CATCHWORDS
CORPORATIONS LAW - private offer memorandum ("POM") offering shares in syndicate venture for purchase of brood mares - whether manner of issue of POM constituted an offer to the public - s.169 Companies Code (NSW)
TRADE PRACTICES - failure to state in clear terms total amount for which syndicate investors liable - whether misleading or deceptive conduct - whether opinion of valuer as to value of bloodstock capable of constituting misleading or deceptive - whether reasonable grounds for valuer's opinion as to value of syndicate mares - whether provision of valuation to financier caused damage - s.52 Trade Practices Act 1974 (Cth) - s.42 Fair Trading Act (NSW).
NEGLIGENCE - valuation of bloodstock - whether valuation relied upon at settlement - whether duty of care owed to the investors and the financier - whether negligent valuation causative of loss.
FIDUCIARY DUTIES - promoters - conflict of interest - vendor of bloodstock acting as promoter of sale to syndicate purchasers - failure to disclose information as to previous sale price for bloodstock to purchasers - whether vendor owed fiduciary duty to purchasers to disclose previous sale prices - accountant adviser acting for vendor of bloodstock and promoter for syndicate - information as to previous sale prices not disclosed to investors - whether full and informed consent non-disclosure obtained - whether breach of fiduciary duty - whether equitable fraud by third party adviser.
INSURANCE - professional indemnity insurance policy - construction of exclusion clauses - whether syndicate venture "operated or controlled" by insured firm - corporate manager granted management and control of venture by syndicate - partner of insured firm one of two directors on board of manager - meaning of "control" - whether de facto control of corporate manager sufficient - whether power of veto over corporate manager to be equated with control - whether provision by insured firm of venture "investment facility or service" - aggregate of claims in excess of maximum liability of policy - whether separate claims each accorded cover to maximum liability of policy.
Companies Code (NSW) - s.169
Income Tax Assessment Act 1936 (Cth) - s.26(j)
Fair Trading Act 1987 (NSW) - s.42
Law Reform (Miscellaneous Provisions) Act 1946 (NSW) - s.6
Trade Practices Act 1974 (Cth) - s.52
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Acron Pacific Ltd v OffShore Oil NL (1985) 157 CLR 514
Akron Securities Ltd v Bernborough Breeding and Racing Ltd (50271/92 delivered 1 August 1994)
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769
Barnes v Addy (1874) LR 9 Ch APP 244
Bateman & Anor v Slatyer (1987) 71 ALR 553
Bennett v Minister of Community Welfare (1992) 176 CLR 408
Blackwell v Barroile Pty Ltd (1994) 123 ALR 81
British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673
Brown v Raphael [1958] 1 Ch 636
Bryan v Maloney (1995) 128 ALR 163
Catt v Marac Australia Ltd (1986) 9 NSWLR 639
Consul Development Pty Ltd v D.P.C. Estates Pty Ltd (1974-75) 132 CLR 373
Corporate Affairs Commission (South Australia) v Australian Central Credit Union (1985) 59 ALJR 785
Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371
Davis v Mortgage Acceptance Nominees Ltd (50173/93 delivered 20 April 1994)
Derry v Peek (1889) 14 AC 337 at 361
Federal Commissioner of Taxation v Commonwealth Aluminium Corporation Ltd (1979-80) 143 CLR 646
Federal Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 95 ATC 4483
Federal Wharf Co Ltd v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24
Hurst v Vestcorp (1988) 12 NSWLR 394
Lee v Evans (1964) 112 CLR 276
March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506
Namol Pty Ltd v A W Baulderstone Pty Ltd (No 2) (1993) 47 FCR 388
O'Reilly v Law Society of NSW (1988) 24 NSWLR 204
RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164
Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300
Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 104 ALR 237
Re The News Corporation Ltd (1987) 70 ALR 419
Royal Brunei Airlines v Tan [1993] 3 All ER 97
San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340
Schipp v Cameron (unreported, 4 April 1995, Supreme Court of NSW)
Smith v Land and House Property Corporation (1884) 28 Ch D 7
The Commonwealth Bank v Smith (1991) 42 FCR 390
Trade Practices Commission v CC (NSW) Pty Ltd (1994) 125 ALR 94
Trade Practices Commission v Manfal Pty Ltd (In Liq) (1991) 105 ALR 520
United Dominions Corporation Ltd v Brian Pty Ltd (1984) 157 CLR 1
Wallingford v Mutual Society (1880) 5 App. Cas. 685
Yorke v Lucas (1985) 158 CLR 661
GRIFFITH MORGAN JONES & ORS v MORTGAGE ACCEPTANCE NOMINEES LIMITED
RODERICK STUART McDONALD, GREGORY ALFRED FARROW
JARPAN MANAGEMENT SERVICES PTY LTD, PETER DONE, BRIAN KING
JAMES BESTER, AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LTD
No G711 of 1991
GRIFFITH MORGAN JONES & ORS v C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
No G 491 of 1994
Davies J
Sydney
10 November 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No G 711 of 1991
)
GENERAL DIVISION )
BETWEEN: GRIFFITH MORGAN JONES
FREDERICK LANCE MESH
EARLE WILFRED BAILEY
THOMAS ALFRED INGLIS BRAYE
JEFFREY WALL
BRIAN DAVID THORNTON
KEVIN IAN PERKINS
PAUL EDWARD NEILSON
ANTHONY MARMADUKE CARMICHAEL
GLEN WILLIAM GREEDY
PAUL STENBERG
GORDON FRASER
JOHN HOPE GIBSON
EDWARD JAMES AIRD (JNR)
DONALD LEVICK
NOLA LEVICK
JEFFREY CECIL FOSTER
MARK THOMAS SEALES
Applicants
AND: MORTGAGE ACCEPTANCE NOMINEES LIMITED
RODERICK STUART McDONALD
GREGORY ALFRED FARROW
JARPAN MANAGEMENT SERVICES PTY LTD
PETER DONE
BRIAN KING
JAMES BESTER
AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LTD
Respondents
No G 491 of 1994
BETWEEN: GRIFFITH MORGAN JONES
FREDERICK LANCE MESH
EARLE WILFRED BAILEY
THOMAS ALFRED INGLIS BRAYE
JEFFREY WALL
BRIAN DAVID THORNTON
KEVIN IAN PERKINS
PAUL EDWARD NEILSON
ANTHONY MARMADUKE CARMICHAEL
GLEN WILLIAM GREEDY
PAUL STENBERG
GORDON FRASER
JOHN HOPE GIBSON
EDWARD JAMES AIRD (JNR)
DONALD LEVICK
NOLA LEVICK
JEFFREY CECIL FOSTER
MARK THOMAS SEALES
Applicants
AND: C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
Respondent
- 2 -
Coram: Davies J.
Date: 10 November 1995
Place: Sydney
MINUTES OF ORDER
THE COURT ORDERS THAT:
Within 14 days, the parties file and serve short minutes as to the orders they propose.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No G 711 of 1991
)
GENERAL DIVISION )
BETWEEN: GRIFFITH MORGAN JONES
FREDERICK LANCE MESH
EARLE WILFRED BAILEY
THOMAS ALFRED INGLIS BRAYE
JEFFREY WALL
BRIAN DAVID THORNTON
KEVIN IAN PERKINS
PAUL EDWARD NEILSON
ANTHONY MARMADUKE CARMICHAEL
GLEN WILLIAM GREEDY
PAUL STENBERG
GORDON FRASER
JOHN HOPE GIBSON
EDWARD JAMES AIRD (JNR)
DONALD LEVICK
NOLA LEVICK
JEFFREY CECIL FOSTER
MARK THOMAS SEALES
Applicants
AND: MORTGAGE ACCEPTANCE NOMINEES LIMITED
RODERICK STUART McDONALD
GREGORY ALFRED FARROW
JARPAN MANAGEMENT SERVICES PTY LTD
PETER DONE
BRIAN KING
JAMES BESTER
AUSTRALIAN BREEDERS CO-OPERATIVE SOCIETY LTD
Respondents
No G 491 of 1994
BETWEEN: GRIFFITH MORGAN JONES
FREDERICK LANCE MESH
EARLE WILFRED BAILEY
THOMAS ALFRED INGLIS BRAYE
JEFFREY WALL
BRIAN DAVID THORNTON
KEVIN IAN PERKINS
PAUL EDWARD NEILSON
ANTHONY MARMADUKE CARMICHAEL
GLEN WILLIAM GREEDY
PAUL STENBERG
GORDON FRASER
JOHN HOPE GIBSON
EDWARD JAMES AIRD (JNR)
DONALD LEVICK
NOLA LEVICK
JEFFREY CECIL FOSTER
MARK THOMAS SEALES
Applicants
AND: C E HEATH CASUALTY & GENERAL INSURANCE LIMITED
Respondent
Coram: Davies J.
Date: 10 November 1995
Place: Sydney
INDEX
Page No.
Reasons 1
Outline of Events 4
Private Offer Memorandum 17
Companies Code 1981 (NSW) 24
The Applicants 31
Mr McDonald 34
Mr Farrow 39
Purchase of Horses 40
Mr King 44
Mr Done 50
The Applicants' Valuers 62
Mr Bester 68
Mr Pulford 76
Mr Tillett 81
Summary of the Valuation Evidence 84
MANL 91
Penalty 93
Damages and Moneys Due 97
i) Capitalisation 97
ii) Banque Bruxelles 98
iii) Taxation 99
iv) Claims for Contribution 100
Heath Insurance 102
REASONS FOR JUDGMENT
In proceedings G711 of 1991, the 18 applicants, together with 3 other persons, were the investors in the First Trinity Park Stud Breeding Venture, a thoroughbred horse breeding syndicate. Most but not all of the applicants were clients of the accounting firm, Beattie McDonald. Roderick Stuart McDonald and Gregory Alfred Farrow, the second and third respondents, were the partners of that firm. During the course of the proceedings, the solicitors for the applicants, Gadens Ridgeway, ceased to act for Frederick Lance Mesh and Paul Stenberg, but both have appeared and have given evidence. The applicants, other than Mesh and Stenberg, were represented at the trial by Mr R B S MacFarlan QC and Mr L S Einstein.
The applicants and the other members of the syndicate are respondents to a cross-claim brought by Mortgage Acceptance Nominees Limited ("MANL"), which seeks recovery of moneys alleged to be due.
The first respondent, MANL, which was represented at the trial by Mr D.E. Grieve QC and Mr M.G. Skinner, was the financier which purchased 14 mares which were to be the breeding stock for the syndicate. MANL also entered into deeds of lease with the individual members of the syndicate under which each member leased an undivided share in each of the mares, the undivided share being usually a 1/20th interest. MANL seeks recovery of rent and also of the residual sum due under each lease. MANL also agreed to lend and indeed lent certain sums to each of the members of the syndicate and now claims recovery of the sums due plus interest. MANL also makes claim under a mortgage into
which each investor entered. Under each mortgage, MANL claims the amount outstanding plus interest due and interest in accordance with the terms of the mortgage.
The second and third respondents, Mr McDonald and Mr Farrow, promoted the venture. Mr McDonald, particularly, played a leading part in the venture and was the principal author of a document called a Private Offer Memorandum ("POM") which was distributed to interested persons and which is alleged to have been negligently drawn and to be misleading and deceptive and therefore published in breach of s.42 of the Fair Trading Act 1987 (NSW). Mr McDonald and Mr Farrow each represented himself.
The fourth respondent, Jarpan Management Services Pty Limited ("Jarpan"), was formed for the purpose of managing the venture. Its directors were Mr McDonald and Mr Ray Marshall, the manager of the Trinity Park Stud on which property the venture was to conduct its operations. Jarpan has played no part in the proceedings and no order is sought against it.
The fifth respondent, Peter Done, is sued as representing all the persons carrying on business as partners of the accounting firm Peat Marwick Hungerfords ("Peat Marwick") between 1 February and 30 June 1989. It is alleged that there was an involvement by Peat Marwick, principally by Mr Done, in the establishment of the venture and that the applicants suffered loss thereby. Mr B.C. Oslington QC and Mr T.D. Castle of counsel appeared for Mr Done.
The sixth respondent, Mr Brian King, was the vendor both personally and through his organisation Natalma Bloodstock Ltd ("Natalma") of the bloodstock acquired for the purposes of the syndicate. He also took an active part in the formation of the syndicate. Mr King appeared on his own behalf.
The Australian Breeders Co-operative Society Ltd ("ABCOS"), for which Mr S D Rares SC and Mr M.C.L. Dicker appeared, provided a valuation of the bloodstock which is alleged to have been negligently prepared and the provision of which is alleged to have been conduct that was misleading and deceptive in breach of s.42 of the Fair Trading Act and of s.52 of the Trade Practices Act 1974 (Cth).
The claim against James Bester, the 7th respondent, has been discontinued but he is the subject of claims for contribution or cross-claims brought by other respondents. Mr Bester gave a valuation of the bloodstock which was included in the POM . He was also instrumental in obtaining the ABCOS valuation. His valuation is said to have been negligently prepared and his conduct is alleged to be misleading and deceptive. Mr Bester represented himself.
Amongst themselves, the respondents made cross-claims or claims for contribution. Cross-claims were brought against other persons but all those have been resolved save cross-claims against C.E. Heath Casualty & General Insurance Ltd ("Heath Insurance").
I do not attempt now to outline all the legal heads upon which the applicants' claims and those of the respondents are made. I shall attempt to outline these in more detail later.
At the moment it is sufficient to say that almost every conceivable claim based on negligence, misleading and deceptive conduct, misrepresentation and breach of fiduciary duty which could have been made has been made.
In proceedings G491 of 1994, Heath is sued as the insurer of Beattie McDonald. Heath has cross-claimed against the respondents named in G711 of 1991. Mr P.T. Taylor SC appeared for Heath.
In these reasons for judgment, I shall deal only with the principal heads of
liability which have been alleged. I have not yet considered the claims made in the cross-claims and claims for contribution and I do not propose to deal in detail with issues as to amounts due or damages or amounts which may be claimed under the claims for contribution. Some of these matters need further formulation and discussion.
OUTLINE OF EVENTS
In this section of my reasons, I shall give only a skeleton outline of the course of events. I shall deal with the facts in more detail when I turn to specific claims made. Even so, I shall not attempt to deal with all the matters of fact which have been described in the evidence.
In 1986, Mr King, a dealer in bloodstock, instructed Mr Done, his accountant, to establish a structure in Guernsey, one of the Channel Islands, to be used in the conduct of his business. A company which became known as Natalma Bloodstock Limited ("Natalma") was incorporated on 10 June 1986 and a trust named "The Natalma Settlement" was
established on 1 September 1986. This structure was under the control of or was managed by Peat Marwick and its agents. Correspondence, facsimiles and cheques passed between Peat Marwick Mitchell & Co's Guernsey office ("the Guernsey office") and Peat Marwick of Sydney, Mr Done having the handling of Mr King's affairs at the Sydney end. The intent of the structure, for taxation reasons, was that Mr King would not have control of it. Nevertheless, for practical purposes, the structure recorded transactions effected by Mr King. Instructions to the Guernsey office were given to Mr Done.
Nothing in these reasons is intended to be a finding as against Natalma, which is not a party. Hereafter, the applicants may wish to make a claim against it. For the purpose of convenience, I shall sometimes, when speaking of Mr King as the vendor of horses to the syndicate, intend to include a reference to Natalma.
Mr King was one of a number of persons who considered that it could be beneficial to the Australian breeding industry to introduce suitable overseas blood lines. After Natalma had been established, he gradually acquired a number of mares and stallions which he considered would be suitable for the purpose. Some of these he arranged to be serviced by overseas sires at a time which met the requirements of the southern hemisphere breeding season, which requires all bloodstock to have a birthday on 1 August of each year. By late 1988, Mr King and Natalma had some bloodstock suitable for the purpose and he was aware of other bloodstock in America and in New Zealand which he believed he could acquire on suitable terms.
In the second half of 1988, Mr King arranged to sell to Mr Ray Marshall, the proprietor of the Trinity Park Stud, a stallion named "Cardell". The stallion was to be syndicated by Mr Marshall. One of Mr Marshall's friends was Mr McDonald, an accountant, whose particular interest in life was a small bloodstock breeding venture which he, Mr McDonald, had conducted unsuccessfully but pleasurably for some years. Mr McDonald was aware of tax driven horse breeding and racing syndicates, which at that time were fashionable. He came to the view that it would be desirable for his firm to promote a horse breeding syndicate.
In my opinion, Mr McDonald was influenced in part by the fees and goodwill which he expected would flow from the promotion of a tax syndicate to his clients, but also by the opportunity which he saw to become involved in a venture which involved the bringing of overseas mares to Australia and the servicing of them by quality Australian sires. It would seem that his interest in achieving a close association with top class bloodstock, which he himself could not achieve in his own bloodstock activities, tended to cloud his judgment as to the financial ramifications of the project.
There were discussions in November 1988 between Mr McDonald and Mr Marshall concerning the establishment of a thoroughbred breeding venture. Mr Marshall suggested that he introduce Mr McDonald to Mr King. There was a meeting between Mr King, Mr McDonald and Mr Marshall in late December 1988 in which the venture was discussed. Mr King declined to become a member of the syndicate, as he considered that there would be a conflict of interest. Notwithstanding that, he was active thereafter in promoting the syndicate.
By the end of December 1988, the general concept of a bloodstock breeding venture based on Mr King's bloodstock had been formulated. As Mr King required some funds and some assurance that the project would proceed, it was agreed that Mr McDonald would purchase some of the animals, the first proposal being that he purchase the mare Northy and its colt for $200,000. Later, Mr McDonald approached his bank for finance of $50,000 to enable him to do so.
During January and early February 1989, Mr King had contact with Mr Done on a number of occasions with respect to this and other matters. Peat Marwick held themselves out to be experienced in the setting up of horse breeding or horse racing syndicates. Mr Done was the partner principally concerned. Mr King suggested to Mr McDonald that Mr Done could assist in the establishment of the syndicate. Mr McDonald had a preliminary discussion with Mr Done on 15 February. Mr McDonald, Mr King and Mr Done conferred at Mr Done's office on 17 February. Mr Done agreed to assist but said to Mr McDonald that, as he acted for Mr King, he could give no advice with respect to the values of or the prices of the bloodstock. On 20 February 1989, Mr Done sent a fax to Mr McDonald setting out in summary form a suggested structure for the breeding venture and some advice. One point he made was that an independent valuation would be required. On the same day Mr Done telephoned a number of brokers to ascertain if finance would be available.
On 28 February 1989, a Mr David Corser introduced Mr Bester to Mr King and Mr Done at the offices of Peat Marwick. It was decided by Mr Done and Mr King that Mr Bester should undertake the valuation. In an office at the premises of Peat Marwick, Mr King then outlined the task to Mr Bester. Later in the day, Mr Done, Mr King, Mr
McDonald and Mr Marshall had a lengthy meeting, in the course of which I assume that Mr McDonald and Mr Marshall were informed that Mr Bester had been asked to do the valuation.
During January, February and March 1989, Mr McDonald and Mr King settled on the bloodstock to be acquired and the prices. Mr McDonald consulted with Mr Marshall but the final decision appears to have been his. Mr McDonald accepted the prices which Mr King nominated. There is no evidence of any haggling over prices. It is an unfortunate element of tax driven syndicates that the greater the expenditure, the greater the tax deduction which will be available. It suited Mr McDonald's purposes that there should be a syndicate with 20 shares and that the cost of the bloodstock would be about $1.5m. Because of the number of mares of which Mr King offered to him, and which attracted his interest, Mr McDonald decided to create two syndicates, the second being the Hallmark Classic Breeding Venture which is now the subject of the proceedings in Sweetman v Australian Thoroughbred Finance, No G 504/91. Some of the mares which were originally proposed for the First Trinity Park Stud Breeding Venture were transferred by Mr McDonald to that syndicate.
During January and February, Mr King arranged for the purchase for Allegra of an additional six mares, two of which became part of the bloodstock of the First Trinity Park Stud Breeding Venture. Allegra was a New Zealand company and which, like Mr King, had acquired overseas mares which were suitable for putting to Australasia's sires. After Mr King's deal with Allegra on 26 January 1989, which he described as a handshake deal, Mr King was under pressure from Allegra to pay the purchase price.
Mr Bester had not previously undertaken a formal valuation but he had worked for a number of years for Mr Robert Sangster and was familiar with overseas bloodstock. During his discussion with Mr King, Mr Bester became excited about the project which aimed at introducing overseas mares with good blood lines to Australian stallions. Mr Bester mentioned one of his own mares, "Plaisir d'Amour", and Mr King agreed to buy it for $55,000, which was attractive to Mr Bester as it had been purchased in 1987 for US$12,500. With Mr McDonald's approval, this mare later formed part of the syndicate's bloodstock.
In the discussion on 28 February, Mr King gave to Mr Bester a schedule of the mares which were under consideration and some documents which had passed between Mr King, Mr McDonald and Mr Marshall with respect to the transaction. Mr King put those documents forward as evidence of an agreed sale. Mr King had several conversations with Mr Bester thereafter and faxed further documents to him. Mr Bester had no contact with Mr McDonald.
