did not contravene his statutory duty of care and diligence by making an unqualified statement of management confidence in the profit forecast for GIO Re to the board. [247]-[248], [670], [805]
(2) The Second Contravention: 17 November Report & Media Release
Per Spigelman CJ, Santow & Ipp JJA agreeing
Notwithstanding the fact that the purpose of the report and media release was to advise the market, the Appellant’s conduct did not contravene his statutory duty by failing to provide information about the basis on which the profit forecast was computed. [316]-[317], [679], [691], [805]
(3) The Third Contravention: 22 November Email
Per Spigelman CJ, Santow & Ipp JJA agreeingIt was not negligent for the Appellant to fail to include in his email the qualification, found to be necessary by Austin J, with respect to the assumptions on which the profit forecast was based. [359], [360], [366], [697], [700], [805]
(4) The Fourth Contravention: Management Sign Off of 8 December
Per Spigelman CJ, Ipp JA agreeing; Santow JA dissenting
The Appellant contravened his duty of care and diligence when he signed the Management Sign Off having failed to take positive steps to advise the Due Diligence Committee of the basis of the assumptions underlying the profit forecast. [451]-[453], [456], [458], [460], [711], [730], [733], [736], [750], [759], [794], [805], [874] The Appellant failed to take the positive steps which his role and responsibilities required be taken. [412] There was no need to identify an event indicating the estimates should be checked, but there were such matters. [446]-[449], [451]-[453]
Per Ipp JA, Spigelman CJ agreeing
There were warning signals that would have lead a reasonable person in the position of the Appellant to take steps to verify Mr Fox’s advice. [419], [452], [863], [866]
Per Santow JA
Absent grounds for suspicion the Appellant was entitled to continue to rely on Mr Fox’s estimate of the exposure to Hurricane Georges in accordance with the reporting relationship between them then in place and was not required to advise the Due Diligence Committee of the basis of the assumptions underlying the forecast when they were aware of them. [728]-[729], [734]
(5) The Fifth Contravention: Advice to Due Diligence Committee of 8 December
Per Spigelman CJ, Ipp JA agreeing; Santow JA dissentingThe Appellant contravened his duty of care and diligence when he supported the integrity of the GIO profit forecast to the Due Diligence Committee, for the reasons given with respect to Contravention 4. [481], [489]-[490], [763]-[764], [795], [805], [874]
(6) The Sixth Contravention: Advice to the Auditor of 8 December
Per Spigelman CJ; Santow and Ipp JJA agreeingThe findings of Austin J did depart from the pleading. The relevant test for a finding that the parties had deliberately chosen to fight the case on a different basis has not been met. ASIC abandoned its cross-appeal and no declaration in accordance with the pleading can be made. [506], [515], [768], [805]
Dare v Pulham (1982) 148 CLR 658; Gould v The Mount Oxide Mines Limited (in liq) and Ors (1916) 22 CLR 490 applied.
(7) The Seventh Contravention: Conduct After 8 December
Per Spigelman CJ, Ipp JA agreeing; Santow JA dissentingThe Appellant contravened his duty of care and diligence in the period after the Part B issued by failing to give attention to whether the GIO Re profit forecast would be achieved. [537]-[538], [774]-[775], [794], [805], [874]
The Honesty Defence
(1) Per Spigelman CJ, Ipp JA agreeing; Santow JA expressing no view
No basis was made out for interfering with the trial judge’s discretionary judgment. [556]-[557], [560], [805]
(2) Per Spigelman CJ, Ipp JA and Santow JA agreeing
The statute requires a value judgment, prior to the exercise of discretion, which may invoke a less restrictive test for appellate intervention. [572], [556], [558], [802], [805]
Warren v Coombes (1979) 142 CLR 531; House v The King (1936) 55 CLR 499 considered.
Norbis v Norbis (1986) 161 CLR 513; Singer v Berghouse (1994) 181 CLR 207; Coal and Allied Operations Pty Ltd v AIRC (2000) 203 CLR 194; Russo v Aiello (2003) 215 CLR 643; Buller v Black (2003) 56 NSWLR 425; Blackburn v Allianz Australia Insurance Ltd (2004) 61 NSWLR 632; Figliuzzi v Yonan [2005] NSWCA 290; Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41; Murphy v Overton Investments Pty Ltd [2002] FCAFC 129; AMP General Insurance Ltd v Victorian Workcover Authority [2006] VSCA 236 cited.
(3) Per Spigelman CJ, Ipp JA agreeing, and Santow JA dissenting
On the less restrictive test, given the seriousness of the contraventions, relief should not be granted. [561], [573], [802], [805]
(4) Per Santow JA
Relief should be granted given the nature of the contraventions as no more than errors of judgment, as not being flagrant, as involving no dishonesty on the Appellant’s part, and where only three out of seven contraventions were upheld on appeal so discounting the cumulative factor relied on by Austin J. [799]-[802]
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40490/06
SPIGELMAN CJ
SANTOW JA
IPP JAWednesday 4 April 2007
Geoffrey William VINES v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Judgment
TABLE OF CONTENTS
Paragraphs
SPIGELMAN CJ 1
I INTRODUCTION 2
II THE GROUNDS OF APPEAL
1 Overview 20
2 Delay 26
3 Departure from Pleaded Case 32
4 Failure to Cross-Examine 60
III STANDARD OF CARE 63
1 Austin J’s Analysis of the Standard of Care 66
2 Austin J’s Analysis of the Higher Standard
Submission 88
3 The Statutory Duty Case Law 98
4 Standard of Care in Crime 117
5 The Statutory Standard 128
6 The Statutory Regime 138
7 Conclusion on Standard of Care 142
IV PRE CONTRAVENTION EVENTS
1 The Appellant’s Role 153
2 The Development of the $80 million Forecast 168
3 The Extent of the Exposure to Hurricane
Georges 175
4 Retrocession Cover 204
5 Excess Reserves 217
V THE FIRST CONTRAVENTION: THE PROFIT FORECAST
OF 9 NOVEMBER 228
VI EVENTS BETWEEN 9 NOVEMBER AND 17 NOVEMBER
1 31 October Results 250
2 Draft Four Month Results 258
3 Hurricane Georges Register 260
4 Mr Vines’ Knowledge 265
5 The American Re Agreement 269
6 Due Diligence Documents 276
VII THE SECOND CONTRAVENTION: THE REPORT AND
MEDIA RELEASE 17 NOVEMBER 1998 280
VIII THE THIRD CONTRAVENTION: THE EMAIL OF
22 NOVEMBER 1998 319
IX DEVELOPMENTS BEFORE THE PART B
1 The Federal Court Judgment 368
2 The American Re Agreement 369
3 Maintaining the Profit Forecast 376
4 DDC Meeting of 6 December 383
5 Events of 7 December 387
X THE PART B CONTRAVENTIONS
1 The Part B Statement 396
2 The Position on 8 December 402
3 The Appellant’s Knowledge as at 8 December 414
XI THE FOURTH CONTRAVENTION: THE MANAGEMENT
SIGN OFF AND DRAFT PART B 421
XII THE FIFTH CONTRAVENTION: ADVICE TO THE DUE
DILIGENCE COMMITTEE 467
XIII THE SIXTH CONTRAVENTION: ADVICE TO THE
AUDITOR 492
XIV THE SEVENTH CONTRAVENTION: CONDUCT AFTER
8 DECEMBER 1998 517
XV REASONS OF IPP JA 539
XVI THE HONESTY DEFENCE 540
XVII PENALTY: APPEAL AND CROSS-APPEAL 575
XVIII ORDERS 577
SANTOW JA
XIX INTRODUCTION 579
XX THE STATUTORY DUTY OF CARE AND DILIGENCE
IN ITS BROAD APPLICATION 591
1Elaboration of the Role and Responsibilities of Mr Vines 620
2 Outline of Salient Events with Commentary 628
3 Summing Up 661
XXI THE CONTRAVENTIONS
1 The First Contravention: The profit forecast of
9 November 1998 663
2 The Second Contravention: The report and media
release of 17 November 1998 673
a Conclusion 691
3 The Third Contravention: The email of
22 November 1998. 692
4 The Fourth Contravention: The management
sign-off. 701
a Reliance by Mr Vines on Mr Fox 723
b Recapitulation 726
c Conclusion 760
5 The Fifth Contravention: Advice to the Due
Diligence Committee on 8 December 1998 761
6 The Sixth Contravention: Advice to the Auditor
8 December 1998 765
7 The Seventh Contravention: Conduct after 8
December 1998 769
8 The Contraventions as a whole – a Perspective 778
9 Summation 795
XXII OUGHT MR VINES FAIRLY TO BE EXCUSED? 796
XXIII OVERALL CONCLUSION 804
IPP JA
XXIV THE ISSUE ADDRESSED IN THESE REASONS 805
XXV THE RELEVANCE OF BRIGINSHAW 808
XXVI THE POTENTIAL HARM TO GIO ARISING FROM
MISLEADING PROFIT FORECASTS AND ITS
RELEVANCE TO MR VINES’ DUTY 814
XXVII HOW THE PROFIT FORECAST IN THE PART B
STATEMENT WAS ARRIVED AT 824XXVIII MR VINES’ RESPONSIBILITY FOR THE PROFIT
FORECAST 835
XXIX FACTS KNOWN BY MR VINES RELATING TO THE
ACCURACY OF THE PROFIT FORECAST 839XXX WARNING SIGNALS 863
XXXI CONCLUSION 875
SPIGELMAN CJ:
I INTRODUCTION
The Appellant appeals from the judgment of Justice Austin in which he was found to have contravened s232(4) of the Corporations Law, as preserved in force by subsequent legislation, in proceedings for a civil penalty instituted by the Respondent (“ASIC”).
