FEDERAL COURT OF AUSTRALIA

Donald Financial Enterprises Pty Ltd v APIR Systems Ltd [2008] FCA 1112

TRADE PRACTICES – misleading or deceptive conduct – applicant claims relief in respect of subscription for 200,000 shares in the first respondent and purchase of 81,904 shares from existing shareholders – whether the first respondent and its directors engaged in misleading or deceptive conduct in failing to disclose the existence and content of the heads of agreement to which the applicant and the executive directors were parties – executive remuneration agreement – where the first respondent and its executive directors disclosed that only 50,000 shares were to be issued between the executive directors when the second heads of agreement contemplated the issue of at least a further 100,000 shares to each - requirement of disclosure in the audited financial statements – whether the first respondent and its executive directors offered the applicant the opportunity to scrutinise and review documents in a folder described as a ‘due diligence folder’ - accessorial liability and the non-executive directors – the applicable statutory regime under the Corporations Act 2001 (Cth), the Trade Practices Act 1974 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) – remedies – share subscription deed declared void ab initio – cross-claim dismissed

CONTRACT – formation – intention to contract – the principle in Masters v Cameron – ‘subject to contract’ – whether the first and second heads of agreement were binding as between the first respondent and the executive directors

Federal Court of Australia Act 1976 (Cth) s 51A

Trade Practices Act 1974 (Cth) ss 4, 51AF, 52, 75B, 82, 87

Corporations Act 2001 (Cth) ss 79, 208, 209, 764A, 766A, 766C, 1041E, 1041H, 1041I, 1324, 1325

Australian Securities and Investment Commission Act 2001 (Cth) ss 12BB, 12BAA, 12BAB, 12CA, 12DA, 12GB, 12GH, 12GM

Fair Trading Act 1992 (ACT)ss 11, 12, 13, 40, 46

Fair Trading Act 1987 (NSW) ss 42, 43, 61

Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101applied

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 cited

Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 cited

Bramble Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 applied

Cleary & Anor v Australian Co-operative Foods Ltd & Ors (Nos. 2 and 3) (1999) 32 ACSR 701cited

Commonwealth v Cornwell (2007) 229 CLR 519distinguished

Fox v Percy (2003) 214 CLR 118 cited

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640applied

Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 cited

Masters v Cameron (1954) 91 CLR 353 applied

Murphy v Overton Investments Pty Ltd (2004) 216 CLR 3distinguished

Potts v Miller (1940) 64 CLR 282 applied

Re NRMA Ltd; Re NRMA Insurance Ltd (2000) 34 ACSR 2cited

Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 cited

Thompson v White & Ors (2007) NSW Conv R 56-171 applied

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632cited

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 distinguished

Yorke v Lucas (1985) 158 CLR 661 applied

Elisabeth Peden, JW Carter and GJ Tolhurst, When Three Just Isn’t Enough: the Fourth Category of the “Subject to Contract” Cases (2004) 20 JCL 156

DW McLauchlan, In Defence of the Fourth Category of Preliminary Agreements: Or Are There Only Two? (2005) 21 JCL 286

DONALD FINANCIAL ENTERPRISES PTY LIMITED v APIR SYSTEMS LIMITED, ANDREW HUTCHINGS BROSO, ANDREW RILEY, MAUREEN CANE, DAVID MCGREGOR and NOEL WICKS; APIR SYSTEMS LIMITED v DONALD SHARP and DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST

NSD 1200 of 2004

EDMONDS J

30 JULY 2008

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1200 of 2004

BETWEEN:	DONALD FINANCIAL ENTERPRISES PTY LIMITED Applicant
AND:	APIR SYSTEMS LIMITED First Respondent ANDREW HUTCHINGS BROSO Second Respondent ANDREW RILEY Third Respondent MAUREEN CANE Fourth Respondent DAVID MCGREGOR Fifth Respondent NOEL WICKS Sixth Respondent
and between:	APIR SYSTEMS LIMITED Cross-Claimant
and:	DONALD SHARP First Cross-Respondent DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST Second Cross-Respondent

JUDGE:	EDMONDS J
DATE OF ORDER:	30 JULY 2008
WHERE MADE:	SYDNEY

THE COURT DECLARES THAT:

1. The Share Subscription Deed between the first respondent, the applicant and the first cross-respondent dated 23 January 2004 is void ab initio.

THE COURT ORDERS THAT:

2. The first respondent forthwith refunds to the applicant the subscription price of the 200,000 shares in the first respondent for which the applicant applied and subscribed.

3. If the first respondent is unable for any reason beyond its control or otherwise fails to comply with order 2 in full, the second and third respondents jointly and each of them severally, refund to the applicant the subscription price of the shares in order 2 and to the extent of the shortfall.

4. Upon full payment to the applicant of the subscription price of the shares in order 2, the applicant deliver to the first respondent a properly executed instrument or instruments of transfer of such shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs.

5. The second and third respondents jointly and each of them severally, forthwith refund to the applicant the purchase price of the 81,904 shares in the first respondent purchased by the applicant from shareholders in the first respondent in exchange for a properly executed instrument or instruments of transfer of the shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as the first respondent directs.

6. The first, second and third respondents jointly and each of them severally pay interest to the applicant pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the sum of the subscription price in order 2 and the purchase price in order 5 from 28 January 2004 to 30 July 2008 at the rate or rates applied by the Supreme Court of New South Wales during this period.

7. The first, second and third respondents pay the applicant’s costs of the application; and the fourth, fifth and sixth respondents’ costs of defending the application.

8. The cross-claimant pay the first and second cross-respondents’ costs of defending the cross-claim.

9. The cross-claim be dismissed.

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	NSD 1200 of 2004

BETWEEN:	DONALD FINANCIAL ENTERPRISES PTY LIMITED Applicant
AND:	APIR SYSTEMS LIMITED First Respondent ANDREW HUTCHINGS BROSO Second Respondent ANDREW RILEY Third Respondent MAUREEN CANE Fourth Respondent DAVID MCGREGOR Fifth Respondent NOEL WICKS Sixth Respondent
and between:	APIR SYSTEMS LIMITED Cross-Claimant
and:	DONALD SHARP First Cross-Respondent DONALD FINANCIAL ENTERPRISES PTY LIMITED AS TRUSTEE FOR THE ELYSUM TRUST Second Cross-Respondent

JUDGE:	EDMONDS J
DATE:	30 JULY 2008
PLACE:	SYDNEY

INDEX

Introduction.............................................................................................................................. [1]

Background.............................................................................................................................. [4]

APIR Executive Directors’ Remuneration: The First Heads of Agreement................................. [10]

Mr Charles Gibbon and Mr David Adams............................................................................... [14]

The Advent of Mr Sharp......................................................................................................... [26]

The Communications and Meetings over the November 2003 – January 2004 Period Between Mr Sharp and Mr Hutchings Broso and/or Mr Riley............................................................................................. [30]

APIR Executive Directors’ Remuneration: The Second Heads of Agreement............................ [64]

The Communications and Meetings Between Mr Sharp and the other Directors of APIR After the Execution of the SSD.................................................................................................................................. [72]

An Overview of the Respective Cases..................................................................................... [98]

Common Ground and Issues Not in Dispute.......................................................................... [110]

Impression of Witnesses........................................................................................................ [118]

Mr Sharp.......................................................................................................................... [121]

Mr Riley........................................................................................................................... [122]

Mr Hutchings Broso.......................................................................................................... [123]

Ms Cane........................................................................................................................... [124]

Messrs Wicks and McGregor........................................................................................... [126]

The Issues in Dispute............................................................................................................. [127]

Whether the first and second heads of agreement were binding as between APIR and the executive directors?......................................................................................................................................... [127]

Relevant Principles........................................................................................................ [128]

Relevant Circumstances................................................................................................. [134]

Whether the first heads of agreement as between APIR and the executive directors was terminated prior to the advent of the second heads of agreement?......................................................................... [137]

If the second heads of agreement was binding as between the executive directors and APIR, from what date was it binding?.................................................................................................................. [141]

Whether either of the executive directors informed Mr Sharp, at the time or times they told him that 50,000 shares in APIR were to be issued between them, that this was to occur in the context of them becoming employees of APIR?......................................................................................................... [142]

Whether Mr Sharp was offered the opportunity to scrutinise and review documents in a folder described as a ‘due diligence folder’?....................................................................................................... [144]

Whether the executive directors deliberately withheld the existence of the second heads of agreement from Mr Sharp prior to the execution of the SSD on 23 January 2004?............................................ [145]

Whether the executive directors deliberately withheld the planned execution of the executive employment agreements from Mr Sharp prior to the board meeting of 16 April 2004?........................... [151]

Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the first heads of agreement?............................................................................ [154]

Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the second heads of agreement?....................................................................... [158]

Conclusions on Ultimate Issues.............................................................................................. [165]

Conclusion on Misleading or Deceptive Conduct............................................................... [170]

The Non-Executive Directors and Accessorial Liability...................................................... [171]

The Applicable Statutory Regime........................................................................................... [174]

Remedies under the Corporations Act 2001......................................................................... [177]

Relief Sought......................................................................................................................... [180]

Argument and Reasoning on Remedies and Relief.................................................................. [181]

The Cross-Claim................................................................................................................... [193]

REASONS FOR JUDGMENT

Introduction

1 By its further amended application dated 30 January 2008 (‘the FAA’), leave for the filing of which I granted on the same date, the applicant, Donald Financial Enterprises Pty Limited (‘DFE’), as trustee of a trust fund known as ‘The Elysum Trust’, claims relief in respect of DFE’s subscription for 200,000 shares in the first respondent, APIR Systems Limited (‘APIR’), and in respect of DFE’s purchase of 81,904 shares in APIR from existing shareholders. The FAA is stated to be made under ss 1041E, 1041H, 1041I, 1325(1) and (5) of the Corporations Act 2001 (Cth); ss 12DA and 12GM of the Australian Securities and Investment Commission Act 2001 (Cth) (‘the ASIC Act’); and ss 82 and 87 of the Trade Practices Act 1974 (Cth) (‘the TP Act’).

2 The bases for DFE’s claims for relief, set out in DFE’s Second Further Amended Statement of Claim dated 16 March 2006 (‘the SFASC’), are that the respondents jointly and each of them severally:

(1) engaged in conduct that was misleading or deceptive or likely to mislead or deceive contrary to s 52 of the TP Act, s 12 of the Fair Trading Act 1992 (ACT) (‘the ACT Act’) and/or engaged in conduct in relation to a financial product or a financial service that was misleading or deceptive or was likely to mislead or deceive contrary to s 1041H of the Corporations Act 2001 and/or subs 12DA(1) of the ASIC Act;

(2) engaged in conduct in contravention of s 1041E of the Corporations Act 2001; and

that by engaging in such conduct, the second to sixth respondents, jointly and each of them severally:

(3) (i) aided, abetted, counselled or procured the contraventions of s 52 of the TP Act and/or s 12 of the ACT Act by APIR; and

(ii) have been directly or indirectly, knowingly concerned in or party to the aforesaid contravention; and

(iii) have conspired to effect the contraventions as contemplated by s 75B of the TP Act and s 40 of the ACT Act respectively, together with s 12GB of the ASIC Act in relation to contraventions to s 12DA of that Act.

(4) was involved in the contravention of the aforesaid Acts (namely the TP Act, the ACT Act, the Corporations Act 2001 and the ASIC Act), as contemplated and referred to in s 82 and s 87 of the TP Act and s 46 of the ACT Act and further was engaged in the aforesaid contraventions as contemplated in s 1041I, s 1324, subs 1325(1) and subs 1325(5) of the Corporations Act 2001 together with s 12GH and s 12GM of the ASIC Act.

(5) both directed and/or procured the aforesaid contraventions of the statutory obligations of APIR and/or engaged in the deliberate wilful and knowing pursuit of a course of conduct that was likely to constitute infringement and/or reflected an indifference to the risk of infringements of the aforesaid statutory obligations.

3 By an amended cross-claim dated 21 August 2006 and filed on 4 September 2006 (‘the ACC’), APIR claims various forms of relief against Mr Donald Sharp (‘Mr Sharp’), the sole director of DFE, and DFE, as trustee of The Elysum Trust, on the following bases:

(1) During negotiations leading up to the transactions described in [1] above, Mr Sharp and DFE engaged in conduct that was misleading or deceptive or likely to mislead APIR within the meaning of s 12DA of the ASIC Act and/or s 12 of the ACT Act and/or s 42 of the Fair Trading Act 1987 (NSW) (‘the NSW Act’) and/or s 1041H of the Corporations Act 2001; and such conduct constituted representations as to a future matter within the meaning of s 12BB of the ASIC Act, s 41 of the NSW Act, s 11 of the ACT Act, which Mr Sharp and DFE had no reasonable grounds to make.

(2) that the conduct of Mr Sharp and/or DFE was unconscionable conduct in trade and commerce within the meaning of s 12CA of the ASIC Act and/or s 13 of the ACT Act; and/or s 43 of the NSW Act;

(3) that Mr Sharp in his capacity as the sole director of DFE:

(a) aided counselled and/or abetted; and/or

(b) induced; and/or

to contravene ss 12DA, 12BB and 12CA of the ASIC Act within the meaning of subs 12GB(1) of the ASIC Act; s 61 of the NSW Act; and/or s 40 of the ACT Act;

(4) in the alternative, for breach of clause 6.1 and clause 6.2 of a Share Subscription Deed between APIR, DFE and Mr Sharp dated 23 January 2004 (‘the SSD’).

Background

4 APIR was incorporated on 15 December 1997 as a proprietary company and on 7 February 2003 converted to a public company. Its first directors were the second respondent, Mr Andrew Hutchings Broso (‘Mr Hutchings Broso’), the third respondent, Mr Andrew Riley (‘Mr Riley’), the fifth respondent, Mr David McGregor (‘Mr McGregor’) and the sixth respondent, Mr Noel Wicks (‘Mr Wicks’). The fourth respondent, Ms Maureen Cane (‘Ms Cane’) joined the Board on 8 April 2000. At all relevant times:

(1) Mr Hutchings Broso was the Managing Director of APIR;

(2) Mr Riley was the Technical Director and Company Secretary of APIR; and

(3) Mr Hutchings Broso and Mr Riley were the only executive directors of APIR, all other directors being non-executive directors. Mr Hutchings Broso and Mr Riley are sometimes hereinafter together referred to as ‘the executive directors’ or ‘EDs’.

Initially, Mr Hutchings Broso was the Chairman but was replaced as Chairman by Ms Cane on 27 February 2004.

5 According to its financial statements for the year ended 30 June 2003, APIR had a paid-up capital at that date of $1,118,000 comprising 763,982 fully paid ordinary shares (compared to $939,200 as at 30 June 2002 comprising 686,535 fully paid ordinary shares). Accumulated trading losses as at 30 June 2003 reduced total equity to $56,439 (compared to $665,399 as at 30 June 2002). According to the Directors’ Report for the year ended 30 June 2003, the principal activity of APIR during that year ‘… was the development and implementation of electronic commerce infrastructure for the financial services industry’.

6 In this latter respect, the background evidence of its executive directors was not in dispute.

7 Mr Hutchings Broso deposed:

‘3. … Following my retirement [from the Army] in 1993 I provided consultancy services to the government and private enterprise in the Canberra region, relating to communication, particularly in the financial services industry.

4. As a part of the consultancy services I was engaged in advising a company that was developing a coding system for participants in the finance industry and the products which they manufacture and sell. That company went into liquidation in 1997 but as a result of that consultancy I developed specialist knowledge of the company and financial products coding system. This knowledge combined with my military training meant I had specialist experience on how that coding system was to be used in the market and how information could be formatted, categorised, applied and communicated. I identified that the business of the company that had gone into liquidation had significant potential value and that a properly funded and well run business utilising the intellectual property of that company would have significant capacity to make substantial in-roads into the industry. As a result of my opinion I formed a consortium of people who were creditors of the failed company and had a substantial investment in that company by way of unpaid consultancy fees and investment funds and I negotiated with the liquidator of the failed company, Mr Rangott, to purchase the intellectual property of the Asia Pacific Investment Register. I invested $20,000 and the other investors invested $100,000. I then formed the company to be known as APIR Systems Pty Ltd.

5. … As the managing director and chairman of APIR, along with Andrew Riley I set about creatinga new software program based on intellectual property of the earlier company and inApril 1998, with the support of the Investment and Financial Services Association (‘IFSA’) APIR became the industry standard coding for products and participants in the financial services industry. That coding provides a unique identifier and is used throughout the industry in reporting and identifying participants and products. Any analysis in the public media includes the coding system developed by APIR.

7. The initial coding purchased from Asia Pacific Investment Register involved 3,000 products that had been transferred as part of the purchase price from the liquidator. This coding utilised a software approach, APIR quickly developed new software and with the support of IFSA, obtained substantial industry coverage of approximately 7,000 products and participants by the year 2000, and now over 14,000. The approach of APIR was completely different from the failed company in that the revenue of APIR was derived from a fee for service, rather than an advertising revenue model. This has resulted in considerable growth in the company revenues, particularly in the last couple of years. There is considerable scope to market this coding business into emerging economies.

8. …

9. In late 1999 [I] was approached by a group of large financial institutions asking whether APIR could build a system to identify financial advisors and check whether they were compliant with the incoming regulatory regime (the Financial Services Reform Act). I identified that APIR had the technical expertise and capacity to meet the request but insufficient capital to fund the research and development required to deliver the hardware and software necessary. I approached AusIndustry on behalf of APIR and sought a grant to enable the development of the solution sought by major industry players. APIR was successful in obtaining a grant for nearly one million dollars, which was required to be matched dollar for dollar by APIR. APIR therefore needed to access nearly one million dollars to meet its obligations to AusIndustry. As a result of this imperative, I began to look around for methods of raising that money.

10. I approached a number of potential lenders and investors and whilst those discussions were ongoing, APIR provided its contribution as required by the AusIndustry “R & D Start Grant” from existing working capital and some small loans from existing shareholders and some capital injection. This process put strain on APIR’s cash flow position and there was a need to find a substantial investor. As a result by mid 2003 I had entered into discussion with 2 potential investors, Mr Charles Gibbon and some time later, Mr David Adams. …’

8 Mr Riley deposed:

‘7. APIR is a technology based company and produces a unique identifier code which enables operators within the financial services industry to enable the recognition of information about a particular financial product or participant. That code is recognized as the industry standard code. I was a member of the team that helped develop this coding system and I brought that specialised knowledge to APIR when it was set up. The importance of the APIR coding system to the financial services industry is such that the company must be regarded as being beyond reproach and can’t be aligned with any financial service participant. Because of the industry standard coding system, APIR is privy to Market sensitive information so that APIR can code appropriately a product and issue a code to be used in an information statement or prospectus. Participants must be assured that the information will be held in confidence and not made available to other participants in the industry.

8. As the technical director of APIR, I supervise the smooth running of APIR’s computer system technology, software development, for the issuing, storing and publishing of code data. Because the market for financial products is growing, and APIR is increasing its penetration of that market the hardware and software used to develop unique codes is constantly under development. This development is set against the background of the use of a diverse range of computer systems operated by participants in the Financial Services Industry. APIR’s coding system enables computer systems to recognise the participant and its financial products.

9. It was apparent to me in October 2002 that APIR needed more capital to enable it to keep abreast of developments and maintain its position as industry standard provider. I had informal discussions with other directors about the need I perceived for greater investment and the need to raise more working capital. As a result of those conversations, I, in my role as executive director was asked by the directors to assist in seeking to source more working capital. Andrew Hutchings Broso was with me whilst those conversations took place. The directors wanted us both to raise money.’

9 In early 2003, APIR engaged Newport Capital Group Pty Ltd (‘Newport Capital’) to provide services directed to raising funds for APIR through various financing strategies, including evaluation of such strategies and advice as to the manner in which to structure and implement such financing transactions.

APIR Executive Directors’ Remuneration: The First Heads of Agreement

10 The minutes of a meeting of directors of APIR held on 7 March 2003 record the following:

‘EXECUTIVE DIRECTOR’S REMUNERATION

The proposed Heads of Agreement (see Minutes 29/11/02 and 31/1/03) for future remuneration of the Executive Directors was discussed in detail in the context of the progress with Newport Capital Group and consequently to ensure that agreements were in place for continuing management.

The interests of A Hutchings Broso and A Riley as the Executive Directors were noted.

It was AGREED to circulate the proposed Heads of Agreement with amendments to be signed off as agreement is reached.

It was subsequently RESOLVED by separately executed Resolution last date 4 May 2003 that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement now attached. The commencement date of the Agreements will not be until the receipt of at least $1,000,000.00 from new investors.’

Mr Riley agreed in cross-examination that this minute was prepared shortly after 4 May 2003.

11 The heads of agreement referred to in the minute was embodied in a separate resolution sent to each of the non-executive directors by Mr Riley under cover of a letter bearing date 24 April 2003. The separate resolution was signed by all directors of APIR, including Mr Hutchings Broso and Mr Riley, between 24 April and 4 May 2003 and is hereafter referred to as ‘the first heads of agreement’.

12 The separate resolution provided:

‘EXECUTIVE REMUNERATION

It was RESOLVED that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement attached: The commencement date of the Agreements will be that of the receipt of at least $1,000,000.00 from new investors.

HEADS OF AGREEMENT

Subject to shareholder approval where required, this Agreement will apply for the Managing Director, Andrew Hutchings Broso, and Andrew Riley as the Executive Directors (each an ED). The company, “APIR”, includes associated companies.

The ED will initially provide his services as defined in the Schedule for a period of two years from the Commencement Date. The cost of employment of the ED will be in three increments. From the Commencement Date until the receipt of a further $1M from the capital raising program, the cost of employment will be $120/100 pa. From that date until the receipt of a further $1 M from the capital raising program the cost of employment will be $1 60/140K per annum. From that date the cost of employment will be $210/175K pa. In the event that the Board decides not to proceed to raise this further $IM, then the cost of employment will increase to $210/175K on the achievement of revenue from operations of $2M pa.

The Agreement will include a Completion Payment which becomes due at the end of the two year commitment if the company chooses not to continue the EDs. The Completion Payment will be the greater of $350K or 100,000 times the share price on completion, but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them. If APIR chooses to terminate the Agreement before the end of the two year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the EDs.

The Continuing Agreement would be for an indefinite period, terminable on 6 months Notice or payment in lieu. A Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares.

APIR would have the right of termination for any reason justifying summary dismissal at law.

The EDs will be directors of APR but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company.

The EDs will be entitled to reimbursement of expenses, and to take annual leave, sick leave, and parental leave as agreed. There is no entitlement to be paid out for accumulated sick leave on termination.

In addition to the cost of employment, the EDs will be offered a performance incentive by way of options to purchase shares in the same class as those held by the “foundation shareholder group” (i.e. the current shareholders on the members register not including those issued $3.50 shares).

The initial opportunity will be on reaching revenue from operations of $2M per annum. The number of shares will be that required to bring the shareholdings of the EDs in aggregate to 25% of the number of shares held by the “foundation group shareholders”. The shares will be offered to the two EDs on the ratio of .1.2/1.0. A second opportunity will be on the achievement of an annual net profit of $500,000. The number of shares will be negotiated.

The exercise price of the Options will be negotiated in good faith.

APIR will arrange finance for the EDs to exercise the options with interest and principle repayment tied to dividend rates and franking credits paid. The exercise period for taking up the Options will be three years.

There will be allowance for trigger events ie takeover, change of control, joint ventures and splits.

AGREED by:

M Cane ……………………………

A Hutchings Broso ……………………………

D McGregor ……………………………

A Riley ……………………………

N Wicks ……………………………’

13 The covering letter provided:

‘COVERING LETTER

Attached to this letter is a proposed Heads of Agreement covering a remuneration package to be offered to our executive directors, Managing Director Andy Hutchings Broso and Andrew Riley.

The package provides for incentives tied to the key performance needs of the company as it moves forward and grows:

· Capital raising

· Establishment of Revenue

· Delivery of Operating Profit

The terms of the Agreement are such as to protect the company from liability in the case that success is not achieved i.e. payments are tied to performance events that ensure that funds are available.

Commencement of Agreement

The Agreement does not come into effect until $1M of new investment has been received i. e. there is no obligation or commitment whatsoever until there is funding from new equity to cover it.

Capital Raising

Three pay increments are defined against levels of capital raised. These are quoted in terms of cost of employment (COE) to allow for packaging or fees, followed by an equivalent in salary in $000s. (AHB/AJR)

Current COE $77/73 (approx salary equivalent $59/56

New investment of $1M, increase to $120/100 $90/75)

Further $1M (i.e. total $2M) $160/140 $125/105

Further $1M (i.e. total $3M) $210/175 $160/135

Establishment of Revenue

A share based incentive will be offered on reaching a per annum revenue from operations of $2M. This incentive takes account of the dilution of the EDs over time and allows them to purchase shares to recover a position of 25% of the foundation group holding. The option to purchase will be offered on a ratio of 1.2/1.0 between AHB/AJR

This means AHB will have the option to purchase 40,932 shares, AJR 34,110.