By 13 March 1989, the final bloodstock package had been established. In all there were 14 mares and 4 foals. Two of the mares and one foal came from Mr McDonald's own stock. The prices nominated for the mares totalled $1,436,000 and for the foals $130,000.
On 15 March 1989, after receiving information as to the final package and the prices, Mr Bester valued each of the mares and the yearlings at precisely the figure on which Mr King and Mr McDonald had agreed. Mr Bester forwarded the valuation, which he addressed to the First Trinity Park Stud Breeding Venture, to Peat Marwick. It was considered by Mr Done to be rather unprofessional in its form. The valuation was redrawn by Peat Marwick
and re-signed by Mr Bester. It was then forwarded by Peat Marwick to Mr McDonald. Mr Bester's account was addressed to Mr King.
The Inglis Easter Yearling sales were held on 28-30 March 1989, and the brood mare sales on 2 April 1989. Record prices were obtained. Euphoria prevailed.
Mr McDonald had commenced drafting a Private Offer Memorandum ("POM"). The draft was sent to Mr Done in early April. On 6 April 1989, Mr Done made some suggestions for amendments. The POM was then printed. It included a copy of Mr Bester's valuation as well as a description of the bloodstock.
The POM was printed and distributed. The number printed is unknown but a figure of 40 was suggested. Some were given to Mr Marshall and some to Mr King.
Mr McDonald had drawn up the venture on the footing that there would be 20 shares, which figure was no doubt adopted because of s.169 of the Companies Code (NSW). Most of those who became members were clients of Beattie McDonald but, at one stage, it seemed there might be a shortfall in the numbers. Mr King approached some persons in Queensland with success, and paid substantial fees or commissions to attract extra members. One participant heard of the venture from another source. To make up the numbers, Mr McDonald took 1 1/2 shares and Mr Farrow took a half share. Because of a joint holding there were ultimately 21 members, though only 20 shares.
On 5 April 1989, Mr Done and Mr King had a lengthy conference with NZI Securities with a view to obtaining finance and came away hopeful that NZI Securities would finance the venture.
On 17 April, Mr Done wrote to Cohen Brown solicitors instructing them with respect to the management agreement which was required. Cohen Brown responded on 16 May setting out the provisions which they proposed incorporating into the Management Agreement. Mr Done went through the letter with care and noted a number of changes that should be made and, on 18 May, he responded to Mr Brown.
NZI Securities in fact decided that it did not wish to become involved in the type of venture which was proposed. Mr Done was put in touch with finance brokers, Australian Thoroughbred Finance, a division of Equico Financial Corporation. On 25 May 1989, Australian Thoroughbred Finance wrote to Mr Done advising, inter alia, that "We will need a valuation from William Inglis & Sons Ltd to the value of $1,436,000", which was the value of the mares which the financier would purchase. On that day, Mr Done noted in his diary, "Sort out problem re valuation etc".
Mr John Hutchinson of William Inglis & Sons was given the task of doing the valuation. He was the brood mare manager with Inglis & Sons. Mr Bester spoke with him and gave him the documents which had been supplied to him. On 5 June 1989, Mr Done phoned Mr Brown and advised that he, Mr Done, would keep on the back of the valuers, as Inglis & Sons were doing a check valuation.
On 2 June, Cohen Brown sent a draft management agreement to Mr Done. On the same day, Cohen Brown wrote to Michell Sillar Brown, the solicitors for MANL, concerning the other documents which needed to be prepared. On 5 June 1989, Mr Done sent a fax to Mr King including a draft of the Management Agreement and requested that he ensure that Mr McDonald had a copy of the same and was happy with its contents.
On 6 June, Mr McDonald wrote to Mr Done confirming the purchase of 3 of the mares, Lumenette, Swift Eagle and Kaysariyya, for a total of $300,000. These mares were the bloodstock finally settled upon which Mr McDonald was to purchase, in place of Northy and its colt mentioned earlier, and of Lumenette and Ricara which were also considered at one time.
In the middle of June, after considering his valuation at length and after consulting with one of his employers, Mr Hutchinson advised Mr Bester that Inglis & Sons could not assist with the valuation. There is some dispute in the evidence about the terms of the conversation but I think it was made clear to Mr Bester that Inglis could not value the bloodstock anywhere near the figure that Mr Bester was seeking.
Mr Bester appears to have advised Mr King and Mr Done that Inglis & Sons were too busy to do the valuation. After speaking with Mr Done, Mr Bester then contacted Mr Alistair Pulford of ABCOS and asked him to do the valuation. Mr Bester advised Mr Pulford that a precise figure was required.
Mr Bester gave to Mr Pulford the documents which he had earlier supplied to Mr Hutchinson as well as pedigrees on which he had noted prices. There was prepared, at Peat Marwick's request, an invoice from Natalma to Jarpan which was dated 14 June. On 20 June, Mr Bester phoned Peat Marwick and sought a copy of the invoice. It was faxed that day to Mr Bester by Mr Done's secretary. On the same day, Mr Bester sent the invoice to Mr Pulford with a note which said, inter alia:-
"proof of invoiced purchase prices has just reached me from Peat-Marwick Hungerfords, as per this fax, on 6 of the mares."
About this time, MANL or Australian Thoroughbred Finance was supplied with details of the income and assets of the investors.
On 26 June, Mr Done sent a fax to Mr McDonald setting out details of all the items which needed to be completed. Mr Done noted in the fax, inter alia, that a valuation of the horses had to be agreed with the financier and he listed four possible valuers, one of whom was Mr Bester. Mr Done also listed other matters that needed to be attended to such as invoices for the sale of the mares from Natalma and from Horse Australie, which was the name under which Mr King traded, and an invoice from Mr McDonald for Lumenette, Swift Eagle and Kaysariyya and for Bayoone and its foal and Hope Val Does, the mares which were Mr McDonald's own stock.
For its part, MANL had approved finance in principle pursuant to a credit proposal. There is in evidence a settlement sheet which shows that the credit approval was given in principle by the signature of 3 officers. The settlement sheet listed 9 matters to be attended
to including "Valuation of bloodstock to be addressed to MANL - Valued at $1565,000 - Acquisition cost $1436000."
On 23 June 1989, Mr Done sent to Mr Rowntree of Elders Livestock Insurance Brokers a copy of Mr Bester's valuation. Mr Rowntree responded on the same day and advised that the insurance policy would include a note "that the sum insured stated in the Policy Schedule is an agreed value and, in the event of loss the sum insured shall be taken to be the market value for the purpose of settlement of claims."
By 27 June, Mr Pulford had completed his valuation. On that day, the secretary for Mr Pulford signed an appraisal of the bloodstock for a total value of $1,565,000. Some of the figures were slightly below those which Mr Bester had adopted and some were slightly above, but in general the figures accorded with those set out in Mr Bester's valuation. The letter accompanying the appraisal was addressed to First Trinity Park Stud Breeding Venture and the appraisal itself was expressed to be "on a/c of Mr Brian King". The appraisal and letter were faxed to Mr King. It appears from a note on the fax that Mr King brought the fax to the attention of Mr Lock of MANL. On 30 June 1989, at Mr King's request, the appraisal was retyped and addressed to Jarpan.
On 29 June, there was a lengthy meeting in the office of Peat Marwick which was attended by Mr McDonald, Mr Done and Mr King. The individual syndicate members other than Mr Gibson had each given to Mr McDonald a power of attorney to act on his or her behalf. At the meeting, all the relevant documents were executed. In each case, there was executed on behalf of the syndicate member a lease, a mortgage, an agreement for loan and
a management agreement. The management agreement in each case had to be executed by Jarpan. Mr King was persuaded to become secretary of Jarpan pro tem and he signed the management agreements accordingly.
On the following day, 30 June 1989, settlement took place at MANL's offices.
From the moneys paid out on settlement, Mr King paid Mr Bester $55,000 and Mr Bailey $30,000. Mr McDonald personally received $350,000 from MANL, being payment for 5 horses which he sold to the venture. He received a further amount in respect of the foal of Bayoone. He repaid Mr Fraser $60,000 that he had borrowed from him to assist in the acquisition of 3 of the mares from Mr King. He paid out $17,537.45 to Mr Farrow for a debt that was owing. Provest Securities, a company associated with Mr McDonald, charged and was paid $42,400 by Jarpan, though it had played no part at all in establishing the venture.
Peat Marwick charged the venture $13,500 for the work done in its establishment. It charged Natalma $15,000 according to a fax of 17 July 1989. There was another account to Natalma dated 19 July 1989 which charged $10,300 for professional services in relation to accounting services in respect of the year ended 30 June 1989.
Long before settlement, the seeds of destruction had been sown. Leaving aside the bloodstock acquired from Mr McDonald and the yearlings, the bloodstock, which was purchased for the syndicate for $1,385,000, had been acquired by Mr King or Natalma for the equivalent of A$377,128. Many of the mares were still in the United States. The record
prices which had been reached at the Inglis Easter sales earlier in 1989 had been influenced in particular by the actions of Mr Smith and Mr Cummings who had bid against each other driving prices up. By late June, however, it was known in some circles that Mr Smith and Mr Cummings had not settled for all their purchases. During July, this fact became public knowledge. It also became public knowledge that both Mr Smith and Mr Cummings were in financial difficulties. Mr Smith and Mr Cummings had not been successful in establishing all the tax driven racing syndicates which they had proposed. In a September 1989 sale, some of the stock which Mr Cummings had purchased was put to auction and sold at a much reduced price. At the Inglis Easter sales in 1990, the prices fell further. Three of the yearlings which the venture had proposed to sell for $150,000 each were put to auction but were not sold. One of the yearlings, which had a reserve of $80,000, received a bid of $70,000, but this was so close to the reserve that I think it would not have been a true bid.
By this time, the venture had, for practical purposes failed, though the syndicate members were not so informed. Of the mares that remained at the Trinity Park Stud, they were put to the stallion Cardell, but no success was achieved. Cardell was not a successful commercial stallion. MANL took possession on 1 October 1991. The bloodstock in Australia was eventually sold off for a negligible return. The bloodstock in the United States remained there and was eventually put to auction by the owner of the property on which the bloodstock was agisted with a view to recovering some of the agistment fees which were owing. In other hands, one of the mares, Prospect Digger, later achieved some success in America and was sold in the United States at a Keeneland sale for US$55,000. But even this was no greater than the figure at which the venture had acquired the mare.
The first syndicate newsletter which went out in January 1990 expressed confidence and said that 3 of the yearlings would be sold at the Sydney Easter Select Sale and the 4th at the Gold Nugget Sale Gold Coast. A second newsletter again expressed confidence. It reported that the yearlings had not attracted acceptable offers but that the managers were hopeful of completing satisfactory transactions within a few weeks. The newsletter attached revised financial figures which showed that greater contributions would be required for the 1990 year and for the 1991 year. However, the end result of the venture was not materially changed. The third newsletter, which went out in March 1991, reported that, of the 1990 yearlings, one had been sold for $50,000 whilst the others were still on hand and were then 2 year olds. The newsletter stated that the future viability of the venture was extremely doubtful. A fourth newsletter of 17 May 1991 noted that an American valuer, Mr Rollin Wilder Baugh, had inspected the bloodstock in the United States and had reported that, only a matter of months prior to the venture's acquiring them, some of the mares had been sold at public auctions in the United States for relatively low prices. It was recommended that legal advice be obtained and that a fighting fund be established. On 2 October 1991, the applicants gave notice to MANL that they avoided their agreements with MANL. In 1991 these proceedings were commenced.
Subsequently, MANL sold the mares in Australia realising a net $12,598.40. Lumenette was sold for $420.40. The mares in the United States when sold realised less than the outstanding agistment fees.
PRIVATE OFFER MEMORANDUM
The POM proposed a venture which was not a partnership. As the first year ended on 30 June 1989, the venture ran thereafter effectively for four years. The POM proposed that there would be payments by the members in the years ended 1989, 1990 and 1991 income years and that, in those years, taxation deductions would flow to the members. The POM proposed that, in the 1992 and 1993 years, profits and income would flow to the
members. The venture was to come to an end in the year ended 30 June 1993, when yearlings would be sold for $1m and the mares would be sold for $2.5m, the total receipts forecast for that year being $3.5m.
The concept was a strange one, for if in the year ended 30 June 1993 the breeding venture was to be as successful as was proposed, there would have been little reason to bring the venture to an end, it having been developed into a highly successful business by that time. A venture is usually established when there is a natural end to the activity, eg., the conclusion of a sea voyage or the subdivision and development of an area of land. The POM proposed to bring the venture to an end just when it was at the height of its profit potential.
However, nothing turns upon that in these present proceedings. Nor, I think, does anything turn upon any distinction between a venture and partnership. In an associated matter, Sweetman v Australian Thoroughbred Finance, I expressed in interlocutory proceedings my view, in the analogous circumstances of that case, that although MANL entered into individual contracts with the investors and dealt with them individually and not as partners, it was strongly arguable that, in the carrying on of the operations of the venture, the members were carrying on a business in common with a view to profit and that they were in partnership. For the reasons I shall later state, I think that that was the position with the First Trinity Park Stud Breeding Venture.
The POM contained three pages of explanation. Schedule 1 attached a budgeted venture cash flow. Schedule 2 showed budgeted investors' cash flow per ownership unit. Schedule 3 was a copy of Mr Bester's valuation and attached to that were two pages of descriptions of the bloodstock.
The third page of the POM gave this information:-
"* OUTLAYS REQUIRED
Budgets have been prepared for the life of the Venture. These budgets set out:
(a) the budgeted Venture cash flow
(b) Budgeted Investor's cash flow per ownership unit
(c) Budgeted tax result per ownership unit
In summary these budgets show that the following outlays will be required by an investor per ownership unit.
|
|
|
| If Borrows from financier | If does not borrow | |
| Period end 30th June, 1989 | ...................................................... | $10,150 | $52,000 | ||
| Years ended | 30th June, 1990 30th June, 1991 30th June, 1992 30th June, 1993 | ...................................................... ...................................................... ...................................................... ...................................................... | $15,400 $5,250 $19,900 $9,750 Income will exceed commitments Income will exceed commitments | ||
Full details of the above calculations are set out in the attached Schedules 1 and 2.
* FINANCE AVAILABLE
The Manager has arranged for a financial institution ("Lender") to offer financing to participants who wish to borrow money to fund up to 100% of their contributions for 1989. Interest will be due on the loan payable yearly in advance. The lender is prepared to extend interest only loan facilities to participants who satisfy its lending criteria.
* PARTICIPANT'S TAX POSITION
Schedules 1 and 2 contain a summary of the estimated costs and revenues associated with the Venture together with the estimated tax position of Participants in each year.
Schedule 2 has been prepared based on the 1989 contribution being 100% funded by the Lender. If you compare the budgeted cash outflow for each ownership unit with the tax result (and resulting tax savings) the position is as follows - assuming a 50% tax rate:
| 1989 $'000 | 1990 $'000 | 1991 $'000 | 1992 $'000 | 1993 $'000 | |
| Tax loss (profit) ................................ | 55.00 | 19.30 | 19.75 | (16.35) | 143.25 |
| Tax savings thereon ........................ Less cash outlay .............................. | 27.77 (10.1x175) | 9.65 (15.40) | 9.88 (19.90) | (8.17) 16.10 | (71.62) 94.35 |
| Net result............................................ | 17.62 | (5.75) | (10.02) | 7.93 | 22.73 |
| Cumulative ........................................ | 17.62 | 11.87 | 1.85 | 9.78 | 32.51 |
Schedule 2 gave this information, inter alia:-
"BUDGETED INVESTOR'S CASH FLOW PER OWNERSHIP UNIT
|
Period ended |
Years ended 30th June | ||||
|
| 30 June 1989 $'000 | 1990 $'000 | 1991 $'000 | 1992 $'000 | 1993 $'000 |
| Profit Distribution from venture.......................... Loan from financier................ |
__ 52.00 |
15.50 __ |
11.00 __ |
47.00 __ |
164.30 __ |
|
| 52.00 | 15.50 | 11.00 | 47.00 | 164.30 |
| Less contributions to venture.............................. |
31.25 |
__ |
__ |
__ |
__ |
|
|
20.75 | 15.50 | 11.00 | 47.00 | 164.30 |
| Lease residual......................... Lease payment........................ | __ 20.75 | __ 20.75 | __ 20.75 | __ 20.75 | 17.95 __ |
|
| __ | (5.25) | (9.75) | 26.25 | 146.35 |
| Loan repayment...................... Interest to $52,000 payable in advance...................................... | __
(10.15) | __
(10.15) | __
(10.15) | __
(10.15) | 52.00
__ |
| Net outflow.............................. | (10.15) | (15.40) | (19.90) | 16.10 | 94.35 |
| Cumulative............................... | (10.15) | (25.55) | (45.45) | (29.35) | 65.00 |
In my opinion, the POM, in its statement of an investor's financial position, was misleading and deceptive to an ordinary investor who was not accustomed to analysing financial details. Particularly is this so as the venture was promoted in part as a tax scheme. It seems to be the natural reaction of many persons involved in tax schemes that they do not inquire too closely into them. Such an attitude was positively encouraged by advisers when s.260 of the Income Tax Assessment Act 1936 (Cth) was in force, but I assume that none of the investors were aware of that. At any rate, the mere mention of tax seems to discourage analysis of what, as in this case, may be a straightforward business activity.
A person reading the POM, and many of the investors did so only cursorily, would have understood that "the following outlays", which totalled $45,450, would be required, that they would receive tax deductions in 1989, 1990 and 1991 years totalling $47,300 and that the cumulative end result would be a net gain to them of $32,510. That much can be perceived if the document is read. Perhaps unfortunately, the sum of the tax loss in the 1989 year, $55,550, which stands out prominently because it is the first figure, could distract attention from other figures.
What the document did not do was to state in clear, unambiguous terms that each investor was liable for the 3 instalments totalling $45,450, plus the borrowing of $52,000, plus 4 payments of interest totalling $40,600, plus 4 rental payments totalling $83,000, plus a lease residual of $17,950, a total of $187,000. On top of this, each investor was to be liable for penalty interest if there was a default.
The investors were not told in direct terms by the POM that they would be required to enter at the commencement of the venture into liabilities totalling almost $200,000. Indeed, the liabilities into which each actually entered when the final figures were worked out was over $200,000. This could only be ascertained by a careful analysis of the document. If the magnitude of the liabilities had been explained to the investors, it seems unlikely that most would have been willing to enter into the venture, having regard to the modest returns proposed and to the risks involved.
Few if any of the applicants in fact appreciated that he or she was entering into liabilities of the magnitude of $200,000. Most understood that their involvement was limited to the 3 instalments totalling $45,450. Mr Farrow in his evidence said that he explained to each of the investors to whom he spoke the magnitude of the total liabilities. Having heard the applicants give evidence, I consider it unlikely that he did bring that point clearly to the attention of those applicants to whom he spoke. Mr Farrow concluded in his evidence that, in hindsight, the venture was a highly geared, high risk venture. It was not explained to the investors in that way.
The POM was an important document. The investors did not see the other documents. Each of them other than Mr Gibson gave a power of attorney to Mr McDonald to execute the formal agreements. The investors' understanding of the arrangement was that which they had from a reading of the POM and from what they had been told. Because, in the formation of syndicates of this type, it is common to obtain powers of attorney from syndicate members and because, therefore, syndicate members do not themselves have to face up to the execution of the awesome legal documents such as were executed in the present case, it is particularly important that a memorandum which sets out the terms of the proposal be explicit in describing the obligations which will be entered into.
The POM was misleading in other ways. The POM said:-
"These mares will be served by well credentialled commercial stallions at medium priced service fees. The aim is to produce top calibre progeny who should qualify for the top division of the major select sales in Australia and if necessary, New Zealand. The mares selected for this Venture have been carefully chosen with specific markets and buyers in mind. They are from pedigrees which are well known as being successful in the Northern Hemisphere, and which are currently being raced by some of the most notable and largest investors in U.S.A., Canada and New Zealand.
...
This venture is structured to avoid this problem because the manager's purchasing strategy is to acquire very well bred imported mares at relatively low cost and access to top class stallions at medium priced fees. This, together with the strength of the pedigrees should fetch above average yearling prices and result in a very good return of capital invested." (emphasis added)
This description was misleading and deceptive in that it suggested that the manager had pursued a "purchasing strategy" and had "selected" mares, the philosophy being to purchase well-bred mares for "prices which are not excessive" and "at relatively low cost". In fact, Mr McDonald had simply selected from the mares which Mr King offered him and he accepted without quibble the prices which Mr King asked. Those prices were not low. They
were extremely high. Apart from discussing the matter with Mr Marshall, who incidentally did not give evidence at the trial, Mr McDonald did nothing to check on the prices which Mr King asked. He took no part in obtaining a valuation from Mr Bester or from Inglis & Sons, or from ABCOS or, for that matter, from any other source. He left the question of prices entirely to Mr King and Mr Done.
The POM was also misleading and deceptive in that it included Mr Bester's valuation. This valuation was itself a misleading and deceptive document and I shall deal with that in more detail. What was not explained was that Mr Bester had had no prior experience of giving a formal valuation. Those reading the POM would have assumed that Mr Bester was a well-recognised and experienced valuer.