Section 232(4) provided:
“In the exercise of his or her powers and the discharge of his or her duties, an officer of the corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances.”
His Honour rejected the case of the Respondent in a number of respects. In the respects in which his Honour upheld that case and made findings of contravention, the Appellant appeals.
It is convenient to refer to his Honour’s first judgment as the Contraventions Judgment (ASIC v Vines [2005] NSWSC 738; 55 ACSR 617).
This judgment also dealt with contraventions by two other officers of the same corporation, which proceedings were heard together with the proceedings against the Appellant.
The Appellant sought relief from liability under s1317JA or s1318 of the Corporations Law. Those sections provide, relevantly:
“1317JA(2) Where, in eligible proceedings against a person, it appears to the court that the person has, or may have, contravened civil penalty provisions but that:
(a) the person has acted honestly; and
(b) having regard to all the circumstances of the case (including, where applicable those connected with the person’s appointment as an officer of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.”
“1318(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.”
His Honour rejected these defences in a second judgment. (ASIC v Vines [2005] NSWSC 1349; 65 NSWLR 281.) The Appellant appeals from this decision. It is convenient to refer to this as the Honesty Judgment.
Save with respect to this aspect of the appeal, the Honesty Judgement is not directly relevant to other grounds of appeal. However, the Respondent often referred to it as a useful summary of the Contraventions Judgment and did so without objection. Furthermore, the Appellant expressly relied on it, again without objection, to elaborate on findings in the Contraventions Judgment. Some limited reference to the Honesty Judgment on the principal appeal is, in these circumstances, appropriate.
In a third judgment his Honour considered penalty. His Honour made eleven declarations of contravention. He imposed a fine of $100,000 and disqualified Mr Vines from acting as a director for three years. (ASIC v Vines [2006] NSWSC 760; 58 ACSR 298.) It is convenient to refer to this as the Penalty Judgment. The Appellant appeals from the penalties imposed upon him.
Mr Vines was the Chief Financial Officer of GIO Australia Holdings Ltd (“GIO”), a company listed on the Australian Stock Exchange and engaged in insurance. On 25 August 1998, a takeover bid for the shares in GIO was announced by another insurance company, AMP Limited. This was a hostile takeover bid and was resisted by the board of GIO.
As required by the Corporations Law, GIO in due course published its Part B Statement on 16 December 1998. That Part B Statement contained a profit forecast for the year 1998-1999 of A$250 million for the GIO Group. The amount included a forecast profit of A$80 million for GIO Re, the reinsurance division of GIO Insurance Ltd, a subsidiary of GIO.
As can readily be appreciated, the profit forecast was of considerable significance in the context of a hostile takeover battle. The Part B Statement was accompanied by a number of documents which are pertinent to specific contraventions. I will refer to those documents in the context of dealing with each contravention.
These proceedings focused on the validity of the $80 million profit forecast for GIO Re. That division was exposed to significant claims as a result of Hurricane Georges which struck Puerto Rico and the United States Virgin Islands, moved into the Gulf of Mexico and made land fall in Mississippi in the period from 21 to 28 September 1998. This was about a month after the takeover bid had been announced and occurred during the period in which GIO was preparing its Part B Statement.
The conduct found to have contravened the Corporations Law on the part of Mr Vines commenced on 9 November 1998 and continued up to and, indeed, after the publication of the Part B Statement on 16 December 1998. The principal issue with respect to each of the alleged contraventions was whether Mr Vines contravened the statutory duty of care and diligence in or in connection with the profit forecast for GIO, by reason of the impact of Hurricane Georges on GIO Re, having appropriate regard to other matters relating to the making of the profit forecast for the GIO Group.
There were, relevantly, three elements which were under consideration for the purposes of determining the profit forecast for GIO Re. Each of these elements varied from time to time.
The first element was the magnitude of the exposure to Hurricane Georges. The hurricane had occurred but the final size of the claims to which GIO Re’s policy would have to respond could only be estimated.
The second element was the possibility of GIO Re obtaining a policy with another reinsurer, known as a “retrocession policy”, which would enable it to assert, relevantly for accounting purposes, that it had transferred the risk of its exposure to Hurricane Georges exceeding the amount of A$25 million that had been taken into account in the computation of the $80 million GIO Re profit forecast.
The third element was a reassessment of the reserves made by way of provision for other risks to which GIO Re was exposed. The reserves for GIO Re’s exposure to professional negligence insurance is referred to as MIPI. The argot of insurers used the terminology of an “unders and overs” analysis by which extant reserves would be assessed, some of which made inadequate provision (“unders”) while others made excessive provision (“overs”). MIPI was accepted to have been one of the “overs” for which an adjustment needed to be made.
II THE GROUNDS OF APPEAL
1 Overview
The further Amended Notice of Appeal contains 34 separate grounds. I will deal with these grounds under a series of headings and subheadings to encompass the following matters:
(i) Failure to adopt a higher standard of negligence.
(ii)Denial of procedural fairness by the making of findings outside of the pleaded case.
(iii)Denial of procedural fairness by the failure to put matters to the Appellant by way of cross-examination.
(iv)The effects of delay in delivery of the Contraventions Judgment.
(v)The failure to deal with the full range of submissions made on behalf of the Appellant.
(vi)Challenges to findings of fact including assertions that the findings were not supported by the evidence, that findings were not made on constituent elements and the implications of the rejection of constituent elements, together with specific error in a finding in the judgment at [916].
Challenges to each finding of contravention which I will consider under the following subheadings (the contraventions being dealt with in their order chronologically rather than as numbered in the pleadings):
The Profit Forecast of 9 November 1998. (The First Contravention)
The Report and Media Release of 17 November 1998. (The Second Contravention)
The Email of 22 November 1998. (The Third Contravention)
The Management Sign-Off and Draft Part B of 8 December 1998. (The Fourth Contravention)
Advice to the Due Diligence Committee of 8 December 1988. (The Fifth Contravention)
Advice to the Auditor of 8 December 1998. (The Sixth Contravention)
Conduct after 8 December 1998. (The Seventh Contravention)
As noted above, a number of the contraventions found by his Honour occurred on 8 December 1998, being the date on which the contents of the Part B Statement were finalised. The sting in each of the contraventions found by Austin J concerned the fact that statements were made on the basis of an $80 million profit forecast for GIO Re at a time when the Appellant knew or ought to have known of facts that should have led him to advise it was improbable that the company would achieve that forecast.
There was, in substance, a single course of conduct on 8 December constituted by a series of discreet acts which I will consider, as noted above, in the following sequence:
(a)Execution by the Appellant of a document headed “Management Sign-Off” for purposes of inclusion in the Part B Statement.
(b)Advice to the Due Diligence Committee of the Board (the “DDC”) for purposes of Board approval of the Part B Statement.
(c)Advice to Price Waterhouse Coopers Securities (“PwC”) for the purposes of that company’s report to be included in the Part B Statement.
Each of the matters set out as (v), (vi) and (vii) in par [20] above – failure to deal with submissions, challenges to findings of fact and to each finding of contravention – are best considered in the context of each contravention. I will set out his Honour’s factual findings which determine the overall context and the findings of fact up to the time of the first contravention. Thereafter I will consider each contravention chronologically, under the subheadings I have indicated, with sections indicating developments between contraventions.