The price of the shares and company financing assistance is to be negotiated in good faith at the time.

Operating Profit

A second trigger for a share-based incentive will be on the achievement of a net profit from operations of $500K per annum. This incentive is not defined at all, and will be negotiated at the time and in the context of the prospects for the company.

Management Continuity

A key element of investor confidence for the new capital raising is that there be confidence in the continuity of management. The arrangement offered is in terms of a Completion Payment which comes into play on satisfactory completion of two years of service. If the company chooses to offer a continuing agreement for continuing services, then the payment is spread forward. To balance the company’s opportunity to get rid of the management early to avoid the Completion Payment, that same payment would be due as a Termination Payment. This arrangement offers a new investor the opportunity to either put in his “own men” at a known cost and with no legal issues, or to continue the current management with a pre-agreed performance incentive at an effectively discounted rate.

The Completion Payment is set at the greater of $350K or 100,000 times the then current share price.

Assessment of Completion Payment

In the last five years, APIR has grown from its origins to a company with intellectual property, technology and an industry presence that could be sold for a multiple of shareholder value. In 1997 the company was a beach shack, through profitable trading, government grants and shareholder injections the company is looking more like a quality beachside property. The recent cash flow issues surrounding the final stage of the investment phase should not be seen to diminish this achievement.

The non-executive directors believe that the experience and domain knowledge of the current management team are absolutely essential to the short to medium term success of the company. If they meet the performance criteria they will have demonstrated their suitability to continue to grow the company. The Executive Directors have stated that they are willing to commit to the terms of the suggested Agreement. They have also pointed out that due to the uncertainty surrounding future direction and control of the company, that without an Agreement, they would be put in a position of having no sensible choice but to accept other offers of employment.

At the time the Completion Payment first becomes payable, at Commencement plus two years, the Executive Directors will have worked for APIR for more than seven years and four months at a salary that will have been at less than half their reasonable expectations for at least six of those years.

Recommendation

The non-executive directors recommend that members approve the Heads of Agreement.’

Mr Charles Gibbon and Mr David Adams

14 From around mid-2003 until towards the end of that calendar year Mr Hutchings Broso, on behalf of APIR, had numerous communications, both oral and written, with Mr Charles Gibbon (‘Mr Gibbon’) and Mr David Adams (‘Mr Adams’) concerning the possibility of their making a substantial investment in APIR. Messrs Gibbon and Adams had been introduced to APIR through Mr Jay Hennock (‘Mr Hennock’) of Newport Capital. The terms upon which they might invest remained fairly fluid right up until the time that Mr Sharp came on the scene in October/November 2003. Apparently, a Term Sheet for what was described as a ‘Round 1 Investment and Instrument’ was agreed on or about 15 September 2003. It provided, inter alia:

‘1.1 Subscribe for $350,000 (of a maximum of $600,000 to be known as “Round 1”) of 1 year Convertible Notes having the following features:

· converts at a price of $2.65 per share at time of conversion (Conversion Price),

· interest rate of 12% pa paid at end of 12 months or convertible into equity

· (at $2.65 per share) at option of Noteholder,

· first charge over the assets of company similar to existing Promissory Notes (it is assumed that the company assets have no prior charge).’

15 Towards the end of October 2003, Mr Gibbon put forward a Revised Term Sheet which provided, inter alia:

‘Under the Term Sheet of 15 September 2003 it was agreed that Round 1 investors would subscribe for $350,000 out of a maximum raising of $600,000. It was intended that David Adams would subscribe for the remaining $250,000. The conversion price was $2.65. The Term Sheet was silent on exact payment although it was reasonably assumed that the whole $350,000 would have been paid on normal settlement.

In light of recent events (see below) it is now proposed that Round 1 be raised to $500,000 due to David Adams’ unwillingness to accept the risk that he sees in the stock at present. David wants to stay close to APIR and has indicated that he would invest subject to the meeting of certain milestones. It is understood that David will be offered an option to purchase subject to specific terms.

It is now proposed that the payment of $500,000 be subject to two equal tranches; the first on normal document completion and second on the meeting of the David Adams related milestones.

In other respects the Term Sheet remains unchanged.’

16 Mr Hutchings Broso responded by email to Mr Gibbon on 30 October 2003 making a number of points, the second one of which read:

‘b. I am most definite that the salary arrangements for the executive directors be put to bed as part of Tranche 1. I have no concern with benefits not being triggered until the milestones for Tranche 2 are achieved, but am most concerned at the prospect of progressing without the surety of a Management Agreement.’

17 Mr Gibbon addressed a meeting of the APIR board on 5 November 2003. The minutes of that meeting record the following:

‘EQUITY RAISING

Charles Gibbon was invited to address the Directors concerning the proposal to invest in the company by the group of which he is spokesman. Correspondence and amendments to the Terms Sheet executed on 15 September 2003 and previously circulated were discussed.

C Gibbon tabled notes on an Executive Remuneration Plan for consideration. It was noted that there was an existing Resolution (6 May 2003) detailing a Heads of Agreement for an Executive Remuneration Plan. There was discussion on merging the provisions and principles of the two documents.

It was noted that finalisation of the Plan is a Condition precedent of the Terms Sheet.

Progress with the investment documents (Convertible Note Deed, Shareholders Agreement) was discussed.

C. Gibbon queried arrangements for selection of the Chairman of the Directors.’

18 The notes on an Executive Remuneration Plan which Mr Gibbon tabled at the meeting were not in evidence, but the following day, 6 November 2003, Mr Hutchings Broso emailed Mr Gibbon in the following terms:

‘Subject: Executive Remuneration

Charles,

I have drafted a proposed amendment to the original Board Resolution on Exec Remuneration in response to yesterday’s meeting. The attachment attempts to take account of the original issues and accept the methodology you proposed, while rejecting both my and Andrew’s position. I am passing this to the Board for their response but consider that as it impacts on the Conditions Precedent you should remain in the loop.

Would appreciate your input.’

19 The proposed amended resolution on Executive Remuneration read:

‘EXECUTIVE REMUNERATION

It was RESOLVED that the two Executive Directors each be offered an Agreement for the ongoing provision of their services in accordance with the Heads of Agreement attached. The Commencement Date of the Agreements will be the signing of the Convertible Note Deeds with new investors sourced by Newport Capital, probably Charles Gibbon and associates.

HEADS OF AGREEMENT

The ED will initially provide his services as defined in the Schedule for a period of two years from 1 July 2004.

The cost of employment of the ED will be in three increments.

1. From the Commencement Date until whichever is first of either the receipt of the second tranche of the Convertible Note or the achievement of the milestone upon which the payment is predicated, the cost of employment continues at its current level. That is $72,000/81,000 pa (not including GST) with AHB also provided with a vehicle and mobile phone expenses.

2. On achievement of the above milestone or payment of the second tranche the ED will receive:

2.1. A one off issue of 50,000 shares at no cost to them, split AHB 27,500 and AJR 22,500 as compensation for salary and conditions foregone over six years.

2.2. A bonus to AHB of $50,000 and AJR $40,000 to be paid 50% in shares at $2.65 and 50% either in cash or shares at $3.25 at the discretion of the ED.

2.3. A new cost of employment figure for AHB of $111,000 (approx salary equivalent $100,000) and AJR $100,000 (approx salary equivalent $90,000). Existing benefits to be maintained until appropriate to be converted to cash.

2.4. This new cost of employment will remain in place until 30 June 2004.

3. From 1 July 2004 the total cost of employment will be based on a package comprising cost of employment, bonus and option components to be determined by the Remuneration Committee (comprised of non executive directors with the CEO there by invitation). The dollar quantum of the all up package is to be called the “On Target Earnings” or OTE.

Remuneration Methodology

The Remuneration Committee (RC) will use the following principles in developing the OTE for the post 30 June 2004 period.

1. Cost of Employment Component. The RC will use both internal and external benchmarks, the relative stage of maturity of the company and the roles of the ED to provide a basis for cost of employment discussions with the ED. Until an actual OTE of $175,000 is achieved in a financial year for AJR, the differential ratio for AHB and AJR is to be 1.2/1.00, after which time it is to move to 1.24/1.00.

2. Bonuses. Both ED are to have ongoing incentive plans which will be subject to bonus payments. Bonuses will normally be reset every 12 months and may take the form of a fixed amount or some other form as deemed appropriate. They will be target or milestone related and based on company goals, typically 30%, individual goals, 40%, and “soft goals”, 30%.

3. Options. Option schemes are to be considered primarily as a “retention mechanism” rather than a “remuneration” mechanism.

3.1. An annual pool of options is to be made available to the ED and for senior management where deemed appropriate by the Board.

3.2. The maximum allocation to the ED is AHB 40% and AJR 35%, leaving a minimum of 25% for staff.

3.3. The options are to be exercisable at a deemed market price as at 1 July in the financial year in which they are allocated.

3.4. Options will be exercisable over a three year period at 1/3 per year.

3.5. The options will be exercisable in the event of the sale of the Company or within six months of leaving if the ED’s contract is terminated or not renewed.

The Agreement will include a Completion Payment which becomes due at the end of the two year commitment if the company chooses not to continue the EDs. The Completion Payment will be the greater of $325K or 100,000 times the share price on completion, but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them. If APIR chooses to terminate the Agreement before the end of the two year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the EDs.

APIR would have the right of termination for any reason justifying summary dismissal at law. Each ED will have the choice of providing their services as an employee or as a consultant and of arranging their remuneration packages as they choose, except that the Board may, not acting unreasonably, not approve a proposed arrangement on the grounds of prejudice to the company. The EDs will be directors of APIR, but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company.

The EDs will be entitled to reimbursement of expenses, and to take annual leave, and sick leave.. There is no entitlement to be paid out for accumulated sick leave on termination.

AGREED by:

M Cane …………………………………………

A Hutchings Broso ……………………………

D McGregor ……………………………………

A Riley …………………………………………’

20 On 12 November 2003, Mr Gibbon sent Mr Hutchings Broso an email making suggested changes to the proposed amended resolution on Executive Remuneration so that it read:

‘EXECUTIVE REMUNERATION

HEADS OF AGREEMENT

The ED will initially provide his services as defined in the Schedule for a period of two and a half years from 1 January 2004.

The cost of employment of the ED will be in three increments.

1. Until the meeting o the second tranche of the Convertible Note and the achievement of other milestones agreed to by the Remuneration Committee (performance hurdles), the cost of employment continues at its current level. That is $72,000/81,000 pa (not including GST) with AHB also provided with a vehicle and mobile phone expenses.

2. On achievement of the above performance hurdles (assumed to be around Feb/March 2004) the ED will receive:

2.1 A one off issue adjustment to be agreed split AHB 55% and AJR 45% as compensation for salary and conditions foregone over six years. (There appears to be acknowledgement that a legacy issue exists ie outstanding payment for services already provided. The Completion Payment as far as it relates to legacy issues should be addressed here also. It is noted that a Completion Payment was to be made on ED leaving subject to the company being profitable and being able to make a payment to shareholders. CLG is happy to assist in structuring a mutually acceptable solution between existing shareholders and the EDs. We should attempt to make this tax and cash flow efficient.

2.2 A bonus to AHB of $50,000 and AJR $40,000 to be paid either in cash or in shares (with a minimum of 50% in shares) at $3.25 with the election to be made at time of signing of Round 1 Convertible Notes documentation.

2.3 A new cost of employment figure for AHB of $111,000 (approx salary equivalent $100,000) and AJR $100,000 (approx salary equivalent $90,000). Existing benefits to be maintained until appropriate to be converted to cash.

2.4 This new cost of employment in 2.3 will be subject to review 30 September 2004 and thereafter annually at 30 June each year (the first after 30 September 2004 being 30 June 2005).

3. From 1 July 2004 the total, cost of employment will be based on a package comprising cost of employment, bonus and option components to be determined by the Remuneration Committee (comprised of non executive directors with the CEO there by invitation). The dollar quantum of the all up package is to be called the “On Target Earnings” or OTE.

Remuneration Methodology

The Remuneration Committee (RC) will use the following principles in developing the OTE for the post 30 June 2004 period.

2. Bonuses. Both ED are to have ongoing incentive plans which will be subject to bonus payments. Bonuses will normally be reset every 12 months and may take the form of a fixed amount or some other form as deemed appropriate. The next reset will be after the performance hurdles have been attained and run through to 30 September 2004. This process will become an annual review effective 1 July each year (ie commencing 2005). Bonuses will be target or milestone related and based on company goals, typically 30%, individual goals, 40%, and “soft goals”, 30%.

3. Options. Option schemes are to be considered primarily as a “retention” mechanism rather than a “remuneration” mechanism. The terms and conditions for the scheme shall reflect industry practices and trends.

3.1. An annual pool of options is to be made available to the ED and for senior management where deemed appropriate by the Board.

3.2. The maximum allocation to the ED is AHB 37.5% and AJR 27.5%, leaving a minimum of 35% for staff/ unallocated.

3.3. The exercise price of the options will be based on the deemed market price at the time of allocation..

3.4. Options will be exercisable over a three year period at 1/3 per year.

3.5. The options will be exercisable in the event of the sale of the Company or within six months of leaving if the ED’s contract is terminated without cause or not renewed.

If APIR chooses to terminate the Agreement before the end of the two and a half year period (ie prior to 30 June 206), a Completion Payment will be payable based on the then current OTE remuneration calculated for the duration of the remainder of the remuneration contract period. This does not apply where termination is for cause or where the AMC performance hurdle relating to the second tranche payment is not met.

The Agreement would continue after 30 June 2006 (the 2.5 year period) unless notice of termination/ renegotiation was provided by either prior to 30 December 2005. Thereafter termination would be by 6 month written notice by the other party. The Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares.

The EDs will agree to appropriate clauses on deeding Intellectual Property, on the protection of Confidential Information and for the Restraint of activities to the detriment of APIR both during and after the term of the Agreement. There will be a Non-Compete provision to cover a period of 2 years from the date of departure or from 30 June 2006 whichever is the later.

The EDs will be entitled to reimbursement of properly incurred expenses, and to take annual leave, and sick leave. There is no entitlement to be paid out for accumulated sick leave on termination.

AGREED by:

M Cane …………………………………

A Hutchings Broso ……………………

D McGregor……………………………

A Riley …………………………………

N Wicks ………………………………’

21 This evoked the following email response from Mr Hutchings Broso the following day:

‘Dear Charles,

Not unexpectedly I was upset by my reading of your position.

In drafting the replacement Resolution I attempted to meld both the historical or legacy issues around Exec Remuneration as contained in the original Resolution agreed by the Board on 4 May 2003, as well as take account of the methodology you proposed as an appropriate way forward.

Both Andrew and I felt that while the shareholders have borne a considerable part of the investment risk, a firm share price of $3.25 after such a process as we have been through, with the potential of further increases will ensure a strong return and reward for their patience. On the other hand the Exec Directors have borne ongoing reduced income and considerable personal risk without the reward mechanisms being formalised. The previous Board Resolution went some way towards establishing such a mechanism.

In addition, the proposal replaces capital raising milestones with ones that will positively impact the value of the shareholders’ investment. The “reward”, while restructured is probably marginally reduced from the May agreement.

Being sympathetic to the impact on the company of a limited capital injection and the obvious reluctance of a new investor to see his $s going straight out the door in salary, we offered the alternative of a “wage” at the subsistence level, well below going rate, but with the promise of a cash payment down the track. The payment has a performance component but a minimum level to compensate for the sacrifice made earlier. Note that in the agreed Resolution, the Completion Payment is carried forward indefinitely as long as the service continues to be provided with a settlement to be negotiated at that time. Perhaps this was not apparent.

My reading is that within the 21/2 year period there is only the one bonus and pay rise being offered, in March 2004, with no compensation for termination. A cynic could say that it overcomes the risk period for little cost and provides for a cheap off-load. The salary level offered is equivalent to a medium-experience programmer or salesman, and while acceptable in an environment where efforts are recognised and gains are shared, without the Completion Payment, the salary is derisory.

While we have accepted low salaries in the establishement [sic] phase of the company in the interests of all shareholders we have never valued ourselves or our contribution at such a level. We therefore expect to be adequately rewarded in step with the company’s progress. We have already met the first hurdle of the agreed Resolution in spirit so signing of the Convertible Note Deed should cover the first pay rise.

The legacy issue around ED remuneration were well known to all of us from the first and to use this as an opportunity to game the share price after the two tranche adjustment would I feel test the Board.

In summary, I feel that your proposals meet neither the needs of the EDs, the thrust of the existing resolution or the spirit of our earlier discussions.

I trust this adds clarity to enable us to move forward.’

22 By a further email on the same day, 13 November 2003, Mr Hutchings Broso informed Mr Gibbon of Mr Sharp’s visit to APIR’s office the previous day and his interest in taking up a 20% investment in APIR at the $2.65 price Mr Gibbon would be paying.

23 Mr Hutchings Broso sent an email to Mr Gibbon on 2 December 2003 which relevantly provided:

‘Charles

The Board has been pleased with the general thrust of our engagement to date, however believes that it is now appropriate to raise some issues before progressing further.

Our level of discomfort over the increasing gap between the perceived thrust and spirit of our early discussions and Term Sheet and the subsequent evolution of the deal has been crystallised by the current iteration of the Convertible Note Deed. We discussed these amendments in a long meeting with our company solicitor who has subsequently given us his detailed comments. These comments are quite robust and because they reinforced and extended our initial concerns have been discussed by the Board. To our minds the progressive changes have taken the deal as represented by the Deed to a point that is distant from the original start point and no longer considered to be fully in the Company’s best interest. Accordingly, it is our belief that it is time to review the deal in its totality in order to put it back on what the Company would consider to be an equitable win-win basis. …’

Under the heading ‘Conditions Precedent’, it provided, inter alia:

‘The issue of Executive Remuneration has now been going on for some time. The proposed amendment essentially asks the EDs to sign up for two and a half years on the basis of a small initial pay rise and the opportunity to negotiate further. Given the current state of discussions and the continuing divergence of views, the EDs consider it in their best interests that the framework for these discussions and minimum outcomes be agreed before they step away from the package offered by the existing Board Resolution. From the Board’s perspective it is felt that any reduction in the capacity of executive management at this time would generate unacceptable commercial risk for the Company at a critical time in its development.’

24 By letter dated 11 December 2003, Mr Gibbon wrote to the Board of APIR:

‘I write with regard to the intended fund raising, the agreement (the Agreement) dated 15 September 2003 and the email (the Email) from Andy Hutchings Broso of 2 December 2003. I understand form Andy that the Board and its advisors are meeting Friday 12 December to consider the fund raising and accordingly I would appreciate if this correspondence could form part o the input to the Board’s deliberations.

…

Executive Remuneration

I discussed at the Board meeting 5 November a possible structure for executive director remuneration going forward. I have said to Andy on a number of occasions that it is not in the interests of any stakeholder to underpay key staff. I outlined a package comprising options, bonuses and base salary which would allow the build up of equity in the company.

What remains as an issue however is in essence an “ex gracia” [sic] payment for services rendered and promises made over the last 5 years or so. It is difficult for me to address this as I have no meaningful knowledge of the issues. I can however provide advice as to structures for making the payment.

It appears that there is further need for discussion regarding the legacy issue. For this reason I suggested to Andy (and had reflected in the last version of the Deed) that the remuneration package agreed mid year by the Board be accepted as basis for going forward. It is important to recognise that the co-mingling of executive remuneration negotiations with fund raising can prove very difficult and also throw up conflicts. …’

25 On 16 December 2003, Mr Hutchings Broso sent an email to Mr Gibbon in the following terms:

‘Charles

The Board did meet on Friday 12 December 2003 and undertook the proposed review of the progress of our negotiations. For your information, the letter and revised terms attached to your email of Thursday 11 December were tabled and discussed at great length. As a consequence it was felt appropriate that the Board should respond formally to that letter and will do so in due time.

As you are most likely aware from your discussions with Jay, the Board considered the whole situation in some depth, eventually concluding that the Company continued to require as much capital as it can use in launching the register and compliance services. At the same time the Board considered that the Company’s position was somewhat changed from that which existed earlier this year. Therefore, while the Board considered it desirable to continue an association with you it did not believe that your current position, as represented by your proposed changes to the draft Convertible Note Deed, was in the best interests of the Company. Accordingly, the Board directed these negotiations to be terminated and directed Andrew and I, in consultation with Jay, to find some way of restarting discussions based on the Company’s current risk profile.

We look forward to continuing our discussions once we have had time to go through these issues with Jay.’

The Advent of Mr Sharp

26 Mr Sharp first met Messrs Hutchings Broso and Riley at the Financial Planning Association Conference held in Adelaide from 7 to 9 October 2003. At that time, Mr Sharp expressed interest in learning more about APIR’s business.

27 Mr Sharp followed up this contact by telephoning Mr Hutchings Broso and meeting with him on 13 or 14 October 2003 and again on 21 October 2003 at the offices of Investors Mutual Ltd in Sydney.

28 In the months of November and December 2003 and January 2004, there followed a number of communications and meetings between Mr Sharp on the one hand, and Mr Hutchings Broso and/or Mr Riley on the other, leading up to the execution of the SSD on 23 January 2004 whereby DFE applied for 200,000 ordinary shares in the capital of APIR at $2.65 per share for a total consideration of $530,000, on payment of which APIR agreed to issue such shares to DFE, as trustee of The Elysum Trust. The date and place of these communications and meetings, the persons present and the subjects discussed are largely not in dispute, particularly where they are supported by contemporary documentation. There are, however, a number of factual issues arising out of these communications and meetings which are in dispute between the parties. In the main, these relate to what was said and, as importantly, what was not said in these communications and at these meetings and were the subject of fairly intensive cross-examination of Mr Sharp who gave evidence on behalf of DFE and Mr Hutchings Broso, Mr Riley and Ms Cane who gave evidence on behalf of APIR, as well as themselves. Mr McGregor and Mr Wicks also gave evidence on behalf of APIR and themselves.

29 I propose to deal with these factual issues which are in dispute between the parties, and my findings in relation to them, later in these reasons (see [127] to [164] below) but it is important to understand the context in which they arose. For that reason, I propose to recount these communications and meetings in the order in which they occurred but, to the extent it is possible to do so, without reference at this stage to the factual issues in dispute. In this regard, I have relied on the affidavit evidence of Mr Sharp which, according to the affidavit evidence of Mr Hutchings Broso and Mr Riley, is substantially agreed. On the other hand, I have also relied on the affidavit evidence of Mr Hutchings Broso where there is an obvious conflict.

The Communications and Meetings over the November 2003 – January 2004 Period Between Mr Sharp and Mr Hutchings Broso and/or Mr Riley

30 Mr Sharp visited Mr Hutchings Broso and Mr Riley in the Canberra offices of APIR on 12 November 2003. They discussed details of the various registers that APIR maintained on behalf of the industry, including a relatively new product called SPIN, which registered superannuation funds including industry, government and private funds. The SPIN registration details were more extensive than the current registration of products and included the registration of the bank account. Mr Sharp thought there was a commercial application for the industry and was interested in this opportunity.

31 At that meeting, Mr Sharp also learnt that APIR was finalising a new system called Advisor Management Centre (‘AMC’). He was shown the system including the rule-based software by one of their developers. During the course of the meeting Mr Sharp was advised that the AMC system was funded by a loan of approximately $1 million from a government body that he came to know to be the Industry Research and Development Board (‘IRDB’).

32 During the course of the 12 November 2003 meeting, Mr Sharp was advised by either Mr Hutchings Broso or Mr Riley, or both of them, that APIR had engaged a company called Newport Capital to raise capital for APIR and that they had introduced a man named Charles Gibbon to the company as an investor. They advised Mr Sharp that APIR had entered into a Term Sheet with Mr Gibbon and another investor to invest in convertible notes.

33 On 24 November 2003, Mr Sharp had a further meeting with Mr Hutchings Broso in Sydney. They discussed the intention of APIR to be an independent organisation within the industry that is not tied to any fund manager or tied to any financial products or systems. During the course of the 24 November 2003 meeting, they had a discussion about the capital raising objectives of APIR and the possibility of Mr Sharp becoming involved as an investor in APIR.

34 Two days later on 26 November 2003, Mr Sharp sent an email to Mr Hutchings Broso with an investment proposal in relation to APIR. The email read:

‘Subject Equity In APIR

I would like to confirm that interest associated with myself are interested to subscribe up to 200000 shares (or equate to 20% of the new enlarged issue capital of the company) at a price that you are currently negotiating [sic] with another party. We are prepared to subscribe to Ordinary shairs [sic].