The valuation on the face of it expressed itself to be a valuation on the basis of "pedigrees, as well as foaling and covering details". In fact, Mr Bester gave what he described in his evidence as "a ratification type valuation". The POM stated that the prices at which the venture was acquiring the bloodstock were prices based upon Mr Bester's valuation. What the POM did not say was that Mr Bester, in his valuation, gave substantial weight to the prices which he understood Mr King and Mr McDonald had agreed upon and which he understood were prices in a concluded contract arrived at between two persons each of whom had had experience in the bloodstock industry. If the investors had been informed that the prices had been fixed by the vendor, that Mr McDonald had not quibbled about them and that Mr Bester made his valuation substantially in reliance upon those prices, they would have refused to invest in the venture.
Finally, the POM was misleading and deceptive in that it failed to state that, leaving aside the two Australian mares and the yearlings, vendors were selling to the venture for the price of A$1,385,000 bloodstock which Mr King and Natalma had recently purchased for the equivalent of A$377,128. This was, of course, not a fact known to Mr McDonald but it was nevertheless a material matter bearing upon the value of the bloodstock and would have been sufficiently material to discourage some of the applicants from entering into the venture.
COMPANIES CODE 1981 (NSW)
Section 169 of the Companies Code 1981 (NSW) provided:-
"A person, other than a company or an agent of a company authorized for that purpose under the common or official seal of the company, shall not issue to the public, offer to the public for subscription or purchase, or invite the public to subscribe for or purchase, any prescribed interest."
"Prescribed interest" was defined as:-
"`prescribed interest' means -
(a) a participation interest; or
(b) a right, whether enforceable or not, whether actual, prospective or contingent and whether or not evidenced by a formal document, to participate in a time-sharing scheme,
but does not include a right or interest, or a right or interest included in a class or kind of rights or interests, declared by the regulations to be an exempt right or interest, or a class or kind of exempt rights or interests, for the purposes of Division 6 of Part IV"
"Participation interest" was defined as:-
"`participation interest' means any right to participate, or any interest -
(a) in any profits, assets or realisation of any financial or business undertaking or scheme whether in the State or elsewhere;
(b) in any common enterprise, whether in the State or elsewhere, in relation to which the holder of the right or interest is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or a third party; or
(c) in any investment contract,
whether or not the right or interest is enforceable, whether the right or interest is actual, prospective or contingent, whether or not the right or interest is evidenced by a formal document and whether or not the right or interest relates to a physical asset, but does not include -
(d) such a right that is a right to participate in a time-sharing scheme;
(e) any share in, or debenture of, a corporation;
(f) any interest in, or arising out of, a policy of life insurance; or
(g) an interest in a partnership agreement, unless the agreement or proposed agreement -
(i) relates to an undertaking, scheme, enterprise or investment contract promoted by or on behalf of a person whose ordinary business is or includes the promotion of similar undertakings, schemes, enterprises or investment contracts, whether or not that person is, or is to become, a party to the agreement or proposed agreement; or
(ii) is or would be an agreement, or is or would be within a class of agreements, prescribed by the regulations for the purposes of this paragraph"
Section 5(4) of the Companies Code provided inter alia:
"A reference in this Code to, or to the making of, an offer to the public or to the issuing of, an invitation to the public shall, unless the contrary intention appears, be construed as including a reference to, or to the making of, an offer to any section of the public ... whether selected as clients of the person making the offer or issuing the invitation or in any other manner and notwithstanding that the offer is capable of acceptance only by each person to whom it is made or that an offer or application may be made pursuant to the invitation only by a person to whom the invitation is issued, but a bona fide offer or invitation shall not be taken to be an offer or invitation to the public if it -
(a) is an offer or invitation to enter into an underwriting agreement;
(b) is made or issued to a person whose ordinary business is to buy or sell shares, debentures or prescribed interests, whether as principal or agent;
(c) is made or issued to existing members or debenture holders of a corporation and relates to shares in, or debentures of, that corporation;
(ca) is made or issued to holders of prescribed interests made available by a corporation pursuant to a deed that is an approved deed for the purposes of Division 6 of Part IV and is an offer or invitation that relates to prescribed interests made available by that corporation pursuant to the same approved deed; or
(d) is made or issued to existing members of a company in connection with a proposal referred to in section 409 and relates to shares in that company." (emphasis added)
It is alleged by the applicants that the POM was distributed so widely as to constitute an offer to the public and that, as no prospectus had been lodged and approved, no reliance could be placed by MANL upon its agreement of loan, its leases or its mortgages.
The POM, as its name inferred, was intended to be a "private" as opposed to a "public" offer. Mr McDonald had been made aware by Mr Done of the need to ensure that the offer did not fall within the provisions of s.169 of the Companies Code. Nevertheless, it is necessary to look at what in fact occurred. The determination of whether an offer was made to the public calls for an objective assessment of the nature of the offer and of the manner in which the offer was issued and communicated. As Barwick CJ put it in Lee v Evans (1964) 112 CLR 276 at 285:-
"But whether the question is whether the invitation is ex facie an invitation to the public or whether an invitation has become an invitation to the public by reason of the nature or extent of its issue, the basic concept is that the invitation, though maybe not universal, is general; that it is an invitation to all and sundry of some segment of the community at large. This does not mean that it must be an invitation to all the public either everywhere, or in any particular community. How large a section of the public must be addressed in a general invitation for it to be an invitation to the public in the relevant connexion must depend on the context of each particular enactment and the circumstances of each case. But within that sufficient area of the community the invitation must be general in the sense spoken of by Viscount Sumner in Nash v. Lynde [1929] A.C., at p.169, by Warrington J. in Sherwell's Case (1907) 23 SLR at p.483, `An offer of shares to anyone who should choose to come in', and by Jordan C.J. in Ex parte Lovell; Re Buckley (1938) 38 S.R. (N.S.W.) 153, at p.159; 55 W.N. 63, at p.65, `made to the public generally and capable therefore of being acted upon by any member of the public'. That those to whose hands such an invitation is intended to come, also stand in some special relationship to the invitor, will not prevent the invitation being an invitation to the public. See In re South of England Natural Gas and Petroleum Company, Ltd. [1911] 1 Ch. 573. In my opinion Nash v. Lynde [1928] 2 K.B. 93; [1929] A.C. 158 lends no support to the proposition that an invitation to a single individual as a member of the public in the sense that he stands in no special relationship to the invitor is an invitation to the public within the meaning of the amending section." (emphasis added)
Subsequently, in Corporate Affairs Commission (South Australia) v Australian Central Credit Union (1985) 59 ALJR 785, Mason ACJ, Wilson, Deane & Dawson JJ said at 787-8:-
"The question whether a particular group of persons constitutes a section of the public for the purposes of s.5(4) of the Code cannot be answered in the abstract. For some purposes and in some circumstances, each citizen is a member of the public and any group of persons can constitute a section of the public. For other purposes and in other circumstances, the same person or the same group can be seen as identified by some special characteristic which isolates him or them in a private capacity and places him or them in a position of contrast with a member or section of the public. In a case where an offer is made by a stranger and there is no rational connection between the characteristic which sets the members of a group apart and the nature of the offer made to them, the group will, at least ordinarily, constitute a section of the public for the purposes of the offer. If, however, there is some subsisting special relationship between offeror and members of a group or some rational connection between the common characteristic of members of a group and the offer made to them, the question whether the group constitutes a section of the public for the purposes of the offer will fall to be determined by reference to a variety of factors of which the most important will ordinarily be: the number of persons comprising the group, the subsisting relationship between the offeror and the members of the group, the nature and content of the offer, the significance of any particular characteristic which identifies the members of the group and any connection between that characteristic and the offer: cf., generally Lee v Evans at 287; Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex rel. Corporate Affairs Commission (1981) 148 CLR 121 at 135-136, 143-144 ....
No particular number of persons can be designated as being, of itself, necessarily sufficient or inadequate to constitute the public or a section of the public for every purpose. "Anything from two to infinity may serve: perhaps even one, if he is intended to be the first of a series of subscribers, but makes further proceedings needless by himself subscribing the whole": Nash v Lynde [1929] AC 158 at 169 ..." (emphasis added)
Brennan J said at 789:
"The viewpoint from which a group is to be distinguished from a `section of the public' is the viewpoint of the offeror. When an offeror contemplates the making of a particular offer to a particular group, the question is whether or not that group is to be seen by a reasonable person in the offeror's position as a section of the public. The answer to that question depends on whether there exists some particular relationship between the offeror and the group whom he has in contemplation as offerees which is apt to distinguish the group from a section of the public. The relationship must exist before the offer is made, for the group must be classified as a section of the public at the moment when the offer is made if s 5(4) is to apply. But relationships, particularly commercial relationships, are various and not every relationship between an offeror and a group will suffice to take an offer to a group out of s 5(4). Some relationships between offeror and offerees may have no connection or only a tenuous connection with the subject-matter of the offer to be made. But when an antecedent relationship exists between an offeror and a group of offerees and, by reason of that relationship, the offerees have a special interest in the subject matter of the offer, there is a ground for distinguishing the group from the public. (It may be that a ground of distinction appears also when the offeror has some kind of special interest in the acceptance of the offer by the offerees because of the relationship between the offeror and offerees, but that question can await consideration in another case.)
When the offerees' special interest is substantially greater than or substantially different from the interest which the offerees would have had in the subject-matter of the offer if the antecedent relationship did not exist, the ground for distinguishing them from a section of the public is substantial. In my opinion the criterion which distinguishes an offer to a group of offerees who are not a section of the public is this: whether the offerees are members of a group who, by reason of their antecedent relationship with the offeror, have an interest in the subject-matter of
the offer substantially greater than or substantially different from the interest which others who do not have that relationship would have in the subject-matter of the offer."
It is worth noting particular points made in Hurst v Vestcorp (1988) 12 NSWLR 394, where Kirby P said at 404:
"It is the generality of the offer which gives it the character which attracts the operation of the statute. It could not be otherwise as there are always many members of the public (perhaps a majority) who could not afford in any circumstances to invest in a company. Their existence, and that of a comparatively small proportion of the public with disposable income interested in investments of a speculative nature but with distinct tax advantages, cannot relieve a company from compliance with the protective provisions..." (emphasis added)
McHugh JA said at 440:
"Employment of agents for commission to introduce suitable investors seems almost conclusive evidence of an offer to the public. It is no answer to that proposition to say that the agents themselves came from a specially selected group or that many of the investors came from their clients. The overwhelming inference is that persons were accepted as investors, not because they were clients of accountants or had participated in previous tax schemes or were partners or were members of the families of such persons but because, as members of the public, they had the funds to invest in a scheme which gave them tax advantages." (emphasis added)
Mr McDonald said that there were probably 35 to 40 POM's printed and distributed by him. Of those at least 10 to 12 copies were given to Mr King and Mr Marshall. The investors were, initially at least, subsisting clients of Beattie McDonald who had been identified as being suitable both from the point of view of their income and capital assets as well as their potential tax liability. However, as June 30 1989 drew closer, fewer than the requisite 20 shares had been taken up.
Mr King was aware that investment by 20 members was critical. He contacted some of his own friends in Queensland: Mr Bailey, Mr Wall and Mr Mesh and others. He offered commissions to Mr Bailey and Mr Wall to sign up other investors. And he offered Mr Mesh $30,000 personally, to take up a share. Mr McDonald was kept unaware of these arrangements. Mr Bailey estimated that he contacted as many as 35 business acquaintances and friends on the basis of a promised $20,000 commission from Mr King for each person who invested. Mr Bailey probably made facsimile copies of the POM when conducting his own marketing campaign for the scheme. Mr Duncombe was introduced to the scheme through Mr Bailey. Mr Gibson heard of the venture through Mr Caldwell, a solicitor at the firm who acted for the financier, MANL.
Notwithstanding the extent to which the venture was ultimately promoted, it seems to me that the offer was not made to the public. The offer was communicated to clients and friends in a private way and always to persons whom it was thought would have a particular interest in a horse breeding syndicate, particularly one with tax incentives. The principal promoter, Mr McDonald, did not himself make an offer to the public. The issue arises only because of the commissions paid by Mr King and the activities of Mr Bailey. In my opinion, the activities of Mr Bailey were peripheral and of insufficient consequence to impose the character of an offer to the public upon that which was intended to be and was promoted as a private offer.
The firm of Beattie McDonald had a special relationship with its clients whom it sought to interest in the venture. As Beattie McDonald carried on practice in and around Maitland, many of the clients would have had a general interest in bloodstock. And Beattie McDonald was the tax agent for each of the clients. It was of particular interest to the clients that Mr McDonald intended to play an active role in the management of the venture.
The offers made to the clients were not made to them as members of the public but because of their relationship with Beattie McDonald.
Ultimately, Mr McDonald needed a few more members. He asked Mr King to assist. Mr King spoke to Mr Bailey and Mr Wall, who were directors of Bailey Wall Consulting Pty Ltd, which had acted for him on other affairs. He also spoke to his friend and dentist, Mr Mesh. A particular interest which these persons all had was an interest in bloodstock. Mr Wall was a member of the Queensland Turf Club and of the Brisbane Amateur Turf Club and he, Mr Bailey and Mr Mesh held or had held interests in bloodstock. They knew of Mr King's involvement in the industry and understood that Mr King was connected with the establishment of the venture. They joined because of their association with Mr King.
The only members who had no prior association with Beattie McDonald or Mr King were Mr Gibson and Mr Duncombe. However, they were only 2 out of 21. Mr Gibson heard of the scheme through a solicitor who was acting for MANL and asked if he could join. Mr Duncombe was a friend of Mr Bailey. He is not one of the applicants. As Barwick CJ pointed out in Lee v Evans at 285, it is not sufficient to constitute an offer to the public that one of the persons who took an interest would be regarded, if looked at on his or her own, to be a member of the public, not having had any pre-existing relationship with the offeror. Mr Gibson and Mr Duncombe were both introduced to Mr McDonald as persons who wished to invest in the venture.
In my opinion, the offer was essentially a private offer. A doubt arises because of the activities of Mr Bailey who contacted numerous persons after Mr King had offered to pay
a substantial commission. If his activities were looked at on their own, the conclusion may be drawn that Mr Bailey made an offer to the public. But those activities had not been directed or authorised by Mr McDonald, who was unaware that Mr Bailey had been promised a commission by Mr King. Mr McDonald was the principal promoter of the venture. He settled the membership and he signed the agreements on behalf of all members other than Mr Gibson. Insofar as interests were issued, he was the person who issued them, for he gave the list of the members and attended the execution of the agreements. It is principally from Mr McDonald's activities and knowledge that the offer derives its character. In my opinion, the offer of interests and the issue of interests were essentially private acts.
In these circumstances, I am of the opinion that the allegation of a breach of s.169 of the Companies Code has not been established. Counsel have chosen not to raise the issue as to whether the offer made was an offer of an interest in a partnership and thus exempted by s.5(1) from s.169.
THE APPLICANTS
I need not deal with the evidence of the applicants in detail. The evidence was uniformly similar. None fully understand the extent of the liabilities into which he or she entered or the risks involved. Each was influenced by the POM. I have already discussed the POM and I think that the applicants' misunderstanding of what was proposed was the consequence of its misleading contents.
Many of the applicants read the POM only cursorily. But it formed the structure on which the venture was promoted orally. Not only did Mr McDonald speak to his clients in terms similar to those which appeared in the POM, but Mr Farrow and Mr Schultz did likewise. Mr McDonald made copies available to Mr King, and, although Mr King may not have read the document in detail, Mr McDonald would also have spoken to him in terms similar to those he used in the POM. Mr King would have spoken in like terms to those with whom he spoke. The evidence of each of the applicants, whether or not he or she was a client of Beattie McDonald, as to what he or she was informed about the venture was very similar.
The principal issue raised is that it is said that 15 of the applicants had the funds to mitigate the losses which they are now suffering. Those applicants were Mr Aird, Mr Carmichael, Mr Bailey jointly with Mr Wall, Mr Braye, Mr Foster, Mr Fraser, Mr Gibson, Mr Greedy, Mr Jones, Mr Levick, Mr Neilson, Mr Seales, Mr Stenberg and Mr Thornton. In respect of these applicants, I am satisfied that it may well have been possible for them to refinance their obligations to MANL.
The principle to be applied is that stated in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, 689 where Viscount Haldane L.C. said:-
"The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps."
The applicants did not refinance their liabilities because they had received legal advice that there was a reasonable prospect that no moneys were due to MANL or, at any rate, that
MANL's claims would not be allowed to the extent of the claim which MANL now makes, that is at an interest rate of 26% compounding monthly.
Therefore, none of the applicants considered it to be prudent to discharge the liability to MANL at the rates which MANL claimed because, by doing so, they would throw away their right to argue the point that the establishment of the venture involved an offer to the public in breach of s.169 of the Companies Code. In my opinion, the legal arguments which were available to the applicants and which their legal advisers propounded were reasonably strong arguments. I have not accepted them but the arguments were strong and the case was borderline.
I do not consider that any of the applicants failed to act reasonably. In my opinion, it could have been unwise for any of the applicants to pay out MANL and to enter into alternate financing arrangements.
It was alleged as against the applicants that they failed to take reasonable care in the management of the mares and in the disposition of the mares and the foals. It was said that the mares were not put to good quality sires and that their values suffered accordingly. It was said that the applicants allowed the mares in Australia to be sold by MANL at exceedingly low prices and allowed the mares in the United States to be sold for unpaid agistment fees.
I am of the view that there was no negligence in this respect. The applicants were not experts in the management or value of bloodstock. Moreover, there was no provision
in the management agreement for meetings of the investors or for the investors to take control of the bloodstock. The scheme was for each investor to hold an undivided share in each mare and foal and for the management to be handled by Jarpan. Jarpan, for its part, was always short of funds once it was clear that the mares and foals could not be sold for the projected prices. I do not think that there was any step which persons in the position of the investors reasonably ought to have taken which they did not take.
It was also submitted that the applicants other than Mr Gibson were negligent in not examining the agreements in detail, in not having them perused by their own legal advisers and in giving a power of attorney to Mr McDonald. However, it is not at all uncommon for investors in transactions such as the present to rely upon the advice of an accountant such as Beattie McDonald and it is not at all uncommon for investors in such schemes to give a power of attorney to an accountant or lawyer for the purpose of settlement. The applicants were not negligent in leaving the "paperwork" to Mr McDonald, who was a well regarded accountant.
MR McDONALD
Mr McDonald's actions and failures were responsible, though not wholly responsible, for the disaster which occurred. Mr McDonald may have been driven primarily by his love of bloodstock and his desire to become a significant figure in a major breeding venture. Mr McDonald may also have been influenced by the potential profit from professional fees and managerial fees. In the first half of 1989, Mr McDonald's financial position, while not stressed, was at least stretched.
Mr McDonald was the principal promoter of the venture. He was no doubt encouraged by Mr Marshall's plan to syndicate "Cardell" and by Mr Marshall's preparedness to care for and manage the mares at the Trinity Park Stud. Mr Marshall introduced him to Mr King. Mr McDonald decided which of the horses would go into the venture, though he discussed the matter with Mr Marshall and Mr King. He agreed to the prices which Mr King stipulated. He drafted the POM, after taking advice from Mr Done. He had the POM printed and he asked his partner, Mr Farrow, and his employee, Mr Schultz, to promote it amongst their clients. Mr McDonald himself spoke to the applicants, Messrs Braye, Foster, Fraser, Greedy, Jones, Levick, Mesh and Thornton. Mr McDonald got together the financial statements and applications for finance which had to be lodged with Australian Thoroughbred Finance. He signed relevant documents as a director of Jarpan. As attorney for all the applicants save Mr Gibson, he signed the thoroughbred owner management agreement and various security agreements on behalf of the applicants.
What Mr McDonald failed to do and what a person in his position had a duty to do, having regard to his relationship with his clients and with the other persons who became members of the venture, was to obtain independent advice as to the value of the bloodstock that was being acquired. It was fundamental to the venture's success that the question of price not be left to the vendor. It was essential that, in the establishment of a venture such as the First Trinity Park Breeding Venture, the values be accurate. The whole success of the venture depended on that fact. Yet, Mr McDonald left the matter of an independent valuation to Mr King and Mr Done, who was Mr King's accountant. It was Mr King & Mr Done who engaged Mr Bester and it was Mr Bester who engaged Mr Pulford. Mr Bester, ABCOS and Inglis & Sons all sent their invoices to Mr King. Mr Bester's valuation went
to Peat Marwick and only through Peat Marwick to Mr McDonald. Mr Pulford's valuation went to Mr King in the first instance.
It was important not only that the values be correct but that they should be conservative. The venture was a 4 year venture. It was to come to an end in the year ending 30 June 1993. In that year, all the bloodstock was to be sold, MANL was to be paid off and the profits were to be distributed. To achieve a result as predicted over a 4 year period, a conservative approach was required. This was not a case where investors were being asked to invest in a venture which entailed risks but would be likely to give rise to profit in due course. The venture was promoted as being one in which there were to be specified returns to the members over a 4 year period, some of the returns being in the form of income tax deductions.
