FEDERAL COURT OF AUSTRALIA
Gun Capital Management Pty Ltd v Solamind Pty Ltd [2013] FCA 620
IN THE FEDERAL COURT OF AUSTRALIA | |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. The application is dismissed.
1. The cross claim is dismissed.
2. The question of costs is reserved
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | WAD 223 of 2010 |
BETWEEN: | GUN CAPITAL MANAGEMENT PTY LTD (ACN 092 221 546) Applicant
|
AND: | SOLAMIND PTY LTD (ACN 082 203 772) First Respondent SOLAGRAN LTD (ACN 002 592 396) Second Respondent VAGIF SOULTANOVICH SOULTANOV Third Respondent
|
and between: | SOLAMIND PTY LTD (ACN 082 203 772) First Cross-Claimant SOLAGRAN LTD (ACN 002 592 396) Second Cross-Claimant VAGIF SOULTANOVICH SOULTANOV Third Cross-Claimant |
and: | GUN CAPITAL MANAGEMENT PTY LTD (ACN 092 221 546) First Cross-Respondent ELIAS (LEO) KHOURI Second Cross-Respondent MINING INVESTMENTS LTD Third Cross-Respondent |
JUDGE: | NORTH J |
DATE: | 21 JUNE 2013 |
PLACE: | MELBOURNE |
REASONS FOR JUDGMENT
1 The applicant, Gun Capital Management Pty Ltd (Gun), claims against all respondents compensation for misleading and deceptive conduct (the representation claim). Gun alleges that, on 7 November 2007, the third respondent, Dr Vagif Soultanov, on his behalf and on behalf of the first and second respondents as a director of each, made false representations in a telephone conversation with Mr Leo Khouri, acting on behalf of Gun. Gun claims a loss resulting from the false representations amounting to $6.5 million. This claim is brought under s 52 of the Trade Practices Act 1974 (Cth) and other statutory provisions in like terms.
2 Gun further claims against the first respondent, Solamind Pty Ltd (Solamind), the balance of $2.35 million of an original debt which amounted to $3 million (the debt claim). The debt is alleged to have resulted from an oral agreement made on 21 April 2008 between Dr Soultanov, acting on behalf of Solamind, and Mr Khouri, acting on behalf of Gun.
3 These reasons for judgment conclude that Gun has not established either the representation claim or the debt claim.
4 Although the evidence of the events of 7 November 2007 and 21 April 2008, are within a narrow compass, the resolution of the issues in the case depend on an understanding of the circumstances in which those events arose. Consequently, these reasons will first address the context in which the critical events occurred. Then they will deal in turn with the particular events relevant to each of the representation claim and the debt claim.
5 The following description of the context represents my findings of fact about those circumstances.
Dr Soultanov and bioeffectives
6 Dr Soultanov was born in the Soviet Union in 1949. He holds a PhD in organic chemistry and biochemistry. In addition, in 1982, he qualified as a medical doctor and practised in St Petersburg. In 1990, he came to Australia and was employed by the CSIRO as a scientist. His medical qualification was not recognised in Australia. However, he undertook a course in naturopathy in Australia and obtained a diploma. This enabled him to establish and operate an alternative medicine clinic. Dr Soultanov presently conducts that practice in South Melbourne.
7 From 1971, in the Soviet Union, Dr Soultanov was involved in research into the use of substances made from the needles of pine trees for human and animal therapeutic purposes. The research had a long history commencing in 1931 with Professor Salotky and Dr Agranat in St Petersburg. This research resulted in the discovery of several substances called bioeffectives, some of which are now on the market in New Zealand, Malaysia and the Emirates. It is claimed that these substances are effective antioxidants and useful in the treatment of arthritis, gastric problems, and stress. Over the last 30 odd years Professor Roschin in Russia has developed another bioeffective called Ropren for the treatment of liver and brain ailments. Ropren is the first natural pharmaceutical medicine to be registered in Russia. Dr Soultanov attends annual professional conferences in Russia and writes and speaks widely on the development of bioeffectives.
8 In 1992 Dr Soultanov began to consider ways of commercialising research into bioeffectives. The idea seems to have been to locate the intellectual property in Australia and to devise a structure which would allow money to be raised in Australia to fund the continuing research by scientists in Russia with whom Dr Soultanov had a long professional association. Thus, in 1995, Dr Soultanov started a company for this purpose with a number of interested people including Mr Denis Kilroy, about whom more will be said later.