In addition we are prepared to offer to existing shareholders the same price for another 30% of the company with the understanding that no individual shareholder will control more than 20%

What we need to complete the transaction is the latest set of Financial accounts, Budgets & pricing strategies. We also need a copy of the existing & proposed Shareholder agreements

We are in a position to settle ASAP’

Mr Hutchings Broso forwarded the email to each of the members of the APIR board.

35 Between about 28 November 2003 and 5 December 2003, Mr Riley on behalf of APIR sent Mr Sharp a note attaching a profit and loss statement and balance sheet of APIR as at 28 November 2003, a draft audit report for the year ended 30 June 2003, pricing policies for codes and various budgets being for the code business of APIR only for 2003 – 2004, budget for 2003 – 2004 taking into account the code business and AMC, and a budget for 2004 – 2005 taking into account the code business and AMC. Relevantly, the draft audit report for the year ended 30 June 2003 contained, among the notes to and forming part of the financial statements for the year ended 30 June 2003, the following item:

‘NOTE 17 EVENTS SUBSEQUENT TO BALANCE DATE

In September 2003 the Company entered into an arrangement with two external investors whereby $350,000 of 1 year Convertible Notes were issued together with an option to acquire further shares upon the conversion of the notes. The Convertible Notes convert at a price of $2.65 per share at time of conversion, attract an interest rate of 12% pa paid at the end of 12 months or convertible into equity and have first charge over the assets of the Company similar to existing Promissory Notes.’

36 On 3 December 2003 and prior to receiving the documents from Mr Riley referred to in [35] above, Mr Sharp had a short meeting with Mr Hutchings Broso at 11.30 a.m. followed by lunch on a boat as part of a luncheon meeting with the Financial Managers and Advisors (‘FMAA’). Mr Sharp’s purpose in inviting Mr Hutchings Broso was to enable him to meet other people in the industry. According to Mr Sharp, Mr Hutchings Broso and he did not have any further discussion concerning APIR during that afternoon other than Mr Sharp’s request that Mr Hutchings Broso arrange for a copy of a list of APIR shareholders and the number of shares held by each shareholder to be provided to him.

37 After receiving the documents from Mr Riley referred to in [35] above, Mr Sharp made notes of the key matters that concerned him. After completing his consideration of the documents and his notes, Mr Sharp contacted Mr Hutchings Broso by telephone and arranged to meet him. To the best of his recollection he met with Mr Hutchings Broso on 8 December 2003 in the coffee shop of a hotel that is now known as the Sydney Harbour Marriott in Pitt Street, Sydney.

38 According to Mr Sharp, during the meeting they had a conversation in words to the following effect:

‘Hutchings Broso: I have a list of the shareholdings here. There are 11 foundation shareholders and 7 others. There were 478,750 shares issued at $1 each. There are 239,375 shares issued at $2 each and 45,857 shares issued at $3.50 each. That makes the total shares issued 763,982 and the capital value is $1,118,000.

…

Sharp: Who are the likely sellers?’

39 Mr Hutchings Broso tore a page out of the notebook that he was holding and handed it to Mr Sharp. The initials indicated the shareholders and the percentages indicated the size of their stake in APIR. They had a discussion about the existing shareholders in relation to whether or not they were likely to be interested in selling their shares at the price of $2.65. Mr Sharp noted either ‘no’ or ‘?’ according to what Mr Hutchings Broso told him. The use of ‘no’ indicated that Mr Hutchings Broso had told Mr Sharp that the particular shareholder would not be interested in selling at a price of $2.65 per share and ‘?’ indicated that he was unsure as to whether or not they would be interested in selling at that price. The remaining comments of ‘unlikely’ or ‘not well off’ and ‘unlikely – some’ reflected what Mr Hutchings Broso told Mr Sharp about those shareholders. Mr Hutchings Broso told Mr Sharp that ‘DM’ referred to a syndicate of an accountant, David McGregor, who was also a director of APIR, and that he was not sure if any of the syndicate would be sellers, but that David was not a seller at that price.

40 Mr Hutchings Broso says he did have the conversations and discussions with Mr Sharp referred to in [38] and [39] above, but that those all occurred at their meeting on 3 December 2003.

41 According to Mr Sharp, they then discussed the convertible notes investors as reflected in item 17 of the financial statements of APIR. According to Mr Sharp, he was concerned to find out the terms and conditions by which these investors were going to be holding a stake in the company. He cannot recall precisely what was said but the effect of the conversation was as follows:

‘Sharp: Who are the investors?

Hutchings Broso: The investors are Charles Gibbon and another investor known to him.

Hutchings Broso: The conversion price of the convertible notes was dependent on meeting certain milestones and that if they were not met the conversion price would be less than $2.65

Sharp: The offer to invest was made on the assumption that the convertible note offer to Charles Gibbon does not proceed, that if the convertible notes are dependent on meeting milestones this could be highly dilutionary to existing shareholders, particularly if the milestones are not met as more shares could be issued. I don’t want that to happen because I won’t know how many shares will be issued

Hutchings Broso: The Charles Gibbon deal hasn’t been completed’

Mr Hutchings Broso disputes the terms of this conversation but agrees that it was apparent to him from that conversation that Mr Sharp would not proceed if the deal proceeded with Mr Gibbon on the basis he (Mr Hutchings Broso) had outlined.

42 Mr Sharp also recalls Mr Hutchings Broso saying:

‘There is an agreement that Andrew and I will be receiving 50,000 shares at no cost’

Mr Hutchings Broso deposes that this was in response to Mr Sharp asking:

‘Are there any other shares on issue?’

To which he, Mr Hutchings Broso, responded:

‘No, but there will probably be about 50,000 shares issued to Andrew and I in our remuneration packages as we are going to become full time employees.’

In cross-examination, Mr Sharp categorically denied that Mr Hutchings Broso’s response included the words ‘as we are going to become full time employees’. It is common ground that Mr Sharp did not respond to whatever Mr Hutchings Broso said. Mr Sharp said that he did not consider it useful to respond because he knew from the disclosure in Note 19 to the financial statements for the year ended 30 June 2003 that Messrs Hutchings Broso and Riley were consultants. Note 19 relevantly provided:

‘EW Systems Pty Limited, of which Mr Andrew Riley is a director, was paid consulting fees of $86,130 from entities in the economic entity during the year (2002 : $84,750).

Gundenham House Pty Limited, of which Mr Andrew Hutchings Broso is a director, was paid consulting fees of $89,349 from entities within the economic entity, during the year (2002 : $78,000).’

43 After being told by Mr Hutchings Broso that the convertible notes deal had not been concluded, Mr Sharp raised the other matters that he had noted down for consideration with Mr Hutchings Broso. According to Mr Sharp, they had a conversation to the following effect:

‘Sharp: What is the term and interest rate for the promissory notes?

Hutchings Broso: Between 3 and 6 months and between 12% and 15%.

Sharp: What is the interest rate and the term and the amount of the AusIndustry loan?

Hutchings Broso: The maximum loan is $982,000. No repayments for 42 months. We have four years to repay. The interest rate is 3.2%. As at 31 November we owe $634,000.’

Their conversation continued to the following effect:

‘Sharp: Do you have a shareholders agreement?

Hutchings Broso: No.’

Mr Hutchings Broso’s version of the conversation in relation to the AusIndustry loan was slightly, but not substantively, different.

44 After the meeting with Mr Hutchings Broso on 8 December 2003, Mr Sharp considered the information that had been given to him and made a decision on behalf of DFE to make an offer to invest in APIR. He reduced that offer to writing and sent it to Mr Hutchings Broso in an email on 9 December 2003. It read:

‘Thanks for your time in the last 24 Hours.

I confirm that my previous offer was on the assumption that the proposed convertible offer did not proceed. As you are aware the offer was debt with an option to convert to Equity. This could put the note holders at a significant advantage to existing shareholders.

My offer is amended to

A) 200,000 shares at $2.65 ($530,000)

B) My nominee for one Director

C) The board to be reduced to 5 over the next 12 Months

D) Shareholders agreement to include that existing shareholders can sell to existing Shareholders. If they which [sic] to sell to none Shareholders then they must offer to existing shareholders at the same price

E) I will offer to all existing Shareholder $2.65 to sell up to 50% of the enlarged capital of the company

F) No one shareholder will hold more than 20% If I exceed this level than [sic] I will undertake to sell down to 20% within 6 Months’

45 A short time after sending his email to Mr Hutchings Broso, Mr Sharp received an acknowledgment advising him that the proposal he had made on behalf of DFE would be discussed with the APIR Board which was to occur that day and that Mr Hutchings Broso would be organising a Board Meeting for Friday at around lunch time if the Board was agreeable to what Mr Sharp had proposed.

46 On 12 December 2003, Mr Sharp sent a further email to Mr Hutchings Broso noting a need to draft a letter to shareholders for the Board to consider and other points. The email read:

‘We also need to draft a letter to shareholders for the Board to consider today. The following are the points that should be included.

1) Don Sharp or his nominee is prepared to offer to all shareholders, on a first come priority, $2.65 per share.

2) The offer is for approximately 300,000 shares & subject to the number of acceptances.

3) If as a result of this offer his interests exceed 20% he agrees to sell down his interest to 20% within 6 months at the same price offered to shareholders.

4) This offer will allow those shareholder the opportunity of cashing out part or all of their share-holding thus giving liquidity to all shareholders at the same price that the new capital has been issued ie $2.65

5) The directors will shortly be requesting shareholders to sign a Shareholder agreement with the following terms (set out the terms in the Board resolution)’

47 Later the same day, 12 December 2003, Mr Sharp received an email from Mr Hutchings Broso forwarding an email that had been sent to him by Mr Riley containing the final form of the resolution passed by the Board of APIR that day. It read:

‘RESOLUTION: DON SHARP OFFER

It was RESOLVED that the Executive directors are authorized to implement the following as follows

A. That the Company issue 200,000 new Ordinary shares to “Nominee of Don Sharp” as soon as the following Conditions are met:

1. Receipt of $530,000 in cleared funds by the Company

2. Execution of an Agreement (draft attached) by Don Sharp and “Nominee of Don Sharp” which includes the following agreements:

i. That Don Sharp will use best endeavors to support and enhance the position of APIR Systems Limited in the Financial Services Industry as a neutral and even-handed provider of non competitive infrastructure services.

ii. That Don Sharp will resign from and not occupy positions or roles in the Financial Services Industry which could be perceived as in conflict with APIR’s neutral position as in i. above.

and the Secretary is authorised to take the actions required to implement this decision.

B. On issue of the shares Don Sharp or his nominee will be appointed a Director of the Company to fill a casual vacancy in accordance with the Constitution of the company.

C. On implementation of B. above, the Board of Directors will move to reduce to five members, including Don Sharp or nominee, within twelve months, except that a Chairperson may be an additional member.

D. Other than for remuneration arrangements, no other issue of shares or agreements to issue shares will be authorized for a period of two weeks or until Don Sharp is appointed a Director whichever first occurs.

E On completion of A. above, The Board will make best endeavors to achieve a binding Agreement by then current Shareholders, and a precedent requirement for future Shareholders, that the following conditions attach to the ownership, sale or transfer of shares in the Company:

a. That existing shareholders may sell shares to existing_. Shareholders.

b. That any shareholder wishing to dispose of shares in the Company must give first right of refusal to the existing shareholders at the same price which that shareholder has been offered by a non-shareholder.

c. That no shareholder may hold more than 20% of the shares of the Company, and that if this situation occurs, they will sell down to 20% as quickly as possible and in any event within 6 months.

d. That a shareholder who controls more than 20% of the shares in the Company will not vote more than 20% of those shares in the period before sell-down.

In particular, the Directors agree to these conditions for the shares they own or control.

F. On completion of B above, the Secretary will notify all existing shareholders that “Nominee of Don Sharp” is offering $2.65 per share for their shares to bring its holding up to a maximum of 50% of the total number of shares on issue including the shares issued in A. above, noting that E.c. and E.d. above will apply.’

48 According to Mr Sharp, he understood the reference to ‘remuneration arrangements’ in D was a reference to the 50,000 shares that were to be issued between Mr Riley and Mr Hutchings Broso which Mr Hutchings Broso told him about at his meeting with Mr Hutchings Broso on 8 December 2003 (see [42] above). According to Mr Sharp, he was not told of any other proposal to provide anything else by way of remuneration to either Mr Riley or Mr Hutchings Broso.

49 The minutes of the APIR Board meeting on 12 December 2003 also records the following:

‘EQUITY RAISING Charles Gibbon Offer

The Managing Director briefed the meeting on the progress of the negotiations with Charles Gibbon to invest in the Company via Convertible Note. The correspondence from Charles Gibbon dated 11 December 2003 and sent separately to each Director was discussed.

It was noted that the offer was now for $500,000 by Convertible Note in two tranches of $2.10 and $3.25 with a milestone hurdle for the second tranche. Charles Gibbon also indicated that he was willing to revert to an offer of $350,000. It was noted that the terms offered with the Convertible Note involved significant risks to the existing shareholders of the Company.

The Directors reviewed the advice from the company solicitor (David Toole of Deacons) and from Jay Hennock (Jacanda Capital).

RESOLVED that the offer from Charles Gibbon and associated parties was not acceptable to the Company in its current form and that negotiations on that offer should be terminated.

(Proposed M. Cane, seconded N. Wicks)

It was noted that an association with Charles Gibbon was still considered desirable and that the Executive Directors should continue to strive to arrange an agreement with him that reflected the Directors’ view of the value of the Company.’

50 On 18 December 2003, Mr Sharp met with Mr Hutchings Broso and Mr Riley at the offices of APIR in Canberra. They had a general discussion about APIR’s business. One of the matters discussed was Note 17 to the financial statements of APIR for the year ended 30 June 2003 (see [35] above). Mr Sharp asked that the terms of the note be changed so that it did not convey the impression that the convertible notes had actually been issued and Mr Riley responded that he would have Duesburys make the change. During the course of that meeting, there was discussion about the letter that was to go out to the shareholders concerning the offer Mr Sharp had made on behalf of DFE to purchase shares in APIR. Mr Sharp subsequently received a copy of the letter, which to his knowledge, was sent to the shareholders dated the next day, 19 December 2003. It read:

‘19 December 2003

«FirstName»«LastName»

«Address 1»

«CITY»«State»«PostalCode»

Dear «FirstName»,

We have received an offer to subscribe to new equity from a new shareholder, Don Sharp. Don is taking 200,000 shares at $2.65 per share for $530,000 and is willing to extend this offer to existing shareholders to purchase all or part of their shares at $2.65 per share.

Don is, as they say, a veteran of the industry who is well known for establishing the very successful Bridges financial planning business and more recently as the Chairman of Investors’ Mutual Limited, a successful wholesale manager. It is proposed that Don will fill a casual vacancy on the Board, bringing considerable drive and experience in the distribution side of the industry. The other Directors look forward to his participation on the Board.

Don’s initial approach was separate from the Newport Capital initiative; he was interested in APIR and enquired as to whether any existing shareholders would be looking to sell down their holdings. As a consequence of those discussions Don will take up the new equity and his holding will equate to approximately 20 percent of the equity.

With such a sizeable shareholding now being held by other than foundation shareholders the Board has decided a formal shareholders’ agreement needs to be put in place. Existing shareholders will be asked to sign one early in the New Year and it will apply to all new shareholders. Conditions will include:

a. That existing shareholders may sell shares to existing shareholders.

c. That no shareholder may hold more than 20% of the shares of the Company, and that if this situation occurs, they will sell down to 20% as quickly as possible and in any event within 6 months.

d. That a shareholder who controls more than 20% of the shares in the Company will not vote more than 20% of those shares in the period before sell-down.

The Directors will agree to these conditions for the shares they own or control.

As stated above Don has now reiterated his offer to all existing shareholders and has asked we inform everyone of the terms. They are that:

1. He is willing to purchase any shares you may wish to sell, on a first come first serve basis, at the same price as the new equity, that is $2.65 per share. For your holding of «TotalShares» the purchase price would be «Total Value».

2. The offer is for approximately 300,000 shares & subject to the number of acceptances.

3. If as a result of this offer his interest exceeds 20% he agrees to sell down his interest to 20% within 6 months at the same price offered to shareholders.

The Directors note that the offer does provide shareholders with liquidity at the same price as the new capital has been issued.

If you are interested in the offer please complete, sign and return the attached form to APIR Systems.

Cheers,

Andy Hutchings Broso

Managing Director’

51 On 23 December 2003, Mr Sharp had a meeting with Mr Hutchings Broso, Mr Riley, Mr Gibbon and Mr Hennock, formerly from Newport Capital. That meeting took place at the offices of Mr Hennock at the ABN AMRO building on Phillip Street, Sydney. At the commencement of the meeting, Mr Sharp was present during a conversation between Mr Riley and Mr Gibbon to the following effect:

‘Riley: The Board has resolved not to proceed with the convertible notes.

Gibbon: I have not been advised by APIR that they have terminated the 15th September agreement’

Mr Gibbon also raised the issue that the agreement called for APIR to put on hold any discussions with any other party. Mr Gibbon subsequently emailed a letter later that night in which he indicated his position to Mr Sharp. Mr Sharp did not respond to Mr Gibbon’s letter.

52 Later that day, 23 December 2003, Mr Sharp received a copy of a fax that had been sent to APIR from a shareholder agreeing to sell 69,904 shares under the terms of letter of offer to all shareholders at a price of $2.65 each.

53 The next day, 24 December 2003, Mr Sharp received a telephone call from Mr Hutchings Broso to discuss the meeting on the previous day with Mr Gibbon and others. According to Mr Sharp, they had a conversation to the following effect:

‘Sharp: I’ve had an opportunity to read the agreement with IRDB and it is clear that the raising of $1 million in additional capital is a condition of the loan and APIR is in breach of this condition. You didn’t tell me about this.

Hutchings Broso: I believe that IRDB will not treat the failure to raise funds as a breach of the loan.

Sharp: On my reading of the agreement this would be a breach.

Hutchings Broso: I don’t think they’re concerned about that.’

Mr Hutchings Broso denies that he had this conversation on 24 December 2003. Rather, he claims that on 6 January 2004, he met with Mr Sharp at the APIR office in Kingston and a conversation occurred to the following effect:

‘Sharp: I’ve had the opportunity to read the agreement with IRDB and it states that APIR is supposed to raise a million dollars to match the loan.

Hutchings Broso: Yes, that’s right, it’s why we are raising money.

Sharp: On my reading of the agreement you are in breach.

Hutchings Broso: In theory, but they are happy that we are in the process of raising capital and have been meeting our obligation to match them dollar for dollar. That’s why they’ve already given us over $650,000.

Sharp: I’ve also had a good look at your financials and I believe that APIR needs more money to achieve its objectives.

Hutchings Broso: It would be good to have it in reserve but we don’t want it until later in the year.

Sharp: I think I should take out options for about $600,000 to cover that need and meet the IRDB requirement.

Hutchings Broso: I’ll have to take that to the board.

Sharp: It will need to be included in the share deed.’

54 On or about 20 January 2004, Mr Sharp telephoned Mr Hutchings Broso to raise with him Mr Sharp’s preferred position – for DFE to have an option to purchase 200,000 additional shares in APIR at $2.65. According to Mr Sharp, they had a conversation to the following effect:

‘Sharp: I would like an option to purchase 200,000 additional shares at $2.65. I have two reasons for wanting to do this. The acceptance of shares from the existing shareholders has been less than I expected. If I or my nominee took up the additional shares then the total holding, after allowing for the free shares of 50,000 to be issued to you and Andrew will take the total holding to just under 40%. I am also concerned about the non-compliance with the IRDB loan in not raising the $1 million capital and taking out this option would make APIR compliant.

Hutchings Broso: Okay I’ll put this to the Board.’

55 According to Mr Sharp, not long after this conversation they had a further telephone conversation in which Mr Hutchings Broso said words to the effect:

‘Hutchings Broso: The Board will agree provided that the exercise price is $3.25. The reason for this higher price is that it’s likely that David Adams will take up a position as Chairman and he will be offered options at $3.25.’

Mr Sharp cannot remember what he said precisely in response to this, but he agreed to the higher price and to the amendment to the SSD accordingly. He was not concerned about further options being given to Mr Adams because it was at a price that was greater than the price that he was paying for the shares and was payable in cash. It was, in any event, not going to take place until sometime in the future when Mr Sharp was already a shareholder and would have a position on the Board of APIR.

56 Mr Hutchings Broso denies that he had these telephone conversations with Mr Sharp but accepts that a conversation in similar terms took place at his meeting with Mr Sharp on 21 January 2004. On 21 January 2004, Mr Sharp travelled to Canberra and went to the APIR offices on the afternoon of that day and the following day. He had numerous discussions with Mr Hutchings Broso and Mr Riley on the topic of the future direction of the company. At that meeting, Mr Hutchings Broso said he had a conversation with Mr Sharp to the following effect:

‘Sharp: The company will need more funding.

Hutchings Broso: The terms of the Options are 200,000 at $3.25 and they will lapse six months after the deed is signed. … They are priced at $3.25 because David Adams is already looking to invest at $3.25 and is looking to invest at the end of the first quarter.

Sharp: So you want me to pay $3.25?

Hutchings Broso: Yes.

Sharp: Ok.’

57 There was no further discussion of shareholding or of any shares being issued to anybody else or of any agreement or other arrangement to provide further shares to either Mr Hutchings Broso or Mr Riley.

58 The next day, 23 January 2004, Mr Sharp went to the offices of APIR in the morning. He was greeted by Mr Hutchings Broso and Mr Riley. On a table at the APIR offices were a number of documents that turned out to be those required to complete the deal. A final settlement with Mr Gibbon had not taken place.

59 Mr Sharp had a conversation with Mr Riley to the following effect:

‘Riley: The cost of resolving the dispute has been agreed in principle and it is for a reasonable dollar amount.’

The conversation then turned to the investment deal that Mr Sharp was about to enter into with APIR.

‘Sharp: Can I have an up to date budget summary and cash flow forecast for the year ended 30 June 2004?.’

This document was provided to Mr Sharp. When he read it he discovered APIR had only $56,633 in cash as at 31 December 2003 and that APIR was running out of funds.

60 Mr Sharp’s conversation with Mr Hutchings Broso and Mr Riley continued to the following effect:

‘Sharp: You are running out of funds. Do you have enough to pay the wages this month?

Hutchings Broso: Yes, we do.’

Mr Sharp signed the SSD and initialled the attachments.

61 Attached to the SSD were financial statements for the year ended 30 June 2003. The only difference between those accounts and those that had been provided to Mr Sharp at the end of 2003 was a change to Note 17 – ‘Events subsequent to balance date’, where the wording had been changed from [35] above to make it clear that the convertible note issue proposal was no more than that, a proposal, and to include a statement referring to an offer received for investment of at least $500,000, which was a reference to the investment offer Mr Sharp made on behalf of DFE. It read:

‘‘NOTE 17 EVENTS SUBSEQUENT TO BALANCE DATE

In September 2003 the Company entered into a Term Sheet with two external investors envisaging $350,000 of 1 year Convertible Notes with an option to acquire further shares upon the conversion of the notes. The Convertible Notes would convert at a price of $2.65 per share at the time of conversion of the notes, attract an interest rate of 12% and have first charge over the assets of the company. Subsequently other investment offers have been received and the company is currently negotiating for investment arrangements of at least $500,000, either by Convertible Note or Direct Equity.’

62 Also attached to the SSD were profit and loss accounts and a balance sheet dated 30 November 2003. Mr Sharp also signed an application for shares and provided a cheque for the full investment amount of $530,000.

63 According to Mr Sharp, he had not been expecting the deal to proceed that day and had not placed sufficient funds in the account on which the cheque was drawn. He asked that the cheque not be banked until the following Monday. On the other hand, Mr Hutchings Broso understood the request to mean that Mr Sharp did not want APIR to bank the cheque until a resolution of the Gibbon situation was achieved.

APIR Executive Directors’ Remuneration: The Second Heads of Agreement

64 The second heads of agreement relating to the future remuneration of the APIR executive directors, Messrs Hutchings Broso and Riley, had its origin in the negotiations with Mr Gibbon (see [14] – [25] above) which were terminated on 12 December 2003 (see [49] above).

65 Mr Hennock, who by this time had left Newport Capital to set up a new company, Jacanda Capital Pty Limited (‘Jacanda Capital’), was in attendance throughout the APIR board meeting held on 12 December 2003. At that meeting he obtained a copy of the first heads of agreement from Mr McGregor. On 20 December 2003, Mr Hennock sent an email to Mr Riley with a copy to Mr Hutchings Broso which said in part:

‘Also Andy, you and me need to talk on Monday re Executive Remuneration. I need to understand your bottom line and we need to have a firm position from the current Board, so that we have a firm position with Don and Charles.’