Mr McDonald did not adopt a conservative approach. He made no enquiry which was independent of the vendor, other than that he had some discussions with Mr Marshall. Mr Marshall has not given evidence in Mr McDonald's case. He was not a valuer. In any event, Mr Marshall was not sufficiently independent. Mr Marshall could see a considerable financial gain coming to him if the venture went ahead. It was at Mr Marshall's stud that the bloodstock was to be agisted and he anticipated that the stallions standing at Trinity Park Stud would service many of the mares.
It seems likely that Mr McDonald's excitement at becoming involved in a venture of the type proposed, the financial rewards he could see flowing to him from it and the fact that, to obtain useful tax deductions, there needed to be a certain level of payments to the
financier, were all factors which led Mr McDonald to overlook the necessity for his obtaining an independent assessment of the values of the bloodstock, a failure which, in retrospect, Mr McDonald recognises and regrets.
The POM was, for the reasons I have mentioned, a misleading and deceptive document and Mr McDonald's conduct in creating and distributing it was a breach of s.42 of the Fair Trading Act. As this document was a crucial document in the establishment of the venture, I am satisfied that all the applicants suffered loss from this breach of s.42 and are entitled to damages from Mr McDonald.
I am also satisfied that Mr McDonald had a relationship of proximity not only to the clients of Beattie McDonald but also to all potential investors in the venture such as to give rise to a duty of care on his behalf. In San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340, Gibbs CJ, Mason, Wilson and Dawson JJ summarised the duty in these terms:-
"... whenever a person gives information or advice to another upon a serious matter in circumstances where the speaker realizes, or ought to realize, that he is being trusted to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for that other party to act on that information or advice, the speaker comes under a duty to take reasonable care in the provision of the information or advice which he chooses to give."
I am satisfied that Mr McDonald was negligent in his preparation of the POM and in the steps he took to establish the venture. Mr McDonald had no sufficient information before him as would have justified him to put the figures in the POM to investors whom he expected would rely upon them. Mr McDonald had made no adequate enquiries. He left the question of value to others. In the result, he failed to fulfil his duty of care.
As Mr McDonald was a promoter of the venture, he had fiduciary duties to the members and potential members of the syndicate. Reliance was placed upon United Dominions Corporation Ltd v Brian Pty Ltd (1984) 157 CLR 1 where Mason, Brennan & Deane JJ said at p.12:-
"A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation."
See also Gibbs CJ at 5 and Dawson J at 16. See also Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300. Mr McDonald was also subject to fiduciary duties arising out of his position as a chartered accountant advising people with respect to investment. Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371; Catt v Marac Australia Ltd (1986) 9 NSWLR 639.
Mr McDonald failed to advise most of the investors to whom he spoke that he himself was the vendor of mares to the syndicate, that one of the mares of Mr Bester, whose valuation was to be relied upon, was being acquired for the syndicate and that he, Mr McDonald, was taking advice and leaving much of the task of establishing the venture to Mr King, who was the vendor or in control of the vendor of most of bloodstock to be acquired by the syndicate. Mr McDonald may not have thought of Mr King as a promoter of the venture. However, he clearly knew that Mr King was his principal adviser as to the bloodstock to be acquired and his principal adviser as to their value. He also knew that he
was taking advice from Mr Done who acted for Mr King and that the obtaining of a valuation was in the hands of Mr King. If these matters had been disclosed to potential investors, it would have been unlikely that the venture would have proceeded.
Negligence, breach of fiduciary duty and a breach of s.42 of the Fair Trading Act are established against Mr McDonald. Damages, equitable compensation and the return of profits are sought against him. Fraud in the promotion of the venture has not been established against him. Mr McDonald was not aware that either Mr Bester's valuation or the ABCOS valuation were unsound. He believed that the prices which he agreed with Mr King were fair prices and that the venture would be successful. Although many of the statements in the POM were glowing, they expressed generally the view which Mr McDonald held about the venture. Mr McDonald did not make statements in the POM without a belief in their truth or not caring whether they were true or false. Derry v Peek (1889) 14 AC 337 at 361.
MR FARROW
Mr Farrow is liable as a partner for Mr McDonald's negligence. The venture was established in the course of the conduct of the practice of Beattie McDonald.
Mr Farrow is also responsible in that he and Mr McDonald distributed the misleading and deceptive document, the POM, and so did the employee Mr Schultz. Mr Farrow himself attracted a number of the applicants to the venture. None of these applicants was given a clear understanding of the total liabilities or, for that matter, that there were serious risks involved in the venture. The applicants Aird, Carmichael and Seales were informed by Mr
Farrow that Mr McDonald's figures were conservative as, I think, Mr Farrow considered they should have been. What Mr Farrow told the investors orally and what he conveyed to them by giving them copies of the POM was misleading and deceptive. Mr Farrow's conduct necessarily breached s.42 of the Fair Trading Act.
PURCHASE OF HORSES
There was a conflict of evidence between Mr McDonald and Mr King as to the arrangements between them. Mr McDonald's case, as put in his evidence in chief, was that he did not agree to purchase any of the horses personally. He said that the transaction that led to the apparent purchase by him of the mares Lumenette, Swift Eagle and Kaysariyya arose because Mr King required an advance. Mr McDonald said that the 3 mares were put into his name by way of security for the sums which he advanced. Mr King, in his evidence in chief, said that his understanding of his arrangement with Mr McDonald and Mr Marshall was, at all times, that Mr McDonald & Mr Marshall or at least Mr McDonald had entered into a binding arrangement to purchase not only those 3 horses but also the other 9 horses which were being acquired from Mr King and Natalma.
The issue must be determined by reference not to what Mr McDonald and Mr King thought at the time, but by reference to the events which happened and the words which were used. The issue being a contractual one, the test is an objective one.
In my opinion, Mr McDonald agreed to purchase 2 or 3 horses from Mr King. This transaction appears to have occurred because Mr King needed some funds to assist him with purchases he was making and, in addition, desired an expression of good faith and because
Mr McDonald needed some security for the moneys he was to pay. I am satisfied that Mr McDonald agreed originally to the purchase of Northy and its foal but that ultimately that agreement was altered to the purchase of Lumenette, Swift Eagle and Kaysariyya. The minutes of Mr McDonald's record:-
"Mr McDonald has paid $150,000 - (from own funds) to secure part payment of the number 1 brood mare Northy & unnamed colt. Residual of $50,000 - was to be paid by 30/4/89."
In fact, Mr McDonald had not at that time paid any sum but, nevertheless, he was then seeking finance of $50,000 to enable him to make the purchase.
Later, the mares to be purchased by Mr McDonald became Lumenette and Ricara. An invoice dated 19 January 1989 for the sale of Lumenette for $150,000 and Ricara for the sum of $200,000 was addressed to Trinity Park Stud for the attention of Mr Ray Marshall. Presumably, it was then sent to Mr McDonald .
On 3 February 1989, Mr McDonald wrote this letter to Mr King:-
"I refer to our recent discussions and now confirm the following arrangements.
1. Ray Marshall and the writer, acting as nominees for a corporate Manager, are preparing a thoroughbred breeding venture for private participation.
2. The proposal is to acquire the package of broodmares as submitted by you on the following basis.
(i) The purchase of broodmares `Lumenette' and `Ricara' for the sum of $350,000 with settlement to be made on or about the 8th February, 1989.
(ii) The remaining mares as listed will be acquired by a mutually accepted arrangement subject to the final settlement being effected not later than 30th April, 1989.
I am authorised to advise that the venture is proceeding in good faith and an undertaking is given that every endeavour will be made to complete the total acquisition expeditiously with a view to final settlement being effected on the earliest possible date."
It will be noted that Lumenette and Ricara were to be acquired immediately.
On 13 March 1989, Mr King sent a letter by fax to Mr McDonald which commenced:-
"The six mares whose details follow, are now in hand. With your approval, they will complete the high quality package `A'."
The six mares nominated all became part of the venture's bloodstock. Indeed, Mr McDonald's notes had earlier included them. By this time, Ricara was not in this venture, it being included in the other venture, the Hallmark Classic Breeding Venture, which Mr McDonald had decided to establish.
The final list of the bloodstock was settled by 15 March, when Mr Bester made his valuation. There was subsequently an agreement reached that the purchase by Mr McDonald would be of the mares, Lumenette, Swift Eagle and Kaysariyya for a total of $300,000. On 6 June 1989, Mr McDonald wrote to Mr Done:-
"Dear Peter,
For your records, I confirm the purchase of the following mares which form part of the First Trinity Park Stud Breeding Venture for a total consideration of $300,000.00.
1. Lumenette (USA) 150,000.00
2. Swift Eagle (NZ) 75,000.00
3. Kaysariyya (IRE) 75,000.00
__________
$300,000.00
__________
I also confirm that this purchase constitutes a deposit on the acquisition of the total thoroughbred stock of the venture at the agreed value of $1,565,000 as set out in Schedule 3 of the memorandum."
Probably, this letter served two purposes, one of which was to confirm that Mr McDonald was purchasing Lumenette, Swift Eagle and Kaysariyya, the other being to provide a letter which would be an assurance to the vendors to Mr King such as Allegra.
Mr McDonald provided on settlement an invoice directed to MANL for Lumenette, Swift Eagle, Kaysariyya, Bayoone and Hope Val Does, for a total of $350,000. On settlement, he received that sum plus the sum attributed to the foal of Bayoone which the venture acquired directly. Mr McDonald had earlier made these payments to Mr King:-
22 February 1989 $130,000
4 April 1989 $ 33,000
3 May 1989 $ 50,000
23 May 1989 $ 60,000
$273,000
The balance of the $300,000 was not paid.
In my opinion, it was always a part of the arrangement that Mr McDonald would personally purchase some of the mares. Those mares, in the end, were Lumenette, Swift Eagle and Kaysariyya. This arrangement was not just a security arrangement though it served to provide security to Mr McDonald for the moneys he paid to Mr King. At least by 6 June 1989, there was a contract between Mr McDonald and Mr King for the sale and purchase of Lumenette, Swift Eagle and Kaysariyya.
As for the remaining horses sold by Natalma and Horse Australie, I am of the opinion that the arrangement between Mr McDonald and Mr King was simply that the mares would be purchased by the venture, if it were established. The fact that there was an express arrangement for the acquisition by Mr McDonald of particular mares is supportive of this conclusion. It is also significant that Mr King understood, at all material times, that Mr McDonald was seeking to establish a syndicate and that neither Mr McDonald nor Mr Marshall had any interest in purchasing a package of brood mares for their own purposes. Mr King's involvement in promoting the venture is an indication that he understood that the sale of the remaining 9 mares and of the foals was dependent upon the successful establishment of a syndicate. Mr King understood that Mr McDonald did not have sufficient funds to enable him personally to purchase the whole package.
MR KING
A claim is made against Mr King on the footing that he was a promoter of the venture.
Mr King took a very active part in the establishment of the venture. He declined to become a member of the syndicate, as he considered that there would be a conflict of interest. Nevertheless, he did all that he could do to see that the venture was established. Mr King gave this evidence, inter alia:-
"You were intending to include in that reference a reference to the syndication of the mares when you said you were trying to get the whole act together?--I don't deny for a moment that I did everything I could within the boundaries of what I felt proper in terms of facilitating other aspects of the union which would help me sell the horses, whether that be a wise statement to make here or not, I do not know, but that was the fact.
...
I will ask you again, Mr King, apart from Messrs Bailey, Walsh and Mesh, did you believe yourself to be selling the venture as opposed to the horses?---Selling the venture?
Yes?---I will have to repeat what I said the other day is that I believe I did assist in every way I could to ensure that I would sell the horses. But I never spoke to any of the other 16 applicants or whatever the number is in the partnership that was brought in from New South Wales and made
no representations to them apart from whatever representations came over or called to me from Mr Levick." (emphasis added)
Unfortunately for Mr King, it does not assist him to say that what he did in the establishment of the venture he did for the purpose of selling his horses. It was because he was a vendor of horses to the syndicate that he had a conflict of interest. He ought not to have taken an active role in the obtaining of the valuations, for his interests and those of the investors' interests were not the same.
In 1988, Mr King was looking for an opportunity to sell his bloodstock to just such a syndicate. Over 1987 and 1988 he had gathered together a number of mares and had had them, or some of them, serviced to southern hemisphere time. His project had reached the stage where he needed a purchaser in Australia. Resale in the United States was not his intention, because he could not have made the profit he desired. From the moment Mr King was introduced to Mr McDonald, Mr King promoted the establishment of the venture as strongly as he could. He had more to gain than anyone else. Mr McDonald's proposed venture was precisely the vehicle which Mr King required for the sale of his mares at the prices which he sought.
The First Trinity Park Stud Breeding Venture would not have been established had not Mr King taken the steps that he did. Mr McDonald did not have the experience to set up the venture on his own. In many, many ways, Mr King was the driving force behind the establishment of the syndicate.
Mr King introduced Mr McDonald to his accountant and adviser Mr Done. This step had the object and result of ensuring that what was done in relation to the venture would not be adverse to Mr King's interests.
Mr King said in cross-examination that probably he had understood as to the valuation that it was to be an "independent valuation that would be required as a comfort for the potential investors and perhaps the financiers." Yet Mr King was the person through whom information with respect to the valuation was given to Mr Bester. Mr King kept in close personal touch with Mr Bester. Mr King was instrumental in having Mr Bester's valuation go, in the first instance, from Mr Bester to Peat Marwick. He was kept fully informed by Mr Bester as to the unsuccessful attempt to obtain a valuation from Inglis & Sons and as to the obtaining of a valuation from Mr Pulford of ABCOS. As I have earlier mentioned, the invoices of Mr Bester, of Inglis & Sons and of ABCOS were all addressed to Mr King. Mr King paid at least the account from ABCOS. Mr Bester has not been paid.
Mr King played an active part in obtaining finance. On 16 February, he spoke with Excel Finance concerning the venture. Later, on 5 April, he and Mr Done had a long conference with NZI Securities which they hoped would be successful. Subsequently, Mr King and Mr Done were referred to Australian Thoroughbred Finance. Mr King developed such a relationship with members of the financier that, on 27 June, he sent a fax to Mr Wayne Cross of Equico addressing the remarks to "Wayne".
Mr King arranged insurance on the mares and foals for the venture operative from the commencement of the venture. Mr King attended throughout the execution of the
agreements on 29 June, though there was no agreement which he was required to sign. In the end, he agreed to act as secretary of Jarpan and he signed the management agreements in that capacity. Mr King attended at settlement.
Mr King also sought members for the syndicate and gave substantial incentives to some syndicate members to invest. He introduced Mr Bailey, Mr Wall and Mr Mesh. He paid $30,000 to Mr Mesh. He paid $20,000 to Mr Bailey for introducing Mr Duncombe. Five thousand dollars of the $20,000 was paid on to Mr Wall by Mr Bailey.
Mr King was clearly a promoter of the venture, notwithstanding that he promoted it so that the venture would purchase his bloodstock at the prices he sought. See the passage from the judgment of Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd cited above.
Having a clear conflict of interest, because he was a vendor of horses to the syndicate, Mr King ought not to have played any part in obtaining the valuations on which the investors and the financier were to rely. As events turned out, he influenced the two valuations, those of Mr Bester and of Mr Pulford, and they were favourable to him. Mr King's actions ensured that there was no independent valuation. The fact that a vendor of the horses was actively involved as a promoter of the syndicate and played an essential part in setting it up was not disclosed to the investors.
Even Mr McDonald was not informed expressly that Mr King was the vendor of the horses or in control of the vendor of the horses. Mr McDonald gave evidence that he knew that Mr King was the vendor of one of the horses, Plaisir d'Amour, that a firm by the name of Natalma Bloodstock owned some of them and that he believed that, with respect to the balance of the horses, Mr King was associated with or acted as agent for the vendor.
Mr Bailey understood that Mr King was a vendor of horses to the syndicate and that he stood to make a substantial profit. However, in answer to questions put to him by Mr King, Mr Mesh said that he understood from Mr King that Mr King was buying horses for the venture and that he did not understand that Mr King was a vendor. Mr Wall gave evidence that he did not know that Mr King was a vendor of horses to the venture.
Mr King failed to disclose to the investors matters set out in the POM which he knew were incorrect. He was aware that the horses were not being purchased "for prices which are not excessive" and "at relatively low cost". Mr King was also aware of the statement in the POM that "The acquisition price of the bloodstock is based on his [Mr Bester's] valuation" was misleading for Mr Bester had adopted Mr King's figures and had done so principally on the basis of invoices purporting to show sales by Mr King to the venture of the horses at those prices.
In failing to disclose information which would have been material for the investors to know, including the prices which had been paid for the bloodstock in the open market, and in taking steps to ensure that the prices he sought for the bloodstock were adopted in the valuations put forward to the investors and to the financier as appropriate prices, Mr King breached the fiduciary duties which he owed to the investors.
It follows from the breach of fiduciary duties that Mr King is liable to account to the applicants for the benefits received by him as the result of his breach. Those benefits may include Natalma's profits, but as that company is not a party, I make no finding as to whether the profits are recoverable from it. The applicants also claim monetary compensation for Mr King's breach of his fiduciary obligations. This may be the appropriate relief as the applicants' loss is greater than Mr King's gain.
I am of the opinion that Mr King engaged in misleading and deceptive conduct which was in breach of s.42 of the Fair Trading Act in that he distributed the POM to Mr Bailey, Mr Wall and Mr Mesh at least. I am of the view that it is probable that, had these three persons not been attracted into the syndicate, the syndicate as it was ultimately formed could not have gone ahead. Mr McDonald and Mr Farrow had reluctantly taken up 2 shares between them because they were unable to attract sufficient investors. Had Mr King not interested Mr Bailey, Mr Wall and Mr Mesh in the venture, it would have been unlikely to proceed. It follows that the steps which Mr King took in promoting the venture by distributing the POM and speaking to potential investors was conduct which was a contributing cause of the loss suffered by all the members of the syndicate.
A claim was made against Mr King based on fraud and fraudulent misrepresentation. This was not, however, propounded with respect to Mr King's communications with Mr McDonald or Mr Bester, which probably did include some unfounded misrepresentations, but with respect to Mr King's communications with the applicants. In fact, Mr King spoke with only a few of the applicants: Mr Bailey, Mr Wall and Mr Mesh. I am not satisfied that the requisite element of fraud, in the Derry v Peek sense, is made out. Mr King considered
that the bloodstock was worth the prices which he sought and he was optimistic as to their potential. As to the POM, it was not his document and he did not put it forward as such.
MR DONE
The most difficult part of the case is that which concerns the allegations made against Mr Done.
I am satisfied that whatever Mr Done did was done by him in good faith, as he saw it. Mr Done had an ability to see affairs in terms of black and white. He informed Mr McDonald that he could not advise him with respect to prices. Mr Done honestly thought that that was the end of that matter. He did not see the significance of his acting in the establishment of the venture nor the significance of steps that he later took. A conflict of interest is an insidious matter. When it exists, it requires that a great deal of positive thought be given to ensuring that each party is given the advice that that party would otherwise be entitled to absent the conflict. Otherwise, the conflict will tend to have an effect upon affairs. Having said to Mr McDonald that he could not advise Mr McDonald with respect to the prices or values of the mares, Mr Done appears to have given the matter of conflict no further attention.
Mr Done said in evidence that he perceived Mr King to be his "Number One client". He also was aware that the success in establishing the syndicate was very much in Mr King's interests. And he was aware of the difference between the prices which Mr King had paid for the bloodstock and the prices at which he was selling the bloodstock.
In The Commonwealth Bank v Smith (1991) 42 FCR 390 and in Blackwell v Barroile Pty Ltd (1994) 123 ALR 81, judges of this Court referred to the undesirability of a professional person acting for two parties when their interests are not identical. The reason for that is clear enough. The fact that a professional person acts for both parties of itself tends to suggest to the parties that they have a common interest in having the proposed transaction proceed. But very often it turns out that the transaction was favourable to one and not to the other and very often it turns out that the disadvantaged client was not given the advice which he or she might have received had he or she been advised by a person who was acting for one party only.
Although the practice of acting for persons whose interests may be in conflict is undesirable, it still commonly occurs, especially on the sale and purchase of real estate. Recently, in O'Reilly v Law Society of NSW (1988) 24 NSWLR 204, Kirby P said at p.209:-
"Searching out and providing finance, particularly for land title conveyancing, has long been a function of solicitors in our community. That function can be beneficial to clients, especially those inexperienced in financial matters who look to the solicitor for guidance. Access to finance in such circumstances may be in the best interests of the client. But where the solicitor has an interest in the finance provided, however indirect, there is an inevitable risk of the reality, or appearance, of a conflict of interest and duty. That risk can only be avoided by the most scrupulous conduct on the part of the solicitor. Depending upon any special terms of the retainer, such conduct will oblige him or her to do at least the following:
(a) to disclose the interest fully and candidly to the client, preferably confirmed in writing in case of later disputes or inquiries;
(b) to advise and facilitate the provision of independent advice where that is appropriate and to do so in more than a perfunctory way; and
(c) to advise on, and facilitate access to, alternative sources of funds, particularly where these may be in the client's advantage, being more beneficial than those which the solicitor can provide directly or through any associated company in which he or she has an interest, however indirect." (emphasis added)
If Mr Done had had no information which Mr McDonald would have considered to be material and if he had merely acted in the interests of both Mr King and of the investors in the syndicate, Mr Done would not have breached any duty which he owed to the investors notwithstanding that the interests of Mr King and of the investors were not identical.