9 In 1996, Dr Soultanov treated Mr Charles Pellegrino as a patient. Mr Pellegrino was an accountant and began to assist Dr Soultanov in relation to corporate advice relating to the commercialisation of the research into bioeffectives. In 2001 Mr Pellegrino operated the Imperial Hotel in Melbourne and knew Mr Leo Khouri because Mr Khouri had an interest in a nearby bar called Barfly. Mr Pellegrino introduced Mr Khouri to Dr Soultanov because Dr Soultanov was looking for further funding to expand research into the pharmaceuticals and he thought Mr Khouri could assist in the search for funding. In late February or early March 2002, Mr Khouri was diagnosed with cancer. He described what happened then:
The diagnosis didn’t look quite positive. There was radical radiation chemotherapy followed by a permanent colostomy bag. The cancer was colorectal cancer, and, yes, it was quite hard times.
And what involvement did Mr Soultanov have in your experience with being ill with cancer?---At the time when I first got back from Lebanon I discussed it briefly with him, and he said to me that perhaps I should come around and get checked, and I just said, “Look, I will take it up with my doctors.” After getting the full diagnosis of it, the prognosis didn’t look good. The quality of the life that I wanted was diminished by the radiation, chemotherapy, and then to carry a colostomy bag at such a young age [he was 37] I was looking for alternatives. So having the discussions that I had with Dr Soultanov about the product and the compound, I sat back and did some research and considered the option. And after the full diagnosis I actually visited Dr Soultanov’s clinic and subsequently got checked in and started some treatment over all.
Yes. So the result of all of that is you decided not to undertake chemotherapy or radiotherapy, but undertook treatment with Mr Soultanov, combined with fasting?---Yes. I fasted for about 55 days, thereabouts, basically on small amounts of juice. I weighed about 120 kilos. By the time I got to the surgery I weighed 76, so I waited about three months during the process. And it was an overall treatment. It wasn’t just one particular product. It was the mindset. It was the fasting, so you stopped your food intake. You started the shrink, so the tumour starts to shrink. And accompanied with the compound that Dr Soultanov had flown in to me from Russia, the Ropren, which is their Bioeffective R product, everything had an influence. So when I went in for the surgery I felt quite fit. The tumour, that was an advanced T3 tumour with lymph nodes into the nodes and some metastasis there, the tumour had then started to shrink. The colon started to heal, and they just took out a section of the bowel and, three months later, I was – I had a colostomy bag for about three months, and then it removed.
Now, as a result of this experience, did you have some further discussions – well, I suggest to you you had some further discussions with Dr Soultanov about the possibilities of commercialising products such as Ropren?---Because of the treatment and the fact that we became closer, I decided that I would try to do my best to assist, and did an introduction to a company called Travelshop which, at the time, was going out of its travel business and was looking at another acquisition or some type. So during that period of time with the treatment and my surgery and my recovery, I worked and assisted the group by introducing the Travelshop directors with the Solamind Solagran directors as well.
10 Travelshop Limited was a publicly listed company. Mr Khouri arranged for a takeover of this company as a vehicle for the development and commercialisation of the bioeffectives business. On 4 February 2003, the name was changed to Solagran Ltd, the second respondent (Solagran). Dr Soultanov was almost from inception, and remains, the executive chairman of Solagran.
11 Solamind was incorporated in 1998. The main shareholders were Dr Soultanov and a number of the Russian scientists involved in the research into bioeffectives. From 2003, when Solagran came on to the scene, Solamind’s primary role was to hold shares in Solagran. When Solagran started in 2003, Solamind held about 36 million ten cent fully paid shares. The issued capital of Solagran was 77 million shares. Thus, Solamind held just over 46 per cent of the issued capital of Solagran. The purpose was to allow the Russian scientists and Dr Soultanov to retain control over the intellectual property relating to the production of bioeffectives.
Mr Khouri, Gun, and the Bejjal Superannuation Fund
12 Mr Khouri was born in Lebanon in 1965 and migrated to Australia in 1967. He went to school until year 11 and left in 1982. In the next two years he undertook odd jobs including as a barman and security guard. Between 1983 and 1987 he was a store supervisor at Bonds Weaving Mills. In 1987 he married Anne Caracoudis. Between 1987 and 1995 he worked in logistics for the Commonwealth Department of Administrative Services and was retrenched in 1995. In 1996 he started a car wrecking and parts business for Toyota Landcruisers. Whilst operating that business in 1997 he began investing in the stock market.
13 In 1999, Mr Khouri established a self managed superannuation fund called Bejjal Superannuation Fund, and in 2003 incorporated Bejjal Pty Ltd (Bejjal) as trustee of the fund. The beneficiaries are Mr and Mrs Khouri.