Mr Hutchings Broso replied on 22 December 2003 in the following terms:

‘Jay,

Put simply our (A&A) bottom line is:

a. Recognition and compensation for 6 yrs of sacrifice,

b. Capacity to share in future upside,

c. Realistic salary package,

d. Security of employment.

Therefore we believe

a. a share package of 50,000 shares meets most of a.

b. share package plus bonus shares/options at sane [sic] rates meets b.

c. salary package of $120k/100k starting immediately, followed by increases by the end of FY 04, $140/$120, followed by milestone given review from there on.

d. Tenure to at least 30 June 2006 with the Completion and Termination payment covered in the May Resolution meet the security issue.’

66 On 13 January 2004, Mr Hutchings Broso sent Mr Hennock his amended proposal on executive remuneration set out in [19] above. Later the same day, Mr Hennock sent an email to Messrs Hutchings Broso and Riley with his comments on Mr Hutchings Broso’s amended proposal. His comments appear interspersed in the body of the amended proposal set out below against the initials ‘JH’:

‘EXECUTIVE REMUNERATION

It was RESOLVED that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement attached. The Commencement Date of the Agreements will be the signing of the Convertible Note Deeds with new investors sourced by Newport Capital, probably Charles Gibbon and associates.

JH – I assume this timing for the commencements of the agreements is so that there is money in the bank to fund them rather than the capital raising being a specific milestone which you personally have to achieve.

HEADS OF AGREEMENT

The ED will initially provide his services as defined in the Schedule for a period of two years from I July 2004.

The cost of employment of the ED will be in three increments.

2. On achievement of the above milestone or payment of the second tranche the ED will receive:

2.1. A one off issue of 50,000 shares at no cost to them, split AHB 27,500 and AJR 22,500 as compensation for salary and conditions foregone over six years.

JH – It appears that this has already been agreed to by the Board. There may be income tax issues to consider – ie the ATO may view the share issue as income and charge tax accordingly. You need to get advice from your accountants as to the best way to structure these – it could be by using partly paid share or options.

2.2. A bonus to AHB of $50,000 and AJR $40,000 to be paid 50% in shares at $2.65 and 50% either in cash or shares at $3.25 at the discretion of the ED.

JH – This is effectively part of 2.1 and any share issue will be subject to the same tax treatment as 2.1.

JH – Given the high level of foregone salaries by you and Andrew, I think 2.1 and 2.2 are very reasonable from the company’s perspective.

JH – These are below market salaries for CEO and CTO/COO of early stage companies. Typically a VC is happy for a CEO, who has a significant shareholding in the company, to get around $140,000. CTO/COO are at the $110-$120,000 level.

2.4. This new cost of employment will remain in place until 30 June 2004.

JH – A business development, target based package is pretty standard. It is usually based on securing specific pieces of business and/or revenue targets and/or net earnings targets. Very rarely is it based on securing equity capital.

Remuneration Methodology

The Remuneration Committee (RC) will use the following principles in developing the OTE for the post 30 June 2004 period.

JH – It is unclear what is the OTE specified above. Is $175,000 pre tax earnings, post tax earnings etc?

2. Bonuses. Both ED are to have ongoing incentive plans which will be subject to bonus payments. Bonuses will normally be reset every 12 months and may take the form of a fixed amount or some other form as deemed appropriate. They will be target or milestone related and based on company goals, typically 30%, individual goals, 40%, and “soft goals”, 30%.

JH – Not sure what ‘soft goals’ means. I thought it was a soccer term.

3. Options. Option schemes are to be considered primarily as a “retention mechanism” rather than a “remuneration” mechanism.

JH – Normally options are for performance and for sticking around, but given you are going for bonuses, then I agree. BTW VC’s would only ever agree to an ESOP – no bonuses, so that capital is preserved in the company.

3.1. An annual pool of options is to be made available to the ED and for senior management where deemed appropriate by the Board.

JH – The total ESOP needs to be defined up front. This provides comfort for existing investors, incoming investors and the ED’s. The Board may chose to increase the size of the ESOP at any time.

3.2. The maximum allocation to the ED is AHB 40% and AJR 35%, leaving a minimum of 25% for staff.

JH – Up to your negotiating skill, although it is important to have a reasonable amount available should you need to attract talented people.

3.3. The options are to be exercisable at a deemed market price as at 1 July in the financial year in which they are allocated.

3.4. Options will be exercisable over a three year period at 1/3 per year.

JH – Not sure what this means. Normally options are vested over say a three year period at quarterly vesting dates – 50% based on performance criteria and 50% based on “being there”. They are generally only required to be exercised as per your Point 3.5.

3.5. The options will be exercisable in the event of the sale of the Company or within six months of leaving if the ED’s contract is terminated or not renewed.

The Agreement will include a Completion Payment which becomes due at the end of the two year commitment if the company chooses not to continue the EDs. The Completion Payment will be the greater of $325K or 100,000 times the share price on completion, but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them. If APIR chooses to terminate the Agreement before the end of the two year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the EDs.

JH – Good if you can get it, but I think any incoming investor would have a problem with this – potentially a $650,000 plus payout. Also the wording used – “but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them” – is pretty fuzzy. Normally with share buyback agreements – a similar scenario – the test is around “continuing solvency” – ie the Board could not make a payout which would cause the company to become insolvent. Equally the Board will want to ensure there is adequate “working capital” which may include development capital – etc etc etc. You can see how all of this leads to fuzziness and lots of room for interpretation. This needs to be carefully thought through.

JH – Don’t believe you can use the word indefinite – all contracts need a terminal date – particularly employment contracts. This could void the whole contract. Need to get input from your lawyers.

APIR would have the right of termination for any reason justifying summary dismissal at law.

Each ED will have the choice of providing their services as an employee or as a consultant and of arranging their remuneration packages as they choose, except that the Board may, not acting unreasonably, not approve a proposed arrangement on the grounds of prejudice to the company. The EDs will be directors of APIR, but will not receive additional remuneration for this role. APIR will pay premiums for appropriate D&O insurance and indemnify the EDs within the capacity of the company.

JH – Standard practice.

The EDs will be entitled to reimbursement of expenses, and to take annual leave, and sick leave. There is no entitlement to be paid out for accumulated sick leave on termination.

AGREED by:

M Cane …………………………………

A Hutching Broso………………………

D McGregor……………………………

A Riley……………………………………

N Wicks …………………………………’

67 The following day, 14 January 2004, Mr Hutchings Broso responded:

‘Jay,

ED Remuneration. That’s great. Just one request, could you water down the comments about Completion Payment along the following lines?

“JH – I think any incoming investor would have a problem with this because of the effect on capital and the short time frame. Also …”

I have redrafted the resolution to convert the payout to shares, ie 100,000@$3.25, which also overcomes the issue around cash.’

68 The same day, Mr Hennock revised his comments about the Completion Payment in accordance with Mr Hutchings Broso’s request.

69 Later the same day, Mr Hutchings Broso sent an email to all the other directors of APIR in the following terms:

‘All,

Attached is Jay’s notes on our earlier draft (ED REMUNER..) and my rewrite of the draft to take account of Jay’s comments. I would appreciate your comments and feedback asap to ensure we have it squared away before Don hands over his cheque. At this stage he will be in Canberra Wed-Fri next week.’

70 Mr Hutchings Broso’s rewrite of the draft became ‘the second heads of agreement’ and read as follows:

‘EXECUTIVE REMUNERATION

HEADS OF AGREEMENT

The ED will initially provide his services as defined in the Schedule for a period of four years from the Commencement Date.

The cost of employment of the ED will be in three increments.

1. At the Commencement Date the ED will be entitled to a one off issue of 50,000 shares at no cost to them, split AHB 27,500 and AJR 22,500 as compensation for salary and conditions foregone over six years.

2. From the Commencement Date until the achievement of the milestone of IFSA acceptance or equivalent industry support for APIR coding of dealers and advisers, the cost of employment continues at its current level. That is $72,000/81,000 pa (not including GST) with AHB also provided with a vehicle and mobile phone expenses.

3. On achievement of the above milestone the ED will receive:

3.1. A bonus to AHB of $50,000 and AJR $40,000 to be paid 50% in shares at $2.65 and 50% either in cash or shares at $3.25 at the discretion of the ED. APIR will arrange finance for the ED with interest and principle repayment tied to dividend rates and franking credits paid. The exercise period for taking up the shares will be three years. There will be allowance for trigger events ie takeover, change of control, joint ventures and splits.

3.2. A new salary or equivalent figure for AHB of $140,000 and AJR $120,000.

On achieving the milestone the future total cost of employment will be based on milestones and performance with a package comprising cost of employment, bonus and option components to be determined by the Remuneration Committee (comprised of non executive directors with the CEO there by invitation). The dollar quantum of the all up package is to be called the “On Target Earnings” or OTE.

Remuneration Methodology

The Remuneration Committee (RC) will use the following principles in developing the OTE for the post first milestone period.

2. Bonuses and Options. Both ED are to have ongoing incentive plans which will include bonus payments and options. Targets will normally be reset every 12 months.

Completion Payment

Each Agreement will include a Completion Payment which becomes due at the end of the four year commitment if the company chooses not to continue the ED. The Completion Payment will be the greater of 100,000 shares or shares to a minimum value of $325,000. However, any share buy back then in operation will not be payable if in the opinion of the Board, not acting unreasonably, such a buy back would threaten the Company’s on going solvency.

If APIR chooses to terminate the Agreement before the end of the four year period, then the Completion Payment is payable as a Termination Payment. If APIR chooses to offer a Continuing Agreement for the provision of services the Completion Payment will be carried forward as an obligation with payment in future tranches or in an equivalent value in shares to be negotiated with the ED.

The Continuing Agreement would be for a period of six years, terminable on 6 months Notice or payment in lieu. A Continuing Agreement would include an annual performance Bonus which may include payment or issue of options or shares.

APIR would have the right of termination for any reason justifying summary dismissal at law.

The EDs will be entitled to reimbursement of expenses, and to take annual leave, and sick leave. There is no entitlement to be paid out for accumulated sick leave on termination.

AGREED by:

M Cane …………………………………

A Hutchings Broso ……………………

D McGregor……………………………

A Riley …………………………………

N Wicks …………………………………’

71 It was signed off on by Mr Hutchings Broso and Mr Riley on 14 January 2004, by Mr Wicks on 15 January 2004, by Ms Cane on 27 January 2004 and by Mr McGregor on 5 February 2004.

The Communications and Meetings Between Mr Sharp and the other Directors of APIR After the Execution of the SSD

72 In recounting these events, I again propose, to the extent it is possible, to leave out of consideration any factual issues which are in dispute between the parties; my immediate purpose is to facilitate an understanding of the context in which these factual issues arose. I deal with these factual issues and my findings in relation to them later in these reasons (see [127] to [164] below). Again I have relied on the affidavit evidence of Mr Sharp but I have also relied on the affidavit evidence of Mr Hutchings Broso and Ms Cane where there is an obvious conflict.

73 At some point prior to 25 February 2004, Mr Sharp told Mr Hutchings Broso that he was going into hospital for an operation. At some later time, Mr Hutchings Broso invited him to attend a board meeting on 27 February 2004. Mr Sharp was unable to attend because he was not going to be fully recovered by then. On 25 February 2004, Mr Sharp went into hospital as scheduled. He ended up leaving hospital on the morning of 27 February 2004, but went directly home.

74 According to Mr Sharp, later that afternoon he telephoned Mr Hutchings Broso and asked him what had happened at the board meeting. He cannot remember precisely what Mr Hutchings Broso told him but he indicated that the meeting had gone well. Mr Hutchings Broso did not say anything about any executive employment agreement or anything of that kind. Mr Sharp never received any notice of the 27 February 2004 meeting nor a copy of the agenda. He was not at that time a director of APIR, although it was clear that he was intended to become a director at the 27 February 2004 board meeting and was invited to attend.

75 The minutes of the meeting of directors of APIR held on 27 February 2004 record the following:

‘POSITION OF CHAIRMAN

It was RESOLVED that M Cane be the Chairman of the company from completion of the Annual General Meeting. (A Hutchings Broso/ D McGregor)

…

EQUITY RAISING

The Managing Director advised that the initial investment in the company by D Sharp had been completed in accordance with the previous Resolution and the Share Application Deed drawn up by Deacons. 200,000 shares at $2.65 had been allotted to D Sharp, and he had purchased an additional 81,904 shares from existing shareholders. An additional six month option for 200,000 shares at $3.25 had been granted.

SHARE TRANSFERS

Itwas RESOLVED that the three share transfers tabled be approved.

(A Riley/ A Hutchings Broso)

APPOINTMENT OF DIRECTOR

It was RESOLVED that D Sharp be appointed a Director of the company to fill a casual vacancy in accordance with the Constitution of the company. (A Riley/ N Wicks).

It was noted that the appointment would only be until the AGM following at which time it was subject to election by the members of the company.

SHAREHOLDERS AGREEMENT

Progress on the drafting of the Shareholders Agreement (see Resolution of 12 December 2003) was discussed.

…

EXECUTIVE REMUNERATION

The Resolution previously circulated and agreed was discussed. RESOLVED that the Resolution on Executive Remuneration (attached) was agreed and that the date of the adoption of the Resolution be 5 February 2004. (M Cane/N Wicks)

It was agreed that the members of the Remuneration Committee would be M. Cane and N Wicks.’

76 Between the 27 February 2004 board meeting and the next board meeting scheduled for 16 April 2004, Deacons had been instructed by Mr Hutchings Broso and/or Mr Riley to prepare executive employment agreements between APIR and Mr Hutchings Broso and Mr Riley based upon the second heads of agreement. By 5 April 2004, drafts of these agreements had been prepared and were circulated by Mr Hutchings Broso to the Remuneration Committee (Ms Cane and the Wicks) with a copy to Mr Riley under cover of an email which read:

‘Subject: Executive Remuneration Agreements

Maureen & Noel (Remuneration Committee),

Attached for your comments are the draft agreements for Andrew and myself from Deacons.

Once any points have been resolved I propose to print them off and send them to Maureen for signature with a stamped envelope for posting on to Noel.

As discussed with Maureen on Friday these should be executed in advance of the Directors’ Meeting of 16 April.

Cheers,

Andy’

77 At some point after coming out of hospital, Mr Sharp became aware of the next board meeting of APIR being scheduled for 16 April 2004. He attended that board meeting. He was not provided with any of the board papers prior to arriving at the meeting other than the agenda, Item 10 of which read:

‘Executive Remuneration: Employment contracts for the new executive directors are now executed.’

78 When Mr Sharp arrived at the meeting he was given a copy of the minutes of the previous meeting of directors of 27 February 2004. The second item on the agenda was consideration of the minutes of the previous meeting of directors on 27 February 2004. One resolution in the minutes was on executive remuneration. According to Mr Sharp, he had a conversation with the Chairman, Ms Cane, to the following effect:

‘Sharp: What is this all about?

Cane: An agreement is being entered into with Andy and Andrew.

Sharp: Can I have a copy of the agreement?’

79 The minutes of the meeting of directors held on 16 April 2000 record the following:

‘SHAREHOLDERS AGREEMENT

A draft Shareholders Agreement was tabled and discussed. It was requested that Directors review the draft and return comments by 3 May 2004. It is planned to circulate a final version of the Agreement prior to the next meeting of Directors.

EXECUTIVE REMUNERATION AGREEMENTS

It was noted that Employment Agreements had been executed by the Remuneration Committee with the Executive Directors, A Hutchings Broso and A Riley. M Cane tabled a copy of the Agreements.’

80 On the night of 23 April 2004, Mr Sharp arrived home to find a parcel addressed to him from APIR. That parcel enclosed a copy of the executive employment agreements between APIR and Mr Hutchings Broso and Mr Riley. Mr Sharp did not read the documents until a couple of days later. When he did read the documents he found that they were executed on 14 April 2004, two days before the board meeting that he attended on 16 April 2004.

81 Between receiving those documents on 23 April 2004 and taking any further step in relation to what had happened, Mr Sharp sought legal advice from his solicitors. On or about 11 May 2004, he contacted Ms Cane and arranged to meet with her at her office in Canberra (which was not the offices of APIR) on the morning of 14 May 2004. On 11 May 2004, Mr Sharp telephoned Mr Riley and said to him words to the following effect:

‘Sharp: Could you please fax me a copy of the resolution that was referred to in the minutes of the Board Meeting of 27 February 2004.’

82 Later the same day, 11 May 2004, Mr Sharp received a fax from Mr Riley with a handwritten note on the cover sheet which said:

“[T]his is the paper referred to in the 27/2/04 Minutes. A Resolution was originally passed in May 2003, but the Agreements were not finalised during the Charles Gibbon period.’

The following pages comprised a document headed ‘Executive Remuneration’ first signed on 14 January 2004 on the second page by Mr Riley and indicating the agreement to the resolution by the directors of APIR. This is the ‘second heads of agreement’ document reproduced at [70] above.

83 Prior to receiving this resolution from Mr Riley on 11 May 2004, Mr Sharp had never seen this document and was not aware of its existence at any time prior to entering into the SSD. Mr Sharp had never previously been aware of any resolution being passed by the board in or about May 2003 as referred to by Mr Riley in his covering note. There was no disclosure in the Financial Statements of APIR dated 30 June 2003 of the resolutions approved by APIR’s Board in or about May 2003.

84 After receiving the note and ‘Executive Remuneration’ document from Mr Riley on 11 May 2004, Mr Sharp wrote out a series of questions that he wanted to ask in relation to the executive employment agreements that had been entered into without his knowledge. When he subsequently met with Ms Cane, he made annotations to that document recording the responses to the questions that he asked.

85 On 14 May 2004, Mr Sharp travelled to Canberra and met with Ms Cane at her offices in Tuggeranong, a suburb of Canberra. Based on his note, he recalls that a conversation to the following effect took place:

‘Sharp: Was the May 2003 resolution ever rescinded by the Board?

Cane: Not sure.

Sharp: When you agreed to the circulated Resolution in January 2004 did you ask Andy [Hutchings Broso] whether a copy was provided to me?

Cane: No.

Sharp: Did any other Director?

Cane: Don’t know.

Sharp: When I was invited to the Board Meeting on the 27th of February 2004 were you aware I was to enter hospital on the 25th of February 2004 and was not able to attend?

Cane: Yes.

Sharp: Who instructed Deacons on the Employment Agreement?

Cane: Andy [Hutchings Broso].

Sharp: Who prepared the Resolution?

Cane: Deacons [Mr Sharp did not make a note on the answer but he recalls this being the answer that was given].

Sharp: Post the 27 February 2003 Board Resolution were you aware that there was an addition to clause 6.1 providing for indexing? [Mr Sharp did not record any answer but he recalled that she did not know about the additions to clause 6.1].

Sharp: Have the 50,000 shares been issued? [Mr Sharp did not record an answer to that question but his recollection is that she did not know the answer to the question].

Sharp: In relation to the effect of clause 6.1 of the employment agreement Mr Sharp asked Ms Cane “Do you understand the effects of indexing?”

Cane: No.

Sharp: Do you understand the effect of conversion of the $650,000 to shares that are priced lower than $3.25?

Cane: No.’

Ms Cane says she does not recall any of the questions being put to her in the form set out by Mr Sharp and believes she would have remembered them if they had been put to her in that form.

86 After meeting with Ms Cane, Mr Sharp then met with her and the other non-executive directors of APIR, Mr Wicks and Mr McGregor in order to discuss with them what he had said in his meeting with Ms Cane. During the course of this further meeting Mr Sharp had a further conversation with Ms Cane, Mr Wicks and Mr McGregor to the following effect:

‘Sharp: Do you understand the effects of indexing in clause 6.1 of the employment agreement and the dilutionary effect it has on shares issued for less than $3.25?

Wicks: No

McGregor: No’

Mr Sharp then spent some time discussing and explaining the effects of clause 6.1 of the employment agreement including the indexing and dilutionary effects if shares were issued for less than $3.25 and he gave them a copy of the price chart of a company called Powerland which had a similar conversion price without a floor price. He said words to the effect:

‘Sharp: If the shares are valued at less than $3.25 then they will be entitled to receive more shares.’

He then said words to the effect:

‘Sharp: I was only told of the 50,000 shares that were to be issued to Andy [Hutchings Broso] and Andrew [Riley].

I was not advised of the other shares to be issued to them and this had a material effect on the value of the company and depending on the conversion price, they could end up with a majority of the company.

The effect of the indexing is that if further shares are issued then they maintain their percentage in the company without any cost to them.’

87 According to Mr Sharp, the conversation between himself, Mr Wicks, Mr McGregor and Ms Cane was quite lengthy and he could not recall everything that was said. After that conversation the other directors decided they should call Mr Riley and Mr Hutchings Broso into the meeting. Mr Sharp said words to the effect:

‘Sharp: I don’t think I should stay because I may be taking legal action against the company and my attendance could prejudice their defence.’

88 One of the directors asked Mr Sharp to stay at the meeting and the other directors present agreed. Upon Mr Riley and Mr Hutchings Broso coming into the room, there was a discussion about the non-disclosure of the resolutions in relation to the executive employment agreement. According to Mr Sharp, Mr Hutchings Broso said words to the effect:

‘Hutchings Broso: They were disclosed to you because they were in the company’s minute book.

Sharp: I did not see the minute book and did not ask to see the minute book.’

According to Mr Sharp, Mr Hutchings Broso acknowledged that he (Mr Sharp) did not receive the minute book but then said words to the following effect:

‘Hutchings Broso: It is my understanding that there was full disclosure because it was disclosed in the minute book.’

The discussion then moved on to the question of indexation.

‘Riley: Indexation protected us if the company was restructured.

Sharp: This gave you both a free ride. When further shares were issued in the company you were to maintain your percentage equity at no cost to you.’

89 According to Mr Hutchings Broso, he and Mr Riley had a conversation with Mr Sharp using words to the following effect:

‘Hutchings Broso: We disclosed everything.

Sharp: No you didn’t.

Hutchings Broso: What about the due diligence folder, we offered that to you a couple of times at least and you weren’t interested.

Sharp: No you didn’t.

Riley: I offered you the Minutes.

Sharp: You can put whatever you like in the Minutes, they lie and I don’t believe them.

Cane: Don I am sure they did, did they or didn’t they?

Sharp: Yes.’

90 According to Mr Sharp, they also had a discussion on the topic of the dilutionary effect of issuing shares at less than $3.25 in line with his earlier conversation. Mr Sharp once again referred to the different numbers of shares that would be issued at different share prices. Mr Sharp further said words to the effect

‘Sharp: The effect of the combination of indexing and not having a floor price in the conversion of the $650,000 means that nobody will invest in the company as they will not know what equity they are getting. It will be impossible to raise further capital.’

91 After this conversation, Mr Sharp was asked to leave the room by Ms Cane. The remaining directors then had a meeting in his absence. Mr Sharp was then invited back into the room by Mr McGregor.

92 As Mr McGregor was inviting Mr Sharp into the room, Mr Sharp said to him words to the effect:

‘Sharp: It was the duty of Andy [Hutchings Broso] to disclose material issues and not for me to discover.

I cannot accept the issue of shares but I’m happy to pay the money [for performance].

McGregor: That would be hard.’

93 According to Mr Sharp, when he went back into the meeting, Ms Cane said words to the following effect:

‘Cane: There was no intent to mislead you. The wording of clause 6.1 cannot be read as a dilutionary clause. The language in that clause is there to protect Andy [Hutchings Broso] and Andrew [Riley]. Their interests are to be protected. We need to work together. Clause 6.1 will be looked at and we will advise you accordingly.’

Mr Sharp didn’t make any comment in relation to that as he had already made his position quite clear.

94 After this preliminary meeting was over, the board meeting commenced. Mr Sharp attended the board meeting and the minutes of the prior board meeting of 16 April 2004 were tabled. The minutes included a statement that the Executive Employment Agreements were tabled at the previous meeting. Mr Sharp said words to the effect

‘Sharp: They weren’t tabled at the last meeting because I asked for a copy, if they were available, and if they had been tabled why wasn’t I provided with a copy?

Cane: They were tabled.

Riley: Yes they were tabled.’

95 On 21 May 2004, Mr Sharp sent an email to Ms Cane, with copies to Messrs Wicks and McGregor, setting out the issues as he saw them and suggesting ways in which the dispute might be able to be settled. It reads:

‘From Don Sharp sharp.dk@telsra.com

Sent Friday, May 21, 2004 9;20 am

To Maureen.cane@comsatwork.org

Cc david.mcgregor@kothes.com.au, wicksef@netspeed.com.au

Bcc

Subject APIR Employment Agreement

Thanks for you time on Friday & in particular the manners that you all handled the issue. It gives me confidance [sic] that this can be resolved from your prospective however I am not as confident that Andy & maybe Andrew will agree to changes that must be done.