However, Mr Done did have knowledge which Mr McDonald would have regarded as material and he did not disclose it. That knowledge was knowledge of the prices which Mr King had paid for the mares.
Mr McDonald gave this evidence:-
"And if you had been told in the first half of 1989 after Mr Bester's name was first mentioned to you that Mr Bester had never done a valuation for an outside party of this scale would that have been a matter of concern to you?‑‑‑It would've concerned me, I was under the impression that he was experienced and had done valuations.
Would you have been prepared to rely upon the valuation if you had been told that?‑‑‑No I wouldn't.
And again would you have not proceeded without ensuring that an independent valuation which you could rely upon was obtained?‑‑‑That's correct.
And if you had been told in the first half of 1989 that Mr King either directly or through an associated entity of his was the vendor of many of the horses to the syndicate and was selling the horses to the syndicate at three or four times or more the prices he had paid would that have been a matter of concern to you?‑‑‑It would have been of great concern.
And would you have not proceeded with the syndicate if you had become aware of that?‑‑‑Yes, the syndicate would not have proceeded because the mathematics of it wouldn't have worked if the horses were of considerably less value so I wouldn't have proceeded with the syndicate.
And in any event you certainly would not have allowed the POM to be issued without disclosing that information, would you?‑‑‑No I wouldn't."
I accept that evidence.
Mr King did not make merely a reasonable profit on the sale. Mr King made a very large profit, more than 3 times his costs. Had Mr McDonald been aware of this, he undoubtedly would have taken other action.
Mr King gave evidence that, in his opinion, the prices paid overseas were irrelevant to Australian prices. However, in my opinion, the prices paid by Mr King and the profits made by him were not irrelevant, for the quantum of the profits was so great as to cast doubt on the financial viability of the venture. Moreover, at the time when the discussions were taking place, most of the mares were not in Australia. The POM itself proposed that $73,000 would be expended in the 1990 year for transport, most of this being for the transport of the mares from the United States to Australia. In my opinion, the value of the mares where they were agisted when the transaction occurred was a relevant factor. And some of the mares were acquired from Allegra, which was a New Zealand company. Prices in New Zealand have an influence on and are influenced by Australian prices. Australia and New Zealand effectively comprise one market for bloodstock.
Mr Done said in evidence that he would not have regarded the prices paid by Mr King as a relevant matter. That may have been the case had an independent and reliable valuation been obtained. But that was not the case.
Mr Done had knowledge of the prices at which Mr King and Natalma had purchased and of the prices at which they were to be sold to the syndicate. Mr King knew these matters because he was the person through whom all communications were made to Guernsey. He knew that Mr King and Natalma were obtaining prices 3 times or more
greater than they had paid, and this included not only the bloodstock purchased in the United States but also the bloodstock which was being purchased from Allegra of New Zealand.
When Mr Done informed Mr McDonald that he had a conflict and could not advise Mr McDonald with respect to prices or values, that disclosure simply indicated to Mr McDonald that he, Mr Done, was an honourable person on whom he, Mr McDonald, could rely. Mr McDonald did not realise that Mr Done had information which, if disclosed, would have materially affected Mr McDonald's course of action. Not knowing that fact, he thought he could rely upon Mr Done. Mr McDonald's consent to Mr Done's non-disclosure was not an informed consent, for he was unaware of the significance of the information which Mr Done withheld.
The problem then arose that, not only did Mr Done not positively insist that Mr McDonald obtain his own valuation totally independently of Mr King, but Mr Done and Mr King selected and instructed the valuer. Just a few days after having informed Mr McDonald that he could not advise on prices or values, Mr Done took an active part in the selection of Mr Bester. Mr Done's diary notes are usually brief. On 28 February, however, one-third of the page is taken up with the heading "Valuations" and matters associated with that. Under the heading, there is a reference to James Bester and to David Corser. On the top of the page appears the name David Corser underlined and also towards the top of the page is the name James Bester with a star against it. Mr Done was to see Mr McDonald, Mr Marshall and Mr King at 12 o'clock.
Although Mr Done could not recall it, I think it is likely that, before noon on 28 February 1989, Mr Corser and Mr Bester came to the offices of Peat Marwick, as Mr Bester and Mr King testified they did, and that Mr Corser there introduced Mr Bester to Mr Done and to Mr King. Mr Corser did not remain long and I think that it is probable that Mr Done did not remain long thereafter save to assure himself that Mr Bester was a satisfactory person to undertake the valuation. I suspect that the star against Mr Bester's name towards the top of the diary page may be an indication that Mr Bester was selected for the task. Whether or not the star has that meaning, Mr Bester was approved and Mr Done left Mr King to instruct Mr Bester as to what had to be done. Mr King did so in one of the offices in Peat Marwick's premises.
Later in the day, Mr Done held a conference with Mr McDonald, Mr Marshall and Mr King. Mr McDonald and Mr Marshall would have been informed as to what had occurred. As Mr McDonald had confidence in Mr Done and Mr King, he accepted that Mr Bester should do the valuation and he took no further part in the matter.
Mr Done ought not to have allowed that to happen. As he had a conflict, Mr Done should have played no part whatever in the obtaining of a valuation and should have advised Mr King that he too should play no part in it. As it was, Mr McDonald was content to allow the matter to proceed because he trusted Mr Done and Mr King and thought the matter was in good hands.
By way of example of Mr Done's knowledge of the profits which were being made, I refer to a fax from Mr Done to Guernsey in which he specified five mares purchased from Allegra, two of which went into the syndicate. The purchase price from Allegra of the five mares was $280,000 and the sale price to the two syndicates which Mr McDonald was establishing, was $975,000. Another of the mares, Prospect Digger, was referred to as having cost Natalma $US18,000 and as being sold to the syndicate for A$95,000.
Mr Done was later informed that Inglis & Sons would not provide a valuation but was probably not informed that that was because Mr Hutchinson could not arrive at a valuation anywhere near the figure sought. Mr Done was kept generally informed of the events surrounding the obtaining of a valuation from ABCOS but his fax to Mr McDonald of 26 June 1989 suggests that the evidence of Mr Bester that Mr Done approved the engagement of ABCOS may be incorrect.
In early June 1989, Peat Marwick prepared invoices from Natalma Bloodstock and from Mr King to Jarpan. Later in the month, invoices addressed to MANL were prepared by or on the instructions of Peat Marwick. On 20 June 1989, Mr Bester asked Mr Done's secretary for a copy of Natalma's invoice so that he might deliver it to Mr Pulford of ABCOS. This was supplied. It was an invoice dated 13 June 1989 and was expressed in US$.
Mr Done gave evidence that he would have been away from the office when Mr Bester's request was made. Mr Done's secretary, Ms Sharon Gardner, has given evidence that she would not have released the documents to Mr Bester without authority. It is unnecessary to resolve the factual dispute. It is possible that Ms Gardner obtained authority from someone other than Mr Done. In any event, Peat Marwick did provide the statement
to Mr Bester for its supply to Mr Pulford. Mr Pulford, in making his valuation, relied upon it.
Mr Done not merely gave advice on the structure of the venture but took an active management role in the setting up of the venture. The obtaining of the valuation, of finance and of insurance were matters which Mr McDonald left in the hands of Mr King and of Mr Done.
Mr Done gave evidence that his involvement in the matter was much more limited than I have stated it to be. For example, Mr Done said as to his involvement:-
"Well what was it limited to then, if it was?---It was limited to showing how the syndicate would be set up, so for example that it was effective for tax purposes but at the same time each investor couldn't pick up the liabilities of the other investor. So it was a structure that was there that had the benefits of the partnership in the sense of being a business, but at the same time it wasn't a partnership at law. That was the basic structure that was I showing them.
It is as simple as this is it not Mr Done, that Mr McDonald told you that it was desired that a syndicate be put together and he asked you for help to put it together and you agreed to assist, subject to one matter that you've mentioned in your statement; is that right?---Not openly the way you've put it."
However, I think it is clear that whatever was Mr Done's original concept of what his instructions were, he and Peat Marwick took a much more active role in the establishment of the venture than that.
Mr Done owed fiduciary duties to the investors for he acted in his professional capacity in advising on the venture and in assisting with its establishment. A charge of $13,500 was made by Peat Marwick for this work. In my opinion, Mr Done, who was aware of the prices at which Mr King and Natalma Bloodstock had purchased and were
purchasing the mares, ought not to have acted for the syndicate. He could not, without breach of confidence, disclose the information which was confidential to Mr King. The mere fact that he acted in the matter encouraged Mr McDonald to conclude that there was nothing in the background about the value of the horses which he should investigate. The fact that Mr Done was acting without suggesting that there was anything that ought to be disclosed comforted Mr McDonald to such an extent that he thought he could safely leave the valuation and the obtaining of finance to Mr King and Mr Done.
Mr McDonald expressly assented to the non-disclosure by Mr Done to him of any information he had with respect to values or prices. However, Mr McDonald's assent was not an informed assent: See Trade Practices Commission v CC (NSW) Pty Ltd (1994) 125 ALR 94 at 105; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390. Mr McDonald was unaware of the large differences which existed between the prices paid by Mr King and the prices sought by him. Mr McDonald would have anticipated that he was speaking with a person who had nothing to hide. In his cross-examination Mr Done conceded, or came very close to conceding, that, but for his conversation with Mr McDonald and his relationship with Mr King, he would have felt himself under obligation to disclose the difference between the prices and the values because he saw himself as having some responsibility to the investors through Mr McDonald. In my opinion, those matters were material, and should have been disclosed if Mr Done was to act as he did.
I am satisfied that Mr Done was in breach of the fiduciary duties which he owed to the investors.
In these circumstances, the applicants claim equitable damages from Mr Done and the other partners of Peat Marwick to compensate them for the loss that they suffered through his breach. I am satisfied that, if Mr McDonald had gone to an independent adviser, it is probable that he would have been firmly advised to obtain an independent valuation and would have acted on that advice. That is because the success of the venture depended upon the value of the bloodstock.
It was alleged by counsel for the applicants that Mr Done was a promoter of the venture. However, I am satisfied that anything that he or Peat Marwick did was done merely in the capacity of professional adviser and accountant.
It was submitted that Mr Done was guilty of misleading and deceptive conduct in that he played a part in the settling of the POM and did not correct the misstatements
which appeared therein. In my opinion, Mr Done's part in settling the POM was a limited one. Mr Done merely directed attention to some aspects which he thought had been overlooked, such as the need for the transport of the mares from the United States to Australia. It was not Mr Done's task to analyse carefully the implications of every matter stated in the POM. It was not a document which he or his firm was to issue. And the evidence does not suggest that, at any time during the first half of 1989, it was brought to Mr Done's attention that the POM was misleading. I accept his evidence that he did not himself realise that it was misleading.
The applicants' claim on the ground of negligence also fails on the basis on which it was pleaded. The applicants allege that Mr Done owed a duty to take reasonable care to
ensure that the misleading representations in the POM were not made or to ensure that their falsity was disclosed. The duty is not made out, however. My finding as to Mr Done's role in the preparation of the POM leads to the conclusion that there was not the necessary relationship of proximity between Mr Done and the applicants in respect of the matters complained of.
The applicants allege that Mr Done was knowingly concerned in Mr King's breaches and rely upon the words of Lord Selborne in Barnes v Addy (1874) LR 9 Ch APP 244 at 251-2 where his Lordship said:-
"Now in this case we have to deal with certain persons who are trustees, and with certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. Those are the principles, as it seems to me, which we must bear in mind in dealing with the facts of this case. If those principles were disregarded, I know not how any one could, in transactions admitting of doubt as to the view which a Court of Equity might take of them, safely discharge the office of solicitor, of banker, or of agent of any sort to trustees. But, on the other hand, if persons dealing honestly as agents are at liberty to rely on the legal power of the trustees, and are not to have the character of trustees constructively imposed upon them, then the transactions of mankind can safely be carried through; and I apprehend those who create trusts do expressly intend, in the absence of fraud and dishonesty, to exonerate such agents of all classes from the responsibilities which are expressly incumbent, by reason of the fiduciary relation, upon the trustees." (emphasis added)
In my opinion, the requisite knowledge should not be attributed to Mr Done. I think that Mr Done would not have appreciated that Mr King was so active in the establishment of the venture as to be categorised as a promoter having fiduciary duties to the investors. In finding against Mr King in that respect, I have taken into account matters in addition to those which were known to Mr Done. It is the combination of all the matters relating to Mr
King's involvement which occurred between February and June 1989 which leads to that conclusion. I am not satisfied that Mr Done had knowledge that Mr King was under fiduciary duties or that he was acting in breach of those duties. I am sure that Mr Done looked upon Mr King as a vendor of horses to the syndicate, not as a promoter of the syndicate. I am satisfied that everything that Mr Done did was done in good faith, notwithstanding that he failed to appreciate the consequences of the conflict of interest. Mr Done was not knowingly involved in Mr King's breach of fiduciary duty such as would be necessary in equity to obtain relief: see Consul Development Pty Ltd v D.P.C. Estates Pty Ltd (1974-75) 132 CLR 373 per Barwick CJ at 376, per Gibbs J at 397-398, and Stephen J at 411-413; Royal Brunei Airlines v Tan [1993] 3 All ER 97.
Similarly, I am of the view that Mr Done was not involved, in the sense enunciated in Yorke v Lucas (1985) 158 CLR 661, in any breach by Mr King of the Fair Trading Act.
The applicants' counsel strongly attacked Mr Done's credit. I need not discuss the various points raised. Mr Done was a basically honest witness, though I have not accepted all his evidence. After the passage of time, it would be surprising if any witness could recall accurately all the events spoken of in the evidence. Mr Done had, moreover, a tendency to look at affairs in terms of black and white, and thus to diminish the complexity of events. I have taken these matters into account. Counsel for the applicants placed particular weight upon an event which occurred in the course of the trial. Mr King regrettably rang Mr Done one evening and Mr Done spoke with him. I mention the matter only to say that I think the incident did not reflect adversely on Mr Done's credit.
THE APPLICANTS' VALUERS
The mares were sold into the venture for $1,435,000 plus $130,000 for the foals, a total of $1,565,000.
The mares had been purchased by Mr King and Natalma for prices which equate to A$377,128. Something more must be added for the value of the mares sold by Mr McDonald to the syndicate for $50,000, and for the foals sold to the syndicate for $130,000.
The first witness, Mr Rollin Baugh, who gave his evidence by videolink, was an impressive witness. Mr Baugh put a total value on most of the mares of US$130,000. He did not value Swift Eagle or Mr McDonald's two mares. Mr Baugh gave evidence as to the values in the United States. He did so by reference to the pedigrees and to the prices which the mares had brought at auction sales. An interesting fact is that, on his values, Mr King paid twice the current American values to obtain the mares. Mr Baugh valued Alli-Jay at US$30,000, Lumenette and Northy at US$15,000 each, Native Pass at US$10,000 and all the other mares at US$5,000 or less. Plainly, he did not regard these mares as being, in early 1989, anything special.
Mr Baugh answered questions directly and well and appeared to be most knowledgeable in his field.
Mr Leslie Young is an experienced valuer and was an impressive witness who gave his evidence briefly and explicitly. Mr Young put a value of $340,000 on the mares to which he would have added $15,000 for each of the five mares which were in New Zealand,
once they had arrived in Australia. If one adds to that figure $130,000 for the yearlings, one arrives at a figure of $545,000. I consider that Mr Young was well informed on values in the Australian market.
The general tenor of Mr Young's evidence is confirmed by the fact that, at the Easter Inglis brood mare sale in 1989, the average price of the mares sold was approximately $29,000 and most mares were sold for under $50,000, although one mare sold for the record price of $300,000.
Mr Enemark, an experienced valuer, would have valued the mares at A$380,000. If $130,000 were added for the foals, the total would be $510,000. I consider Mr Enemark to be a reliable valuer who approached his task fairly and sensibly. In cross-examination Mr Enemark conceded that some of the horses which he had earlier valued had sold in early 1989 for considerably greater sums than the values he had placed on them. Notwithstanding the cross-examination, it appeared to me that Mr Enemark had a good grasp of values.
It will be seen that the figures arrived at by Mr Young and Mr Enemark were, in total, reasonably close to the prices which Mr King paid for the bloodstock.
The last valuer called for the applicants was Mr John Hutchinson of William Inglis & Sons. He was experienced in making assessments of the value of bloodstock, having been involved in that task for at least 10 years prior to 1989. He was the bloodstock manager of the firm from 1986. Subject to the supervision of his employers, he was in charge of the section of Inglis & Sons' business that undertook valuations in relation to brood mares.
Mr Hutchinson had been supplied with the pedigrees of the bloodstock and with the other documents which Mr Bester held. Mr Hutchinson examined the pedigrees and information which he had from his sale catalogues as to the prices which the mares had reached in past sales. Mr Hutchinson concluded that the values which he would place upon the bloodstock would reach nowhere near the figure which Mr Bester desired. He considered the matter over a period of about 3 weeks for he was troubled by it. Mr Hutchinson discussed the mares and their pedigrees with one of his employers and was given a confirmatory opinion. He then informed Mr Bester that he could not give a valuation as sought. Mr Hutchinson gave evidence that when Mr Bester asked him:-
"How are you progressing with the valuation?"
Mr Hutchinson replied:-
"We [Inglis & Sons] look like being nowhere near your figures."
I think it was made clear to Mr Bester that Inglis & Sons would not support Mr Bester's valuation. It is possible that Mr Hutchinson expressed this point in delicate terms.
Mr Hutchinson did not do a formal valuation and no longer has any of the notes which he then took. He did not in his affidavit express a value. Nevertheless, when asked in the witness box what was the total value which, in 1989, he had had in mind for the bloodstock, he said that it was about $600,000. At one stage he mentioned $600,000 to $800,000, but I think this reflected his view as to the outer limits of a reasonable range. Mr Hutchinson was cross-examined as to the valuation but stood by his opinion.
As a result perhaps of a misunderstanding that the valuation of horses was similar to the valuation of real estate, Mr Young and Mr Enemark were sent on a hunt for sales of bloodstock comparable to the syndicate mares. In the end, I think that the search for comparable sales was not a helpful exercise. Each horse is distinct from other horses. Even two sisters are likely to have different breeding and racing capabilities. Half-sisters have even greater disparity. In the case of the bloodstock examined in this trial, the reference to comparable sales tended to be a reference to other mares which the valuer giving evidence considered to have a comparable value. Each of the valuers placed different weight on differing factors. The basic point of comparability may be accepted, but as Mr Young said in evidence:-
"[W]hat is comparable to one person, may not entirely be comparable to another, and horses are no different from humans, every horse is an individual and has its own qualities, and it's a matter of you know perhaps finding something that is as close as possible. Usually there is no perfect comparison."
Indeed, pursuing this direction tended to lead into a morass, at least when the trial judge has no knowledge of bloodstock.
Considering the evidence of the applicants' valuers alone, I would be inclined to arrive at a value closer to the $600,000 determined by Mr Hutchinson, rather than the lower sums arrived at by Mr Young and Mr Enemark, though there is not much difference between them. Mr Hutchinson undertook the task at the time. Mr Young and Mr Enemark may be influenced by hindsight. The euphoria of the first half of 1989 does not exist at the present time. Moreover, I accept that a competent valuer could have come to a valuation considerably in excess of the valuation of $600,000 determined by Mr Hutchinson. That is because a valuation of bloodstock is so much a matter of subjective impression. There are
too many variables to allow for a purely objective valuation. Nevertheless, I have the impression from the evidence of the applicants' valuers that any valuation over $900,000 would have been outside the range to which a reasonable valuer may have come.
I do not propose to discuss at length the comparable sales which counsel for ABCOS put to Mr Young and Mr Enemark and with which they almost invariably disagreed. It is impossible for a judge inexperienced in bloodstock to place greater weight on the breeding and performance of one horse rather than on the breeding and performance of another. The valuation of horses is not an exact science, although valuers who occupy themselves in the task, as Mr Young, Mr Enemark and Mr Hutchinson do, come to have a good understanding of the range that a particular horse or mare may reach if sold in the auction ring.
One of the mares that was mentioned as a comparable sale was "Sea Ballad". She sold in the Inglis Easter brood mare sale in 1989 for $300,000. A valuer called for ABCOS, Mr Murray Tillett, said that this mare was comparable on paper to some of the subject mares. However, there are many factors which would lead to the conclusion that the sale was not a good guide as to the value of the mares acquired for the syndicate. For example, Sea Ballad was put forward by Mr Tillett as a horse comparable to no less than 3 of the syndicate's mares, which of itself suggested a value of $900,000 for those mares. Noone, including Mr Pulford and Mr Bester, in conducting their appraisals, valued a syndicate mare anywhere near $300,000. There were probably factors involved in the Sea Ballad sale which influenced the price. Mr Young and Mr Enemark were both suspicious of the sale. I refused to admit further evidence as to the sale as I thought the issue of Sea Ballad would not have assisted clarification of the issues in this case.