14 In January 2000 Mr Khouri incorporated Gun which he used as his main investment vehicle. He is the sole shareholder in Gun.
Mr Khouri’s early bad experience with Tricom Equities Ltd
15 In 2002 Gun had a margin lending account with Tricom Equities Ltd (Tricom). Whilst Mr Khouri was undergoing treatment for cancer Tricom froze the Gun and Bejjal accounts. Mr Khouri regarded this as unjustified and took legal action against Tricom. The action was settled but Mr Khouri retained a sense of outrage against Tricom and, in particular, against Mr Lance Rosenberg, who apparently controlled Tricom. As a result, Mr Khouri transferred his margin lending account to a lender which was later called Opes Prime Stockbroking Limited (Opes). Mr Khouri dealt with and built up a strong relationship with Mr Laurie Emini who ran Opes.
Mr Khouri’s 5 January 2006 email
16 On 5 January 2006, Mr Khouri sent Dr Soultanov an email which provides some insight into the way Mr Khouri viewed Dr Soultanov, others involved in the administration of Solagran, and the way in which the companies were run. He wrote:
It has been a jungle out there, hard journey to date we have both had allot [sic] to contend with. During this journey and as a result of knowing you on both a friendship and work colleague I have grown to both the awareness of my surrounds and spiritually with your great guidance.
This journey started some 4 to 5 years ago now I remember our first meeting when we sat together talking about this great company which is now slogan [sic] and about what was needed I believe then I stated that I would guide you in this journey as you have guided me in my medical journey which was as I see now a test of the spirit and the will to both survive and to see destiny being complete life experiences to reach the ultimate point in existence, I believe now more than ever Vagif my friend I am getting closer however it seems that I am now finding myself now more then ever unable to get through to the people around you (it has always been a fight, and people’s emotion/positioning/greed/ego and ones own gain seems to miss lead [sic] you and misrepresent the situation so you do not get a clear picture) or whether there are other forces at work trying to prevent my input or maybe it is the way that it must be I am still trying to come to terms with it.
I am not a beginner in this game as you are not a first time healer, I believe that I am truly a master in the game of strategically building companies and regardless of what people say I do get the job done (as I am not the only patient you have treated successfully, every company I have been involved with has achieved its objectives, people like Charlie [Pellegrino] [then a director of Solagran] who want to throw remarks about ethics but sometimes should look at themselves in the mirror and apply it to themselves, and someone like [Peter] Stedwell [then a director and secretary of Solagran] who is nothing with all due respect but a washed up director with truly no home except for Solagran and the investment community has completely no respect for him out there.) It may not always be in the way people want it to be done but if it achieves the result in the end does … it matter?? If good come with pain I think it is worth it.
(Emphasis added.)
17 Mr Khouri then referred to problems in the ways the company went about seeking to raise funds and continued:
… the stock did go to the mid to high 20’s but was unable to hold these levels I believe that the board believed the company was well on its way because it made a few announcements, I knew better trying to get the message across, before options expired and try to get a few brokers to take positions and support the company many brokers that brought to in the early days as a result of the first presentation in solagran (not sure if you remember how the board room was full but I had people fly in from all states till this day no company has had brokers mass for a presentation in companies offices like we did that day all we had to do was to keep it up in that way till the options were due to be exercised which would have brought in allot [sic] of money) many sold and moved on vowing never to return.
18 Mr Khouri later referred to further unsuccessful attempts to raise money and continued:
It was then decided that we would re price the rights issue @.10 even then come time to settle Stedwell threw a spanner in the works I believe he miss represented [sic] the situation again giving (this was for his own financial gain GRUMPY TOOK SHARES @.10 SOLD BEFORE INK WAS DRY) you the wrong perception when I asked for the final numbers so we can conclude the issue he started by saying that I was playing games and was greedy he was very Wrong anyway I still completed my end of the deal and then he didn’t want to pay the Fees and Charlie went around placing stock @.10 when it was higher this was very wrong as there was a deal on the table giving the shortfall away so as you see Vagif anytime anyone could they had a shot at me.