At our meeting on Friday Andy confirmed that, in relation to the Employment Agreement, he disclosed that he & Andrew were to receive 50K shares at no cost. The contents of the rest of the Employment agreement that had been approved by the Board were not disclosed. Andy went on to argue that full discloser [sic] was made as it was contained in the companies [sic] Minute book which was not given to me.

As you are aware the deal had to be done quickly & I relied on Warranties that full discloses [sic] of all material matters have been disclosed to me. Under the terms of the Warranties it is not up to me to discover, it is up to the company to disclose.

It is clear that the terms of the Employment agreement are material. Eg At the time I was considering investing in the company their were 763,982 shares on issue & at $2.65 the value was $2.024M the free shares of 50K was worth $132K le 6.5 % of the company which I thought was reasonable.

The additional $650,000 pay out is an additional 32% of the vale of the business.

The additional benefit of converting, them into 200000 shares gives them a free option to participate in any capital appreciation with the additional benefit if the shares are not worth $3.25 then can take the cash.

As you are aware their [sic] are other conversion terms including indexing (that is they participate in additional free share if further shares are issue) Andy &/or Andrew added this to the resolution that you approved.

They advised at our Friday meeting this was not the intent. I do not believe them.

Other obligations to pay bonus which can be converted into shares & to double salary based upon KPIs which will not bring in cash in time to paythese benefits.

They have agreed to change clause 6.1 & I received a letter from Deacons which I got no idea how to interpret.

All the existing shareholder have had their share value dilute. I wonder what they would think.

I understand I have been asked to accept these terms proved the wording on the dilutionary aspect is resolved

I can do that

The way forward

1) The $650,000 is to be paid to them based on archiving agreed KPI at the end of 4 years. No conversion into shares

2) Bonus & salaries are to have new KPIs.

If they don’t Agree

By their willful none discloser of a material agreement, in which they have a material benefit, will cause action against the company for this none discloses. They should be terminated under clause 15 of their employment agreement.’

96 In cross-examination Mr Hutchings Broso identified a handwritten document which he had prepared as a draft of what Ms Cane should consider in responding to Mr Sharp’s email. He agreed ‘that he attempted in this draft to set out fully his response to the general thrust of the allegations of impropriety that were being made against him and Mr Riley’. Under the heading ‘Disclosure’, Mr Hutchings Broso wrote:

‘Disclosure

Firstly, please bear in mind the context of all discussions last Friday when no one was aware of the issue until you raised it. As I was enlightened only in the morning, Andy and Andrew were completely unaware of the fact of the meeting or the issues raised.

I have reviewed the chronology of events and believe that while in retrospect you may feel peeved, the reality is there was no failure to disclose under the warranties and in particular there was no wilful non-disclosure.

Things were moving quickly in January 2004 as you rightly noted. The remuneration agreement had been in discussion since October 2002, had been formally agreed in May 2003 and had been an irritation to everybody during the Charles Gibbon period.’

97 On or shortly after 3 June 2004, Mr Sharp received a letter from Ms Cane dated 3 June 2004. It read:

‘Mr Don Sharp

19 Wybaleena St

Hunters Hill, NSW 2110

Dear Don,

APIR Remuneration Agreement

David, Noel and I have looked closely at the matters raised in your email of Friday, 21 May, which is why it has taken some time to get back to you. Basically, you’re saying:

· the Agreement is too generous and should be replaced by a lump sum payment for separation from the company; and salaries and bonuses should have new KPIs

· the Agreement is a material document and wasn’t disclosed by two people with an interest in it

· if the Agreement cannot be renegotiated, you believe you have grounds for action against the company.

We have come to three conclusions. First, there was no unethical behaviour by the EDs in relation to the Agreement. Second, the Agreement is valid and must stand. Third, there's been misunderstanding on both sides about the disclosure aspect, but no intention by the EDs to either mislead you or not disclose all material matters.

Let me explain our reasoning. I will deal with the Agreement first.

Let me tell you how we first approached a possible Agreement. We did so with one fact very much in our mind: that everything achieved so far (from a base of zero) is due to the EDs. For example, we’re on the verge of an historic breakthrough with both IFSA and the FPA. Without the EDs, we’d still be nowhere. So we felt they should be reasonably paid if they stayed with us, and generously paid out if things turned out that way. We also felt they should share in any growth in the company, whether as employees or ex-employees, because they were the ones who put us on track for success, and during that time they were paid the salary of a Public Service clerk.

I turn now to the various points you make against the Agreement. To make what I have to say a bit easier to follow, I have taken the liberty of changing the order of your items.

First, the problem clause (6.1) was initially agreed in May 2003 at $ 350 000 minimum, based on 100 000 shares at $3.50 e.g. the last sale price. The potential investors at the time were aware of the Heads of Agreement and as you know were willing to proceed.

Second, providing shares instead of cash was in fact suggested by both the Board and its corporate advisers, to preserve capital. Our corporate advisers also told us this would be a normal new-investor requirement anyway. The EDs agreed to this change, though they still had three main concerns about shares: lack of liquidity, scope for price manipulation by a future Board, and Board restrictions on who they could sell to.

As a result, Clause 6.1 was structured to provide some certainty to them i.e.

- it set a floor value for the package -an amount actually less than that agreed in May 2003

- it tied the share value to those normal variations in share price that flow from company performance or the need to raise capital

- it protected the share value from any future stock manipulation. If, say, a two-for-one split occurred, the EDs would be treated in exactly the same way as all other shareholders. That is to say, their holding would be doubled. On the other hand, issuing new stock to raise capital would not give them further shares. That is to say, the value of their parcel would simply keep parity with those of all other members.

This is what Clause 6.1 tried to do, both in its original form and in the recent rewrite. If you think it still doesn’t do this, how about getting your lawyer to talk to Deacons direct, to put together some words we are all happy with?

Third, it was always the Board’s intention to “index” the ED parcel, and indeed it was part of the May 2003 Resolution. The Resolution and Agreement of 2004 continued this intent. Thus we cannot accuse the EDs of having added it later.

Fourth, your figures about the ED completion/termination payments diluting other shareholders’ parcels would have been theoretically right – before your entry to the company. But we have to remember that completion payment dilution (if in fact it ever occurs) is four to ten years off. By that time, unless our ideas about the company’s future are badly astray, our need to issue new shares to fund growth will have greatly cut back the relative importance of those packages.

Fifth, we do not see a connection between completion payments and KPIs. For example, even if the EDs did meet such KPIs, there may be other reasons, not connected with performance, which makes the Board feel it doesn’t want to renew. So not to renew, even though KPIs were in fact met, could raise problems for the Board.

Sixth, I turn now to the matter of disclosure, and here I think the trouble is with perceptions rather than with facts. That is to say, you and the EDs have a different view of what happened and what should have happened.

A folder of disclosure documents was offered to all potential APIR investors, who trawled through it and resolved any queries by asking questions. I am advised that this folder was offered to you twice, but you declined. A copy of the May 2003 Board Resolution was in the folder.

We believe that offering these documents and answering all questions openly means that there was proper disclosure. Time was not an issue, since discussions began as far back as early October 2003. The EDs did not expect (nor, we believe, should they) that you relied on these various discussions as disclosure. As to the 90 000 shares, we understand that this came up in informal discussion in another context.

The timings on finalising the Agreement also helped create confusion. The Share Subscription Deed was signed on 23 January 2004, at which time the new Resolution was still being, circulated, and therefore had no standing. But in essence it was the same as the May 2003 Resolution, which was, of course, in the disclosure document folder.

To summarise our conclusions:

· The EDs, in talks with you on the Company's behalf, did not fail to disclose anything material and therefore warranties were not breached. Indeed, I would say that every reasonable effort was made to inform you.

· Any ambiguity in Clause 6.1 is a matter of drafting and we are happy for your lawyer to sort the wording out with Deacons.

· The ED packages recognise how we got to where we are but, more importantly, will be much less beneficial when and if they ever come into play.

· We fully support the EDs and the intent and content of their Remuneration Agreements.

Finally, on a personal note, you will recall my shock at first hearing of your concerns at our initial May 14 meeting. I have now been able, along with David and Noel, to piece together the events of the last few months and can assure you, as documented above, that your concerns are without foundation.

However, it will be no surprise to you, as you indicated in our brief telephone conversation yesterday, that these events have resulted in some tension. Therefore to confirm our common sense of purpose, restore effective relationships and in the interests of procedural fairness and good governance, I have focussed my mind on our Board practices. I believe all correspondence on company matters should be directed to all Board members, and then be tabled and dealt with formally by the Board. I intend to implement this practice by having these current papers tabled and discussed at the next Board meeting on June 11.

I look forward to working with you on the Board towards fulfilling APIR’s commercial potential.

Yours sincerely

Maureen Cane

Chairman

APIR Board of Directors

3 June 2004’

An Overview of the Respective Cases

98 It lies at the heart of DFE’s case that the first and second heads of agreement were legally binding agreements as between APIR and the executive directors. The first until it was replaced by the second, with the second finding ultimate manifestation in the respective executive employment agreements between APIR and each of the executive directors which, it is not in dispute, were legally binding agreements: see [116] below. Second, that in consequence, the respondents were under an obligation to disclose to DFE (through Mr Sharp) the existence and content of the first and second heads of agreement prior to 23 January 2004 when DFE executed the SSD and subscribed for 200,000 shares in APIR for a total subscription price of $530,000; and that their failure to so disclose amounted, inter alia, to misleading or deceptive conduct contrary to s 52 of the TP Act.

99 DFE contends that there are three sources from which this obligation of disclosure arises:

(1) Clause 5.1(1) of the SSD by which APIR warranted to DFE and Mr Sharp that ‘full disclosure has been made as to current state of affairs of [APIR]’.

(2) The financial statements of APIR for the year ended 30 June 2003 and to 30 November 2003 neither of which made any such disclosure; coupled with the warranty at 5.1(3) of the SSD that the attached accounts were the accounts of APIR for the periods ending on those dates.

(3) The ‘half truth’ alleged to have occurred by reason of Mr Sharp having been told by Mr Hutchings Broso that he (Mr Hutchings Broso) and Mr Riley would be receiving 50,000 shares as part of their remuneration packages (at [42] above) which, without any reference to the ‘completion payment’ in cash or, in particular, shares, was conduct which was misleading or deceptive. While the change in the first heads of agreement to the second heads of agreement to allow the ‘completion payment’ to be discharged in shares occurred after these conversations, Mr Sharp was never informed of this change in circumstances where the executive directors knew that he was unaware of the first heads of agreement.

100 As to (1), DFE contends that the warranty was in all circumstances, something so essential to the decision to invest, pursuant to which the deed was being entered into, as to be an essential term of the contract: see Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 (reversed on other grounds at (1938) 61 CLR 286); Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 556.

101 The nature and terms of the SSD demonstrate that Mr Sharp and DFE would not have entered into it unless they were assured of strict compliance with the requirement of full disclosure as to the current state of affairs of APIR. This obligation in part was sought to be met by the annexing of the final 2003 financial statements (which failed in fact to achieve this purpose), whether or not the accounting standards required them to, plus the last available balance sheet and profit and loss statement as at the end of November 2003.

102 Additional factors that favour treating clause 5.1(1) as a condition of the contract are (see Ankar, op. cit., 162 CLR 549 at 557):

(a) the difficulties in proving quantum of damage as a suitable remedy, as evidenced by the dispute between the experts on this topic;

(b) the plain purpose of the clause in facilitating a properly informed decision as to whether to enter into the SSD in the first place; and

(c) the special nature of a share subscription deed in the context of an unlisted public company in which an investor legitimately requires that the decision to invest be one that is made on a fully informed basis by way of a contractual obligation on the company, as the repository of the relevant information, to disclose rather than on any obligation for the investor to hunt out and discover. The warranty is only of real utility if it is a condition permitting rescission.

103 To meet this condition, DFE contends that nothing less than provision of a copy of the two heads of agreement, or at least whichever was considered current to Mr Sharp, was required. Indeed, it was of sufficient moment to be annexed to the SSD, but of course then Mr Sharp would not have signed it and he would not have handed over his cheque.

104 As to (2), the accounting experts called on behalf of the parties, Dr Martin Bloom (‘Mr Bloom’) on behalf of DFE and Mr Paul Carter (‘Mr Carter’) on behalf of the respondents, appear to be in agreement that if the first heads of agreement constituted a binding agreement, then it should have been disclosed in the financial accounts of APIR for the year ended 30 June 2003: see the common ground referred to in [117] below.

105 Alternatively, DFE submits that the Court should prefer Dr Bloom’s opinion to that of Mr Carter, and find that there was a sufficient commitment evidenced by the terms and circumstances of the 4 May 2003 resolution and the first heads of agreement, in light of the special concern with related party transactions sought to be addressed by the standard AASB 1017, ‘Related Party Disclosures’. Moreover, as Dr Bloom identified, even if the accounting standards did not require disclosure, the obligation in s 297 of the Corporations Act (see also s 295(3)(c)) goes well beyond those standards, and expressly requires financial statements to go beyond them, when adherence to those standards would fail to give a true and fair view of the financial position and performance of a company.

106 As to (3), in the context of what Mr Sharp was told about the 50,000 shares, the 2003 financial statements had the effect of strongly reinforcing the half-truth, especially by the terms of Note 19.

107 The respondents’ case is articulated in two streams:

(1) On the facts, there was no duty, and therefore no obligation on APIR or any of its directors, to disclose to DFE (through Mr Sharp) the existence and content of the first or second heads of agreement; and even if there were,

(2) that obligation or those obligations were discharged by Mr Riley offering to Mr Sharp, on three occasions, access to a folder of documents in terms of a ‘due diligence folder’, which Mr Sharp declined on each of the occasions that it was offered.

108 Implicit in (1) is that neither the first nor the second heads of agreement was a legally binding contract. They were no more than an ‘umbrella’ or ‘terms sheet’ (to use a phrase which finds expression in the factual contextual background) by reference to which a legally binding contract was to be agreed.

109 Implicit in (2) is that no other disclosure was made.

Common Ground and Issues Not in Dispute

110 It is common ground that, as at 23 January 2004, on which date the SSD was executed and Mr Sharp handed over a cheque for $530,000 in payment of the subscription price for the 200,000 shares DFE subscribed for in APIR, Mr Sharp had no knowledge of either the first heads of agreement or of the second heads of agreement. Indeed, it is common ground that Mr Sharp had no knowledge of the first heads of agreement or the second heads of agreement prior to the APIR board meeting of 16 April 2004, by which time the executive employment agreements between each of the executive directors on the one hand, and APIR on the other, had been executed.

111 It is not in dispute that each of the executive directors knew, as at 23 January 2004, that Mr Sharp was not aware of the existence or content of either the first heads of agreement or the second heads of agreement. Indeed, it is not in dispute that each of the executive directors knew, throughout the months that followed, that Mr Sharp was not aware of the existence or content of either of the heads of agreement prior to the APIR board meeting of 16 April 2004.

112 It follows from the common ground referred to in [110] above, that it is not in dispute that Mr Sharp was not told of the existence or content of the second heads of agreement by any of the directors of APIR prior to 15 January 2004, by which date the heads of agreement had been signed off on by the executive directors and Mr Wicks; prior to 23 January 2004, when the SSD was executed and the subscription for the 200,000 shares in APIR was made by DFE; prior to 5 February 2004, when the last of the directors of APIR (Mr McGregor) signed off on the second heads of agreement; nor prior to 14 April 2004, when the executive employment agreements between each of the executive directors on the one hand, and APIR on the other, were signed.

113 It is not in dispute that Mr Sharp was told by Mr Hutchings Broso that 50,000 shares in APIR were to be issued between himself and Mr Riley as part of their remuneration packages. What is disputed by Mr Sharp is that this disclosure by Mr Hutchings Broso was qualified by him as occurring in the context of him and Mr Riley becoming full-time employees of APIR: see [42] above. Nor is it in dispute that Mr Sharp was told nothing, either at that time, or at any other time, of a proposal to discharge the completion payment obligation to the executive directors under their proposed respective executive employment agreements by the issue of shares.

114 It is common ground that the folder of documents which the executive directors referred to as the ‘due diligence folder’ never contained any documents detailing the existence or content of the second heads of agreement at any time, either prior to or after the execution of the SSD and DFE’s subscription for the 200,000 shares, because Mr Riley ceased to maintain that folder, in the sense of putting relevant documents into it, from about September or October 2003. Consequently, even if Mr Sharp had sought access to the folder immediately prior to the execution of the SSD and DFE’s subscription for the shares on 23 January 2004, the existence and content of the second heads of agreement would not have come to his attention.

115 It is also common ground that by the time Mr Sharp came along, APIR was in desperate need of an injection of funds. For each of the years ended 30 June 2002 and 2003, it had traded at a ‘significant loss’. In calendar year 2003, APIR’s financial situation, according to Ms Cane, was ‘in extremis’ and foundation shareholders were called on to make loans which might be converted into equity. In an exchange of emails immediately before the execution of the SSD and DFE’s subscription for the shares, Mr Hutchings Broso and Ms Cane remarked on the need for ‘additional funds … by Monday’ and the need for DFE’s ‘money’. Indeed, even on the day of execution of the SSD, Mr Sharp remarked on the parlous state of APIR’s cash position in the terms referred to in [60] above.

116 It is not in dispute that the executive employment agreements between APIR and each of the executive directors signed on 14 April 2004 constitute valid and binding agreements between the parties and contain, or are consistent with, all the provisions of the second heads of agreement.

117 It is common ground between the experts called by the parties, Dr Bloom by DFE, and Mr Carter by the respondents, that if the first heads of agreement was legally binding as between APIR and the executive directors then its existence and substance was required to be disclosed in the audited financial statements of APIR for the year ended 30 June 2003 and there was no such disclosure.

Impression of Witnesses

118 As indicated at [28], [29] and [72] above, there are a number of factual issues in dispute. There are also other issues in dispute that raise underlying issues of mixed fact and law.

119 The determination of most of the issues in dispute can be achieved without recourse to witness credibility, but by reference to contemporary materials, objectively established facts and the apparent logic of events. This is helpful because I am mindful of what was said in the joint judgment of Gleeson CJ, Gummow and Kirby JJ in Fox v Percy (2003) 214 CLR 118 at [31] for judges:

‘… to reason their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events. This does not eliminate the established principle about witness credibility, but it tends to reduce the decisions, where those principles are seen as critical.’

120 There are one or two exceptions where, for one reason or another, such as lack of contemporary documents, recourse to credit is unavoidable in determining the issue in dispute; but even in the case of these exceptions, witness credibility is only one of the determinants. Nevertheless, if only for this reason, I have set out below my general impression of the lay witnesses called on behalf of each party.

Mr Sharp

121 I was impressed by Mr Sharp and I have no reason not to accept the evidence he gave by way of affidavit or in cross-examination. He was principally cross-examined on issues raised by the cross-claim, but he was also cross-examined on the issue of whether the disclosure of the proposed issue of 50,000 shares to Messrs Hutchings Broso and Riley was made in the context of their becoming employees of APIR and whether he was offered, at least on one occasion, but perhaps on three occasions, a folder of documents described as a ‘due diligence folder’. He was forthright and direct in the responses he gave to questions put to him in cross-examination. There was no inconsistency in his recollection and his oral evidence was consistent with such contemporary documentation that was in evidence on the matters upon which he was cross-examined.

Mr Riley

122 I did not find Mr Riley to be an impressive witness at all. In fact, I found him to be evasive in responding to questions which raised factual issues of importance, or to lack recollection on those issues, when at the same time his recollection on less important issues seemed sound. He could not, or did not, constructively respond to a number of questions which were put to him when contemporary documentation suggested responses which were adverse to his interests. He repeatedly sought to overcome what was apparent and clear from contemporary documents by the response that a contrary or a different version of events was ‘in my mind’ or ‘in everybody’s mind’. If it were necessary to have recourse to credit in determining issues in dispute, which, as I have indicated, subject to one or two exceptions, it is not, I would have difficulty in accepting the following aspects of Mr Riley’s evidence:

(1) His evidence that by the time of the negotiations with Mr Gibbon concerning the remuneration package for executive directors, the first heads of agreement ‘was no longer on foot’, had been ‘tossed out in the course of the negotiation’ and ‘blown away’. A relevant passage from the transcript is reproduced in [137] below.

(2) His evidence that he offered Mr Sharp a folder of documents, described to Mr Sharp as a ‘due diligence folder’, on three occasions: 12 November and 18 December 2003 and 6 January 2004.

(3) His evidence that the reference to having what was to become the second heads of agreement ‘squared away before [Mr Sharp] hands over his cheque’ (see [69] above) was no more than: ‘It would have been good corporate governance to have it fixed up …’

(4) His evidence that when he told Mr Sharp that he and Mr Hutchings Broso were to be issued with 50,000 shares between them, that this was in the context of telling Mr Sharp ‘when we commence employment’; or ‘we are negotiating employment agreements’; or ‘when negotiating employment’.

(5) His evidence that he did not intend to proceed and ‘square away’ the second heads of agreement before Mr Sharp found out about the completion payment: ‘That was not the thought that was in my mind …’; and his response to a question I put to him, that it did not cross his mind that between 14 January and 23 January 2004 there should have been some disclosure to Mr Sharp about the terms of the second heads of agreement and in particular the completion payment aspects.

Mr Hutchings Broso

123 Mr Hutchings Broso was no better. He gave a number of responses to questions that were put to him in cross-examination, which, when it was pointed out to him that his answers were inconsistent with contemporary documentation, he ‘walked away’ and changed his evidence. For example, his evidence that Mr Hennock proposed the change from cash to shares as the means of discharge of the completion payment until his attention was drawn to the content of the contemporary emails. He then conceded it was his idea. In other cases, he just contradicted himself without any explanation. For example, he gave evidence that he had the benefit of seeing Ms Cane’s letter to Mr Sharp of 3 June 2004 (see [97] above) before it was sent. Shortly after he says he doesn’t recall saying that; and in the very next breath, he says he does not recall seeing the letter before it was sent. Another example is his evidence by way of explanation as to why Ms Cane, in her abovementioned letter to Mr Sharp of 3 June 2004, never referred to the folder of documents that was said to be offered to Mr Sharp as a ‘due diligence folder’. He said: ‘We never told Ms Cane that it was called a due diligence folder’. A little later, when it was put to him that he did not describe the folder to Ms Cane as a ‘due diligence folder’, he responded: ‘I almost certainly would have. That was the expression we had for the document’. The overwhelming impression I got from his evidence in cross-examination was that he ‘closed his eyes’ to the apparent logic of events. On many occasions he did this by claiming an inability to recall. Again, if it were necessary to have recourse to credit in determining issues in dispute, which, as I have indicated, subject to one or two exceptions, it is not, I would have difficulty in accepting the following aspects of Mr Hutchings Broso’s evidence:

(1) His evidence that the first heads of agreement had lapsed in November 2003 during the course of his negotiations with Mr Gibbon.

(2) His evidence that the folder of documents that was offered to Mr Sharp on the one occasion when he was present, was described by the offeror as a ‘due diligence folder’.

(3) His evidence that in the conversation referred to in [89] above, in particular Mr Sharp’s response of ‘yes’ to Ms Cane’s question: ‘Don I am sure they did, did they or didn’t they?’; that he, Mr Hutchings Broso, understood Mr Sharp to be admitting that he was offered a folder of documents described as a ‘due diligence folder’.

(4) His evidence, that it did not enter his mind to tell the non-executive directors of APIR on 14 January 2004 or, between 14 and 23 January 2004, that Mr Sharp was completely unaware of the proposal, that is, the second heads of agreement.

(5) His evidence that the reason why the resolution of 14 January 2004 was to be ‘squared away before Don handed over his cheque’ was because ‘we wanted to be professional, we wanted to get all the administration square[d] away’.

(6) His evidence denying that he wanted the resolution of 14 January 2004 ‘squared away before Don handed over his cheque’ because he, Mr Hutchings Broso, knew Mr Sharp was unaware of the existence of the remuneration agreement.

(7) His evidence that he had ‘no recollection … at all’ / ‘absolutely no memory’ of whether he, Mr Hutchings Broso, wanted the formal agreements (the executive employment agreements) signed before the board meeting on 16 April 2004 because that would be Mr Sharp’s first board meeting.

(8) His evidence denying that he wanted the executive employment agreements signed before the 16 April 2004 board meeting because he knew that he had kept Mr Sharp in the dark about the matter and that he appreciated that if Mr Sharp knew, he would object; and his evidence again that ‘the squaring away’ was ‘getting the administrative details out of the way’.

(9) His evidence denying that he did not disclose the discharge of the completion payment in shares to Mr Sharp because that too would have been unacceptable to him in the face of his admission that he, Mr Hutchings Broso, opted for shares rather than cash as the means of discharge because he knew, in the light of Mr Hennock’s comments, that cash was unlikely to be acceptable to Mr Sharp.