The mare "Attanagh" was put forward as a comparable mare. Evidence was given that Attanagh had been purchased in the United States for US$40,000 and had been sold in June 1989 for A$150,000. The evidence shows that while she was in the United Kingdom, Attanagh had been serviced by lesser quality sires, whereas, when she was brought to Australia, she was put to the best sires standing in Australia. Her progeny were a success and her value prospered accordingly. The worth of the syndicate mares had not been demonstrated in a similar manner. According to the POM, they were to be put to sires having a medium price service fee, which I take to be a suggestion that they were to be put to sires standing at Trinity Park Stud. Attanagh demonstrated potential when serviced by the best Australian sires, but this was not proposed with respect to any of the mares sold to the syndicate.
The subject mares were valued sight unseen and were assumed to be of average conformity. The weight of the evidence suggests that in 1989, a boom time, exceptional prices went to those horses and mares which were singled out as having exceptional potential. The evidence does not suggest that the mares sold to the syndicate had that potential. It is perhaps worth noting that Mr Young subsequently visited America and inspected the mares in that country. He found them to be then in generally poor condition and their physical attributes to be uninspiring. Mr Tillett also conceded that, if only age, racing success and breeding success were taken into account, the mares in the package were not impressive.
MR BESTER
Caution must be taken with Mr Bester's evidence. He conceded himself that his recollection of events was poor. Moreover, much of his evidence favoured his case and, on cross-examination, was shown to be unsound.
In early 1989, Mr Bester was employed with an organisation connected with Sir Tristan Antico. Mr Bester also had a letterhead which described him as a bloodstock consultant. He said in the evidence that, in undertaking the valuation, he was "moonlighting", though that is probably too strong a word.
Mr Bester knew Mr David Corser, who was connected with the magazine, "Greater Australian Racing". Mr Corser knew Mr Done and Mr King. Mr King asked Mr Corser who was a suitable person to value some northern hemisphere mares. Mr Corser mentioned the name of Mr Bester. Mr Bester was asked to attend Peat Marwick's office on 28 February. He there saw Mr Corser. Mr Corser introduced Mr Bester to Mr Done and Mr King. Mr Corser then left. Mr Bester was asked if he could do the valuation. He expressed confidence in his own ability to undertake the task though he said he had not previously done a formal valuation. As I have already said, it is probable that, once Mr Done and Mr King were satisfied that Mr Bester should undertake the valuation, Mr Done left Mr Bester with Mr King.
Mr King, who knew where his interests lay, informed Mr Bester in general terms that a package of mares was being acquired for a syndicate and he went on to encourage Mr Bester in the belief that he ought to act upon the prices at which Mr King was selling the
mares. He gave to Mr Bester copies of some of the documents which had passed between Mr King, Mr McDonald and Mr Marshall. Those documents probably included the letter of 26 January 1989 and the letter of 23 February 1989 and one or more of the documents headed "Schedule of Syndicate Mares". The copies given to Mr Bester would have been copies having the prices on them. No witness was clear as to what documents actually passed hands on 28 February.
After that date, Mr King sent further information to Mr Bester and had several conversations with him. In fact, the horses which were to go into the package were not settled until March. The fax from Mr King to Mr McDonald dated 13 March, which was the last of the documents given to Mr Bester, did not express a binding agreement. It was expressed to be subject to approval. Moreover, one of the typed prices, that for Tempergaze for $75,000, was altered by oral agreement to $95,000 which was the price that appeared in Mr Bester's valuation.
Mr Bester seems to have thought that he should act in the interests of Mr Done and Mr King. He gave this evidence:-
"Who did you think you were valuing it for? Mr Done having asked you for ‑ ‑ ‑ ?‑‑‑Well, I was approached by Peter Done and Brian King, initially by Brian King as it turns out it appears to say come to Peter Done's office.
There the two of them ‑ and I can't remember who said what ‑ but with the two of them there it was ‑ I was asked to do a valuation of bang, this bunch of mares. Now, as far as I was concerned I was doing the valuation for them and they supplied ‑ I asked them for documents and they supplied me with documents that evidenced the sales, so I was quite happy that even though I was ‑ well, I was very happy with the bona fides of Peat Marwick, but here I am saying to myself well, they've issued the invoices and everything themselves and I'm doing this for Done and/or King, cause of course they were the ones that instructed me and gave me everything; they didn't say we want you to value this for some yet to be approached group of potential investors."
Subsequently, he forwarded his valuation to Mr Done and he sent his account to Mr King. The valuation was completed before the Inglis Easter sales. Mr Bester could not therefore have incorporated into his valuation the dramatic sale price rises that occurred at that sale.
Mr Bester had no contact with Mr McDonald, whom he did not meet until 1990.
Mr Bester was aware before he made his valuation that the valuation was required for the purposes of the establishment of a syndicate, although he appears not to have turned his attention positively to the interest which Mr McDonald and potential investors in the syndicate had in receiving a reliable valuation.
Mr Bester said in his evidence that the prices which he took into account were, in his understanding, not prices which a syndicate was to pay but prices which Mr McDonald and Mr Marshall had agreed to pay. However, the documents headed "Schedule of Syndicate Mares" and Mr Bester's valuation itself make it plain that the mares being valued were mares which were being acquired for the purposes of a syndicate. Mr Bester's valuation included his own mare Plaisir d'Amour and the two mares and the foal which Mr McDonald was putting into the syndicate. The contention that there had been some separate transaction between Mr King and Mr McDonald simply does not fit the facts, save in respect of the mare Lumenette which Mr McDonald had at that time agreed to purchase for a specified price.
Mr Bester gave evidence that he knew by the time he was speaking with Mr Pulford that a syndicate was being formed. Mr Bester gave evidence that, in the middle of April,
a Mr Clive Weston had contacted him and enquired about his valuation as he was considering investing in the package. Mr Bester asked him to fax a copy of the POM, which he did.
It became clear in the course of the evidence that Mr Bester was aware from the start that a syndicate was being formed. There was a substantial package of mares and the price was large. Mr Bester had the letter of 26 January 1989 which commenced:-
"This is to confirm sale to you or your nominees of the following mares."
He had the letter of 3 February 1989 which said:-
"Ray Marshall and the writer, acting as nominees for a Corporate Manager, are preparing a thoroughbred breeding venture for private participation."
And the schedules of mares which were given to Mr Bester were headed "Schedule of Syndicate Mares".
Mr Bester could not have been under any misapprehension about the matter. He was an intelligent person who had gained both an arts and a law degree from universities in South Africa. Had the sale been a concluded sale between Mr King and Mr McDonald, there would have been no need for a valuation. Insurance was not mentioned to Mr Bester.
Mr Bester said of his valuation "I was absolutely convinced and comfortable with the value." However, he went on to give this evidence:-
"How did you arrive at those values?‑‑‑Well, look, I did rely very heavily on the apparent agreement of purchase and sale prior to that. My ‑ my own understanding of market value as it applies to a lot of things not only horses but certainly in the case of horses is that a horse is worth what somebody is prepared to pay for it. It's not worth its calcium or protein value, it's worth what somebody wants to pay for it for whatever purpose they want to use it for. Now, I will admit that that's only the case
when the buyer and seller are very experienced and know what they are doing but I placed substantial reliance on those prices.
And when you say it only is appropriate when the buyer and seller are experienced and know what they are doing, what information did you have at the time you performed the Trinity Park valuation as to the degree of experience of the buyer and the seller of those horses?‑‑‑Well, obviously when I was asked to do the valuation, I knew nothing about either. At the meeting, I formed an impression of Mr King's experience in the game and he ‑ I can't remember if he told me ‑ but I formed a definite impression that he had bought and sold a lot of horses in Australia. I was informed by Done and King, it was pointed out to me that Ray Marshall and Rod McDonald had, in fact, purchased or agreed to purchase those horses. Whereupon my question was, who the hell are Marshall and McDonald, or words to that effect. I was told that Ray Marshall was a very respected and experienced studmaster and that McDonald was a client of his who had owned horses for some considerable time."
Mr Bester's lack of attention to the task which he had to undertake is plainly disclosed by the following evidence:-
"Well, now, what were you told about the purpose of the valuation?‑‑‑I wasn't actually told very much about the purpose of the valuation at all.
You were not asked to advise the purchaser on whether the purchase price was a good price?‑‑‑Absolutely not.
You were not asked to advise the vendor on whether that was a suitable price for the vendor to sell?‑‑‑Well, I wasn't asked that. At the time I didn't know ‑ I would certainly not have been asked that.
You were not asked to advise an insurance company about the value for insurance?‑‑‑I wasn't asked by any insurance company, no.
Well, nobody asked you to value this for insurance purposes?‑‑‑It was my understanding that this may well have been for insurance purposes actually. I didn't know that it was, your Honour, I was under the impression that this was a ratification type valuation."
(emphasis added)
What was required, of course, was an independent valuation by a responsible valuer. Mr Bester should have understood this and should have given an independent valuation, for he knew that Mr King did not require the valuation for his purposes. In giving a "ratification type valuation", he failed to approach his valuation on a correct basis, and it was fatally flawed. Mr Bester's valuation was, in my opinion, outside the range that a competent valuer could have arrived at and was negligently prepared.
Mr Hutchinson of Inglis & Sons later had the same information as did Mr Bester. He regarded the documents as information to which regard could be had but he gave no significant weight to them as he considered it to be his task to arrive at an independent valuation as to the market value of the mares. That was also the approach taken by Mr Young and Mr Enemark who, although at first in their evidence were inclined to dismiss the documents as irrelevant, later conceded that the documents could be looked at but that the task of a valuer was to form and express his own view.
Mr Bester continued to rely very heavily upon what he said were the agreed prices, notwithstanding that in April he read and received the POM and became fully apprised of the purpose for which a valuation was required. Mr Bester took further active steps to obtain a valuation of $1,565,000, having regard to what he said in evidence were the agreed prices. Mr Bester supplied the documents he had relied upon to Mr Hutchinson and he subsequently supplied the same documents and others to Mr Pulford of ABCOS.
In making his valuation, Mr Bester did not examine pedigree records in detail or seek to ascertain at what prices the mares had previously been sold. A surprising feature of the case is that Mr Bester was chosen because of his knowledge of northern hemisphere mares, yet he gave no attention to, indeed he did not bother to ascertain, the mares' northern hemisphere prices. In this, he did not approach his valuation in the manner adopted by Mr Young, Mr Enemark, Mr Hutchinson or Mr Baugh. Nor did Mr Bester take into account the fact that 10 of the mares were in the United States, not Australia. The location of the mares was a relevant factor. If they had been at a local stud such as the Trinity Park Stud,
Mr Bester could have viewed them. Mr Bester had a number of conversations with Mr King and adequate opportunity to ascertain all relevant details about the mares.
I think Mr Bester was "conned" by Mr King. However, he was experienced in the bloodstock industry, and he held himself out to be a bloodstock consultant. He undertook to do the valuation and he thereby undertook to fulfil the duties of a valuer. In my opinion, he failed in that task because he allowed himself to be persuaded that considerable weight should be given to the prices which the vendor was seeking. He failed to turn his mind to the interests of the persons who would rely upon the valuation and he failed to give to the valuation the care and skill which it was the duty of an independent valuer to give.
Of course, Mr Bester allowed a conflict of interest to develop. On about March 1989, Mr Bester's mare Plaisir d'Amour was sold to Mr King at a price which provided him with a substantial profit. No money was to pass hands until later in the year, and indeed none was paid until after 30 June.
Mr Bester had a duty of care to the investors in the syndicate. He may not have been entirely clear what was the purpose for which the valuation was required or who was to rely upon it. However, he was aware that the formal valuation was required and could not reasonably have understood other than that the investors in the syndicate would suffer harm if the valuation was not competently performed. Mr Bester did not act competently in making his valuation and therefore breached his duty of care.
His valuation was, moreover, a misleading and deceptive document and in issuing it Mr Bester breached s 42 of the Fair Trading Act. I shall deal with this point in more detail when discussing the ABCOS valuation.
No claim is now made by the applicants against Mr Bester but he is the subject of cross-claims and claims for contribution.
There are two final matters I should mention with respect to Mr Bester. The first is that, after being informed by Mr Hutchinson that Inglis & Sons would not do the valuation requested, Mr Bester phoned and spoke to Mr Done and he may have suggested that a valuation be obtained from ABCOS. Mr Bester then spoke to Mr Pulford. In his evidence, Mr Bester agreed substantially with Mr Pulford's version of what he said to Mr Pulford. Mr Bester's evidence was as follows:-
"Did you respond with words to this effect: it is not a big deal, the investors have already agreed to buy the horses. I have been sent all the invoices which give proof of the prices so that gives you a good indication of the value, it will not take long?‑‑‑Perhaps. I don't recall those parts of the conversation but I should imagine they went along those lines and I may well have said to him, look, you don't have to go out and, you know, spend a month on this thing, there are a lot of figures, a latest sale price agreed, there's evidence of market value and I'll send you all the information, something along those lines, I should imagine."
Mr Bester agreed that he may well have told Mr Pulford, that the finance company had an end figure in mind and that the figure required was $1,565,000.
After speaking with Mr Pulford, Mr Bester sent him all the documents he had and also pedigrees on which he wrote the sums at which the mares were valued or purchased. Mr Bester did not inform Mr Pulford that Inglis & Sons had been unable to arrive at a figure anything like $1,565,000.
The last matter is that, in his evidence, Mr Bester was inclined to overstate the part played by Mr Done in the making of the valuation. Mr Bester said:-
"People ask for valuations without specifically saying this. They say please value my mare. It could have been for internal purposes, it could have been for insurance purposes, I was not specifically instructed. It was only when I asked Mr Done to whom should it be addressed that McDonald and Marshall even became part of it. I was asked and instructed by Peter Done and/or Brian King in one meeting.
Well, they were the vendors of the horses?‑‑‑Well, Brian King was, Peter Done wasn't.
Well, did you understand what part Peter Done was playing? Was that told to you?‑‑‑I didn't understand necessarily. No, I had no idea actually even that he was Brian King's accountant to tell you the truth.
All right?‑‑‑He was a man from Peat Marwicks and really it was in his office and I saw him as the pivotal point of all of this. In essence I regarded myself as doing my valuations for him." (emphasis added)
I think there was exaggeration in this evidence for I am satisfied that the major information which Mr Bester obtained with respect to the horses came from Mr King, not from Mr Done. Mr Bester's account was addressed to Mr King.
MR PULFORD
Mr Alistair Pulford is a young man who is an employee of ABCOS, a company which is well known in the bloodstock industry. In 1989, Mr Pulford had been with ABCOS for 2 years. He previously had had some experience in the bloodstock industry in South Africa and Zimbabwe.
In the middle of June 1989, or shortly thereafter, Mr Bester phoned Mr Pulford and said:-
"I have a friend who is setting up a tax driven partnership and requires an independent valuation for the finance company for the package to go ahead. Would you value the horses?"
Mr Pulford agreed to do the valuation. Subsequently, Mr Bester sent him the invoice dated 19 January 1989 from Natalma to Trinity Park Stud concerning the sale of Lumenette and Ricara, the letter from Mr McDonald to Mr King of 3 February which dealt with the purchase of Lumenette and Ricara and which referred to the preparation of a thoroughbred breeding venture and the acquisition of the remaining mares by a mutually acceptable arrangement. Mr Bester also forwarded the letter from Mr McDonald to Mr Done of 6 June concerning the mares, Lumenette, Swift Eagle and Kayseriyya and a copy of the invoice in US dollars from Natalma to Jarpan concerning Native Pass, Pegande and its foal, Alli-Jay, Prospect Digger, Knight's Promise and Tejas, which was the copy which Mr Done's secretary had forwarded to him on 20 June. Mr Bester also supplied pedigrees to Mr Bester with prices or values written on them in Mr Bester's hand.
Mr Pulford gave evidence that he examined the pedigrees of the mares and formulated his own view as to their worth. Some of his figures were a little above those put to him by Mr Bester, but he adjusted the final figure to arrive at the sum of $1,565,000 which he understood to be the figure required.
Mr Pulford wrote out his own valuation by hand. It was typed by his secretary, Virginia Yorke, and was sent by facsimile by her to Mr King on 27 June. The valuation was addressed to First Trinity Park Stud Breeding Venture. It was expressed to be "On A/c of Mr Brian King". Subsequently, on 30 June 1989, Ms Yorke, at the request of Mr King, retyped the valuation and addressed it to Jarpan. A copy was faxed to Mr Done and the original was sent direct to Australian Thoroughbred Finance.
The term "valuation" was not used, the term "appraisal" being used in its place. I am satisfied, however, that in the thoroughbred industry both terms are interchangeable. The term "appraisal" reflects the point that a precise valuation cannot be given of bloodstock and that a valuation necessarily reflects the valuer's personal judgment.
The letter which accompanied the valuation commenced with the words:-
"Following are the appraisals for the mares and foals as requested. These are based upon invoices presented and information available to us."
That second sentence was an unusual one to include in a valuation, particularly as no person reading it, other than Mr Bester and perhaps Mr King, would have been aware as to what were the invoices and what was the information referred to. In my opinion, the sentence did not qualify the valuation, for no reader other than Mr Bester and Mr King would have realised what it meant, or even that it was intended as a qualification.
Mr Pulford's first statement, filed 29 January 1993, suggested that Mr Pulford arrived at his valuation from an examination of the pedigrees. It became clear, however, from supplementary statements and from the sentence in the letter accompanying his valuation,that he placed substantial weight upon what he thought were the agreed prices. In a supplementary statement filed 30 June 1994, Mr Pulford said:-
"The briefing documents played a significant role in influencing me in preparing my valuation."
Mr Pulford further said:-
"If I had known that the sales reflected in the briefing documents were not market transactions wholly at arms-length between independent parties I would either have told Mr Bester that I could
not have done the valuations based on the invoices or I would have gone to Mr Hancock, my supervisor, for clarification."
Thus, although Mr Pulford had been asked to give an independent valuation for the purposes of a finance company, he was materially influenced by the figures shown in the invoices he received and on the pedigrees supplied. In cross-examination, Mr Pulford said of the documents, "... they were certainly important. Yes, they were important."
Mr Pulford had difficulty answering questions in cross-examination once he agreed, as he did, that he had been asked for an independent valuation and that his task was to estimate what the mares would be likely to bring if put up for sale at a properly conducted auction. The following are some examples of the problems encountered in cross-examination:-
"If the buyers at this hypothetical auction would not know of these so-called invoice prices, it would be wrong to take them into account in ascertaining or estimating what those buyers would pay at a properly conducted auction, would not it?---Yes, you are right.
So it was wrong for you to take the so-called invoices into account in estimating what buyers would have paid at such an auction, was not it?---I don't think it was wrong, no, I'm sorry."
In his first statement, Mr Pulford said that he used the prices paid for yearlings from imported mares of the 1989 Inglis Easter Yearling Sale as the gauge for determining the strength of the market at the time he prepared the valuation. This approach was flawed as the value of a yearling will depend upon its sire as well as on the mare. Even the value of mares is influenced by the stallions by whom the mares are serviced. Mr Pulford himself pointed this out when he said that the value of the syndicate mares diminished while in the hands of Jarpan, for many of them were put to Cardell, which was an uncommercial sire, not a good quality stallion.
Mr Pulford conceded in cross-examination that his statement as to reliance on the yearling prices was an unsound one. He said that the prices at which brood mares were sold at recent auction sales was just as important and that he had made the mistake by trying to justify his valuation. For my own part, I consider that the prices at which brood mares sold was the dominant factor to consider and that the yearling prices were simply a factor which influenced the value of brood mares. This was the approach taken by the applicants' valuers.
Mr Pulford's difficulty with this issue is shown by the following evidence:-
"Mr Pulford, it is a very simple proposition is it not, when you are valuing some broodmares, to ask whether the best guide to the value of those broodmares and broodmare sales or yearling sales? It is a very simple question is it not?---Yes.
Fundamental to your role as a valuer. Do you agree with that?---Yes.
You have been all over the place when giving an answer to that very simple question have you not?---Yes, it appears I have.
What was the view that you held in June of 1989 about that very simple question?---I don't recall. It wasn't a question I really turned my mind to. It was just, you know, all the sales that I took part in of which the yearling sales were obviously very important, and so were the broodmare sales, and well probably to the same extent except there were obviously far less horses involved private sales, plus other things that happened in the industry that people tell you about, established my perception of the market and that's how I valued the mares."
Mr Pulford gave evidence that he had believed that some of the syndicate mares were in the United States rather than in Australasia, that is to say, rather than in Australia or New Zealand, which effectively comprised one market. He said that he appraised all the mares as though they were already in Australia and disregarded the cost of importation. He did not take into account any previous sale prices though he had access to the library of ABCOS and could have obtained the prices from there or from other sources.
The real explanation for Mr Pulford's failure to have regard to prices at which the mares had been sold at auction appears from the following passage in Mr Pulford's evidence:-
"Because your reasoning is basically this, is not it, because you had the benefit of a recent Australian sale of the horses in question, you did not need to look back into the history of sale prices?---That was my reasoning, yes.
But if you had not had those recent Australian sale prices then the position would have been different?
HIS HONOUR: Did you say yes?---Yes, sorry, your Honour.