With respect to the assertion that certain submissions were not dealt with, I note his Honour’s express observation at the outset of his judgment:
“Although the judgment is long, I have not set out and expressly dealt with every written and oral submission (cf Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58, at [282]-[291]). I have done my best to consider every submission, but I have confined my express reasons for judgment to the findings of fact and submissions that I regard as material, in the sense of being significant to "the decision-making process": see Customs and Excise Commissioners v A [2003] 2 All ER 736, at 753-4; and Digi-Tech at [284].”
His Honour’s approach was entirely appropriate. No submission was made that it was not. Nor that the authorities to which his Honour referred were inapplicable.
2 Delay
The Appellant relies on the fact that some 16 months elapsed between the conclusion of oral submissions and the delivery of the Contraventions Judgment. Reliance was placed on the principles applied in R v Maxwell (1998) 217 ALR 452 and Monie v Commonwealth of Australia [2005] NSWCA 25; 63 NSWLR 729. I observe, first, that the careful detailed and comprehensive judgment of Austin J under appeal in this case does not suggest even a glimmer of a comparison with either of the judgments dealt with in Maxwell and Monie. Indeed, throughout the Appellant’s submissions frequent reference is made to the care and cogency of his Honour’s analysis and reasoning, whenever it suits the Appellant’s case.
In the event the Appellant was reduced to submitting that, whilst his Honour’s careful and detailed analysis of the facts was “full and closely reasoned”, this Court should hold that the ultimate findings of contravention should be regarded in a different way.
During the course of this submission the Appellant relied on a document produced by Austin J after the Contraventions Judgment was handed down, setting out 147 corrections to the original judgment. Almost all of these corrections were typographical and I can see no basis for drawing any kind of adverse inference from their number, in the context of a judgment of this size and complexity. The 147 corrections upon which the Appellant relied in his written submissions included a significant number of omitted commas and trifling spelling errors, missing letters or numbers in the typescript and occasionally inappropriate capitalisation. Even so, the number of 147 corrections was, as the Respondent submitted, something like 0.08 percent of the number of words in the Contraventions Judgment.
These proceedings involved three interrelated cases against three different individuals. The reasons in the case of Mr Vines were only one part of this judgment. There were 56 days of hearing, 4,740 pages of transcript, around 3,000 pages in the original tender bundle and over 800 pages of written submissions. The final judgment itself consists of 1,495 paragraphs over 292 pages. A lengthy delay was to be expected in a case of this magnitude. That was not the case in either Maxwell or Monie.
In the event, in submissions in reply the Appellant advanced a limited number of propositions, abandoning a number of matters that it had emphasised in its original written submissions. It first said that this was a case that required “greater scrutiny” than other judgments that come on appeal. This Court has given the appeal appropriate scrutiny. It was also submitted that the Court should not “readily assume” that the trial judge took into account evidence and submissions not expressly referred to in the judgments. This Court is not in the habit of “readily assuming” anything of the character. The Appellant’s submissions to the effect that his Honour failed to deal with certain submissions or made inappropriate factual findings, or failed to make appropriate factual findings will be dealt with on their merits in the context of the respective contraventions that his Honour ultimately found.
The length of time that elapsed before delivery of the final judgment was much longer than anyone would have wished. However, the case involved a considerable level of complexity with numerous factual issues needing to be decided in the three separate proceedings that had been heard together. Furthermore, this Court is not in a position to allow a trial judge to concentrate on a single case to the exclusion of other cases. Austin J would have been interrupted frequently in the course of preparing judgment in this matter. In the event, his Honour has prepared a judgment which deals comprehensively with the full range of issues in a sensitive, detailed and thorough manner. The reliance placed on the delay and on the list of typographical errors by the Appellant is entirely unwarranted.
3 Departure from Pleaded Case
The Appellant submits that none of the trial judge’s findings of contravention fall within the pleaded case. The Appellant submits that each finding of contravention was materially, substantially and prejudicially outside the pleading. The Appellant submits that in each case the departure from the pleadings was such as to constitute a denial of procedural fairness. He further submits that the gravity of the consequences that attend civil penalty proceedings is such that the significance of any departure from the pleaded case is magnified.
The Respondent asserts that his Honour’s findings of contravention did not depart from each charge as pleaded. It acknowledges that, as the trial developed, certain further particulars of conduct emerged which were within the scope of the pleading properly understood. These particulars became the subject of findings by Austin J, but only after the Appellant had had a full opportunity to deal with them.
Accordingly, ASIC submits that insofar as these particulars were either within the scope of the pleading, or constituted particulars of matters that were not the subject of any pleading, there was no denial of procedural fairness. As will appear below, each charge as pleaded took the form of identifying an act together with, generally, particulars of Mr Vines’ state of knowledge. As will appear, some of the matters of which complaint is made are not particulars of knowledge and, therefore, are not a departure from the pleaded case. Even if, as appears to be the case, no particulars of such matters were sought or received, an issue of procedural fairness could still arise. It will be necessary to assess whether there was a denial of procedural fairness in any respect.
The Appellant relied particularly on the following passages from the judgment in Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279.
In the joint judgment of Mason CJ and Gaudron J, their Honour’s said at 286:
“The function of pleadings is to state with sufficient clarity the case that must be met: Gould and Birbeck and Bacon v Mount Oxide Mines Ltd in liq) (1916) 22 CLR 490 at p517, per Isaacs and Rich JJ. In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party’s right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities. See, e.g. Browne v Dunn (1893) 6 R at p76; Mount Oxide Mines (1916) 22 CLR 490 at pp517-518.”
Furthermore, Brennan J said at 288:
“When the pleadings bring the parties to the issue, the court’s function is to determine that issue and to grant relief founded on the pleadings unless the parties are allowed to alter the issues at the trial without amendment of the pleadings (as to which, see the observations in London Passenger Transport Board v Moscrop [1942] AC 332 at pp340, 347, 351, 356. The rule is clearly laid down in the judgment of this Court in Dare v Pulham (1982) 148 CLR 658 at p664:
‘Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings (Gould and Birbeck and Bacon supra at pp517, 518; Sri Mahant Govind Rao v Sita Ram Kesho (1898) LR 25 Ind App 195 at p207).’ “
The Appellant also relied on the observations of this Court in Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559 at 603 where the Court said:
“[164] In our opinion, a finding of breach of s.232(2) was not open on the way the case was put by the respondent. This was a charge of serious misconduct, and as such had to be formulated with precision. Neither of the two possibilities we have raised was canvassed in the case, either in the pleadings or during the twelve-day hearing before the primary judge. Even now, they have not been advanced by the respondent, either in a Notice of Contention or in any other appropriate way. In relation to them, natural justice has not been afforded to the appellant. It would not in those circumstances be right for this Court to consider and rule upon some new basis which it has itself formulated, such as these two possibilities.
[165] In those circumstances, our conclusion must be that, even if the appellant had been found to have deliberately failed to sign the poll paper, this could not, on the way the case was pleaded and conducted, have been found to be a breach of s.232(2). Accordingly, we do not think it would be appropriate to order a new trial on this issue.”
In response to these submissions, the Respondent referred to the observations of Giles JA, with whom Mason P and Beazley JA agreed, in Adler v ASIC (2003) 46 ACSR 504, where his Honour said, after referring to Banque Commerciale v Akhil Holdings, with respect to the function of pleadings:
“[139] But their function as a foundation for procedural fairness means that whether matters were within or outside ASIC’s pleaded case must have regard to the pleading as a whole and should not be approached with undue pedantry.”
Giles JA went on to repeat the observations of Mason P in Greek Herald Pty Ltd v Nikolopoulos (2002) 54 NSWLR 165, with respect to a pleading of defamatory imputations, where his Honour said at [18]:
“The pleader’s task is to capture the essence of the specific matters imputed in relation to the plaintiff. Necessarily there will be questions of degree and ‘if a problem arises, the solution will usually be found in considerations of practical justice rather than philology’ (per Gleeson CJ in Drummoyne Municipal Council v Australian Broadcasting Corporation (1990) 21 NSWLR 135 at 137). In this as in other areas, pleadings serve the ends of justice; they must not be permitted to assume an independent self-referential function. The pleaded imputation remains ‘the statement which, as the plaintiff alleges, the publication gives the reader or viewer to understand’ (per Mahoney JA in Singleton v Ffrench (1986) 5 NSWLR 425 at 428). It is not a straitjacket, although the rules of procedural fairness place limits upon judge and jury’s capacity to enlarge the issues.”