Ms Cane

124 My impression of Ms Cane as a witness was only marginally better; although I suspect that this had more to do with the fact that she had no ‘coalface’ interaction with Mr Sharp over the negotiations leading up to DFE’s investment in APIR and, in consequence, was unable to shed any light on those events. However, when ‘the curtain went up’ in April/May 2004 and all was revealed to Mr Sharp, Ms Cane had a great deal of interaction with him. Her evidence as to what occurred at the 16 April 2004 board meeting (Mr Sharp’s first board meeting) and the subsequent meetings on 14 May 2004 – the meeting with Ms Cane (see [85] above); the meeting with Ms Cane and the other non-executive directors (see [86] and [87] above); and the meeting with all directors (including the executive directors) (see [88] – [94] above), was, having regard to the importance of that interaction, uncertain and lacking in recall; without being unfair to her, my impression was that she was selectively responsive. Whenever she was faced with a question where the response by reference to contemporary documents was contrary to her interests, her response was ‘I’m not sure’; ‘I cannot recall’; or ‘I don’t know’. The following examples suffice to illustrate the point. In cross-examination, Ms Cane was asked some questions about the availability of copies of the executive employment agreements at the board meeting on 16 April 2004. The transcript reads:

‘Can I suggest to you at the time copies of the executive remuneration agreements were not available to the directors, where they?---I’m trying to recall. I’m trying to recall, I’m sorry, I’m not sure.

Can I suggest to you that there wasn’t even a copy of the agreement or a copy or an original wasn’t available even to be tendered or tabled at that time, was there?---I’m sorry, I can’t remember that either.

Do you remember that Mr Sharp asked for a copy of the executive remuneration agreement?---Yes, I do remember that.

Well, it’s not a surprise, is it, because you understood that he didn’t have it by that time, it was only two days old?---No, I do recall him asking for a copy.

Right and that was hardly a surprise, was it, given that it had only come into existence?---It wasn’t a matter of surprise. He asked for a copy.

Right and you weren’t able to provide him with a copy that day, were you?---I wouldn’t have had a copy. I’m not sure when a copy was provided.

What I’m suggesting to you is that it was not until a couple of days afterwards that a copy was, to your understanding, provided to Mr Sharp by Mr Riley?---I don’t know exactly, but I can make the assumption that that’s correct.

I take it that if a copy was available at the offices of APIR, that is at the time of this board meeting on 16 April, there would have been no problem whatsoever, given your photo-stating capacity and the like, to make a copy for him then and there?---I wouldn’t have thought so, no.

There would have been no problem?---No.

So it’s rather surprising, isn’t it, that if he asked for a copy of the very thing that he was asked to consider at his first board meeting, that one wasn’t made available to him then and there, it’s somewhat surprising, isn’t it?---I can’t make a comment on that.

Well, you would expect, wouldn’t you, a director comes to his first board meeting and you understand from these minutes that the executive remuneration agreements were the topic of part of what was discussed at that meeting, that’s right, isn’t it?---That’s correct.

Right and being a director of that company, you would expect that, as a director, at the very least, in relation to this topic that was being discussed, you would have a copy of the agreement, that’s right, isn’t it?---It would have been helpful.

Well, more than that?---I’m sorry, I don’t know why a copy wasn’t available at that point.

More than that, more than helpful, wouldn’t it, consistent with your understanding of the obligations that are imposed on directors of a company? You just don’t dismiss the fact that this agreement, a copy of this agreement, was not available as being something that would have been helpful. It’s more than that, isn’t it?---It would have been appropriate for a copy to have been available. It would have been more appropriate than not. At the same time I had no idea that Mr Sharp or, no, I take that back.

Well, more than that---?---I did not know whether Mr Sharp was apprised of its contents already.

More than that, it would be inappropriate for him not to have a copy?---I don’t know why copies weren’t available.

I’m not asking you that. I’m asking you it would be positively inappropriate for him, as a director, not to have a copy of these agreements in the context of these agreements being discussed at this board meeting, correct?---I’m saying it would be certainly better if that was the case. My recollection is Mr Sharp asked for a copy. He was told, of course, he could have one. I was not aware that it took a couple of days for him to get one.

Can you answer my question: you agree, don’t you, that it would be inappropriate for him not to be given a copy of this agreement at a board meeting where these very agreements were being discussed? Do you agree with that or not?---The word ‘”inappropriate” I’m not certain about, it depends ---

Well, what’s the problem with it?---It depends on what his level of knowledge was anyway. If he already knew, which he may have done, this is what I’m saying, he may have known what the contents were, having an actual copy in itself might not be the issue, but broadly speaking, I would concur.

Now, can you just put aside, just for one moment, volume 3 and go back to volume 2? I want to direct your attention to the very last document in that folder at page 809.

HIS HONOUR: Just before you do, Mr Higgs, if you don’t mind, do you have page 873 still there in front of you, volume 3? I just want to make sure I understand your evidence, Ms Cane?---That’s the minutes of the meeting.

Yes, on 16 April. If you go right to the bottom of the first page at 873, the last sentence reads “M. Cane tabled a copy of the agreement.” Is your evidence that that’s not correct?---No, I presumably did so. I must have done, your Honour, if that’s what the minutes have said.

Well, as I understood it, you were totally uncertain as to whether the agreements were available for Mr Sharp?---Yes, I haven’t – I ---

I’m confused. The minutes say one thing, are you saying the minutes are false or are you saying they’re correct and, if they’re correct, what do you say about the evidence that you’ve just given?---Sorry, I’m not sure.

You don’t know?---I don’t know.’

Later she was asked:

‘… This minute, given the answers that you’ve given beforehand in not setting out that Mr Sharp didn’t agree that the previous minutes – that the minutes in respect of the previous meeting, accurately reflected what went on in relation to the tabling of the agreement, that should have been recorded in this minute of 14 May 2004, shouldn’t it?---It could’ve been, yes.

Well, you told us already that it should’ve been. Do you want to change that?---It would’ve been preferable perhaps if it was.

Well, not preferable; it should have happened because that then would reflect properly and truthfully what happened. That’s true, isn’t it?---It was an omission.

Yes, and it was wrong. These minutes are wrong in that regard, aren’t they?---They are deficient in that regard. They are correct in saying that the agreements were tabled.’

A little later she was asked:

‘So this minute of 14 May 2004 in that regard is wrong, isn’t it, it should have included Mr Sharp’s dissent, that’s right, isn’t it, at 881?---I don’t know.’

And a little later:

‘… You agree, don’t you, that in what I have put to you, you understood that Mr Sharp was challenging the accuracy of the board minutes of 16 April 2004 insofar as they suggested that you had tabled the executive employment agreements. That’s correct, isn’t it?---He was challenging that, yes.

Yes. Why wasn’t that fact recorded in the minutes of the 14 May 2004 when you came to consider whether the previous minutes were to be confirmed?---It was an oversight. I don’t know.

Well, it shouldn’t have happened, should it?---I don’t know.’

125 Ms Cane’s evidence concerning the tabling of the executive employment agreements at the board meeting held on 16 April 2004 vacillated from her assertion that she would not have had a copy of the agreements on that date; to not knowing, in the face of what the minutes of that meeting recorded, as to whether or not the agreements were tabled; to a positive assertion that the minutes were correct in saying that the agreements were tabled. Of course, Ms Cane was not responsible for the preparation of board minutes; that was Mr Riley’s province. But her vacillation over this issue is indicative of much of her evidence. For what it is worth, and it is relevant to at least one issue in dispute, it is quite clear in my view, from contemporary events (for example, see [78] and [80] above), and I so find, that the executive employment agreements were not tabled at the 16 April 2004 board meeting contrary to what the minutes recorded. And I make this finding despite Mr Riley’s evidence, on which he was not tested, that the executive employment agreements were signed on 14 April 2004 so that they could be tabled at the 16 April 2004 board meeting and were in fact tabled at the board meeting by Ms Cane; but consistent with his evidence that during the meeting Mr Sharp requested that he be given a copy of the agreements and nothing was provided, at least until a week or so after the meeting (see [80] above).

Messrs Wicks and McGregor

126 Messrs Wicks and McGregor were cross-examined on their respective affidavits but I do not regard their evidence as casting a great deal of light on the issues in dispute. Their recollection was not good, but worse, it fluctuated depending on whether or not the determination of a factual issue was important to their interests. On the other hand, subject to these reservations, I accept their evidence in cross-examination.

The Issues in Dispute

Whether the first and second heads of agreement were binding as between APIR and the executive directors?

127 I have come to the conclusion that the first heads of agreement was binding as between APIR and the executive directors and my reasons for coming to this conclusion are set out below. It follows, in my view, that the second heads of agreement was also binding as between APIR and the executive directors and my reasons for being of that view are also set out below.

Relevant Principles

128 The classic statement from Masters v Cameron (1954) 91 CLR 353 at 360 per Dixon CJ, McTiernan and Kitto JJ, is well known:

‘Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common …’

129 In Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628 (affirmed by the Court of Appeal as G R Securities v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631), McLelland J said that there was really a fourth category of case, namely, where the parties were content to be bound immediately and exclusively on the terms which they had agreed upon whilst expecting to make a new contract in substitution for their first contract, containing, by consent, additional terms.

130 Such a view is said to have its origin in the High Court’s decision in Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 317, and has found support in a number of more recent cases. There has been some academic debate on whether a fourth category of case may exist: see, for example, Elisabeth Peden, JW Carter and GJ Tolhurst, When Three Just Isn’t Enough: the Fourth Category of the “Subject to Contract” Cases (2004) 20 JCL 156; DW McLauchlan, In Defence of the Fourth Category of Preliminary Agreements: Or Are There Only Two? (2005) 21 JCL 286. It is unnecessary to get involved in that debate. Whether the first heads of agreement falls within the first category of case in Masters v Cameron, or the so-called fourth category of case described in [129] above, it will, in my view, for the reasons outlined below, constitute a binding agreement.

131 Whether the parties to an instrument intend to enter into a contract binding at law in the terms of the instrument is a question of fact to be determined objectively: Thompson v White & Ors (2007) NSW Conv R 56-171 at [99], [100] per Tobias JA (Ipp and McColl JJA agreeing). In Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101, Ipp J (as he then was) referred to the qualities or characteristics of ‘completeness’ and ‘certainty’ of the terms of the instrument in question, saying at [23]:

‘Where some terms are uncertain or where terms which one would expect to be in a contract of the kind entered into are missing, inferences may be drawn that the parties lacked the requisite intention to contract.’

Earlier, his Honour had said at [23]:

‘Thus, in dealing with the overall submission, it is not possible to divorce issues of completeness and uncertainty from the intention to contract.’

132 In undertaking the task of determining, objectively, what the parties’ intention was, the Court may have regard to all the relevant circumstances. ‘Intention’ in this sense means intention to contract, not what the parties intended by the terms of the contract. The relevant circumstances may include prior negotiations or subsequent conduct, although direct expressions of intent made after the contract was arrived at, are not admissible: Bramble Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at [26] per Heydon JA; Anaconda Nickel at [26]; Thompson v White at [100].

133 Qualification under the first category of cases in Masters v Cameron is predicated on the terms of the instrument being sufficiently complete and certain to evince the requisite intention to contract. In the present case, there was no suggestion that there were terms which one would expect to find in the first heads of agreement which were not there, nor that some of the terms were uncertain. Qualification under the fourth category of cases, if it exists, is predicated on the terms of the instrument being essential to the bargain that the parties wish to conclude, in the expectation that at a later date a further contract will be arrived at containing additional terms that would facilitate and clarify the initial contract. Here, there was no suggestion that the first heads of agreement did not contain those terms essential to the bargain that APIR and the executive directors wished to conclude, nor could there be.

Relevant Circumstances

134 In the present case, the following circumstances, which are relevant by reference to the authorities referred to above, point to a conclusion that the parties, APIR on the one hand and the executive directors on the other, intended to be legally bound by the first and second heads of agreement:

(1) The context in which these heads of agreement were negotiated and concluded. Both were negotiated and concluded in the context of efforts by APIR to obtain further capital to deal with its difficult financial position: see [115] above. The first heads of agreement was preceded by the engagement of Newport Capital to provide services directed to raising funds for APIR through various financing strategies (see [9] above) and the resolution offering the executive directors agreements for the on-going provision of their services in accordance with the first heads of agreement, specifically provided that the commencement date of the agreements will be that of the receipt of at least $1,000,000 from new investors. Indeed, further increments in the ‘cost of employment’ set out in the first heads of agreement were staged by reference to further capital injections; without those, the ‘cost of employment’ increments could not be met. The negotiations which took place with Mr Gibbon over executive remuneration (see [16] – [24] above) were also in the context of Mr Gibbon’s proposal to invest in APIR by a subscription for convertible notes and Mr Hutchings Broso’s proposed amended resolution ‘to the original board Resolution on Exec Remuneration’ provided:

‘The Commencement Date of the Agreements will be the signing of the Convertible Note Deed with new investors sourced by Newport Capital, probably Charles Gibbon and associates.’ (see [19] and [20] above.)

The second heads of agreement also comes into existence in the context of APIR raising capital, this time from DFE through Mr Sharp. Indeed, the nexus between the heads of agreement and the raising of capital is exemplified in Mr Hennock’s first comment on Mr Hutchings Broso’s amended proposal on executive remuneration set out in [19] above:

‘I assume this timing for the commencement of the agreements is so that there is money in the bank to fund them [the executive directors’ remuneration packages] rather than the capital raising being a specific milestone which you personally have to achieve.’ (see [66] above.)

Ultimately, the second heads of agreement was expressed to commence on 1 February 2004, a date by which, it was anticipated as at 14 January 2004, DFE’s investment would be on board.

(2) The terms of the resolution as recorded in the minutes of the meeting of directors of APIR held on 7 March 2003 (see [10] above), namely:

‘… RESOLVED by separately executed Resolution last date 4 May 2003 that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement now attached. The commencement date of the Agreements will not be until the receipt of at least $1,000,000.00 from new investors.’

(3) The terms of the letter under cover of which the separate resolution and attached heads of agreement were sent to each of the non-executive directors by Mr Riley (see [13] above), in particular the passage:

‘… The Executive Directors have stated that they are willing to commit to the terms of the suggested Agreement. They have also pointed out that due to the uncertainty surrounding future direction and control of the company, that without an Agreement, they would be put in a position of having no sensible choice but to accept other offers of employment.’

(4) The fact that the separate resolution and attached heads of agreement were signed by all five directors of APIR: see [11] and [12] above.

(5) The comprehensiveness of the terms of the heads of agreement as to what would be included in the agreement with each of the executive directors and the specificity and certainty with which those terms are detailed: see [12] above.

(6) The fact that these documents comprising the first heads of agreement were maintained by Mr Riley in a folder of documents to show to potential investors, which was kept up to date by Mr Riley, at least until ‘we got into serious negotiations with Charles Gibbon’. Mr Riley did not remember putting anything into the folder after about September – October 2003.

(7) The fact that the first heads of agreement was used as the starting point by Mr Hutchings Broso in drafting a ‘proposed amendment’ to it which was emailed to Mr Gibbon on 6 November 2003: see [18] and [19] above.

(8) The communications which took place between Mr Hutchings Broso on the one hand and Mr Gibbon on the other following Mr Gibbon’s ‘suggested changes’ to Mr Hutchings Broso’s ‘proposed amendment’ (see [20] above), in particular, Mr Hutchings Broso’s email to Mr Gibbon of 2 December 2003 (see [23] above) where he wrote:

‘… Given the current state of discussions and the continuing divergence of views, the EDs consider it in their best interests that the framework for these discussions and minimum outcomes be agreed before they step away from the package offered by the existing Board Resolution …’

and Mr Gibbon’s letter of 11 December 2003 to Mr Hutchings Broso (see [24] above) in which he wrote:

‘It appears that there is further need for discussion regarding the legacy issue. For this reason I suggested to Andy (and had reflected in the last version of the Deed) that the remuneration package agreed mid year by the Board be accepted as basis for going forward …’

(9) The fact that the ‘proposed amendment’ to the first heads of agreement was used as a starting point for having Mr Hennock review and provide his comments on ‘ED Remuneration’ (see [66] above) and the fact Mr Hutchings Broso’s re-write of that draft, incorporating Mr Hennock’s comments, became the document circulated to the other directors of APIR on 14 January 2004 under cover of the ‘squared away’ email (see [69] above) and the second heads of agreement (see [70] above).

(10) The fact that the terms of the second heads of agreement were comprehensively embodied, without any change, in the executive employment agreements between APIR on the one hand, and Mr Hutchings Broso and Mr Riley on the other (see [76] above), it being common ground that these latter agreements were binding on the parties to them.

135 The respondents placed some reliance on the following circumstances for the contrary view, that is, that the first and second heads of agreement were not intended to be binding as between APIR and the executive directors:

(1) The circumstance that the executive directors were prepared to modify the first heads of agreement in an attempt to accommodate Mr Gibbon in their negotiations with him. At best for the respondents, this circumstance is totally neutral in the objective determination of whether the first heads of agreement was intended to be binding on the parties to it; at worst for the respondents, it carries the inference that the terms of the anterior instrument were binding on the parties.

(2) The circumstance that the first and second heads of agreement are expressed to be: ‘Subject to shareholder approval …’, and that shareholder approval was not obtained in respect of the first heads of agreement even if the second heads of agreement, in particular the completion payment aspects of it, was discussed and ‘sold’ to shareholders at the annual general meeting of APIR held on 27 February 2004. But in the case of both heads of agreement, the words: ‘Subject to shareholder approval …’ are followed by the words: ‘… where required …’ and no such approval was required by APIR’s constitution. Moreover, even if shareholder approval to the first and second heads of agreement was required by subs 208(1) of the Corporations Act 2001, failure to obtain it would not invalidate an otherwise binding contract: see subs 209(1).

(3) The circumstance that Duesburys Chartered Accountants, Canberra (‘the auditors’) omitted from the 2003 financial statements any reference to the May 2003 resolution and the first heads of agreement could be seen as an indicia that the first heads of agreement was not binding. The response to this is, of necessity, more convoluted.

(i) First, when conducting the audit, Duesburys must have been told that the deal with Mr Gibbon had already gone ahead to the point of actually executing the first round of convertible notes, because otherwise the error would not have been made in Note 17 to the effect that the convertible notes to the value of $350,000 had been issued and were not just the subject of a term sheet. DFE submitted that this grossly inaccurate information, which survived to the signing of the accounts on or about 28 November 2003 and was not corrected until at least 23 December 2003, casts significant doubt on the accuracy and currency of information that was being supplied to Duesburys. I agree.

(ii) Second, for reasons which it is not necessary to delve into, I agree with DFE’s submission that it is reasonable to conclude that Duesburys never had the means or the cause to consider whether the May 2003 resolution and the first heads of agreement should have been included in the 2003 financial statements for APIR because they did not know of their existence. At the very least, it would be unsafe to conclude that the 2003 financial statements had omitted from them any reference to the May 2003 resolution and the first heads of agreement because of any considered decision by the auditors that they did not need to be disclosed.

(iii) Third, DFE further submitted that had Duesburys been told about the May 2003 resolution and the first heads of agreement at any time up to and including the changes made to Note 17 on or about 23 December 2003, and especially if told about the 12 December 2003 termination of the then current negotiations with Mr Gibbon, that would very likely have resulted in the 2003 financial statements being amended to take this into account. I agree. This is especially so given that Note 17 in its final form included reference to Mr Gibbon’s term sheet, despite the negotiations with Mr Gibbon in relation to the convertible notes from the term sheet having been terminated on 12 December 2003.

(iv) Fourth, Mr Carter suggested, as a matter of ‘speculation’, that the Note 17 reference to Mr Gibbon’s investment may have been promoted by a concern that APIR was not a going concern, noting that APIR had ‘a substantial deficit of current assets vis-à-vis current liabilities but that the auditors’ file was silent as to why that note was included’. DFE submitted that Mr Carter’s speculation is sound, but that he was in error in suggesting this reason was not revealed in the Duesburys working papers. The auditors’ ‘going concern’ review has a handwritten reference to ‘negative working capital’ and ‘heavy losses’ being offset by positive net assets and the $350,000 investment from Mr Gibbon. This was the source of the erroneous Note 17, but still explains the underlying reason for the final Note 17. The final version included not just the mere term sheet (in relation to which negotiations had been terminated) but also other mere negotiations, apparently because of the offsetting impact on ‘going concern’ worries. DFE submitted that, plainly, even a prospect of incoming investment was considered very important to the auditors in light of the precarious financial circumstances of APIR. It submitted that it is difficult to see why a mere prospect of $500,000 coming in to allay ‘going concern’ worries would not be at least matched (if not outweighed) by a board resolution and signed heads of agreement providing for $700,000 to be payable in two years if not sooner. Thus the ‘going concern’ test for inclusion suggested by Mr Carter strongly favours DFE’s case as to the first heads of agreement being required to be referred to in the 2003 financial statements even if it was not binding (contrary to DFE’s primary position). This also supports the inference that Duesburys did not know about it. I agree with those submissions.

(v) Finally, in relation to this circumstance, it is necessary to say something of the note found in the auditors’ working papers headed ‘Minutes Review’ under the further heading ‘07 March 03’:

‘Nothing of audit concern’

and that Duesburys were –

‘… later advised that [the meeting] included consideration of exec contracts – put on hold pending negs with potential investor’.

DFE submitted that the first heads of agreement was never ‘on hold’, but nevertheless made the following three observations:

(a) No evidence has been led from the respondents as to the precise terms of the communication to the auditors which gave rise to this note. Presumably no evidence could be led by the respondents (or the auditors) that would have assisted the respondents. As to whether the first heads of agreement was in fact ‘on hold’ is an issue of law and fact to be determined by the Court. The opinion of the person who may have said the first heads of agreement was ‘on hold’ is not decisive. The evidence in this regard is unsatisfactory in view of there being no precise evidence as to what was actually said. Even if the auditors were expressly told the first heads of agreement was ‘on hold’, the basis upon which this opinion was expressed is unknown. It all turns upon the intention of the parties. It is the intention of both parties viewed on an objective view of the facts. It is not based upon the subjective view of one of the parties (or an officer of one of the parties).

(b) The critical issue is whether the parties intended for the first heads of agreement to be binding. It is the respondent’s primary position that there was never any such intention. If the auditors were literally informed that the first heads of agreement was ‘on hold’, at the very least that would mean in all likelihood, contrary to the principal way in which the respondents put their case, there had been a previous intention for the first heads of agreement to be binding. Otherwise, there would be no need for the agreement to be noted as being ‘on hold’.

(c) An unexplained notation of the first heads of agreement being ‘on hold’ does not (especially if unexplained) impel the conclusion that the parties never intended for it to be binding; nor, viewed in isolation, does it negate the various reasons referred to above as compels a finding that the parties intended for the first heads of agreement to be binding.

I agree with these observations.

136 Finally, even if not as importantly as the circumstances referred to in [125] and [126] above, in cross-examination Mr Hutchings Broso in response to a question that he ‘… understood from the outset when the heads of agreement were first entered into that that was a binding agreement. Correct?’ answered: ‘Correct’; and Mr Riley, in response to a question: ‘That had the first heads of agreement not been rescinded as you assert, it would have been part of your obligation to reveal to Mr Sharp, as part of the current state of affairs of the company, the first heads of agreement?’ answered: ‘That’s correct.’

Whether the first heads of agreement as between APIR and the executive directors was terminated prior to the advent of the second heads of agreement?

137 During the course of cross-examination, Mr Riley gave evidence to the effect that while the first head of agreement was ‘valid’ (which, for present purposes, I take as synonymous with ‘binding’) at the time it was concluded (4 May 2003 at the latest), ‘… it had been tossed out in the course of the negotiation’ with Mr Gibbon. A relevant passage from the transcript is instructive:

‘Now, is it the fact that you say that it would have been removed, the May resolution and the heads of agreement, because – why would it be removed? What was it that would cause it to be in the due diligence folder to begin with and then removed later on?‑‑‑Because in early November the discussions with Charles Gibbon had been such that the – and it had been agreed at a director’s meeting, that the heads of agreement was no longer valid.

All right, now, firstly, in the event of their being a resolution by the board that the heads of agreement were no longer valid, there would be a resolution to that effect in writing, wouldn’t there? You would agree with that, wouldn’t you?‑‑‑I said it had been agreed by the board.

There would be a written minute of the heads of agreement being invalid?‑‑‑I think in the minutes it says that a new one would have to be drawn up.

Yes, well, you were still in the course of negotiating with Mr Gibbon in that regard, weren’t you?‑‑‑Yes, we were.

Right, see I would suggest to you that at the very least when you first prepared the due diligence folder, you were of the view that the heads of agreement was binding and valid, that’s the reason it was in the folder, that’s right, isn’t it?‑‑‑It was there for information for potential investors, yes.