Charlie should have been the most supportive and at times I would feel he would try many times to discredit me and question my loyalty to the company but I was not the one who TOOK (STOLE) something that DIDN’T belong to ME. I i.e. pay a debt that was owed to him from a company that he was going to do a deal with on his vineyard once again Stedwell and he showed that they couldn’t deliver and the deal failed so instead of wearing the loss himself and Stedwell they turned to Solagran to fix it costing 3 million Contributing shares. NOW IS THIS RIGHT YOU TELL ME??? And people wonder why I get angry. They may say but Leo got 2m contrib.. that is true however I used them to get the share price moving last November giving them to other investors to assist me this can be proven as usual I have the documents. This was used to get the contrib. paid up we got the share price to .35 and yes it did fall not long after that however the money came in and I did this in the best interest of the company and Charlie went around telling close friends of mine the reason for the share price falling was because I was selling but failed to state how many where brought by myself.
…
So after all of this I was still on the outer it was not until about late March/April that we had a meeting in the solagran offices and I believe the share price was about .10-12 and the company wanted to show some dignity in its share price, I think at that point I had about 4.5% of the company I was with in the limits of not announcing to the market. (lets also make something very clear here every single share or option that I own was paid for and as a result of what I had been doing for the company I have incurred a substantial tax bill) At that meeting I was asked if I knew anybody who would by [sic] shares and hold them for an extended period of time and the company would give a free option for each share purchased, nothing was agreed nor did I expect anything I proceeded to by [sic] close to 5m shares taking the shares to .20 at a cost of about $800k once again not appreciated and risking being over 5% which I am prepared to take.
…
So I leave Solagran offices very disturbed thinking what the FUCK IS GOING ON WITH THESE PEOPLE AND VERY HURT, I proceed to pull all my support out of the market you don’t mind helping but when it starts to cause you harm you must stop the bleed!!!! I then left for overseas a very dangerous job had to be done I rang you before I left to catch up but heard nothing, I started to think, and crazy things started to go through my mind. I started to think if they had someone else they wouldn’t need me if they found someone that would come in they would love to get rid of me, this is what I thought. Then towards the tail end of my trip I get a call from Adrian and to my horror I am told that the company is offering a deal of buy one get on [sic] free, this came from a reliable source and I think well they can all get lost however still not giving up I ring up Stedwell and he said there may be some deals going on I said to him you are talking to our own people you idiot. YOU SEE VAGIF THE MARKET ON THE ASX IS VERY SMALL not much goes by with out the players finding out this is what drives the market people talking to others speculation/blue sky and so on.
I get back and another meeting is called this time to try to clear things up (for a company that prides itself on respect and doing the right thing we spend allot [sic] of time playing SHERLOCK HOLMS [sic] who said what and LEO’S sold some stock ANZ SELLING AGAIN IT MUST BE LEO, the bottom line is who cares but it is not me as usual I have to provide it like a little KID EMPTY YOUR POCKETS LET’S HAVE A LOOK.
(Emphasis added.)
19 Mr Khouri then made some suggestions about how the company should proceed and recommended that it engage a solicitor, Mr Peter Landau, to give an overview and he concluded:
VAGIF MY FRIEND AND MENTOR, I NEED YOU ALSO TO TELL ME WHAT YOU REQUIRE FROM ME AS I BELIEVE I HAVE DONE EVERYTHING IN GOOD FAITH UNCONDITIONALLY, IF YOU WANT ME TO ASK FOR SOMETHING FOR DOING SOMETHING IT IS NOT WHAT I AM ABOUT AND IT SEEMS THE SOLAGRAN BOARD DOES NOT UNDERSTAND WHAT MAKES ME TICK. SO I SUGGEST YOU AND I MEET AND PUT SOME SERIOUS PLANS MOVING FORWARD.
AS FOR MY ROLE IN SOLAGRAN IT HAS ALWAYS BEEN AS A CARETAKER AND DEFENDER UNTIL SOMEONE BETTER COMES ALONG UNLESS YOU WANT ME TO DO SOMETHING ELSE.
[Capitals in original]
20 It can be seen that this email is a communication to a friend and mentor whom Mr Khouri held in high regard. The email also exhibits several characteristics which are important to consider in assessing Mr Khouri’s evidence. Mr Khouri asserts a confidence in his own ability. He also expresses a degree of contempt of others concerned in the running of Solamind and Solagran. And the email complains about the lack of appreciation by others of Mr Khouri’s ability and contribution, and of their suspicion of his commercial activities.
21 Dr Soultanov said that this was one of the two emails to which Mr Khouri asked him to reply and which led to Dr Soultanov sending his reply by the email dated 19 November 2009 which assumes significance in relation to the debt claim.