MR MACFARLAN: Not only would this information have been relevant in that situation but it would have been of great significance in that situation?---It certainly would've been relevant, yes, and of significance, yes.
Of great significance?---Of great significance, yes."
In my opinion, Mr Pulford did not give an independent valuation as he was requested to do and as the circumstances required. His approach to the valuation was flawed and his values were outside the range that competent valuers would have arrived at.
MR TILLETT
Mr Murray Tillett is managing director of Goodwood Bloodstock Agency of Western Australia. He has had considerable experience in preparing valuations for insurance companies, but has not done a valuation for a financier.
Mr Tillett did not himself do a valuation of the bloodstock. However, he expressed the view that, in mid-1989, he would have regarded a difference in the valuation of the blood stock of between approximately $750,000 and $1,565,000 as being accounted for by reasonable differences of view. It may be noted that Mr Pulford's valuation was right at the
top of this very large range. Mr Tillett conceded that it was at "The very, very top end" of the range.
Mr Tillett at first gave evidence that, if he had been in Mr Pulford's position, he would have taken account of the documents to which Mr Pulford gave weight. He said that a bloodstock valuation was an assessment as to what a willing but not anxious purchaser would be likely to be prepared to pay for the bloodstock and that Mr Pulford was not at variance with accepted standards of competent valuers by taking the documents into account as indicators of prevailing market conditions and values of the stock. Mr Tillett went on to say that this was not a situation where the valuer's opinion was being sought as to whether or not the horses should be purchased at these prices.
In cross-examination, Mr Tillett conceded that he had not understood that the financier, MANL, was purchasing the horses. He further conceded that, if the valuer knew that the sales had not occurred, he should not have placed weight on the briefing documents and that a valuer needed to have a clear understanding of the purpose for which his valuation was required. Mr Tillett effectively resiled from his evidence as to the briefing documents when he gave this evidence:-
"So, would you agree with me on reflection that it would not be appropriate for the valuer in the position of Mr Pulford to place any reliance upon the transactions in the briefing documents?---That may be the case.
Well, it follows from the matters that I put to you, does it not?---It does."
Mr Tillett also qualified his top figure of $1,565,000. In his evidence in chief, he had said that it was proper for Mr Pulford to have regard to the yearling prices. In cross-examination, he conceded that the average price of yearlings had increased at the Inglis
Easter Sale by 75% but that the average price of mares at the Inglis Easter Brood Mare Sale had increased by only 30% from $22,200 to $29,200. It was put to Mr Tillett that, if he disregarded the yearling sales, he could not arrive at the figure of $1,565,000. Mr Tillett gave this evidence:-
"The top of the range you expressed as open to reasonable and competent valuers would have to be lower than the figure you suggested of 1.565 million?---That may be the case.".
Mr Tillett conceded that the prices which the mares had brought at earlier auctions in the United States were relevant. Mr Tillett also conceded that, if a valuation was being carried out for a financier, a prudent valuer would adopt a figure in the lower end of the range and that it would be imprudent to adopt the top end of the range. He agreed, moreover, that a description of the mares in Exhibit AO setting out their age, racing performance and stud report, though not their pedigrees, was "not all that impressive".
Mr Tillett made notes at the time he considered the value of the mares, but he no longer has those notes. He was asked to point out comparable mares sold at the Inglis Easter brood mare sale. He did so but the total of the sale prices of the comparable mares came to just a little under $2m. In my opinion, this was not a useful exercise. For example, the mare Sea Ballad was used on three occasions bringing $300,000 into the calculation three times. None of the valuers who valued the bloodstock gave a value of $300,000 to any of the mares.
SUMMARY OF THE VALUATION EVIDENCE
I prefer the evidence of the applicants' valuers. I consider that their approach to valuation was sound and that their evidence was reliable. I consider that the fact that Mr Hutchinson declined to do a valuation in early June 1989 was because he could not arrive at a figure anywhere near $1,565,000 is a strong ground for concluding that he considered that figure to be quite outside the range that any reasonable valuer could arrive at. I am satisfied that Mr Hutchinson gave a lot of thought to the value of the bloodstock package and that, being an employee of Inglis & Sons, he would not have been likely to have been unduly conservative. He would, moreover, have been fully aware of the events of the Inglis Easter brood mare sale and of the quality of the mares put up at that auction.
I have not placed much weight on promotional memoranda put out before June 1989 in relation to other syndicates, such as the Bell & Tonkes syndicates. They indicate that there was great optimism at the time and I have taken that into consideration. However, I have not thought it useful to compare the subject mares with other bloodstock which was to be placed in other ventures under different management. The circumstances of each syndicate differed.
Mr Bester did not approach his valuation from a proper perspective. He did not make an independent valuation but made what he himself described as a "ratification type valuation". In my opinion, his valuation was negligent both in the manner in which it was done and in the values at which he arrived.
Mr Pulford also placed far too much weight upon the values that had been agreed between Mr King and Mr McDonald. I do not say that those prices were entirely irrelevant. But they should have carried little weight. Mr Pulford was aware that an independent valuation was required for the purposes of a financier. He was aware that he was to give the authority of ABCOS to the valuation and he was aware that a financier would rely upon it. If he had thought about the matter, he would have realised that the transactions on which he placed weight had not been completed and were conditional upon his own valuation.
Both Mr Bester and ABCOS owed the applicants a duty to take reasonable care in the preparation of their valuations. Both were aware that a formal valuation was required. Neither can have been unaware that his valuation would be relied on. Both must have been aware that, if he was negligent in overvaluing the horses, the purchasers and financier might suffer loss.
In San Sebastian Pty Ltd v The Minister, Gibbs CJ, Mason, Wilson and Deane said at 355:-
"When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care."
However, there need not be a direct dealing between the person who is negligent and the person affected by the negligence: Bryan v Maloney (1995) 128 ALR 163. In the present case, the obtaining of a valuation was crucial to the obtaining of finance and to the establishment of the venture. After the ABCOS valuation issued, the various agreements were executed and settlement took place.
It is alleged that both valuations constituted misleading and deceptive conduct in that each was one that no independent valuer acting responsibly could have arrived at. Section 42 of the Fair Trading Act and s 52 Trade Practices Act 1952 (Cth) are relied upon.
In Bateman & Anor v Slatyer (1987) 71 ALR 553, Burchett J said at 559:-
"It is of course clear law that a statement of opinion cannot be regarded as false or misleading, or as misleading or deceptive, simply because it turns out to be incorrect: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88; 55 ALR 25. But such an opinion may convey that there is a basis for it, that it is honestly held, and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise. (See James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 at p.372; Geale v Glenham Holdings Pty. Ltd (1985) ATPR 40-615 at pp.46, 978-46, 979)."
This observation has been cited on many occasions including by Beaumont & Spender JJ in RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164 at 174. At 175 their Honours said of the appraisal there under consideration:-
"... the statements made in the appraisal were not merely opinions; implicit in them, as in Smith's case and the other authorities mentioned, was a representation that the opinions had been grounded on a rational foundation by reason of the superior knowledge and expertise of RAIA as professional insurance brokers."
Their Honours also cited from Smith v Land and House Property Corporation (1884) 28 Ch D 7 and Brown v Raphael [1958] 1 Ch 636 in which, at 644, Lord Evershed said:-
"I am, therefore, entirely of the same opinion as was the judge, that this is a case in which the representation was not merely confined to the fact that the vendor entertained the belief but also, inescapably, there goes with it the further representation that he, being competently advised, had reasonable grounds for supporting that belief."
In the RAIA case, I myself said at 166:-
"... s 52 does not distinguish between representations of fact and representations as to matters other than fact. The common law authorities respecting fraudulent and innocent misrepresentations of fact have no necessary application to s 52. The section is concerned with conduct which misleads or deceives or is likely to do so. If the making of a statement is, in the circumstances of the case, misleading or deceptive or likely to be so, then it contravenes s 52. It is the effect or likely effect of the statement which is the determining factor.
That is not to say that the common law authorities are not informative and helpful. But it is one thing to say that an expression of opinion expressed as such in circumstances where it would be so understood would not contravene s 52 if the opinion were honestly and rationally held, it is another to say that a representation which involves the formation of an opinion, assessment or judgment may not contravene the section."
In my opinion, both the valuations were misleading and deceptive and in breach of the respective statutes.
The applicants and MANL suffered loss as a result of ABCOS' negligence and its breach of s 52. It is sufficient to refer to March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506 and Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 413. Causation is essentially a question of fact. In the present case the agreement would not have been executed, MANL would not have provided the finance and the venture would not have proceeded had not Mr Pulford valued the mares at about $1,436,000.
It was submitted by counsel for ABCOS, Mr Rares, that even if ABCOS' appraisal had reached a figure somewhat less than the proposed finance to be provided by MANL, MANL may well have proceeded with the transaction. Counsel submitted that MANL had placed emphasis on ascertaining the financial net worth of the syndicate members prior to settlement as one measure of security for the transaction.
MANL had, nevertheless, made it a condition of the financing of the proposal that a valuation of bloodstock be addressed to MANL valuing the bloodstock at least at $1,436,000, being the acquisition cost for the bloodstock. That condition appeared on the
credit approval. MANL's bloodstock lending policy also stated that a valuation was required. Having regard to the short time available for settlement of the transaction, I am satisfied that no other arrangement would have been entered into had ABCOS' valuation not supported the required sum.
Mr Rares invited the Court to make an inference adverse to MANL on the issue of reliance. MANL conducted the proceedings without leading evidence from the persons who would have been likely to have been in a position to clarify what if any reliance MANL placed upon the valuation. MANL's counsel relied on documentary evidence which tended to suggest that MANL, having requested an independent valuation of the bloodstock, made it a condition of finance that a satisfactory valuation be obtained.
Mr Hewitt was the only witness called by MANL. He had no first-hand knowledge of the transaction in 1989. He gave evidence, moreover, that he was not aware of any reason why Mr Symond, the managing director of MANL, Mr Lock, the lending manager of MANL or a Mr Waller who also signed the approval could not have given evidence in the proceedings. The initials that appeared on MANL's credit approval alongside "Pre-settlement condition No.1", in relation to the obtaining of a valuation addressed to MANL, were probably Mr Lock's. The Court was informed from the bar table that both Mr Symond and Mr Lock signed statements in relation to these proceedings in 1992, but those statements were not tendered in evidence.
However, although it might have simplified certain issues had those witnesses been called to give evidence, it is another matter to draw the inference suggested from what was alleged to be MANL's "deafening silence".
Mr King gave evidence that MANL had received the first version of the valuation, possibly as early as 27 June and, although it was not addressed to MANL, it included the covering letter. Mr King gave evidence that he provided the valuation to MANL and that Mr Lock had raised with him the matter of having the document readdressed to MANL rather than to the "First Trinity Park Stud Breeding Venture". MANL, for its part, has been unable to or has not confirmed that it was sent a copy by Mr King on or about 27 June.
A further copy of the valuation with the accompanying letter addressed to Jarpan was faxed by Mr Pulford's secretary at 10.40 a.m. on 30 June. This letter included the information that the original valuation had been sent direct to Australian Thoroughbred Finance. Presumably due to MANL's requirement that the valuation be directed to it, a further copy of the valuation was faxed to Mr Done's secretary at 4.53 p.m., the accompanying letter having been amended to read that the original of the valuation had been sent direct to MANL.
MANL was sent two pages of the valuation prior to settlement on June 30 by facsimile from Peat Marwick at 4.20 pm on 30 June. It is not shown, however, that that copy of the valuation included the covering letter to the valuation. Pages 1-6 of the facsimile have been lost from MANL's records, the only 2 pages in evidence being pages 7 & 8 of the fax. Nor have the circumstances of that transmission been explained.
In the absence of evidence from officers of MANL who attended the settlement as to their knowledge of the valuation, I would not accept that these officers or any of them gave detailed attention to the valuation prior to settlement.
Nevertheless, I am satisfied that the officers of MANL were aware that the valuation was in existence and that it met their requirements. The fact that the finance broker had the valuation and that there was a request that the valuation be retyped and readdressed are strong indications that attention was given to ensuring that MANL's requirement was met.
I am satisfied that MANL made it a requirement of settlement that there be a valuation from an acceptable valuer, such as ABCOS, valuing the mares at $1,436,000, that that occurred prior to settlement, that MANL was made aware of it and acted in reliance on the valuation. This is supported by the notations on the credit approval, which served as a settlement sheet. They state in what appears to be Mr Lock's handwriting that on 30 June each of the conditions was accepted as satisfied.
Mr Rares submitted that the copy of the valuation faxed to MANL at 4:20pm on June 30 did not satisfy MANL's own condition which required a valuation "addressed to MANL". However, I think the point has no significance. MANL did act on the faith of the valuation.
I have already mentioned that, although the second sentence of the letter which accompanied the valuation stated that it was "based upon invoices presented and information available to us", the sentence did not qualify the valuation, for the letter did not identify what were the invoices and information referred to. The sentence would have been read by
anyone other than Mr Bester and Mr King not as a qualification but as indicating that the valuation was solidly based. The valuation was given the authority of ABCOS. Therefore, it purported to be a reliable, independent valuation. A much stronger and clearer statement than that which appeared in the second sentence of the letter would have been necessary if the valuation was to be read and understood as a qualified or limited valuation.
MANL
I have earlier stated that the offers and issue of the syndicate interests did not breach s.169 of the Companies Code.
I should add that MANL, although it had a copy of the POM, took no part in its preparation or dissemination. MANL did not play any part in the selection of the members of the syndicate save that it required the members to meet certain income and asset standards. One or two potential members of the venture were rejected on this ground.
MANL played a part in the issue of the interests in the venture in the sense that it acquired the bloodstock and granted leases and made loans to the individual members of the syndicate. The offeror was, however, Mr McDonald or Beattie McDonald and the membership list was ultimately settled by him. MANL merely entered into agreements with the members proposed by Mr McDonald. And it did so on the footing that the offers made were private offers, not an offer or offers to the public. The POM expressed itself to be a Private Offer Memorandum.
It is therefore unnecessary for me to consider the difficult issues of severance and restitution which were considered in Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 and by Rolfe J in Davis v Mortgage Acceptance Nominees Ltd (50173/93 delivered 20 April 1994) and Akron Securities Ltd v Bernborough Breeding and Racing Ltd (50271/92 delivered 1 August 1994). As it has been submitted that there may be a conflict between the judgments of Rolfe J and the judgment of the Court of Appeal in Hurst v Vestcorp Ltd, it is inappropriate that I should discuss these issues when it is unnecessary to do so.
It was alleged on behalf of ABCOS that there was contributory negligence by MANL in that MANL failed to ensure that it obtained and carefully studied the ABCOS valuation including its accompanying letter. I have already said that, in my opinion, the ABCOS valuation was not a qualified valuation and that ABCOS did and was entitled to rely upon it.
It was also alleged that MANL should have known that some of the statements in the POM were unfounded and misleading. In my opinion, MANL, a financier, was not negligent in taking the POM at its face value, particularly in the context that apparently sound businessmen were seeking to invest in the venture.
It was alleged that MANL was negligent in its management of the bloodstock and failed to mitigate its losses. The evidence on this aspect is sparse. It is agreed that the bloodstock in the United States remained on agistment at the same property and that the bloodstock in Australia remained at Trinity Park under Mr Marshall's care and that all the bloodstock was ultimately sold at auction, the bloodstock in Australia being sold at auctions conducted by Inglis & Sons. I am not satisfied that there was some step which MANL as
the owner of the bloodstock ought to have done which it did not do. There has been no evidence called to say that other steps should have been taken. Counsel for ABCOS, Mr Rares, submitted that, had MANL had the mares serviced by leading sires in Australia, their values would have increased substantially. However, I am not satisfied that it was negligent of MANL not to pay the high service fees that would have been required in a speculative attempt to raise the values of the mares. And there is no evidence that it was suggested to MANL that it should take the course that Mr Rares proposed. I assume that MANL took advice from Mr Marshall who had the care of the mares.
It was submitted that MANL should have sent the mares in the United States to Keeneland. However, MANL did not have the management of the auction that occurred. It was arranged by the stud owner in the United States to recover unpaid agistment fees. I am not satisfied that MANL was negligent in not taking more active steps in relation to the bloodstock, steps which would have required, inter alia, the payment of the outstanding fees and the management of the bloodstock to ensure that the animals were in suitable condition to be put up at a Keeneland auction.
PENALTY
Counsel for the applicants, Mr Macfarlan, submitted that the terms upon which interest and other moneys were payable to MANL under the agreements constituted the imposition of penalties.
The deeds of loan provided, inter alia:-
"3.1 The Borrower shall pay to the Lender interest on the Principal Sum and on any judgement or order in which the covenant to repay the Principal Sum may become merged at the Higher Rate [26%] computed from the Commencing Date or such other date or dates upon which the Principal Sum or any component Advances thereof shall have been drawn down or otherwise becomes chargeable with interest calculated at the times and in the manner specified in Item 6 and payable on each Interest Payment Date.
3.2 Provided always and it is hereby agreed and declared that if the Borrower shall pay to the Lender interest calculated in the same manner specified in clause 3.1 at the Lower Rate [22%] on each Interest Payment Date or within the Concessional Interest Period thereafter and shall duly and promptly observe each and all of the obligations, terms and conditions to be observed and performed in connection with this Deed and the Facility and the Loan Securities on the part of the Borrower to be observed and performed and PROVIDED THAT the Facility shall not have been cancelled and/or the Loan Securities have not become enforceable then the Lender will accept interest for the preceding month at the Lower Rate in lieu of the Higher Rate.
...
3.5 If default is made in the payment upon the due date of any moneys payable to the Lender pursuant to this Deed (whether in respect of the Principal Sum interest or otherwise) the Lender may charge simple interest on that sum from the date of default until the sum is paid at the Higher Rate."
The first submission was that the rate of 26% was an obligation which carried on ad infinitum and, as it failed to take into account future fluctuations in market rates, it was not a genuine pre-estimate of loss. However, equity does not exercise a general jurisdiction to relieve against oppressive contracts such as is now conferred by the Contracts Review Act 1980 (NSW). No equity is raised where parties, equally capable of looking after his, her or its own interests, agree upon a rate of interest payable on moneys outstanding.
I see no element of penalty in the arrangements set out in cl.3.1, 3.2 and 3.5. To allow an indulgence for prompt payment is not to impose a penalty: Wallingford v Mutual Society (1880) 5 App. Cas. 685 at 702; Acron Pacific Ltd v OffShore Oil NL (1985) 157 CLR 514 at 518, 520. I should add, moreover, that 26% was, on 30 June 1989, a commercial rate of interest for what was a high risk, highly geared venture. And a fixed rate of interest was not inapposite for a fixed four year loan.
Relevant provisions of the leases read:-
"8.1 "The Lessee shall pay to the Lessor (without any deduction whatsoever) the total rent stated in Item 5 of the Schedule hereto [$86,593.48] (hereinafter referred to as the `Total Rent') by way of rent for the Term such total Rent to be due and payable on the date of commencement of the Term PROVIDED HOWEVER THAT if the Lessee shall duly observe and perform all and singular the covenants and conditions on the part of the Lessee herein contained or implied and if the Lessee shall duly and punctually pay on account of the Total Rent the instalments specified in Item 7 of the Schedule hereto [four equal instalments of $21,648.37 payable annually in advance] without prior demand during the continuance of the Term at the times or within seven (7) days of the respective due dates for payment of the same specified in Item 7 of the Schedule hereto THEN the Lessor shall not demand or seek to enforce payment of the Total Rent or any balance thereof outstanding otherwise than by the said instalments.
...
10.1 If any moneys payable by the Lessee to the Lessor remain due and unpaid, the Lessee will pay interest calculated on a daily basis at the rate set out in Item 10 of the Schedule hereto [26%] (`the Overdue Interest Rate'). Interest payable pursuant to this Clause shall be capitalised monthly.
...
21.1 If an Event of Default occurs, the Lessor may at its option at any time thereafter and notwithstanding that the Lessor may have waived some previous default or matter of a nature hereinbefore referred to EITHER:
21.1.1 by notice in writing to the Lessee revoke its covenant not to enforce immediate payment by the Lessee of the Total Rent and require immediate payment of the unpaid balance of the Total Rent, and declare any other moneys due and payable by the Lessee to be immediately recoverable whereupon the said amounts shall become immediately due and payable and recoverable; ...
...
21.1.4 recover from the Lessee liquidated damages pursuant to Clause 21.2 hereof; ...
...
21.2 Upon the termination of this Lease pursuant to sub-clause 21.1.3 hereof the Lessee shall pay to the Lessor as and by way of liquidated damages an amount equal to the sum of:-
21.2.1 the Residual Value specified in Item 11 of the Schedule hereto [$17,950] and the unpaid instalments on account of the Total Rent that would have been payable during the whole Term had this Lease not terminated and which at the date of termination were not payable rebated to reflect the present value at the date of payment by the Lessee, such value to be ascertained by applying the Discount Rate specified in Item 9 of the Schedule hereto [20%] to each instalment and to the amount of the Residual Value (as the case may be) in respect of the period by which the date for payment thereof is by virtue of this Clause brought forward (together with an amount equal to any stamp duty payable in respect of such rebated total); and
...