And to pick up the language that you’ve used just a little while ago that at the time you included the heads of agreement and the resolution in the due diligence folder, when you first put it together, you believed, to pick up your words, that it was valid at that time, that’s right, isn’t it?‑‑‑That’s what I said, yes.

Yes and you don’t want to change that evidence, do you, because what you told the court was true?‑‑‑I said it was valid, yes.

Yes and I would suggest to you that during the Gibbon negotiation there were proposals to change that valid agreement, wasn’t there, the way of melding proposals that you understood had been put by Mr Gibbon?‑‑‑There was a continuing discussing with Mr Gibbon about executive remuneration and agreements, yes.

Yes and that no final agreement was reached between you and Mr Gibbon in respect of a new remuneration agreement, was it?‑‑‑No, nothing had been finalised, no.

And I would suggest to you that you’re fully aware that at the time the Gibbon – during the course of the Gibbon negotiation, I would suggest to you that your view was that until a new agreement was reached the existing heads of agreement continued to be valid, that’s right, isn’t it?‑‑‑I think it had been tossed out in the course of the negotiation.

And I would suggest to you that the reason that you had a folder in your possession in November that you say you offered to Mr Sharp which contained, at that time, the heads of agreement, was because at that time, during the course of the Gibbon’s negotiation, you knew that those heads of agreement continued to be a relevant, valid document in respect of executive remuneration, didn’t it?‑‑‑No.’

138 Mr Riley’s evidence towards the end of this passage is one of a number of aspects of his evidence which, if it were critical to this issue, I would be unable to accept. There is no contemporary evidence to support his assertion that the first heads of agreement was ‘tossed out’ in the course of the negotiation with Mr Gibbon; indeed, the very most that could be gleaned from contemporary documents is that the executive directors were prepared to ‘tweak’ the first heads of agreement to the extent of the proposed amendment set out in Mr Hutchings Broso’s email to Mr Gibbon of 6 November 2003 (see [18] above), but that ‘tweaking’ fell by the wayside in the face of Mr Gibbon’s response of 12 November 2003 (see [20] above). Moreover, Mr Riley’s evidence is contrary to Mr McGregor’s evidence that his understanding was that the first heads of agreement continued on until it was replaced by the second heads of agreement. Mr Wick’s evidence was also to this effect, as was Ms Cane’s.

139 There is nothing in the minutes and notes of the 5 November 2003 meeting to suggest that the May 2003 resolution was rescinded. More importantly, more was required than mere rescission of the resolution – the agreement had to be terminated. In relation to the subsequent communications with Mr Gibbon, his adverse reaction (see [20] above) and the executive directors’ strident defence of the first heads of agreement (see [21] – [23] above) actively contradict the notion that it was no longer considered on foot.

140 For these reasons, I have come to the conclusion that the first heads of agreement did not cease to be binding prior to the advent of the second heads of agreement.

If the second heads of agreement was binding as between the executive directors and APIR, from what date was it binding?

141 Despite certain responses made by the executive directors and Ms Cane in the course of their cross-examination to the effect that the second heads of agreement was not on foot until it was finally signed by Mr McGregor on 5 February 2004, the objectively established facts discerned from contemporary materials compel the conclusion that the parties, Mr Hutchings Broso and Mr Riley on the one hand, and APIR on the other, intended to be bound as from 14 January 2004. If not, certainly no later than from immediately before Mr Sharp and DFE executed the SSD, namely, 23 January 2004. Indeed, even Ms Cane conceded that it was ‘…a firm commitment … before Don handed over his cheque’. The objectively established facts which compel this conclusion include:

(1) All of the directors, not just the executive directors, wanted the matter of the executive directors’ remuneration ‘squared away’, they wanted ‘the decks cleared’ before Mr Sharp ‘came on board’ and ‘handed over his money’; according to some of them, this whole issue had been going on for too long, since early 2003, and following Mr Hennock’s advice they were anxious to ‘put it to bed’ prior to DFE’s investment.

(2) The second heads of agreement was signed by a majority of the directors (three out of five), including both executive directors by 15 January 2004. No objection had been, or was subsequently, raised by Ms Cane or Mr McGregor prior to their signing on 27 January and 5 February 2004 respectively, which, in retrospect and context, were mere formalities.

(3) The second heads of agreement provided that: ‘The Commencement Date of the Agreements will be 1 February 2004’. The reference to ‘The Agreements’ is not to the second heads of agreement itself, but to the executive employment agreements signed on 14 April 2004: see clause 1.2 of the executive employment agreements.

(4) The terms of the second heads of agreement were embodied verbatim in the executive employment agreements, albeit with some clarifying additional terms, including the last sentence of the first paragraph under the heading ‘Completion Payment’ at the end of clause 6.1 thereof: ‘However, any share buy back then in operation will not be payable if in the opinion of the Board, not acting unreasonably, such a buy back would threaten the Company’s on going solvency’. The relevancy of which, not surprisingly, could not be explained by Ms Cane because, in my view, it is inexplicable.

Whether either of the executive directors informed Mr Sharp, at the time or times they told him that 50,000 shares in APIR were to be issued between them, that this was to occur in the context of them becoming employees of APIR?

142 While this is undoubtedly an issue in dispute (see [42] and [113] above), I am not convinced that a finding one way or another is critical to the resolution of any ultimate issue in the proceedings. Mr Sharp is adamant that he was not informed at any relevant time that Mr Hutchings Broso and Mr Riley were going to change the basis upon which they provided their services to APIR from consultants to employees. Mr Hutchings Broso and Mr Riley are equally adamant that they did and that they did so in the context of telling Mr Sharp that 50,000 shares in APIR were to be issued between them. There is not much in the way of contemporary material to which one can have recourse, but I think it is significant that:

(1) Both the first heads of agreement (May 2003) and the second heads of agreement (January 2004) gave the executive directors a choice of providing their services as an employee or as a consultant and as the advent of these agreements stood, in temporal terms, either side of the period during which the alleged conversations between the executive directors and Mr Sharp took place, this suggests that neither of the executive directors had committed to becoming an employee of APIR at the time the conversations took place.

(2) None of the non-executive directors gave any evidence that they had knowledge, from the time Mr Sharp came on the scene until the advent of the second heads of agreement, that Mr Hutchings Broso and Mr Riley had any intention or commitment to becoming employees of APIR.

(3) Certainly such a change in relationship was not foreshadowed in the ‘give us your bottom line’ communications between Mr Hutchings Broso and Mr Hennock towards the end of December 2003.

143 Having regard to these matters, I incline to the view that Mr Sharp’s recollection is more reliable than that of Mr Hutchings Broso and Mr Riley and that in the course of their conversations concerning the disclosure that 50,000 shares in APIR were to be issued between Mr Hutchings Broso and Mr Riley, I find that no mention was made by them to Mr Sharp that they intended to become employees of APIR. I have to say that I am reinforced in that finding by my general impressions of the credibility of Mr Hutchings Broso and Mr Riley on the one hand and Mr Sharp on the other. On the other hand, it is, as I infer above, an on balance finding and I am not convinced that, had I found to the contrary, it would make any difference to the determination of any ultimate issue in the proceedings.

Whether Mr Sharp was offered the opportunity to scrutinise and review documents in a folder described as a ‘due diligence folder’?

144 Another of the factual issues on which there was conflicting evidence was whether Mr Sharp was offered access to a folder of documents referred to in terms as a ‘due diligence folder’ in the period from the time he first expressed interest in taking up an investment in APIR in early November 2003 through to 23 January 2004 when the SSD was executed. Mr Sharp is adamant that he was not offered access to a folder of documents in those terms while Mr Riley gave evidence that he offered Mr Sharp access to a folder of documents in those terms on at least three occasions and Mr Hutchings Broso gave evidence that he was present on one of those occasions when an offer in those terms was made. I have come to the conclusion, and so find, that in all probability Mr Sharp was offered access to a folder or bundle of documents by Mr Riley on at least one occasion during this period, but that the folder or bundle was referred to as relating to the ‘Gibbon deal’ (a reference to the proposed transaction with Mr Gibbon which was ultimately terminated) or in terms of being minutes and/or papers of the board of APIR and that the term ‘due diligence’ was never mentioned to describe the character of the documents to which access was being offered. My reasons for so finding are as follows:

(1) It is clear that Mr Sharp is an astute and experienced businessman; so much is acknowledged by all of the directors of APIR. Had Mr Sharp been offered access to a folder of documents described in terms of being a ‘due diligence folder’, I have no doubt he would have reviewed the documents carefully. On the other hand, Mr Sharp was undoubtedly cynical on the extent to which he could rely on board minutes to properly disclose the state of affairs, financial and otherwise, of a company; with some justification on the evidence in these proceedings. His declination to inspect and scrutinise these documents that were allegedly offered is more readily explicable on the basis that they were described in Mr Riley’s offers as relating to the “Gibbon deal’ or as board minutes and papers.

(2) There is no reference in any contemporary documentation to a ‘due diligence folder’ being offered to Mr Sharp. There was evidence from Mr Hutchings Broso that at a meeting, prior to the board meeting of 14 May 2004, among the executive directors, the other directors of APIR and Mr Sharp, a conversation took place in words to the effect as set out in [89] above, concluding:

‘Cane: Don I am sure they did, did they or didn’t they.

Sharp: Yes.’

It was suggested that Mr Sharp’s final word ‘yes’ was an admission on his part that he was offered access to a folder or bundle of documents referred to in terms as a ‘due diligence folder’, however, in the face of contemporary documentation I am not prepared to make such a finding. I find that Mr Sharp’s final answer in this conversation was no more than an admission he was offered access to the minutes of board meetings and that he declined to do so for the reasons he gave.

(3) The contemporary documentation upon which I rely can be summarised as follows:

(i) Mr Sharp’s email of 21 May 2004 to Ms Cane, with copies to Messrs McGregor and Wicks (see [95] above), in which the following paragraph appears:

‘At our meeting on Friday Andy confirmed that, in relation to the Employment Agreement, he disclosed that he & Andrew were to receive 50K shares at no cost. The contents of the rest of the Employment agreement that had been approved by the Board were not disclosed. Andy went on to argue that full discloser [sic] was made as it was contained in the companies Minute book which was not given to me.’

(ii) A draft response to this email prepared by Mr Hutchings Broso (see [96] above) which included the following material under the heading ‘Disclosure’:

‘Disclosure

Firstly, please bear in mind the context & all discussion last Friday where no-one was aware of the issue until you raised it. As I was enlightened only in the morning, Andy & Andrew were completely unaware of the fact of the meeting or the issues raised.

I have reviewed the chronology of events and believe that while, in retrospect you may feel peeved, the reality is there was no failure to disclose under the warranties and in particular there was no wilful non-disclosure.

Things were moving quickly in January 2004 as you rightly noted. The Rem. Ag has been in discussion since Oct 2002, had been formally agreed in May 03 and had been an irritation to everybody during the Charles Gibbon period.’

(iii) Ms Cane’s letter of 3 June 2004 to Mr Sharp (see [97] above) in response to his email of 21 May 2004, in particular the passage:

‘Sixth, I turn now to the matter of disclosure, and here I think the trouble is with perceptions rather than with facts. That is to say, you and the EDs have a different view of what happened and what should have happened.

The timings on finalising the Agreement also helped create confusion. The Share Subscription Deed was signed on 23 January 2004, at which time the new Resolution was still being circulated, and therefore had no standing. But in essence it was the same as the May 2003 Resolution, which was, of course, in the disclosure document folder.’

(4) In none of this contemporary documentation is there any reference to a ‘due diligence folder’. As the nexus between the meeting of 14 May 2004 and the documentation is so temporally close, my finding on this issue – that in all probability Mr Sharp was offered access to a folder or bundle of documents by Mr Riley on more than one occasion during the period from early November 2003 through to 23 January 2004 but that the folder or bundle was referred to in terms of relating to the ‘Gibbon deal’ or as being minutes and/or papers of the board of APIR rather than a ‘due diligence folder’ – is compelling if not inescapable.

Whether the executive directors deliberately withheld the existence of the second heads of agreement from Mr Sharp prior to the execution of the SSD on 23 January 2004?

145 On 14 January 2004, Mr Hutchings Broso sent the email (set out at [69] above) to all the other directors of APIR containing the sentence:

‘I would appreciate your comments and feedback asap to ensure we have it squared away before Don hands over his cheque.’

146 The background to this email is set out at [64] to [68] above, in particular, Mr Hennock’s comment concerning the Completion Payment provision, namely –

‘JH – Good if you can get it, but I think any incoming investor would have a problem with this – potentially a $650,000 plus payout. Also the wording used – “but will not be payable unless in the opinion of the Board, not acting unreasonably, the company is expected to make a profit from operations and will have the option of making a return to shareholders if so resolved by them” – is pretty fuzzy. Normally with share buyback agreements – a similar scenario – the test is around ‘continuing solvency’ – ie the Board could not make a payout which would cause the company to become insolvent. Equally the Board will want to ensure there is adequate ‘working capital’ which may include development capital – etc etc etc. You can see how all of this leads to fuzziness and lots of room for interpretation. This needs to be carefully thought through.’

147 On the same day, 14 January 2004, Mr Hutchings Broso responded in the terms set out in [67] above, namely:

‘Jay,

ED Remuneration. That’s great. Just one request, could you water down the comments about Completion Payment along the following lines?

“JH – I think any incoming investor would have a problem with this because of the effect on capital and the short time frame. Also …”

I have redrafted the resolution to convert the payout to shares, ie 100,000@$3.25, which also overcomes the issue around cash.’

148 In accordance with Mr Hutchings Broso’s request, Mr Hennock watered down his comment about the Completion Payment so that the first sentence read –

‘JH – I think any incoming investor would have a problem with this because of the effect on capital and the short time frame.’

149 The watered down version then went to Mr Hutchings Broso’s co-directors with his email of 14 January 2004 referred to in [69] and [146] above. The relevant part of the final version of the second heads of agreement signed off between 14 January and 5 February 2004 read:

‘Each Agreement will include a Completion Payment which becomes due at the end of the four year commitment if the company chooses not to continue the ED. The Completion Payment will be the greater of 100,000 shares or shares to a minimum value of $325,000. However, any share buy back then in operation will not be payable if in the opinion of the Board, not acting unreasonably, such a buy back would threaten the Company’s on going solvency.’

As already indicated in [141(4)] above, the third sentence is inexplicable and, for that reason, totally irrelevant.

150 It is against this background that the implications of the words –

‘I would appreciate your comments and feedback asap to ensure we have it squared away before Don hands over his cheque’

falls to be considered. When questioned, Mr Hutchings Broso said it was merely intended to ‘clear the decks’ so to speak before Mr Sharp ‘came on board’. Ms Cane said it was a matter of professionalism to get the ‘house in order’ before Mr Sharp ‘came on board’. Both rejected any suggestion that it indicated a desire on the part of Mr Hutchings Broso or the other members of the Board to avoid having to deal with such a matter once Mr Sharp was a director of APIR. Each also rejected any suggestion that it was to hide the ‘ED remuneration package’ from him until he had made his financial commitment. However, a review of all the material referred to in its temporal context leads me to the conclusion and I so find, that Mr Hutchings Broso and Mr Riley wanted the ED remuneration package ‘squared away’ before Mr Sharp ‘handed over his cheque’ because they apprehended, based on Mr Hennock’s advice, that Mr Sharp would not ‘come on board’ on the terms he had indicated if he was aware of the ED remuneration arrangements and, in particular, the Completion Payment, even if discharged in shares rather than in cash. The logical consequence of this finding is, and I so find, that Mr Hutchings Broso and Mr Riley deliberately withheld the existence of the second heads of agreement and its content from Mr Sharp prior to DFE executing the SSD, signing the application for shares and paying the subscription price of $530,000.

Whether the executive directors deliberately withheld the planned execution of the executive employment agreements from Mr Sharp prior to the board meeting of 16 April 2004?

151 On 5 April 2004, Mr Hutchings Broso sent an email to Ms Cane and Mr Wicks, as members of the Remuneration Committee, with a copy to Mr Riley, in the terms set out in [76] above, the final paragraph of which read:

‘As discussed with Maureen on Friday these should be executed in advance of the Directors’ Meeting of 16 April.’

152 The background to this email may be summarised as follows:

(1) On 27 February 2004, there was the meeting of the board of APIR. At this meeting Mr Sharp was appointed a director of APIR until the Annual General Meeting which immediately followed. At that later meeting, Mr Sharp was appointed a director of APIR. Mr Sharp was not able to attend either meeting owing to hospitalisation for surgery and treatment.

(2) The minutes of the 27 February 2004 board meeting record what is set out at [75] above.

(3) The next board meeting was scheduled for March 2004 but did not take place. Neither the executive directors nor the other directors of APIR could recall why.

(4) The following board meeting was scheduled for 16 April 2004. It was to be Mr Sharp’s first board meeting.

(5) Mr Sharp had not been provided with a copy of the minutes of the 27 February 2004 board meeting before the 16 April 2004 board meeting. He was thus still unaware of the executive directors’ remuneration arrangements that had been put in place by the second heads of agreement.

153 These events, in their temporal context, have led me to the conclusion, and I so find, that the urgency expressed by Mr Hutchings Broso in his email of 5 April 2004 to have the then executive employment agreements executed before the 16 April 2004 board meeting was driven by the desire, not only on his part, but on the part of Mr Riley as well, to have them completed before they came to Mr Sharp’s attention at the 16 April 2004 board meeting. This was denied by each of the executive directors and Ms Cane. However, in my view, such a conclusion is inescapable. It is reinforced by the fact that the minutes of the 16 April 2004 board meeting record that the agreements were tabled at the board meeting. However, the contemporary evidence is clear that they were not (see [125] above). Ms Cane, the Chairperson, who the minutes recorded as tabling the agreements, could provide no explanation for this anomaly; and she signed the minutes as a correct record of the business transacted at the meeting.

Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the first heads of agreement?

154 Mr Wicks was not asked any questions going to this specific issue, however, one can infer from his answers to other questions that he was not aware that Mr Sharp was unaware of the first heads of agreement until Mr Sharp raised the matter with members of the board of APIR on 14 May 2004.

155 The same observations equally apply to Mr McGregor although he had a general recollection that he became aware before the 14 May 2004 meeting that Mr Sharp had raised allegations that he had not been informed of the executive remuneration arrangements with Mr Hutchings Broso and Mr Riley. While this was before 14 May 2004, it could not have been before 23 April 2004 when the executive employment agreements were first made available to Mr Sharp (see [80] above).

156 There is nothing to suggest that Ms Cane knew, as at 23 January 2004, that Mr Sharp was unaware of the first heads of agreement. That is not surprising because, as indicated in [124] above, she had nothing to do with Mr Sharp over the negotiations leading up to DFE’s investment in APIR. Nor, for that matter, did Mr Wicks or Mr McGregor.

157 For the foregoing reasons, I find that none of the non-executive directors knew, as at 23 January 2004, that Mr Sharp was unaware of the first heads of agreement which, of course, by that date had been replaced by the second heads of agreement.

Whether all or any of the non-executive directors of APIR knew, as at 23 January 2004, that Mr Sharp was unaware of the second heads of agreement?

158 Having regard to my finding on the previous issue, the most likely inference is that, as at 23 January 2004, the non-executive directors were equally unaware that Mr Sharp was unaware of the second heads of agreement. On the other hand, their respective evidence in cross-examination suggests a diversity of awareness among them.

159 It was never put to Mr Wicks that, as at 23 January 2004, he knew that Mr Sharp was unaware of the second heads of agreement, and none of his answers to other questions put to him in cross-examination suggests he was aware.

160 Mr McGregor’s evidence on this issue is unclear. I attribute this as much to the questions he was asked as to the answers he gave. The transcript records the following:

‘This exchange with Mr Hennock [at [66] – [68] above] made it plain, didn’t it, that it was unlikely that Mr Sharp or any other potential adviser would be happy with cash being paid as part of the completion payment. That’s right, isn’t it?---True.

Indeed, Mr Hutchings Broso’s reaction was to accept that suggestion and in lieu of cash suggest shares. Correct?---Correct.

It’s plain, isn’t it, that you understood at the time from this email and your discussions that the reason for the change from cash to shares was because there had been no agreement sought from Mr Sharp about this resolution to do with the heads of agreement whereby the completion payment was to involve cash? True?---True.

You knew, didn’t you, that when the proposed resolution changed from cash to shares, obviously at 14 January, Mr Sharp wouldn’t have been aware of that change, would he?---Well, I don’t know that specifically but – but ---

Well, it hadn’t been agreed by anyone. It was being floated for the first time on 14 January so he wouldn’t have known about it on 14 January to your understanding?---Yes, but whether he had seen previous agreements or anything else. Well, I mean, that’s all whatever else.

But, sir, we have just been over it?---Yes.

With Mr Hennock, he says, Look, no investor is going to agree to that. Mr Hutchings Broso responds, Well, look, we’ll change it to shares. It was obvious, wasn’t it, that Mr Sharp was unaware, to your knowledge, of the suggestion that the completion payment should be made in accordance with any heads of agreement in the form of cash? That was the reason for the change?---And it also suits the company.

All right, well, it might suit the company but I am just asking you to focus upon – see, here it is, there is now something like nine days to go before the share subscription deed was to be signed, if not sooner. It could have happened sooner, couldn’t it?---Possibly.

I’d suggest to you at that time you were aware that Mr Sharp had not – that you were aware, consistent with Mr Hennock’s comment, that if he was aware of a completion payment of $325,000 or 100,000 times the share price, that consistent with what Mr Hennock said that he would have a problem?---Yes, or any other potential investor.

All right, thank you. By the time the share subscription deed was signed on 23 January you were aware that Mr Sharp was unaware of any suggestion of a completion payment being in the form of cash. True?---Well, probably but I can’t remember the dates of ---

…

Well, as we have been over, you knew from the exchange between Mr Sharp, Mr Hutchings Broso and Mr Hennock, as we have been over a number of times now, that Mr Hutchings Broso’s change of the executive remuneration heads of agreement in relation to the completion payment from cash to shares, that Mr Sharp was in fact unaware of that because he wouldn’t be happy with it, as would not any other potential investor. That’s right, isn’t it?---Correct.’

161 It was initially put to Ms Cane that she was aware, at the time of the 27 February 2004 board meeting (the board meeting Mr Sharp could not attend), that Mr Sharp was unaware of the second heads of agreement. She denied this. It was put to her that, at the time of Mr Hutchings Broso’s exchange of emails with Mr Hennock, she was aware that Mr Sharp was unaware of Mr Hutchings Broso’s draft heads of agreement that involved the executive directors getting shares rather than cash. Her response was:

‘I can’t be sure, because I was not involved in the discussions with Mr Sharp … He may not have had the documents. What I’m saying is the issue may have been discussed with him and that is something I cannot comment on.’

162 She was subsequently asked:

‘Now, you knew by the time the executive remuneration agreements were signed in that interval between the February and the April meeting, that Mr Sharp had not seen these agreements, that’s right, isn’t it?---No, I didn’t know that exactly.

Well, how in the world could he have seen them?---I didn’t know what negotiations or discussions had gone on between Mr Sharp and Mr Hutchings Broso or what Mr Sharp’s approach might be.

I’m not talking about the negotiations. I’m asking you about having seen the actual documents, do you understand me?---Well, I’m saying I don’t know.’

Ms Cane ultimately conceded that she knew Mr Sharp would not have seen the signed executive employment agreements before he attended the first board meeting on 16 April 2004.

163 Somewhat later she was asked:

‘By 3 June 2004 with the benefit of speaking to the executive directors, you were aware, weren’t you, on their version of events that Mr Sharp would not have been aware of the first heads of agreement and/or the second heads of agreement. That’s right isn’t it?---I was then aware that Mr Sharp had not availed himself of the opportunity to, to look at the disclosure documents. I was certainly aware of that.

So you were plainly aware, after you did your investigations, that on Mr Hutchings Broso’s version of events and Mr Riley’s version of events, he – Mr Sharp – was not aware of these heads of agreement, true?---I still believe he could potentially have been – potentially could have been discussed but he would presumably not have got the documents.

Could have been aware, you say, but you knew was not aware?---It was only on May 14 that I became aware that he might not have known or might not have availed himself of knowledge that was available.

Well, can I suggest to you that you well knew by the time Mr Sharp attended his first board meeting that he was unaware of any of these heads of agreement. That’s true, isn’t it?---No, it’s not true at all.

That’s the reason why you went to such great lengths with the other executive directors to make sure that the formal agreement was signed off before he, Mr Sharp, attended his first board meeting. That’s right, isn’t it?---No. It’s totally untrue.

You didn’t do anything. You did everything in your power to make sure that this employment agreement was signed before he attended his first board meeting. That’s right, isn’t it?---I explained yesterday that we, we wished to try to clear the decks so that we could concentrate on the future of our company. That was what we, that’s what that was all about.