Solagran’s share price 2003 - 2007
22 Between 2003 and 2007 Solagran generated no profit. It spent funds primarily on research undertaken in Russia.
23 The share price stayed around ten cents until later in 2006. In mid 2006 it reached nearly twenty cents and by December 2006 was over thirty cents. In February 2007 it rose to forty cents and then reached fifty cents.
24 Gun invoiced Solagran for consulting and professional services for certain months in the period August 2003 to June 2006 at the rate of $1,500 per month a total of $37,950 including GST.
25 Then it invoiced Solagran for such services from August to December 2007 at the rate of $5,000 per month, a total of $27,500 including GST, and from January to July 2008 it invoiced Solagran $38,500 including GST. For these latter two periods there was a written twelve month agreement constituted by a letter dated 1 August 2007 from Solagran to Mr Khouri.
26 Apart from an email from Mr Khouri dated 10 June 2008 and referred to later in these reasons at [67] no written advice was provided by Mr Khouri in return for these payments.
27 The engagement of Mr Khouri as a consultant is relevant to his knowledge of the affairs of the companies and the likelihood that he knew that the Opes account was being operated in November 2007 to purchase Solagran shares.
Release from escrow announcement
28 On 7 March 2007, Solagran made an announcement to the Australian Securities Exchange (ASX) as follows:
7 March, 2007
Company Announcement
Release of Solamind Shares from Voluntary Escrow
The Directors of Solagran Limited are pleased to advise the market that its largest shareholder, Solamind Pty Ltd, has had its holding of 36,125,000 ordinary shares released from voluntary escrow.
Solamind is a company associated with the founders of Solagran. Its shareholders include the Russian scientists involved in the development of Bioeffectives. Its Directors are Dr Vagif Soultanov and Mr Denis Kilroy.
In June 2006, the Directors of Solamind entered into a further voluntary escrow agreement with Solagran. One of the clauses in that agreement was that it would lapse in the event that Solagran shares closed at a price above $0.50 for three consecutive ASX trading days. This occurred in February.
In late February, Solamind requested that its shares be released from escrow in accordance with the agreement. At the same time, Solamind also requested that the market be advised that it has no intention of ever selling any of its shares.
Solamind indicated that it believed the voluntary escrow no longer served the interests of either company – whereas releasing the shares from escrow would give Solamind complete freedom to act in the best interest of Solagran. This could include using its holding as security to raise debt for the purpose of purchasing additional Solagran shares – something that would not have been possible if the voluntary escrow agreement was extended.
The appropriate Appendix 3B is attached.
(Emphasis added.)
29 Mr Pellegrino practised as an accountant. He became a non executive director of Solagran on 1 April 2004. In about July 2007 he became an executive director of Solagran and was paid a salary of $8,000 per month.
30 After the Solamind shareholding in Solagran was released from escrow, Mr Pellegrino, Mr Peter Stedwell, another director, and Dr Soultanov discussed the strategy which Solamind should adopt. Mr Pellegrino and Mr Stedwell proposed to Dr Soultanov that Solamind should find a margin lending facility and then purchase Solagran shares using the existing holding as security. Dr Soultanov agreed with the concept. The idea was to keep buying in small parcels so that the price of Solagran shares would not be pushed too high. The rationale for Solamind to purchase shares was to retain control and thereby to protect Solagran from a takeover by a large pharmaceutical company and the attendant risk of the loss of the research into bioeffectives and the intellectual property held over bioeffectives by Solagran.
31 Mr Pellegrino already had a margin lending account with Opes so he approached Opes to open an account for Solamind. Opes refused because it already had a sufficient holding of Solagran shares. Despite this refusal, somehow, an account was opened by Opes. Not knowing this Solamind approached Tricom on 1 May 2007 and was accepted.
32 From 24 May 2007 to 3 August 2007 the Tricom account was used to purchase about 2 million Solagran shares. By 21 August 2007 the account was in debit in the sum of $2.347 million as a result of these purchases. Mr Pellegrino administered the purchase of shares on the Tricom account. During the period he made purchases almost daily. Many of these purchases were publicly disclosed through ASX announcements as required because they were purchases by Solamind, a company in which the directors of Solagran had interests.