In Adler v ASIC Giles JA noted at [140] that “particulars serve the same function, but for a further reason are not a straitjacket”. His Honour went on to refer to Dare v Pulham (1982) 148 CLR 658, to which I will further refer below. Giles JA concluded:
“[141] The underlying regard to procedural fairness is material to whether it should be concluded that a pleaded and particularised case, fleshed out by evidence, was not open to a party.”
It was recognised in the two judgments from Banque Commerciale v Akhil Holdings that I have quoted above, that there was an exception to what was described as a general rule that the case is confined by the pleadings. That exception was characterised as one where the parties have “deliberately chosen some different basis” for the determination of the issues. The two High Court authorities referred to for this proposition are Gould v The Mount Oxide Mines Limited (in liq)and Ors (1916) 22 CLR 490 and Dare v Pulham supra. As the Respondent relies on this proposition it is pertinent to set out the reasons of the High Court in these two cases.
In Mount Oxide Mines supra at 517-518 Isaacs and Rich JJ said:
“Undoubtedly, as a general rule of fair play, and one resting on the fundamental principle that no man ought to be put to loss without having a proper opportunity of meeting the case against him, pleading should state with sufficient clearness the case of the party whose averments they are. That is their function. Their function is discharged when the case is presented with reasonable clearness. Any want of clearness can be cured by amendment or particulars. But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out it is impossible for either of them to hark back to the pleadings and treat them as governing the area of context … There are qualifications, no doubt, and each case must depend for the proper application of the principle upon its own facts. It has been laid down by the Privy Council that ‘as a rule relief not founded on the pleadings should not be granted’. ‘But in this case’ (said their Lordships) ‘the substantial matters which constitute the title of all the parties are touched, though obscurely, in the issues; they have been fully put in evidence, and they have formed the main subject of discussion and decision in all three courts. The High Court are right in treating the cases as not within the rule. [Srimahant Govind Rao Sita Ram Kesho 25 Ind App 195 at 207.]”
In Dare v Pulham supra the joint judgment of the High Court said at 664:
“Pleadings and particulars have a number of functions: they furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it (Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In liq) (1916) 22 CLR 490 at p517); they define the issues for decision in the litigation and thereby enable the relevance and admissibility of evidence to be determined at the trial (Miller v Cameron (1936) 54 CLR 572 at pp576-577); and they give a defendant an understanding of a plaintiff’s claim in aid of the defendant’s right to make a payment into court. Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings (Gould and Birbeck and Bacon at p517, 518); Sri Mahant Govind Rao v Sita Ram Kesho (1898) LR 25 Ind App 195 at p297). But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed (Mummery v Irvings Pty Ltd (1956) 96 CLR 99 at pp111, 112, 127), though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence (Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437 at p446; 50 ALJR 666 at p668).”
The last mentioned authority in this extract is Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666 and the reference was to the judgment of Stephen, Mason and Jacobs JA, who said at 668:
“The pleadings should have been amended in order to make the facts alleged and the particulars of negligence precisely conform to the evidence which had emerged … Now and for many years past, a plaintiff does not fail while being refused leave to amend or through failure formally to apply for amendment, where the evidence had disclosed a case in the cause of action fit to be determined by the tribunal of fact.”
Their Honours went on to contrast a situation at 668-669:
“ … Where amendment would not raise a fresh issue based on a different duty of care but would only amend the expression of the course of events so that the facts pleaded would conform with the evidence given.”
It is, of course, of significance that these observations were made in the context of proceedings in negligence for damages.
ASIC submits that the Appellant’s submissions were based on an over simplified version of the way in which the trial was conducted. It submits that a simple comparison between the Statement of Claim and the reasons for judgment was not appropriate and that what was required, in order to determine whether “the trial judge correctly addressed the issues which were contested before him”, was a detailed consideration of the Statement of Claim and certain other matters.
The ASIC submissions referred to the expert witness called by ASIC, Mr Hogendijk, giving particular attention to the nature of the objections which the Appellant made to the admissibility of Mr Hogendijk’s evidence and to the detailed cross-examination of Mr Hogendijk, together with the evidence in chief given by the Appellant and his cross-examination. ASIC placed particular reliance on the fact that the Appellant did not object to those parts of Mr Hogendijk’s evidence at issue in the appeal on the basis that any of them fell outside the pleaded case. There were objections, including objections as to relevance, but no objection on the basis that they were outside the pleaded case. This submission appears to be correct. Particular attention was drawn to the detailed cross-examination by counsel for the Appellant about each of the matters said to constitute the conduct about which there was a finding of contravention.
ASIC also drew attention to the fact that, with two exceptions which it submits are not material, no submission was made in written or oral submissions before Austin J to the effect that ASIC’s submissions with respect to the contraventions were not permissible on the ground that any one of them was outside the pleaded case.
ASIC further submitted to this Court:
“The Appellant has adopted an unduly technical approach to the function of pleadings and circumstances where the contraventions were squarely raised at trial.”
In many respects his Honour accepted the evidence given by the Appellant and, for that reason, made findings adverse to the ASIC case which had been set out in the pleadings and particulars provided by ASIC in the absence of knowledge of the case to be mounted by way of defence. A specific example was the use by the Appellant of his own “Unders and Overs” schedule, to which I will refer below, which played a significant role in the evidence in a number of respects. There can be no basis, ASIC submits, for a conclusion that the Appellant has been denied procedural fairness in circumstances where he has been given a full opportunity to be heard.
In conclusion, ASIC’s submission to this Court was:
“While the specific findings of contravention made by the trial judge are not always formulated in terms identical to ASIC’s pleaded contraventions, they capture the substance of, and are not inconsistent with, the specific matters pleaded and reflect the evidence at trial.”
Nevertheless, it is of significance that at no stage of the case, including after the evidence given by Mr Vines in his own case, did ASIC seek to amend its pleadings or particulars. This may have been advisable in a context where, given the fact that Mr Vines was not obliged to disclose his case or any evidence before the close of the ASIC case, that case could have been modified, consistently with the requirements of procedural fairness, after it closed. Indeed, even an indictment can be amended during the trial. (See s21 of the Criminal Procedure Act 1986.)
However, primarily with reference to the evidence of Mr Hogendijk, ASIC relied upon the following observations in Water Board v Moustakas (1988) 180 CLR 491 at 495:
“In deciding whether or not a point was raised at trial no narrow or technical view should be taken. Ordinarily the pleadings will be of assistance for it is one of their functions to define the issues so that each party knows the case which he is to meet. In cases where the breach of a duty of care is alleged, the particulars should mark out the area of dispute. The particulars may not be decisive if the evidence has been allowed to travel beyond them, although where this happens and fresh issues are raised, the particulars should be amended to reflect the actual conduct of the proceedings. Nevertheless, failure to amend will not necessarily preclude a verdict upon the facts as they have emerged. (See Dare v Pulham (1982) 148 CLR 658) In Leotta v Public Transport Commission (NSW) (1976) 50 ALJR 666 at p668; 9 ALR 437 at p446), a case having been submitted to the jury which was factually different from that alleged in the pleadings and particulars, Stephen, Mason and Jacobs JJ observed that the pleadings should have been amended in order to make the facts alleged and the particulars of negligence precisely conform to the evidence. The failure to apply for the amendment in that case was held not to be fatal. But in Malone v Commissioner for Railways (NSW) (1978) 53 ALJR 291 at p294; 18 ALR 147 at pp151-152), Jacobs J, with whom the other members of the Court agreed, pointed out that the conclusion in Leotta was reached only upon the presupposition that the new issue or new way of particularizing the existing issue had emerged at the trial and had been litigated.
It is necessary to look to the actual conduct of the proceedings to see whether a point was or was not taken at trial, especially where a particular is equivocal.”
In the present case, this matter must be assessed in the context of civil penalty proceedings. The seriousness of the consequences that may arise in such a case is greater than in a civil action for damages. Accordingly, the necessity to formally amend is significantly higher than would otherwise be the case. Particulars which are, to use the terminology of Moustakas “equivocal” or, to use the terminology of Mr S Robb SC, who appeared for ASIC, which have a “penumbra of uncertainty”, will not readily be understood in their broadest sense. Nevertheless, the issue is one of procedural fairness and the course of the trial may determine that there has been no failure in that regard.
It will be necessary below to consider the alleged departure from pleadings in the context of some of the contraventions which his Honour found. If necessary at all, the role of Mr Hogendijk’s evidence may need to be considered. The Respondent contends that in no respect did the Appellant object to the evidence of Mr Hogendijk as falling outside the pleaded case, indeed, that there was extensive cross-examination with respect to the very matters that were found to have constituted the contraventions. Furthermore, both ASIC and the Appellant addressed Mr Hogendijk’s evidence in submissions.