21.2.3 interest (if any) at the Overdue Rate [26%] on overdue amounts payable under this Lease;"
The schedule to each lease specified the following:
ITEM 5
Total Rent: $86,593.48.
...
ITEM 7
Rent Instalments and Dates: Four (4) equal instalments each in the sum of $21,648.37 payable annually in advance the first instalment to be made on the date of this Lease and thereafter on each anniversary of such date.
...
ITEM 9
Discount Rate: Twenty per centum (20.00%) per annum.
ITEM 10
Overdue Interest Rate: Twenty six per centum (26.00%) per annum.
ITEM 11
Residual Value: $17,950.00.
I read these provisions as requiring the lessees in substance to pay the whole of the rental in advance and, if payment was to be made by the permitted instalments, then to pay also a Residual Value, which I assume was calculated to be the equivalent of interest at 20% or thereabouts on the rental outstanding.
The provision for payment of the Residual Value was not a penalty. The obligation to pay this sum did not arise only in default, as counsel for the applicants contended.
Had the provision in 21.2.3 for the payment of interest on default at the rate of 26% stood on its own, I would have held that the provision was void as imposing a penalty. However, the mortgage deed encompassed the moneys paid by MANL to purchase the
bloodstock, which moneys were included within the "Moneys Hereby Secured". Clause 3.1(b) of the mortgage deed provided:-
"3.1 The Mortgagor covenants with the Mortgagee that:‑
...
(b) The Moneys Hereby Secured shall carry interest in accordance with the terms specified in this Mortgage or in any agreement security or instrument relating to any part or parts of such moneys and in the absence of any such specified terms then interest shall be payable at the Higher Rate computed from the date upon which such moneys became payable to the Mortgagee calculated on daily balances and payable on monthly rests, the first payment to be made at the expiration of one calendar month after the date of this Mortgage and thereafter on the same day in each succeeding month, or on such other dates as may be agreed in writing between the Mortgagor and the Mortgagee."
The "Higher Rate" was defined as having the same meaning as in the loan agreement, as was therefore 26%.
Reading the documents together, as they should be, there was an agreement between the parties that the moneys lent or paid out by MANL would carry interest at 26%, provision being made for a reduction in the rate should payment be made as specified in the lease. Thus, the matter falls within the principle enunciated in Wallingford v Mutual Society.
DAMAGES AND MONEYS DUE
The parties will calculate the sums which are to be included in the orders. I need comment upon only some matters of principle:-
(i) Capitalisation
Clause 3.4 of the deeds of loan provided:-
"3.4 If any interest payable hereunder shall not be paid within the Concessional Interest Period after the Interest Payment Date then at the discretion of the Lender as and from the Interest Payment Date (but without prejudice to the Lender's right at any time to treat such default in payment as an event of default as provided in clause 7 hereof) the interest so in arrears calculated as hereinafter provided shall be capitalized and be regarded as part of the moneys included within
the expression the `Principal Sum' and shall bear interest under clause 3 accordingly. Interest on arrears which has capitalized pursuant to this clause 3.4 shall be calculated at the Higher Rate provided that the Lender may in its discretion calculate interest at the Lower Rate."
A witness, Mr G.M. Hewitt, made calculations which capitalised the interest monthly. Such a capitalisation was expressly provided in cl 10.1 of the leases, but the loan agreements contained no such provision. Rather, Item 6 of the Schedule to the Loan agreements provided that, "Interest will be calculated and payable annually in advance."
Mr Hewitt said in his oral evidence that what he did was in accordance with industry standards and in the permitted discretion of the lender.
It appears to me, however, that the loan agreements provided for annual payments of interest and for interest to be capitalised at the discretion of the lender "as and from the Interest Payment Date". This suggests that there would be an exercise of discretion whenever an annual interest payment date arrived. The interest capitalised was, moreover, to be interest at the Higher Rate, which was 26% per annum. Monthly capitalisation steps would arrive at a higher annual figure.
In my opinion, the calculation should be carried out with annual rests. I do not think that the loan agreements and the leases should be read together, as counsel for MANL suggested, to derive an overall agreement for capitalisation on monthly rests.
(ii) Banque Bruxelles
Counsel for ABCOS submitted that I should follow the judgment at first instance rather than the judgment of the Court of Appeal in Banque Bruxelles Lambert SA v Eagle
Star Insurance Co Ltd [1995] 2 All ER 769 on the issue whether the applicants claim for damages may encompass such of the loss as was attributable to the fall in the value of the bloodstock after 30 June 1989 or only the difference between the price paid and the value of the bloodstock on 30 June 1989.
I prefer the judgment of the Court of Appeal, of which the relevant part is noted in clause 4(5) of the headnote. The judgment is, in any event, the latest and best authority on the point. The principle as expounded by the Court of Appeal accords with my understanding of Australian law as to negligent valuations and also the law as to damages under s.82 of the Trade Practices Act and s.68 of the Fair Trading Act.
(iii) Taxation
Counsel for the applicants, Mr Macfarlan, submitted that a sum should be added to the damages to compensate for the fact that a part of the damages will be assessable income. Mr Macfarlan referred to s.26(j) of the Income Tax Assessment Act 1936 (Cth). Section 26(j) provides:
"26 The assessable income of a taxpayer shall include -
...
(j) any amount received by way of insurance or indemnity for or in respect of any loss.
..."
Mr Macfarlan did not refer to any authorities but no doubt he had in mind a case such as Federal Wharf Co Ltd v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24. The issue is not an easy one as the recent decision in Federal Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 95 ATC 4483 shows.
In the present case, I doubt that the damages will be calculated in a way which will attract the operation of s.26(j). I assume that damages will be assessed by reference to the sums paid by each of the applicants out of their own funds plus the sums due by each to MANL less the taxation benefit which each derived. The one member who borrowed the $52,000 from a financier other than MANL will be in an analogous position. In the circumstance, I do not expect that any part of the damages awarded will be assessable income. Section 26(j) will not apply and the applicants will not derive a profit which, if derived, would be assessable under s.25(1) or s25A(1).
No submission has been addressed to the capital gains provisions of the Income Tax Assessment Act and I have therefore not considered them. As I said in Namol Pty Ltd v A W Baulderstone Pty Ltd (No 2) (1993) 47 FCR 388, if such an issue were raised, I would expect to be assisted by at least a written opinion from an experienced member of the Taxation Bar.
(iv) Claims for Contribution
I have not considered in detail the claims for contributions and the cross-claims. There are several claims for contribution. Section 5(1) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) provides inter alia:-
"5(1) Where damage is suffered by any person as a result of a tort (whether a crime or not) -
....
(c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought."
It is a matter of debate as to whether this provision, which is beneficial legislation, should be read as encompassing a claim based on statute, such as s.68 of the Fair Trading Act and whether it has any operation in relation to a federal statutory provision such as s.82 of the Trade Practices Act. Such issues and also the application of equitable principles of contribution in the circumstance of coordinate liabilities were debated in Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 104 ALR 237, Trade Practices Commission v Manfal Pty Ltd (In Liq) (1991) 105 ALR 520 and "Contribution, Contributory Negligence and Section 52 of the Trade Practices Act" by J.C. Campbell QC (1993) 67 ALJ 87.
The issue is a complex one and, to be adequately dealt with, would require a very close examination of the law. However, it seems unnecessary to consider the issue further. On the applicants' claims, Beattie McDonald, ABCOS and Mr Bester have been found liable for the tort of negligence. All or a number of the cross-claims have pleaded negligence on the part of Mr King and Mr Done. In my view, Mr Done and Mr King each came under duty of care to the investors and each breached that duty. The duty arose on Mr Done's part from his undertaking professional work in the establishment of the venture. On Mr King's part, it arose from his capacity as a promoter. I need not further discuss the breaches, which
are apparent from my findings. Section 5 of the Law Reform (Miscellaneous Provisions) Act will therefore apply.
For the purposes of contribution, I would apportion fault as follows: Beattie McDonald 30%, Mr King, Mr Bester and ABCOS 20% each and Mr Done 10%.
It is clear that Beattie McDonald must take the greatest responsibility for the venture was promoted by the firm. Mr Done's contribution was least of all, for he informed Mr McDonald that he had a conflict of interest. He, like Mr McDonald, did not know that the valuations were flawed. Mr King, Mr Bester and Mr Pulford by their actions contributed equally to the financial disaster which occurred.
Should it appear, when the orders are being worked out, that this issue of contribution needs more detailed consideration, counsel may raise it with me again.
HEATH INSURANCE
Heath Insurance is sued as the professional indemnity insurer of Mr McDonald and Mr Farrow, the partners of Beattie McDonald. AMP Fire and General Insurance Co Limited, which undertook 25% of the liability, has agreed to be bound by the result of these proceedings. The relevant provisions of s.6 of the Law Reform (Miscellaneous Provisions) Act provided:-
"6 (1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.
...
(3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or if such charges arise out of events happening on the same date, they shall rank equally between themselves.
(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured:
Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken."
The insurance policy covered acts, errors or omissions whenever and wherever the same may have been committed on the part of the insured firm or any person employed by the insured firm in or about the conduct of any professional business conducted by or on behalf of the insured firm. The policy indemnified the firm against any claim or claims:-
"(a) first made against it during the period set forth in the said schedule; and
(b) reported to the insurers during such period;
(c) by reason of any act error or omission or breach of contract between the Insured firm and its clients in or about the conduct of any professional business conducted by or on behalf of the Insured firm or its predecessors in business whenever and wherever the same was or may have been committed or alleged to have been committed by the Insured firm or by its predecessors in business or by any person now or heretofore employed by the Insured firm or by its predecessors in business or by any person hereafter to be employed by the Insured firm during the period of this Certificate."
The words "professional business" were deemed "to apply to advice given or services performed for whatsoever nature undertaken by or on behalf of the Insured firm provided always that any fee accruing for such work shall inure to the benefit of the Insured firm ..." It is not in dispute that the claims arose with respect to acts, errors or omissions alleged to have been committed on the part of the insured firm and its employees in the conduct of professional business conducted by or on behalf of Beattie McDonald.
Heath was notified by Beattie McDonald during the period of insurance, 9 November 1990 to 31 December 1991, of the claims made against the partners of the firm by the members of the syndicate. The cross-claims of ABCOS and Done against Mr McDonald, Mr Farrow and Heath were filed and served in the 1992-3 year. The policy wording in respect of that year was similar in relevant respects.
In the certificate attached to the 1990/91 policy and, I assume also that of the 1992/93 policy, the sum insured of $1,000,000 and the excess $3000 were expressed to apply to "each and every claim".
The principal issue arises from the exclusions. The certificate of insurance provided, inter alia:-
"III EXCLUSIONS
This Certificate shall not indemnify the Insured firm against Claims made upon the Insured firm:
...
(b) by or on behalf of any person operated or controlled by the Insured firm or by any partners, employees, nominees or trustees of the Insured firm and in which the Insured firm or any of its partners or any member of their respective families has a direct or indirect financial interest;
(c) by any person advised or induced by the Insured firm or partners or employees of the Insured firm or of its predecessors in business at the time of the advice or inducement to invest in or lend money to any person being a person referred to in the preceding sub-clause or to any person named as the Insured firm under this Policy;
...
(e) arising out of the provision by the Insured firm of any advice, inducement, recommendation, endorsement or opinion regarding the investment of interest, capital or personal endeavour in an investment facility or service in which the Insured firm or its predecessors in business or any of its partners or any member of their families has a direct or indirect control or financial interest.
(f) prior to the commencement of the period of insurance stated in the Schedule or in respect of any claim or circumstance which may possibly give rise to a claim stated on the proposal form or declaration referred to in the Schedule.
The term `financial interest' as used in the exclusion was deemed to exclude "any nominal financial interest of less than 10% of the issued capital in a company or less than 10% of the value of any other enterprise."
Liability was denied under these exclusions. It was alleged on behalf of Heath Insurance that exclusion (b) applied because the claim is made by the unincorporated entity, the First Trinity Park Stud Venture, in which Mr McDonald an Mr Farrow both had a direct financial interest as participating members and in which Mr McDonald had an indirect financial interest by virtue of his interest in Jarpan, which was to manage the operations of the venture.
The claims of the applicants are not made, however, by the members of the venture as a whole or by the members of the venture jointly or jointly and severally. No claim is made with respect to the operations of the venture but only with respect to the actions of Beattie McDonald in its establishment.
It was alleged on behalf of Heath Insurance that exclusion (c) applied because the claims are made by persons advised or induced by Beattie McDonald or its employees to invest in the unincorporated entity, the First Trinity Park Breeding Venture, being a person operated or controlled by the insured and in which the insured had a direct or indirect financial interest.
The concept of "control" is not an easy one. The traditional view of the common law was that the control of a company vested in its shareholders. As Bowen CJ, with whom
Lockhart & Beaumont JJ agreed, said in Re The News Corporation Ltd (1987) 70 ALR 419 at 429:-
"In a series of English and Australian decisions it has been established that `control of a company' under the general law means control of a majority of votes at a general meeting on all matters able to be dealt with at such a meeting (see WP Keighery Pty Ltd v FCT (1957) 100 CLR 66 at 84-9; and Mendes v Commissioner of Probate Duties (Vic) (1967) 122 CLR 152 at 161-4)."
However, increasingly in statutory provisions, the term "control" is being used to refer to "de facto control" rather than to the power to control. Re The News Corporation is illustrative of this point.
In Federal Commissioner of Taxation v Commonwealth Aluminium Corporation Ltd (1979-80) 143 CLR 646, Stephen, Mason and Wilson JJ referred at 659 to the fact that "controlled", when used passively, in its ordinary sense, "refers to de facto control rather than capacity to control." As a consequence, their Honours concluded that de facto control of a company usually resides in the directors rather than in the shareholders. Their Honours said:-
"Although control and management are not synonymous terms, any distinction that may be made between them does not lead to a conclusion that an article such as art.62 constitutes the directors as mere managers and leaves the shareholders in de facto control of the business of the company."
The term "operated or controlled" in exclusion (c) therefore encompasses control of the management and control of the operations of the entity in which the investment is made.
Mr McDonald was a member of the venture and had an ongoing role as a shareholder in and as one of two directors of Jarpan. The Thoroughbred Owner Management Agreement recited, inter alia:-
"D. The Owner [being each of the syndicate members] has requested the Manager [Jarpan] and the Manager agrees subject to the terms hereof to care for and agist and generally manage the Horses with a view to maximising the commercial return therefor."
The Manager was Jarpan. It had the management of the operation of the venture. There was no provision in the management agreement or elsewhere for the holding of meetings of the members of the syndicate or for the giving of directions by the syndicate members to Jarpan.
I think it is likely that Mr McDonald had the guiding role in Jarpan. The venture was established by Mr McDonald, not by Mr Marshall, who had his own syndicate to look after. Mr Marshall put no money into the venture and the work that he was to do in relation to the venture was work for which he was to be remunerated by Jarpan. The budgeted cash flow of the venture provided for the payment of fees for stud management and for the stallion service. It was proposed that most of these payments would be made to the Trinity Park Stud. As Mr Marshall was to be a recipient of remuneration, I think he would have left the overriding control of the venture to Mr McDonald.
Moreover, in Re The News Corporation, it was held that a power of veto was a power to restrain and hence to control. Bowen CJ said at 435:-
"The Oxford English Dictionary defines `control' as `to exercise restraint or direction'. A power to veto is a power to restrain, and hence to control. This view of control accords, in general, with the view of the concept recently taken by the New South Wales Court of Appeal in North Sydney Brick & Tile Co Ltd v Darvall (1986) 10 ACLR 837; 4 ACLC 539 at 545; see also Re Kornblum's
Furnishings Ltd [1982] VR 123 at 132-4; and Re Herald and Weekly Times Ltd; TVW Enterprises Ltd v Queensland Press Ltd (1983) 7 ACLR 821 at 838)."
As Mr McDonald was one of the two directors of Jarpan, he had, in the sense in which Bowen CJ used the term, a power of veto over resolutions of the Board of Jarpan.
In my opinion, Mr McDonald managed the affairs of the venture. There is very little evidence about what actually happened. However, Mr McDonald was a shareholder and director of Jarpan and Mr Farrow was to be the secretary. Mr Farrow in fact signed the letters that went to the investors. The financial information which went to the investors as to the deductions which they could put into their income tax returns also necessarily came from Beattie McDonald.
It was submitted that exclusion (c) could not operate as, when the advice was given, the unincorporated entity, the deemed "person", had not been established. It was said that the advice was given during the planning stage. However, I read exclusion (c) as encompassing investment in an entity which is being formed and which is to be operated or controlled by the insured, at least where the establishment of the entity is in the control of the insured. Mr McDonald had such control. He finalised the membership of the syndicate, arranged settlement and signed the agreements on behalf of all but one of the syndicate members. Mr McDonald even agreed to an increase in the interest rate sought by MANL without referring the matter back to the investors.
The committal by each of the members of funds to the venture in the expectation of profit and tax benefits constituted an investment, as that term is commonly understood, and the promotion by Beattie McDonald of the venture included advice and inducement to invest.
It follows that the criteria of exclusion (c) were satisfied.
Heath Insurance also relied upon para (e) of the exclusions. Counsel alleged that the claims arose out of the provision by the insured of advice or inducement regarding the investment of "interest" or "capital" in an investment facility or service in which the insured had a direct or indirect control or financial interest. In this clause, the word "or" replaces the word "and" in para (b) of the exclusions.
The crucial issue is whether the venture was "an investment facility or service", words which are not technical terms. They refer to a structure or service which facilitates or assists investment and therefore to a structure or service of an ongoing nature. An investment broker would be one example. An investment trust in which units could be taken up and sold from time to time may be another. There are many possibilities. But the First Trinity Park Stud Breeding Venture did not facilitate or assist investment. Its sole concern was taxation and the purchase, breeding and sale of bloodstock. The venture was a one-off tax avoidance and profit-making scheme, not an on-going structure or service which facilitated investment. It follows that exclusion (e) did not apply.
Heath also relied, so far as the claims of ABCOS and Mr Done are concerned, on exclusion (f), which deals with the circumstance where claims or possible claims known to
an insured were not notified to the insured prior to the taking out of the insurance. There is very little evidence about that matter. The communications between Beattie McDonald and Heath are not in evidence. As Beattie McDonald brought the claims of the investors to the notice of Heath and as these proceedings in which ABCOS and Done are respondents commenced in 1991, I am not satisfied that there were relevant matters known to Beattie McDonald which were not brought to the attention of Heath prior to the issue of the 1992/93 policy.
Counsel for Heath, Mr Taylor SC, submitted that there was only one claim and therefore that the maximum liability under the policy was $1,000,000 less the $3000 excess. However, the position is similar to the circumstances where an accident occurs in which several people are injured. Such persons each have a separate claim arising out of the one event. Here also, there is not one claim brought by an unincorporated entity. Each applicant, ABCOS and Done makes its or his own separate claim to which the limit of $1,000,000 will apply. The point is made express by the words "each and every claim". The word "every" refers to each member of a group. Thus, the Macquarie Dictionary states that the term means "each (referring one by one to all the members of an aggregate)." Therefore, up to $1,000,000 is payable in respect of each claim and also in respect of each claim in a group of claims.
Mr Taylor submitted that s.6(1) of the Law Reform (Miscellaneous Provisions) Act did not apply. He submitted that the words "on the happening of the event giving rise to the claim for damages or compensation" required that the contract of insurance be in force at the time of the event, and did not apply to a claims-made policy. The construction of s.6(1) is
difficult. My own impression is to read the section as did Young J in Schipp v Cameron (unreported, 4 April 1995, Supreme Court of NSW), and therefore to give effect to the statute as beneficial legislation. However, in the light of my other findings, it is not necessary for me to arrive at a final view.
The claims against Heath must, however, be dismissed. Heath's cross-claims and claims for contribution will similarly be dismissed.
I certify that this and the 110 preceding pages
are a true copy of the reasons for judgment herein of
the Honourable Justice Davies.
Associate:
Date: 10 November 1995
Counsel for the 1st applicant
and the 3rd to 18th applicants: R B S MacFarlan QC
L S Einstein
Solicitors for the 1st applicant
and the 3rd to 18th applicants: Gadens Ridgeway
Counsel for the 1st respondent/cross-respondent: D E Grieve QC
M G Skinner
Solicitors for the 1st respondent/cross-respondent: Smits Newton & Partners
Counsel for the 5th respondent/cross-respondent: B C Oslington QC
T D Castle
Solicitors for the 5th respondent/cross-respondent: Allen Allen & Hemsley
Counsel for the 8th respondent/cross-respondent: S D Rares SC
M C L Dicker
Solicitor for the 8th respondent/cross-respondent: Minter Ellison
For the 2nd & 6th respondents/cross-respondents: Appearing in person.
For the 7th cross-respondent: Appearing in person
Counsel for the 14th & 15th cross-respondents: P.T. Taylor SC
Solicitors for the 14th & 15th cross-respondents: Phillips Fox
Date of hearing: 6 - 10 March; 13-14 March 1995
16 - 17 March 1995
20 - 24 March 1995
27 - 31 March 1995
3 - 6 April 1995
10-11 April, 13 April 1995
5 May; 17 May & 19 May 1995
Date of judgment: 10 November 1995