33 Mr Pellegrino explained what happened in early August 2007:
I rang up one day to make another share purchase, and Mark Menzies [Solamind’s stock broker at Tricom] told me that he couldn’t make any more purchases because the account had been frozen, and I was shocked at that, and I got him to explain what – you know, what had we done wrong. The facility was quite big, and I think we still had – if we had spent 2, we still had another 6 million capacity in the margin, if you like. We hadn’t done anything wrong. He said, “No,” he says, “Just, you know, the directors are not comfortable with their exposure to the account,” and gave me some story, and I said, “Okay.” So I didn’t really believe it, but I didn’t like it, and so I called Peter Stedwell and told him what had happened, and he was also – couldn’t believe it. And I’m not sure if we then rang Mark Menzies back and got him to explain again what he thought he had done. He said, “No, it’s nothing you guys have done particularly, but the directors are uncomfortable with the exposure,” sort of language. So it was terrible because he then said that, you know, we should look to paying the facility out because they weren’t comfortable with it.
34 A meeting was held at the office of Solamind and Solagran to work out a way to deal with the freezing of Solamind’s Tricom account. At the meeting Mr Khouri rang Mr Emini from Opes and asked him to open a margin lending account for Solamind because Tricom had frozen its account. Mr Emini said he would see what he could do. In due course, Opes opened an account for Solamind.
35 The detail of what occurred at this meeting is central to the representation claim. The circumstances of the meeting will be examined separately later in these reasons. For now it is sufficient to record that Gun alleged, and Dr Soultanov denied, that Dr Soultanov said to Mr Khouri that the new Opes account would not be used to buy more Solagran shares, and only sufficient Solagran shares would be lodged to cover the existing $2.347 million liability.
Use of the Opes account 22 August 2007 – 5 March 2008
36 On 21 August 2007, Opes debited Solamind with an amount of $2.358 million needed to repay Tricom. On 23 August 2007, the whole of the Solamind shareholding in Solagran, amounting then to somewhat more than 37 million shares, was lodged as collateral in the Opes account.
37 On 28 August 2007, the first purchase of Solagran shares was made by Solamind using the Opes facility. Thereafter, the previous pattern of almost daily, modest, generally under $10,000 purchases of Solagran shares was continued. Mr Pellegrino administered these purchases.
38 There were some additional transactions beyond these regular purchases. 17 September 2007 was the day of the extraordinary general meeting of Solagran. Mr Pellegrino noticed that there was increased selling of Solagran shares. There was concern that these transactions were designed to force the price down and embarrass Solagran at the meeting. Consequently, Mr Pellegrino engaged in a series of purchases costing over $500,000 in order to support the price. It later transpired that the seller was Maggie, the company cleaning lady! She held shares which she had bought cheaply and which she sold so that she could settle a property transaction on that day.
39 There were other drawings from the account. Most of the withdrawals, amounting to more than $3 million, funded payments to Mr Pellegrino or companies associated with him. These payments supported some of Mr Pellegrino’s faltering business enterprises including a vineyard. Other drawings, in total less than $1 million, were made to or for the benefit of directors of Solamind, or people associated with them.
Gun buys and exercises 7.5 million Solagran options
40 In November 2007, Gun agreed to buy 7.5 million options in Solagran from Bejjal. The transaction arose in the following circumstances.
41 In 2004 Bejjal acquired 10 million 20 cent options in Solagran exercisable by April 2008. It paid one cent for each option, a total of $100,000. In October 2007, Solagran needed money to fund a related company, Sibex, to complete the construction of the factory which was to produce Ropren in Russia. Solagran asked Mr Khouri to exercise 7.5 million options at 20 cents each in order to bring $1.5 million into Solagran to fund the construction of the factory.
42 By October 2007, Mr and Mrs Khouri had separated. In July 2007, Mr Jerome Smith, a certified financial planner then employed by WHK Horwath, was appointed as an independent financial advisor to the Bejjal Superannuation Fund. Mr Khouri spoke to Mrs Khouri and Mr Smith about the request from Solagran. They did not wish to exercise the options but were prepared to sell them to Gun. As a result Gun agreed to buy the options from Bejjal. This was done in two transactions.
43 For the first transaction a valuation, using the Black-Scholes pricing method, was obtained on 2 November 2007 from Mr Rohan Mansfield. It valued the options at .9958 cents each, a total of $7,468,500. This sum was paid by cheque from Gun to Bejjal on 12 November 2007. The Gun Opes account shows that the options were then exercised by Gun on 3 December 2007 and $1.5 million debited against the Gun Opes account.
The 7 November 2007 phone call
44 Gun alleged that Mr Khouri phoned Dr Soultanov on 7 November 2007 and asked, in effect, whether the representation made at the meeting on 20 August 2007 by Dr Soultanov that the Solamind Opes account would not be used for the purchase of more Solagran shares, and that only sufficient shares would be deposited as security as were needed to cover the $2.358 million liability, still held true. Gun alleged that Dr Soultanov said that things were as stated in the August meeting.