If necessary at all, each contravention will have to be addressed separately with a view to determining whether, in any respect in which there is found to be a departure between the pleadings and the finding of contravention, the test that the parties have chosen to fight the case on a different basis has been met. (The relevant test being that as set out in Mount Oxide Mines and Dare v Pulham, quoted above.)
It may also be necessary to assess the significance of any departure from the pleadings in view of the express statutory requirement in s1317EA(2), set out above, that any declaration of contravention must identify “a specified act or omission” which constitutes the contravention.
The Appellant’s submissions rely on the application, in the circumstances of the proceedings, of the requirement of procedural fairness. The seriousness of the consequences of the orders sought and, in the event, visited upon the Appellant, must inform the content of that requirement. Nevertheless, as is well established, procedural fairness does not involve a fixed body of rules to be applied in a formulaic manner. As Gleeson CJ said in R v Minister for Immigration and Multicultural and Indigenous Affairs: Ex parte Lam (2003) 214 CLR 1 at [37]:
“Fairness is not an abstract concept. It is essentially practical. Whether one talks of procedural fairness or natural justice, the concern of the law is to avoid practical injustice.”
4 Failure to Cross-Examine
The test of “practical injustice” also reflects Chief Justice Gleeson’s analysis of the “rule” in Browne v Dunn in R v Birks (1990) 19 NSWLR 677 at 688:
“It is plain that their Lordships, whilst recognising and affirming a rule of practice in the terms in which they expressed themselves, also recognised the need for flexibility in its application. That need arises from the very nature of the subject matter which it concerns. The central purpose of the rule is to secure fairness in the conduct of adversary proceedings. That consideration provides the best guide, both to the practical requirements of the rule in a given case, and to the consequences which may properly flow from its non-observance, including the remedies that are available to deal with a problem so created.”
See also Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 at 235-237.
There is no unfairness where the relevant witness has had notice before giving evidence of the matter in issue, e.g. of an “intention to impeach the credibility of the story he is telling” (Browne v Dunn (1893) 6 R 67 at 71), as in personal injury cases where damage is always in issue (Thomas Van Den Yssel (1976) 14 SASR 205 at 207-208; Martin v Rowling [2005] QCA 128 at [4]); or where notice has been given of reliance on certain matters; (Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 16; Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 at 148) e.g. where material was already in evidence and a witness “could have dealt with it but chose not to” (Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 at [438]) or where it was clear from one expert’s report that the methodology and opinion of another expert was contested (Townsville City Council v Chief Executive, Department of Main Roads [2005] QCA 226; [2006] 1 Qd R 77 at [51]-[52]).
The Appellant relied on the “rule” in Browne v Dunn supra as a rule of procedural fairness requiring that the “central propositions in a particular party’s case and/or matters central to critical facts found” be put to a witness or party. This matter arises in the context of specific findings and it is appropriate to consider this ground where it is raised with respect to particular contraventions. Matters of fact and degree necessarily arise with respect to the application of this principle. No submission was made to the effect that the rule in Browne v Dunn, as an application of procedural fairness, was not applicable. Whether the rule was not observed has to be determined with respect to each particular contravention.
III STANDARD OF CARE
The Appellant repeated in this Court the submission made before Austin J that the degree of negligence that must be established to constitute a contravention of s232(4) is higher than that which would support a claim of negligence at common law. The Appellant directed attention to the consequences of a finding of a breach of the statutory provision which include a declaration of contravention, penalties in the form of monetary fines, disqualification from office and compensation orders. These consequences are wider than the damages that could be awarded in a claim of negligence at common law. The Appellant submits that in this statutory scheme the failure to act with care and diligence must be “gross enough to become a matter of public concern, to interest the State by reason of its gravity”.
In support of this submission the Appellant relied on the case law for criminal offences which can be committed by negligent conduct, where a higher standard of care had been adopted. I will discuss these cases below. The Appellant relied, by way of analogy, on the general approach to the legislative scheme here under consideration adopted by the High Court in Rich v Australian Securities & Investments Commission (2004) 220 CLR 129.
His Honour rejected this submission after a consideration of the cases relied upon by the Appellant. The Respondent submits that his Honour was correct for the reasons he gave.
1 Austin J’s Analysis of the Standard of Care
When Austin J considered the Appellant’s submission on the standard of care in the Contraventions Judgment, his Honour expressly referred to and adopted his own earlier analysis in the course of a ruling on the admissibility of expert evidence with respect to the conduct of a competent chief financial officer of a corporation. (See ASIC v Vines [2003] NSWSC 1116; 48 ACSR 322). I will refer to this as the Expert Evidence Judgment. In that judgment his Honour indicated that his ruling on evidence would not preclude further submissions on the matter but, having heard such submissions, his Honour remained of the view that he had expressed in the ruling on evidence. In substance, his Honour incorporated the Expert Evidence Judgment into the Contraventions Judgment.
Both in the Expert Evidence Judgment and in the Contraventions Judgment his Honour gave particular attention to the question of whether s232(4) of the Corporations Law adopted an objective standard of care and found that it did. The Appellant does not question this aspect of the reasoning. His Honour also held that the words “in a like position” in s232(4) incorporate both the designated executive office held by each defendant (in Mr Vines’ case the post of Chief Financial Officer) and any additional responsibilities relevantly, in Mr Vines’ case, the particular responsibilities he acquired after the announcement of the AMP takeover bid, especially with respect to the formulation of the Part B Statement. (See at [1062].) The Appellant does not challenge this aspect of his Honour’s analysis.
His Honour commences his consideration of the issue of standard of care in the following way:
“[1070] Given the language of s 232(4) and the case law interpreting it (especially the recognition in Daniels v Anderson that the statutory formula includes a standard of skill), it seems to me that the general law of torts may now be called in aid as a source of guiding principles for the content of the statutory standard of care of company directors and officers. The statutory standard should not be treated as an idiosyncratic and isolated phenomenon, at any rate so far as the content of the duty is concerned. It seems to me that this is so whether the general law duty of care of company directors and officers is an equitable duty arising out of a fiduciary relationship, or now part of the general law of torts; and if it is equitable, whether it is the equitable standard that is adopted by the statute. Ascertaining whether the statutory standard adopts the substance of an equitable duty may be a matter of significance where the issue is (say) measure of compensation or causation, but that matter does not appear to be significant where the issue is the content of the standard of care. It is therefore of assistance to look to the general law of torts.” [Emphasis added]
His Honour referred to the well-known passage in the judgment of Mason J in Wyong Shire Council v Shirt (1980) 146 CLR 40 at 47 identifying the significance of an assessment, when determining what reasonable care required in particular circumstances, of both the magnitude of the relevant risk and the degree of probability of its occurrence.
In this, as in many other respects, the structure of proceedings for contravention of the statutory duty of skill and diligence differs from that which is usually to be found in a case based on negligence at common law. The proceedings do not have the benefit of the particular focus occasioned by having a specific plaintiff before the Court who suffered damage in specific circumstances.
With respect to the issue of “magnitude of risk” his Honour referred to a formulation of Dixon J in Mercer v Commissioner for Road Transport and Tramways (NSW) (1936) 56 CLR 580 at 601 when his Honour said:
“In considering the extent and nature of the measures that due care demands, the first question must be the gravity, frequency and imminence of the danger to be provided against.”
Austin J went on to say:
“[1074] In the present case the danger to be provided against was that the GIO shareholders might be left in a position of making their decision whether to accept or reject the AMP takeover bid on the basis of inaccurate or incomplete information, if the defendants or any of them failed to discharge their statutory duty of care and diligence. If, in consequence of the defendants (or any of them) breaching their duty by conduct which allowed too high a profit forecast to be published, GIO shareholders were to decide not to accept the takeover offer, the risk to them would be that they would find themselves locked into a minority position in a company, management control of which had passed under the bid. Without, at this stage, making any findings about causality or remoteness of damage, the court can infer that this risk was a substantial one, because the liquidity of the market for a listed target company's shares, and the share price, will ordinarily be adversely affected once control has passed and any control premium has evaporated.