You wanted to make sure that it was signed away with Mr Hutchings Broso and Mr Riley so it was locked in before Mr Sharp found out?---I was not aware that Mr Sharp did not know about the earlier documents. In fact I’m very – I was extremely surprised that he didn’t know about those documents and somewhat disappointed, I might say.’

164 Having regard to the objectively established facts, in particular, the fact that none of the non-executive directors had anything to do with Mr Sharp in the negotiations leading up to the execution of the SSD on 23 January 2004; the fact that there is no contemporary evidence which shows that the knowledge which the executive directors undoubtedly had as to Mr Sharp’s knowledge or rather, lack of it, had been communicated to the non-executive directors prior to 23 January 2004; and the evidence outlined in [158] – [163] above given in cross-examination, I have come to the conclusion that, while the non-executive directors might have suspected that Mr Sharp did not know about the changes as between the first and second heads of agreement prior to the execution of the SSD on 23 January 2004, and, in particular, the substitution of shares for cash in discharging the completion payment, none of them knew that Mr Sharp was unaware of the second heads of agreement as at 23 January 2004.

Conclusions on Ultimate Issues

165 In the face of my finding that the first heads of agreement was binding as between APIR and the executive directors (see [127] above), it is common ground that its existence and substance were required to be disclosed in the audited financial statements of APIR for the year ended 30 June 2003 (see [117] above).

166 In the face of my finding that the second heads of agreement was binding as between APIR and the executive directors (see [127] above), and that it was binding as from on or about 14 January 2004, its existence and content were required to be disclosed to DFE and Mr Sharp pursuant to clause 5.1(1) of the SSD – it undoubtedly concerned ‘the state of affairs of [APIR]’ – prior to the execution of the SSD on 23 January 2004.

167 It is abundantly clear, in my view, that if Mr Sharp had been aware of the existence and content of the first heads of agreement, he would not have even offered, on behalf of DFE, to invest in APIR on the terms that he did; that is, to subscribe for 200,000 shares at $2.65 per share and to offer all existing shareholders $2.65 to sell up to 50% of the enlarged capital, unless the completion payment provision was deleted or fundamentally changed. Mr Hennock’s advice on the completion payment provision from the first heads of agreement at [66] above: ‘Good if you can get it, but I think any incoming investor would have a problem with this …’, confirms my view, as does Mr Gibbon’s reaction to the same proposal (see [20] above).

168 It is equally clear, in my view, that if Mr Sharp had been aware of the existence and content of the second heads of agreement prior to the execution of the SSD, he would not have had DFE enter into it or purchase the 81,904 shares in APIR from existing shareholders. So much is clear form his reaction on finding out about the executive employment agreements between APIR and Mr Hutchings Broso and Mr Riley signed on 14 April 2004, which were predicated almost totally, on the terms of the second heads of agreement which, in turn (subject to a number of ‘improvements’ to the first heads of agreement for the benefit of Mr Hutchings Broso and Mr Riley), was predicated on the first heads of agreement.

169 It is also clear, in my view, that when the second heads of agreement came on foot and replaced the first heads of agreement on or about 14 January 2004, Mr Sharp was not disabused that the 50,000 shares to be issued as between Mr Hutchings Broso and Mr Riley was, by that time, taking into account the shares then to be issued in discharge of the completion payment, only a very small part of the shares to be issued to Mr Hutchings Broso and Mr Riley under their remuneration arrangements.

Conclusion on Misleading or Deceptive Conduct

170 It follows from:

(1) The common ground referred to in [110] to [117] above;

(2) my findings on the issues in dispute at [127] to [164] above; and

(3) my conclusions on the ultimate issues at [165] – [169] above

that APIR and its executive directors engaged in conduct that was misleading or deceptive, namely:

(4) not disclosing the existence and content of the first heads of agreement;

(5) not disclosing the existence and content of the second heads of agreement; and

(6) only disclosing that 50,000 shares were to be issued between the executive directors as part of their remuneration arrangements when the completion payment provisions of the second heads of agreement contemplated the issue of at least a further 100,000 shares to each of the executive directors.

The Non-Executive Directors and Accessorial Liability

171 Irrespective of the applicable statutory regime (as to which see [174] below), a person is only involved in a contravention of a provision of the relevant regime, as distinct from engaging in such a contravention, if the person:

‘(a) has aided, abetted, counselled or procured the contravention;

(b) has induced, whether by threats or promises or otherwise, the contravention;

(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d) has conspired with others to effect the contravention.’

See s 75B of the TP Act and s 79 of the Corporations Act 2001.

172 Only (a), (c) and (d) are relied on in the SFASC, but (d), correctly in my view, was not pressed. There is no evidence of any conspiracy between the executive and non-executive directors as groups or among them individually. Moreover, each of (a) and (c) requires a level of knowledge, not necessarily the same level, but absent which a conclusion that a person is involved in conduct that is misleading or deceptive, or likely to mislead or deceive, cannot be sustained. A person will not have aided or abetted such conduct unless it is proven that the person had actual knowledge of the essential elements of such conduct and intentional participation in it: Yorke v Lucas (1985) 158 CLR 661 in the joint judgment at 666 – 669. The words ‘party to a contravention’ refer to a person who participates in, or assents to, the contravention. To be regarded as participating, a person must have actual knowledge of the essential elements constituting the contravention: Yorke v Lucas at 670. At the same page in the joint judgment, their Honours said:

‘…There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention. … In our view … [in order to be knowingly involved] … a party to a contravention [needs] to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.’

173 While the extent of knowledge required to determine that a person is ‘knowingly concerned’ in a contravention has not been settled, my findings in [157] and [164] above impel the conclusion that none of the non-executive directors satisfied any of the relevant criteria to sustain a conclusion of being involved in the misleading or deceptive conduct of APIR and the executive directors referred to in [170] above.

The Applicable Statutory Regime

174 The pleadings in the SFASC rely on a number of statutory regimes: the regimes under the Corporations Act 2001; the ASIC Act; the TP Act and the ACT Act. Section 51AF of the TP Act provides in subs (1) that Part V (Consumer Protection) does not apply to the supply, or possible supply, of services that are financial services and subs (2) provides, inter alia, in para (a) that, without limiting subs (1), s 52 does not apply to conduct engaged in or in relation to financial services. The term ‘financial services’ is defined in s 4 of the TP Act by reference to the meaning it has in Division 2 of Part 2 of the ASIC Act and includes ‘dealing’ in a ‘financial product’ (subs 12BAB(1)(b)), which is defined to include a security (subs 12BAA(7)). The term ‘dealing’ is defined to include applying for or acquiring, or issuing, a security (subs 12BAB(7)). It is clear from these provisions, in my view, that s 52 of the TP Act does not apply to conduct which consists of DFE’s application for and APIR’s issue of the 200,000 shares at $2.65 per share nor, in my view, to DFE’s acquisition of the 81,904 shares in APIR at $2.65 per share from existing shareholders: see Cleary & Anor v Australian Co-operative Foods Ltd & Ors (Nos. 2 and 3) (1999) 32 ACSR 701 per Austin J at [1-107] – [1-109]; Re NRMA Ltd; Re NRMA Insurance Ltd (2000) 34 ACSR 261 per Santow J at [125] – [129].

175 Subsection 1041H(1) of the Corporations Act 2001 prohibits conduct in relation to a financial product or a financial service that is misleading or deceptive or is likely to mislead or deceive. The term ‘financial product’ is defined in Part 7.1, Division 3 to include a security (subs 764A(1)) and the term ‘financial service’ is defined in Part 7.1, Division 4, to include a ‘dealing’ in a financial product (security) (subs 766A(1)). The term ‘dealing’ is defined to include applying for or acquiring, or issuing, a security (subs 766C(1)).

176 Subsection 1041H(2) provides that the reference to engaging in conduct in relation to a financial product (security) includes, but is not limited to, a dealing in a security and, without limitation, the issuing of a security. It is clear, in my view, that s 1041H of the Corporations Act 2001 applies to conduct which consists of DFE’s application for and APIR’s issue of the 200,000 shares at $2.65 per share, as well as to DFE’s acquisition of the 81,904 shares in APIR at $2.65 per share from existing shareholders.

Remedies under the Corporations Act 2001

177 Subsection 1041I(1) is the equivalent of subs 82(1) of the TP Act and provides:

‘A person who suffers loss or damage by conduct of another person that was engaged in in contravention of section 1041E, 1041F, 1041G or 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.’

178 Subsection 1325(1) is the equivalent of subs 87(1) of the TP Act and provides:

‘Where, in a proceeding instituted under, or for a contravention of, Chapter 5C, 6CA or 6D or Part 7.10, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Chapter 5C, 6CA or 6D or Part 7.10, the Court may, whether or not it grants an injunction, or makes an order, under any other provision of this Act, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the first‑mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage.’

179 Subsection 1325(5) is the equivalent of subs 87(2) of the TP Act and provides:

‘The orders referred to in subsections (1) and (2) are:

(a) an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after a specified day before the order is made; and

(b) an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after a specified day before the order is made; and

(c) an order refusing to enforce any or all of the provisions of such a contract; and

(d) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to refund money or return property to the person who suffered the loss or damage; and

(e) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage; and

(f) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, at the person’s own expense, to supply specified services to the person who suffered, or is likely to suffer, the loss or damage.’

Relief Sought

180 In its FAA, DFE sought the following relief:

‘(1) Declaration that the Share Subscription Deed dated 23 January 2004 entered into between the Applicant and the First Respondent:

(a) is void in whole or alternatively in part;

(b) is void ab initio or alternatively has been void from such date as the Court deems fit; and

(c) has been validly rescinded by the Applicant.

(2) Order that the Applicant receive restitution by payment to it of all monies paid pursuant to the Share Subscription Deed.

(2A) Order that the Applicant receive from the Respondents (or such of them as the Court determines) restitution by payment to it of all monies paid for the additional 81,904 shares purchased by the Applicant from other shareholders of the First Respondent by way of a bank cheque in the sum of $217,045.60 plus interest in exchange for a duly executed transfer of the said shares to the Respondents or their nominees.

(3) Further, and alternatively, order the Respondents and each of them pay to the Applicant damages.

(4) Interest pursuant to Section 51A of the Federal Court of Australia Act 1976.’

Argument and Reasoning on Remedies and Relief

181 Subsection 1041I(1) of the Corporations Act 2001 is predicated on a person having suffered loss or damage by the contravening conduct of another person. Subsection 1325(1) is predicated on a person who is a party to the proceeding having suffered, or likely to suffer, loss or damage because of the contravening conduct of another person. Putting aside that the latter provision also applies where a person is likely to suffer loss or damage, and that the nexus in the former provisions is ‘by’, and in the latter is, ‘because of’, there can be no dispute that the loss or damage of which both provisions speak must be an actual loss or damage; risk of loss is not sufficient: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525. The contravening conduct, while concerned with s 82 and s 87 of the TP Act, is equally applicable to s 1041I and s 1325 of the Corporations Act 2001 in this respect. However, it was submitted on behalf of the respondents that, in the present context, actual loss meant realised loss and that DFE would suffer no loss, if any, until its shares in APIR were sold; only then would it be possible to say whether or not there is an actual loss. Reliance for this was placed on Wardley Australia, Commonwealth v Cornwell (2007) 229 CLR 519 and Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, as well as other authorities.

182 In my opinion, this submission is flawed; it is plainly wrong as a matter of first principle and is contrary to the authorities as properly understood and applied.

183 In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 the facts are summarised in the headnote. Before purchasing a small shopping arcade, a prospective purchaser obtained advice from a valuer about the local retail tenancy market, but not the value of the arcade itself. The valuer advised that the construction of a new shopping centre nearby was not likely to affect existing retail tenancy levels adversely. Relying on that advice, in April 1997 the purchaser entered into a contract to purchase the arcade. By March 2000, after the opening of the new shopping centre, the arcade had suffered a collapse in gross rental income with a concomitant fall in value. The purchaser tried to sell the arcade without success.

184 While a central aspect of the decision was the notion that loss was not confined to the loss at the time of acting upon the advice and could include evidence of loss ascertainable later in time but referable to the conduct in issue, the High Court made it clear that if the plaintiff had learned the day after entering into the contract, or the day after completing the contract, that the defendant’s conduct had been misleading as later found, it could have started proceedings then and there: at [25] and [28].

185 The High Court, in HTW Valuers, distinguished Wardley Australia on the ground that the case was dealing with risk of loss only: at [29]. That reasoning arises from the fact that Wardley Australia was an indemnity case, so that there was no actual loss unless and until a loss was suffered under that indemnity, which was an event that might never occur. Unlike an asset worth less than was paid for it by reason of misleading or deceptive conduct, an indemnity cannot give rise to a loss until the party providing the indemnity is liable to pay.

186 The High Court also distinguished Murphy v Overton Investments because the contingency upon which the loss was said to arise could never eventuate unless the respondent exercised its discretion to increase the charges above the level disclosed to the applicants, with the undisclosed contingency not having any impact on value such that there was no loss: at [30]. That point of distinction is equally apposite to this case in which any other investor would rationally treat the shares in APIR being worth less with, than without, the binding agreement to issue 20% of its shares to the executive directors.

187 The remaining case relied upon by the respondents on this issue, Commonwealth v Cornwell, was a limitation case. It turned on when a loss actually took place in respect of the plaintiff having joined the wrong superannuation fund due to being give the wrong information many years earlier, which he only discovered much later. The High Court found that his actual loss matured only at the end of his service and upon the occurrence of one or more of the statutory contingencies which had to be met for him to be entitled to any statutory benefit at all: at [19]. Until he had an entitlement, which might never arise, he could not suffer a loss in respect of that entitlement.

188 There is no doubt that when DFE entered into the SSD on 23 January 2004 and paid the sum of $530,000 to APIR in subscribing for 200,000 shares in APIR, it suffered a loss measured by reference to the difference between what it paid in ignorance of the existence of the second heads of agreement and what it, as a rational investor, would have paid, if anything, in the knowledge of the existence of the second heads of agreement; or what was described in HTW Valuers, at [36], by reference to authority, as the ‘real value’ or ‘fair value’ or ‘what would have been a fair price to be paid … in the circumstances … at the time of the purchase’. Similarly, for the 81,904 hares in APIR it purchased from existing shareholders for the sum of $217,045.60.

189 Although the Court is entitled to take into account events after the date of acquisition, when assessing damages by comparing the price and the real value of the asset at the date of the acquisition, in relation to s 82 of the TP Act (see Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281), it must, as the High Court said in HTW Valuers at [40], ‘… distinguish among possible causes of the decline in value of what has been bought’ and, in doing so, embrace the dichotomy of Dixon J in Potts v Miller (1940) 64 CLR 282 at 298.

‘…If the cause isinherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be “dependent,” “extrinsic,” “supervening” or “accidental,” then the additional loss is not the consequence of the inducement …’

190 In the present case, while the number of shares that might be issued in discharge of the completion payment under the second heads of agreement has a floor – 100,000 for each executive director – it has no ceiling, so that the number of shares that might be issued is potentially unlimited depending on the value of the APIR shares at the relevant time. In context, such an event, post acquisition, is a cause inherent in the thing itself – the second heads of agreement – and not extrinsic or independent of it, and should be taken into account in any assessment of the real value of the shares at the time of acquisition. This makes any assessment of loss or damage, other than for the full subscription/purchase price, exceedingly difficult, if not impossible.

191 For this reason, I have come to the view that the relief sought is not only appropriate, but the most appropriate remedy in all the circumstances of the case. I have no doubt that Mr Sharp (and through him DFE) would not have even contemplated entering into the relevant transactions, let alone entered into them, had he known of the existence and content of the first heads of agreement or the second heads of agreement prior to doing so. He and DFE were misled and deceived by APIR and the executive directors in this regard. It is only right that they should be restored, or as near as possible, to their pre‑transaction position.

192 I therefore propose to make the following declaration and orders:

1. A declaration that the SSD is void ab initio.

2. An order that APIR forthwith refund to DFE the subscription price of the 200,000 shares in APIR for which DFE applied and subscribed.

3. If APIR is unable for any reason beyond its control or otherwise fails to comply with order 2 in full, an order that Mr Hutchings Broso and Mr Riley jointly and each of them severally, refund to DFE the subscription price for the shares in order 2 to the extent of the shortfall.

4. An order that upon full payment to DFE of the subscription price for the shares in order 2, DFE deliver to APIR a properly executed instrument or instruments of transfer of such shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as APIR directs.

5. An order that Mr Hutchings Broso and Mr Riley jointly and each of them severally, forthwith refund to DFE the purchase price of the 81,904 shares in APIR purchased by DFE from shareholders in APIR in exchange for a properly executed instrument or instruments of transfer of the shares in registrable form in favour of such transferee or transferees, and if more than one in such respective numbers, as APIR directs.

6. An order that APIR, Mr Hutchings Broso and Mr Riley jointly and each of them severally pay interest to DFE pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the sum of the subscription price in order 2 and the purchase price in order 5 from 28 January 2004 to 30 July 2008 at the rate or rates applied by the Supreme Court of New South Wales during this period.

The Cross-Claim

193 The statutory and legal bases of the claims for relief in the ACC are set out in [3] above. The factual bases as pleaded may be summarised as follows:

(1) During negotiations leading up to the execution of the SSD, Mr Sharp represented that neither he nor DFE would hold more than a 20% shareholding in APIR. In so doing, Mr Sharp engaged in misleading conduct in that, during that time and at the time of the execution of the SSD, Mr Sharp and DFE intended that DFE hold more than 20% of the shareholding in APIR (‘the first allegation of misleading conduct’).

(2) Prior to, and at the time of, entering into the SSD, Mr Sharp on behalf of DFE represented to APIR that upon the sale of shares in APIR to DFE pursuant to the SSD, Mr Sharp would resign from his positions in the financial services industry that could be perceived as being in conflict with APIR’s neutral position and in future not occupy such positions or roles, specifically those identified in [14] of the ACC. In so doing, Mr Sharp engaged in misleading conduct in that Mr Sharp intended to continue and continues to occupy each of the positions or roles identified in [14] of the ACC (‘the second allegation of misleading conduct’).

194 The pleaded factual basis of the first allegation of misleading conduct has no substantive foundation. The alleged representation was said to have been made in writing and contained in the email from Mr Sharp to Mr Hutchings Broso of 26 November 2003 (see [34] above). Presumably this is a reference to the second paragraph which reads:

‘In addition we are prepared to offer to existing shareholders the same price for another 30% of the company with the understanding that no individual shareholder will control more than 20%’

This paragraph has to be read and understood in the context of other contemporary material, in particular:

1. Mr Sharp’s email to Mr Hutchings Broso of 9 December 2003 (see [44] above).

2. Mr Sharp’s email to Mr Hutchings Broso of 12 December 2003 (see [46] above).

3. The resolution passed at the APIR board meeting on 12 December 2003 concerning Mr Sharp’s offer (see [47] above).

4. The letter to shareholders of 19 December 2003 concerning Mr Sharp’s offer (see [50] above).

195 So read and understood, it is extremely difficult, if not impossible, to accept that Mr Sharp made a representation in the terms alleged, namely, that neither he nor DFE would hold more than a 20% shareholding in APIR. On the contrary, it is clear that what he represented from the very outset was that he (and through him, DFE) would be prepared to purchase, in addition to DFE subscribing for 20% of APIR’s enlarged capital, a further 30% of that capital from existing shareholders at the same price of $2.65, but on the understanding that under the terms of a shareholders’ agreement to be entered into, he would be required to sell down to 20% and, moreover, that he would do so within six months at the price of $2.65.

196 Mr Sharp was cross-examined extensively, and I might say repeatedly, on this issue and the answers he gave in cross-examination were entirely consistent with the contemporary material. The following extracts from the transcript illustrate this observation:

‘You told him on 24 November that it was your intention to hold only 20 per cent in the company?‑‑‑On the 24^th?

Yes?‑‑‑I cant – I don’t think so, because on the 26^th I sent an offer out to buy for 50 per cent of the business.

Yes, but we have seen that offer, Mr Sharp?‑‑‑Sure.

You accept, don’t you, that included in the offer was a statement by you that you sold down to 20 per cent?‑‑‑In the context of a shareholder’s agreement, yes.

You say ‑ ‑ ‑?‑‑‑No investor would hold more than 20 per cent, absolutely.

You say it was your position that the 20 per cent was only good if there was a shareholder’s agreement ‑ ‑ ‑?‑‑‑Absolutely.

‑ ‑ ‑ confining everyone to 20 per cent?‑‑‑Absolutely, that’s why I actually requested 50 per cent because there’s no shareholder’s agreement, it did not protect me in any shape or form, so the way around was to offer for 50 per cent, subject to a shareholder’s agreement.

I suggest to you, Mr Sharp, that you told Mr Hutchings Broso on 24 November and it was always your position so far as your negotiations and relationship with Hutchings Broso and Riley was concerned, that you were not interested in controlling the company?‑‑‑I previously said that to them and I said we usually take up to 40 per cent, 20 per cent for myself, 20 per cent for Colin Scully and do not have management involvement. That was in the context of another deal I did, I changed my mind after talking to these people, I wanted to go to a 50 per cent deal and that’s precisely what I offered them.

And I suggest to you that you maintained, in so far as your dealings with Hutchings Broso and Riley was concerned, a position that you were only ever interested in taking 20 per cent of the company?‑‑‑Certainly not.

…

The explanation for why you sought to – you were seeking to acquire shares beyond 20 per cent was to enable those shareholders which wanted to cash in at the price you were offering, with the price you were purchasing your 20 per cent of shares, could have an opportunity to do so?‑‑‑And I could have obtained up to 50 per cent, correct. That’s the purpose of doing it, getting the 50 per cent, not to help out the existing shareholders themselves, not at all. My offer was very clear, very clear – to purchase up to 50 per cent. That was the offer. It was done in the resolution of the board of 12 December in a share subscription, the letters to the shareholders, so I can’t possibly be more explicit than they did that, not me. It’s not my draft. It’s their draft.

Mr Sharp, the arrangement – the understanding that you and Mr Hutchings Broso had was that any shares above 20 per cent of the total shareholding acquired by you would be sold down to 20 per cent?‑‑‑When there’s as shareholders agreement. You must have understood that – they drafted it.

Well, regardless of who drafted what, what I’m putting to you is that that was the arrangement?‑‑‑The arrangement was as per the draft, as per my email on the 9^th which was then converted into that resolution. That is the arrangement, sir. I didn’t draft it. They did.

…

I will now put my question again. You agreed with Hutchings Broso and Riley that you would be prepared to acquire shares at $2.65 beyond 20 per cent but you would sell them down to 20 per cent?‑‑‑In the context of a shareholders agreement, absolutely.

I am putting to you not in the context of a shareholders ‑ ‑ ‑?‑‑‑Absolutely no way, sir.’

197 The pleaded factual basis of the second allegation of misleading conduct also fails for different reasons. First, one of the positions identified in [14] of the ACC was denied in the Defence and no attempt was made to challenge that denial. Second, in cross-examination of Mr Sharp, it became apparent that two of the other positions identified in [14] of the ACC were only taken up by him in August 2005, well after the events giving rise to theses proceedings. Only two other positions were identified: his position as a director and chairman of Investors Mutual Limited; and his position as a director of Global Value Investors Limited. In respect of Mr Sharp’s holding of these positions, no evidence was led as to why or how they could be perceived as being in conflict with APIR’s neutral position and indeed so much was denied in the Defence. The matter was particularised in the ACC at [14] in the following terms:

‘Each of the above positions or roles is a position or role associated with a financial services provider. APIR’s business involves collecting data on products and participants in financial services industry and adding value to that information by characterizing and mapping the commercial relationship and then disseminating the data for reward to industry, government and regulatory participants. The nature of its business requires that it not be perceived by its customers as affiliated in any way with one financial services provider. The occupation of these roles or positions by Sharp involves an affiliation with particular financial service providers.’

But no evidence was led in support of the allegation of a conflict with APIR’s position of neutrality. In those circumstances, the allegation cannot be sustained.

198 Even if the second allegation of misleading conduct could be sustained, there is no evidence of any loss of damage being suffered by APIR by that conduct.

199 The cross-claim must be dismissed.

I certify that the preceding one hundred and ninety-nine (199) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Associate:

Dated: 30 July 2008

Counsel for the Applicant and Cross-Respondents:	Mr D J Higgs SC with Mr R J Bromwich

Solicitors for the Applicant and Cross-Respondents:	Gambin Legal

Counsel for the Respondents and Cross-Claimant:	Mr R E Williams QC with Mr M J Heath

Solicitors for the Respondents and Cross-Claimant:	Williams Love & Nicol

Dates of Hearing:	3 – 7, 10 – 13 December 2007, 29, 30 January 2008

Date of Judgment:	30 July 2008

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