45 Mr Khouri claimed that he then went ahead after 7 November 2007 with the purchase and exercise of the options in reliance on Dr Soultanov’s response. Again, the detail of this transaction will be explored separately later in these reasons as they lie at the centre of Gun’s case. The loss claimed in the representation claim was the loss which Gun incurred in relation to the purchase and exercise of these 7.5 million Solagran options.
Opes reduces the LVR on Solagran shares
46 As at 5 March 2008, the debt to Opes arising from the share purchases and other drawings had risen from $2.358 million to $9.427 million. The loan to valuation ratio (LVR) for Solagran shares on the Opes account was 35%. This meant that when the price of Solagran shares was 82 cents on 5 March 2008, and the total value of the now approximately 38 million Solagran shares was just over $31 million, the available margin was just over $11 million.
47 Towards the end of February 2008 Mr Pellegrino learned that Opes was contemplating reducing the LVR on Solagran shares to 10%.
48 Mr Pellegrino said that his reaction was “well, panic I think is the word”.
49 The consequence for Solamind would have been that its approximately 38 million shareholding in Solagran valued at approximately $31 million at 5 March 2008 would have provided security for a borrowing of $3.1 million. The actual borrowing was $9.427 million. The result of the proposed reduction of the LVR would have been an immediate margin call and a shortfall of collateral of approximately $6 million.
50 On 5 March 2008, Opes notified its clients that the LVR on Solagran shares would be revised to 10%, effective from 10 March 2007.
The response to the reduction in LVR
51 In response to the news that Opes was considering reducing the LVR on Solagran shares, at least Dr Soultanov, Mr Kilroy, Mr Pellegrino, and Mr Stedwell met with Mr Khouri. Mr Khouri gave evidence that the meeting took place in late February 2008, whereas Mr Kilroy placed this meeting in early March 2008. At the meeting, Mr Khouri phoned Mr Emini and asked for some breathing space to allow Solamind to avoid a margin call when the LVR was reduced. Mr Emini said that more collateral might be needed. Mr Khouri’s evidence was that he understood that if he put more collateral into his accounts Mr Emini would help him out.
52 Again, the detail of this meeting will be revisited as there is some contention about it. For the present it is sufficient to observe that Mr Khouri was involved in the response to the LVR reduction, and that steps were taken by him, he said, in conformity with the understanding reached with Mr Emini.
53 Mr Khouri said that the steps he took supplied the additional collateral necessary to buy Solamind more time and save Solamind from a margin call. The additional collateral required was $7.8 million. This would cover not only Solamind but also several other companies associated with Mr Pellegrino, namely Starbuck Café Pty Ltd and Medco Financial Services Pty Ltd, which had been cross collateralised with Solamind at Mr Pellegrino’s request, and another company in the Solamind group, namely Base Jumper Pty Ltd.
54 The companies which Mr Khouri operated or controlled and which had Opes accounts and assets available to be used for the additional collateral were Gun, Mining Investments Ltd (Mining Investments) and Exchange Minerals Limited (Exchange Minerals). By agreeing to allow Mr Emini access to these assets Mr Khouri immediately provided a further $5.04 million in collateral to support Solamind. The balance of the increased collateral was provided in two ways.
55 First, the debt owing by Exchange Minerals at the end of February 2008 was reduced by about $458,000 by the end of March 2008.
56 Second, Mr Khouri arranged for the lodgement of 12 million options in Greenland Minerals and Energy Limited (Greenland options). The Greenland options were lodged in the Exchange Minerals Opes account on 12 March 2008. Exchange Minerals was a company in which Mr Khouri and Mr Mick Shemasian each held a 50% interest. The Greenland options were worth about $1 each, a total of about $12 million. They had an LVR of 20% thereby adding about $2.4 million to the collateral available to support the borrowing on the Solamind Opes account.
Gun purchases remaining 2.5 million Solagran options from Bejjal
57 On 10 March 2008, Gun paid Bejjal $1.325 million for the 2.5 million balance of the 10 million 20 cent options in Solagran as had been agreed with Mrs Khouri and Mr Smith in October 2007. The options were transferred out of the Bejjal Opes account on 26 March 2008.
Opes fails and the response of Solamind
58 On 27 March 2008, administrators and receivers were appointed to Opes. The collateral lodged by borrowers with Opes was claimed by its financiers, the Australia and New Zealand Banking Group Limited (ANZ), on the basis that, once lodged as collateral, under the terms of the Opes account, the securities vested in Opes.