[1075] The statutory standard set by s 232(4) establishes an inquiry as to the degree of care and diligence that a reasonable person "would exercise", not what a reasonable person might do. The standard is similar in concept to the standard that applies in professional negligence cases. If a professional person acts as a reasonable professional would act, he or she is not negligent even if many others would have acted differently in the circumstances. In applying the general standard of care and diligence to a professional person such as a lawyer, auditor, actuary, reinsurance manager or chief financial officer, the law distinguishes between negligence and mere mistakes.” [Emphasis added]
With respect to the issue of “probability of occurrence” his Honour said:
“[1072] … The three defendants occupied positions which, in somewhat different ways, were capable of influencing the content of GIOs Part B Statement and in particular, the profit forecast. It seems reasonable to infer that the content of the Part B statement, and in particular, the level of the profit forecast, was likely to influence GIO shareholders in making their imminent decision whether to accept or reject the AMP bid. Therefore in this case there was a significant likelihood that failure by the defendants, or any of them, to discharge their duty of care and diligence would be likely to cause harm.”
After referring to other authorities his Honour then said:
“[1077] … Forecasting in a reinsurance business is a difficult and uncertain process, where there is much room for differences of opinion and even small variations of input can produce widely different outcomes (see section 1.2). The issue under s 232(4) is not whether the defendants made mistakes during the course of the due diligence process, but whether they failed to meet the standard of care and diligence that the statute lays down. The statutory standard, like the general law, permits the court to take into account the circumstances of the particular case, and requires the standard to be applied to those circumstances as they existed at the relevant time, without the benefit of hindsight.”
Austin J went on to discuss the role of the law in protecting investors in the context of public fundraising and takeover battles. His Honour identified the significance of a profit forecast in this context, outlined the practice that had emerged of a formal due diligence process and referred to the particular role of Part B Statements. In this context his Honour said:
“[1082] … the Part B process shared with prospectus offerings the fundamental characteristic that the information to be conveyed to investors was vitally important information for the purposes of the decision they were invited or required to make.
[1083] … What is important for present purposes is that the process was very much the formal due diligence committee-dominated process that had become the practice in other areas. Mr Vines made clear in his letter to executives dated 10 November 1998 that the purpose of the due diligence process was to identify matters to be disclosed in the Part B statement and to ensure that the document complied with the law …
[1084] It was plain to anyone who read those documents, and must have been plain to the defendants, that the information given to the DDC would be considered for inclusion in the Part B statement. The same is true of information given to PwC, since it was well-known that PwC Securities was preparing a report upon which the DDC and the board of directors of GIO Australia Holdings would rely for the purposes of the Part B statement …”
His Honour concluded:
“[1085] … the matters that I have described affected the standard of care and diligence to be met by the three defendants. When they provided information for the purposes of the Part B statement, either to the DDC or to PwC, their standard of care and diligence was influenced by the circumstance that the information was provided within the framework of a due diligence process that was designed to ensure adequate and materially complete disclosure to GIO shareholders in compliance with the law and in a fashion that would protect those involved in the process from liability should a defect later be discovered in the document. These circumstances made it necessary for the defendants to take particular care in providing information. Moreover it was or should have been clear from the questionnaire that it would not be enough for them to confine their attention to what they knew, in circumstances where they could uncover material information by appropriate inquiries. It was apparent that the DDC was relying on senior executives including the three defendants to give their conscientious and careful attention to the documents they were asked to complete and to the information they were to provide in other contexts, such as in discussions with PwC.”
As appears from par [1074] of the judgment of Austin J, set out in par [72] above, that his Honour identified a particular risk, namely the “danger” that GIO shareholders might make their decision as to whether or not to accept or reject the AMP bid on the basis of inaccurate information. He referred to the possibility that some could reject the bid in the case of a high profit forecast and then be locked into a minority position. However, in the passage of his judgment which identified the higher “due diligence” standard, which the board of GIO had determined should be applicable to the Part B process, as set out in pars [75]-[76] above, his Honour held that the standard of care and diligence applicable to Mr Vines extended to the contents of the Part B Statement, irrespective of the position of particular GIO shareholders. I do not understand his Honour in the ultimate analysis to have restricted himself to the limited danger he identified in his par [1074].
The section of his judgment which was concerned with the relevant standard encompassing a “due diligence” element, commenced with the following:
“[1078] The law imposes heavy civil, and sometimes criminal, liability on those who provide misleading information to the public securities markets about the price or value of ‘securities’. The law is concerned with the protection of investors by endeavouring to ensure that the information upon which they make their investment decisions is materially accurate and complete. Issues of high public policy are involved.”
A focus on the risk of existing GIO shareholders being locked in as minority shareholders, as suggested in his Honour’s [1074], is too narrow a focus for the scope of the duty and the determination of the relevant standard of care. Nor, in my opinion, did his Honour adopt so narrow a focus as his consideration of the significance of the “due diligence” process indicated. His Honour held that the standard of care and diligence was determined and, it would appear, rendered higher than usual, by reason of the decision of GIO to approach the bid on the basis of adopting a “due diligence” approach.
In his Honour’s par [1085], which I have quoted at [76] above, he referred not only to the necessity of “disclosure to GIO shareholders” but went on to refer to the need to “protect those involved in the process from liability should a defect later be discovered in the document”.
The reference to “parties involved in the process” would encompass the directors and auditors who could be exposed to liability if, relevantly, the profit forecast proved to be negligently wrong. Most significantly, the reference to “parties” included the GIO itself as a corporate entity.
No submission was made that his Honour’s reference to the risk to existing shareholders being locked in was inappropriate. In any event, the reference to the exposure of “parties involved in the process” is sufficient to extend the relevant “danger”, against which the exercise of care and diligence was required, to actions by shareholders against, most relevantly, the company itself.
Indeed, somewhat accidentally, one of the authorities which indicates the possible exposure of the company to such a suit by shareholders – albeit not in a way which is pertinent factually to the present case – is an action by shareholders of the GIO with respect to subsequent conduct concerning the exposure of the GIO’s reinsurance business which, with respect to an earlier time, is in issue in this appeal. (See GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Pty Ltd [2001] FCA 1761; 117 FCR 23.)
The statutory duty set out in s232(4) is, in my opinion, a duty owed to the corporation. That is suggested by the statutory context and the scope of the parallel common law duty. (See e.g. Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 449; Daniels v Anderson (1995) 37 NSWLR 438 at 505; ASIC v Maxwell (2006) 59 ACSR 373 at [102], [105]-[110]; R P Austin et al Company Directors: Principles of Law and Corporate Governance Lexis Nexis Butterworths, Australia 2005 at [5.3], [6.2] and [6.16].)
The relationship is implicit in the historical origins of the common law duty, upon which the statutory duty is based and in the fiduciary relationship of directors to their corporation upon which other statutory duties are based. That duty has been extended, relevantly by statute, to other officers of the corporation.
It may be that further development of the law will identify a duty owed to creditors or shareholders or employees. (See e.g. Gower and Davies Principles of Modern Company Law (7th ed) London, Sweet & Maxwell, 3003 at pp371-379.) However, no such issue arises in the present case.
It is sufficient for present purposes to note that his Honour did not confine the scope of the relevant risk to a shareholder being locked in and, even in that case, such an eventuality carries with it clearly identifiable risks to the corporation.
2 Austin J’s Analysis of the Higher Standard Submission
I return to consider his Honour’s reasoning with respect to the submissions made by the Appellant as to whether there was a special standard of care and diligence under the statute. His Honour said:
“[1086] A finding of negligence in a civil penalty proceeding attracts a declaration of contravention and may attract penalties in the form of monetary fines, disqualification from managing a corporation and compensation orders which are potentially wider in some respects than the damages that could be recovered in a common law negligence action. Mr Vines submitted that, whereas in a common law case the slightest degree of negligence is sufficient to found a suit for damages, in a civil penalty proceeding such as the present one the degree of negligence to be proved must be of a higher level (that is, as I understand the submission, the statutory standard of care and diligence must be a lower standard than the general law). His submission … was that the negligence ‘must be gross enough to become a matter of public concern, to interest the State by reason of its gravity’, and the degree of negligence must be ‘sufficient to merit the punishment which can be imposed’.
[1087] Sometimes the legislature enacts a law creating a criminal offence for merely negligent conduct. For example, the Crimes Act 1900 (NSW) s 54 provides that ‘whosoever by any unlawful negligent act, or omission, causes grievous bodily harm to any person, shall be liable for imprisonment to 2 years’. The interpretation of that provision was at issue in the Court of Criminal Appeal of New South Wales in R v D [1984] 3 NSWLR 29, in which Yeldham J usefully brought together some of the earlier authorities. The case law shows that the courts have generally interpreted such provisions as setting a standard of care distinctly higher than the common law standard.” [Emphasis added]
At the meeting of 7 December 1998, Mr Fox said that, taking the lower end of the range of $60 to $65 million ($60 million), the Hurricane Georges’ loss would be $35 million in excess of the $25 million reserve that had been made.
On 8 December 1998, at a meeting of the GIO Due Diligence Committee (“the DDC”), Mr McClintock (a partner of Price Waterhouse having partial responsibility for verifying the profit forecast) produced a revised version of an “unders and overs schedule” which showed a positive adjustment for MIPI of $35 million. Mr McClintock’s schedule also showed a negative adjustment for catastrophe adverse performance (that is, the effect of Hurricane Georges) of $35 million. Mr McClintock said that the $35 million was based on the ultimate loss estimate of $60 million (that is, the figure provided by Mr Fox at the meeting on 7 December). The $35 million represented the difference between the estimate of $60 million and the reserve of $25 million.
It is necessary to say something about the involvement of Price Waterhouse. They were auditors to GIO Australia Holdings Limited and GIO Insurance Limited. They had been instructed to prepare a review of the financial forecast information that was to be included in the Part B statement. Mr Hammond led the Price Waterhouse team for that purpose and the work was co-ordinated by Mr McClintock. Mr Murray was responsible for the review of two entities within the GIO Group.
On the basis of what had been said at the meeting of 7 December, Mr Vines accepted that the $80 million profit forecast was reasonable. To summarise, it was made up of $50 million ordinary business profits, plus $30 million representing 33% of catastrophe premiums; it took into account the reserve of $25 million, the “overs” reported by Mr McClintock of $35 million, and the expected losses of $60 million from Hurricane Georges. The expected losses from Hurricane Georges of $60 million (being the bottom of the range of $60 to 65 million) would be covered by the reserve of $25 million plus the “overs” reported by Mr McClintock of $35 million.
On this calculation (and subject to the materiality threshold in Appendix B to the Part B statement referred to by Santow JA at [720]), there was no margin for error. What is more, its accuracy depended on the legitimacy of taking the losses from Hurricane Georges as being at the bottom of the range. Subject to the materiality threshold, any increase in GIO’s exposure to liability from Hurricane Georges claims over and above the estimated $60 million would render the $80 million profit forecast (and hence the $250 million profit forecast in the Part B statement) inaccurate. The greater the increase in net liability over $60 million, the greater the reduction in the Part B profit forecast.
XXVIII MR VINES’ RESPONSIBILITY FOR THE PROFIT FORECAST
In determining whether Mr Vines exercised the requisite degree of care and diligence, regard must be had to the position he held in GIO.
Mr Vines agreed in cross-examination that his role as chief financial officer required him to satisfy himself that such matters as budgets were properly and reasonably formulated, and that it was his function to investigate what was reported to him in order to satisfy himself, through his own inquiry, that it was essentially valid. He agreed that he had, generally speaking, a supervisory role in relation to the financial affairs of the group and he had responsibility for the financial integrity of the group.
Mr Vines had the central executive role in the due diligence process relating to the Part B statement in general and the profit forecast in particular. He supported the individual directors who had deputed to become familiar with the specific components of the profit forecast. He described himself as “the arms and legs of the non-executive directors”. Austin J found that “Mr Vines was given an assumed special responsibility with respect to the integrity of the profit forecast. It was a responsibility the same as, or closely similar to, his responsibility as chief financial officer for the financial integrity of the Group. That encompassed a responsibility (the equivalent to the one he acknowledged to exist in respect of financial accounts: T 2890) to exercise care and diligence to the statutory standard, to ensure that accurate information about the profit forecast was prepared and provided to management and the board of directors” (at [1128]).
There is no doubt, as Santow JA points out, that Mr Vines had substantial additional duties, described by Austin J as “a very heavy workload”. Santow JA states at [626], “Mr Vines’ responsibility as chief financial officer for the group did not call for his intervention by ‘usurping the divisional role’ [1144] unless he became aware of some deficiencies requiring this”. Santow JA bases his judgment, in particular, on the role played by Mr Fox who, on 5 November 1998, was appointed as executive director of the GIO subsidiary in which the reinsurance business of the group was carried on. As Santow JA points out [620], Mr Vines relied on Mr Fox in that role throughout.
XXIX FACTS KNOWN BY MR VINES RELATING TO THE ACCURACY OF THE FORECAST
On 19 or 20 October 1998, Mr Vines had obtained the First Quarter Highlights and studied this document. Austin J (at [241]) said that the overall effect of the First Quarter Highlights “was to draw attention to the risk of loss from Hurricane Georges in such a fashion that reasonable persons in the shoes of those responsible for the profit forecast would have thereafter treated the development of Hurricane Georges’ loss as a matter to be kept under particular review”.
In the two days after 20 October 1998, Mr Vines received emails that recorded claims of $24.9 million for the July-September 1998 quarter in respect of Hurricane Georges.
According to Mr Murray, on 23 October he had a discussion with Mr Vines in which it was mentioned that it was extremely difficult to form a view about Hurricane Georges, given it had occurred only four weeks beforehand. There was a considerable degree of uncertainty involved (T 1437).
On 23 October, Price Waterhouse forwarded Mr Vines a draft report for the Part B statement that included a review of the 1999 profit forecasts. The draft contained the comment, “consider Georges disclosure”.
On 27 October, Mr Vines understood that Price Waterhouse had some concern about the 33% profit assumption (on reinsurance premiums) but were not, at that stage, recommending any change.
By the end of October 1998, Mr Vines knew that Price Waterhouse was concerned about the catastrophe component of the profit forecast.
By 5 November, Mr Vines understood that retrocession cover was being sought against the possibility that Hurricane Georges would give rise to losses of more than $25 million.
On 10 November, Mr Vines knew that, if the ultimate loss to GIO for Hurricane Georges exceeded the reserve of $25 million, the $80 million profit forecast could not be achieved unless the shortfall could be made up in other areas of GIO’s business.
On 11 November, Mr Vines was forwarded a catastrophe claims spreadsheet that showed undiscounted claims for Hurricane Georges as at 31 October 1998 to be $69.06 million, an increase of $44 million from 30 September 1998. On the same date, Mr Vines was shown the October results and attended a meeting to discuss the October figures.
On 13 November, the American Re agreement was signed and provided retrocession cover for losses in respect of Hurricane Georges in excess of $25 million to US$100 million.
On 22 November 1998, Mr Vines sent members of the DDC an email referring to the “latest forecast” which projected a profit for both “Reinsurance” and “Corporate” of $69 million. This was based on the original assumption of an $80 million profit by Reinsurance, which was offset by an $11 million loss in Corporate. Mr Vines regarded this forecast operating profit to be “reasonable”. Mr Vines noted that Price Waterhouse had questioned whether the forecast of $29.7 million for the catastrophe portfolio (that is, based on 33% of catastrophe premiums) was achievable given the “high level of events in the first quarter”. He noted that Mr Robertson had concluded that GIO could reasonably expect better claims experience for the remainder of the year.
On 25 November 1998, by reason of the Federal Court’s judgment in the proceedings challenging the takeover, the Part B statement had to be in the hands of shareholders by 16 December. That meant, in practice, that the Part B statement had to be finalised within a week or ten days.
On 1 December 1998, Mr Vines understood that the retrocession cover (that is, from American Re) could not be regarded as effective.
Between 3 and 6 December, Mr Vines was informed that Mr Latham had undertaken a review of the MIPI reserves and had reported that in his opinion there was a surplus of at least $34 to $35 million.
According to Hurricane Georges’ register of 4 December, the total gross claims for Hurricane Georges were $89.7 million on that day and had risen to $91.9 million by 7 December. Mr Vines did not know of these facts when the contraventions were committed.
On 6 December, the DDC met and considered the Part B statement and its own report dated 3 December. The DDC was also provided with a draft report from Price Waterhouse which had been altered to say that the first quarter result for the catastrophe portfolio had assumed the GIO’s exposure to Hurricane Georges would be A$25 million, being 0.6% of a total market loss estimate of US$2.45 billion; but that up to 31 October 1998, claim notifications for Hurricane Georges had increased to $65 million and this increase suggested that “‘the 33% profit assumption used for this portfolio is no longer appropriate’”.
According to the minutes of the DDC meeting of 6 December 1998, Mr Hammond stated that the profit forecast had assumed that claims in respect of Hurricane Georges would not develop beyond $25 million and to the end of October 1998, claim notifications were approximately $20 million. This is to be contrasted with the Price Waterhouse report that stated that, up to 31 October 1998, claims notifications had increased to $65 million. Mr Hammond went on to express the opinion that the current level of claims notifications indicated that claims in respect of Hurricane Georges could rise to the order of $60 million.
On 7 December, Messrs Vines, Robertson and Fox met with Messrs Hammond, McClintock and Murray. Austin J accepted the version of the meeting as recorded by Mr Murray. It is to be borne in mind, however, that Mr Murray’s note, according to his evidence, was not a word for word account of what took place on that day (T 1514).
Mr Murray’s note recorded that Mr Fox had stated that a detailed review of GIO’s exposure to Hurricane Georges claims, contract by contract, had indicated a maximum potential loss of $105 million. It recorded that notifications of claims “to date” were $60 to $65 million, that is, up from $27 million. It recorded that management’s best estimate of GIO’s exposure to liability was of the order of $60 to $65 million.
Although the Murray note recorded that Mr Fox had referred to claims notifications “to date”, Mr McClintock testified that the claims notifications at the meeting were expressed to be up to 30 November 1998. He said that the statement in the Murray note about notifications to date being $60 million to $65 million should read as notifications to the end of November 1998 (T 1641). Austin J said in this regard at [900]:
“I find that evidence [of McClintock] to be inconsistent with the words of the notes itself, which speaks of notifications ‘to date’. This is a matter of some significance”.
His Honour, however, does not resolve the issue.
In my opinion, Mr McClintock’s evidence should be accepted. Price Waterhouse delivered a report dated 9 December on the profit forecast. The report stated:
“To 30 November 1998, we understand that claim notifications for Hurricane Georges have increased to $60 to $65 million and that the ultimate expected loss was within this range. The increase in notifications with respect to Hurricane Georges suggests that the 33% profit assumption used for the catastrophe portfolio is no longer appropriate”.
This report is confirmatory of Mr McClintock’s evidence that, at the meeting of 7 December 1998, claims’ notifications for Hurricane Georges were expressed to be as at 30 November 1998.
Moreover, as Santow JA notes at [616], the Hurricane Georges’ claims register as at the end of November 1998 appeared still to support the estimate of $65 million, although that was not the case by 4 December.
According to Mr McClintock, the $105 million maximum potential loss to which Mr Fox had referred at the meeting of 7 December was based on a contract-by-contract review.
On 8 December, the DDC met. Mr McClintock said that claims notified in respect of Hurricane Georges might increase to an additional $35 to $40 million over the amount that had been provided for. He said, however, that good performance in MIPI of $35 million had been included in an under and overs schedule, which showed a pre-tax shortfall of approximately $14 million which was not material.
Later that day the board considered the DDC report and authorised the signing of the Part B statement.
XXX WARNING SIGNALS
In my opinion, the above facts revealed several important warning signals that, as at 8 December 1998, would have led a reasonable person in Mr Vines’ position to take steps to verify Mr Fox’s advice that GIO’s exposure to liability for claims in respect of Hurricane Georges would be of the order of $60 to $65 million. These signals did not produce appropriate reactions.
The fundamental importance of the importance of the profit forecast in the context of the Part B statement was fully understood by Mr Vines. Great care had to be taken in arriving at a reliable figure. Sensible inferences had to be drawn from known facts. Speculation was to be avoided. It seems that the profit forecast, at least on 8 December 1998, was based to a significant degree on material that was not substantiated or verified as at that date. Mr Vines should have ensured that no decision as to the publication of a profit forecast would be taken without regard to the most recent information available.
The exercise of estimating the profit became unusually difficult once Hurricane Georges began to have an impact. The ultimate liability from Hurricane Georges depended on several factors and was difficult to predict (T 1607). In the time available, it was not possible to do the usual kind of analysis to assess GIO’s liability (T 1608). This meant that even more attention than usual had to be focused on those matters that were known. One of those matters was the extent of claims notified from Hurricane Georges. As Austin J observed at [241], the development of Hurricane Georges’ loss was a matter to be kept under particular review. It would not have been difficult to obtain, each day, an updated report on claims notified. Austin J observed in this regard (at [557]):
“Mr Fricke gave affidavit evidence that if he had been asked, in early November 1998, to obtain up to date information about the level of Hurricane Georges’ claims that had been received, he would have entered the registered event numbers for Hurricane Georges in COGEN, which would have displayed the claims paid and outstanding, together with a list identifying contract numbers and the number of cedants. The entire process would have taken a number of minutes. All claims department staff had access to this function of COGEN, and they could obtain such information provided they knew the relevant event numbers”.
Mr Vines made no attempt, between 1 December and 8 December, to ascertain whether the Hurricane Georges’ claims were being kept under review. He did not bother to find out from the register whether there had been an increase in claims as from 31 October.
Price Waterhouse had on more than one occasion warned that attention had to be given to the extent of potential liability for Hurricane Georges losses. This emphasised the need for current information, where that was available, to be considered. It was Mr Vines’ duty to ensure that this occurred. He did not fulfil this duty.
As I have explained, there was little margin of error in the profit estimate calculations. The comments I have made in the previous paragraph apply.
On 11 November 1998, Mr Vines learned that undiscounted claims for Hurricane Georges as at 31 October 1998 were $69.06 million, an increase of $44 million from 30 September 1998. As Spigelman CJ notes, “[t]his increase does indicate a significant adverse development”. The trend was obvious. As it was put by Mr McClintock, at the end of September GIO’s exposure was seen as being $25 million and by the beginning of December it was seen as being between $60 to $65 million “and during the period between those two dates it changed a number of times, as the notifications arrived” (T 1601). These developments were compelling reasons to have the claims register checked during the period 1 December to 8 December; but Mr Vines made no request for this to be done.
The figures Mr Vines was given on 11 November implied that the view of Mr Robertson that $25 million was an adequate reserve for Hurricane Georges was wrong. Mr Vines accepted this proposition in cross-examination (T 3055). This, alone, called for a revision of the profit estimate. It was the responsibility of Mr Vines to call for this to be done.
There seemed to be some confusion about Hurricane Georges losses amongst those at the meeting of the DDC on 6 December. The Price Waterhouse report, tabled at the meeting, stated that, as at 31 October, claim notifications for Hurricane Georges had increased to $65 million, whereas Mr Hammond stated that, as at the end of October, claim notifications were approximately $20 million. This, alone, called for investigation. It was Mr Vines’ responsibility to require this to be done.
The profit forecast was known to depend for its accuracy on the lower extreme of the range of Hurricane Georges’ losses ($60 million) being achieved. On 6 December, the Price Waterhouse report considered at the DDC meeting on that date stated that claim notifications for Hurricane Georges had increased to $65 million. Mr Fox’s statement at the meeting of 7 December that notifications of claims were $60 to $65 million had to be assessed against the information that Price Waterhouse had given. The uncertainty that had arisen was another reason to have the claims register checked before the sign-off. This was a matter that Mr Vines should have insisted upon.
By 7 December, management was not relying on the 33% profit assumption in respect of catastrophe premiums and that assumption had been removed from the Part B statement (T 1484). This made the original estimate of $80 million highly problematic. It is not clear how the $30 million estimate of profits from catastrophe premiums could be maintained and, if not, how the profit estimate of $80 million was in fact maintained.
The opinion expressed by Mr Fox at the meeting of 7 December, that the maximum potential loss, calculated on a contract-by-contract basis was $105 million, was an additional important reason, once uncertainty had arisen, to double check the register on an ongoing basis, and particularly before the sign-off. Mr Vines should have requested that this be done.
All the factors I have mentioned, when taken as a whole, meant that the profit forecast was fraught with uncertainty. The inference is that reasonable care required the DDC and, arguably the Price Waterhouse representatives, to consider all the up-to-date information and then to attempt to arrive at an overall consensus as to the likely losses from Hurricane Georges. It was dangerous, in the circumstances, to do otherwise. What in fact occurred was that there was a discussion involving DDC and Price Waterhouse, but not on up-to-date information. Mr Vines has to carry the ultimate responsibility for this.
XXXI CONCLUSION
For the reasons I have expressed (and those stated by Spigelman CJ), I consider that Mr Vines contravened s 223(4) of the Corporations Law. As I have said, I agree with the orders proposed by the Chief Justice.
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AMENDMENTS:
07/10/2009 - typographical error in s 232(4) "in" should be "and"
omission of "and" in s 1317JA(2) (a) - Paragraph(s) [3], [7]
LAST UPDATED: 7 October 2009
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