59 On 7 April 2008, the ANZ announced to the ASX that among the shares it acquired following the Opes failure, it held 56,129,515 Solagran shares amounting to 42.582% of the issued ordinary shares, and 10,132,865 deferred delivery shares in Solagran amounting to 21.034% of those shares. The ANZ also said that it would commence a disposal program of those shares.
60 Mr Stedwell, who was a director of Solagran, with the assistance of Mr Kilroy and Mr Pellegrino, then tried to attract friendly investors to buy back the Solagran shares from the ANZ in order to remove the ANZ from the share register and regain control of the company.
61 Mr Khouri alleged that he met with Dr Soultanov, Mr Stedwell and Mr Pellegrino on 21 April 2008, and they asked him to assist in finding people to buy back the ANZ held Solagran shares, and also to provide strategic advice to address the circumstances. Mr Khouri alleged that he eventually agreed to do so on condition that Solamind would pay $3 million. Because Solamind was not able to pay the amount immediately, it was agreed, so it was alleged, that the amount would be paid when Solamind was able to do so.
62 This meeting is central to the debt claim and will be discussed in detail later in these reasons. For the moment it is necessary to note a number of events and transactions which Mr Khouri claimed were part of the performance of the agreement to buy back the shares held by the ANZ. Those transactions and events are set out in [63] to [69] of these reasons.
Bejjal exercises 2.5 million options in Solagran
63 Gun had acquired 2.5 million 20 cent options in Solagran from Bejjal in March 2008 as the second part of the transaction involving the purchase of 10 million options. The 2.5 million options were claimed by the ANZ. They must have found their way into the Gun Opes account. The ANZ did not intend to exercise these options. Mr Stedwell asked Mr Khouri if Gun would do so. Gun was not financially able to do so but Mr Khouri asked Mr Smith, as financial advisor to Bejjal, whether Bejjal would exercise the options. The shares were trading at about 40 cents and the exercise price of the options was 20 cents. Mr Smith agreed to exercise the options. On 20 May 2008, Bejjal acquired 2.5 million Solagran shares for the exercise price of $500,000. By 29 May 2008, Bejjal had sold all the shares for a profit of about $475,000.
Bejjal buys 5 million shares in Solagran
64 Mr Stedwell asked Mr Khouri to buy back the 9 million Solagran shares which Gun held prior to the failure of Opes and 1 million unexercised options. Mr Khouri referred this request to Mr Smith and Mrs Khouri. As a result Bejjal agreed to buy 4 million shares and 1 million options. On 30 June 2008, Bejjal acquired and exercised 1 million options. It paid $200,000. On 3 July 2008, it bought 4 million shares for $1.08 million. The total holding of 5 million shares was then sold down over the period ending 21 January 2010 at a loss of $16,516.03.
Gun buys 1.69 million Solagran shares
65 Mr Khouri tried to interest another company in which he had an interest, BioProspect Ltd (BioProspect), in taking up some of the ANZ holding. When this did not work out, Gun purchased the shares still remaining with the ANZ amounting to 1.69 million shares. The shares were transferred to Gun on 1 September 2008, and were sold over the period ending 11 May 2009. The sales yielded a profit the amount of which the evidence left unclear but was either $5,557.64 or $39,357.
66 Between 22 May and 8 June 2008, Mr Khouri visited Russia with Dr Soultanov. Mr Khouri spoke with the Russian scientists who were investors in Solamind. He also claimed that he had discussions with Dr Soultanov in which he advised about strategies to remove the ANZ from the share register. Mr Khouri claimed that providing this advice was part of the performance of the 21 April 2008 agreement.
67 Part of the strategic advice, he said, was contained in an email sent on 10 June 2008, on his return to Australia, to Mr Kilroy, Mr Stedwell, Mr Pellegrino and some others. The email relevantly read as follows:
I thought I would put some thoughts on a note to all.
Since being out of Australia it has given me a lot of time to think and try to get some clarity on past events and developing my views on moving forward with the different characters in the game.
First of all I would like to thank Vagif for inviting me to Russia to be part of his extended family. It was a great pleasure to meet a lot of incredible people who have dedicated decades to the Solagran legend, these are the people that don’t deserve what has happened to them. Let me tell you, if Vagif told these people that the position is completely lost and there is no interest in the company moving forward they would still continue tirelessly for the sake of humanity. These are the true people that deserve to be reinstated.
I am writing this note to all among the group. There are those who have placed their ideals and own selfish needs above those that entrusted them with their livelihood. There are those that made certain promises about funding coming through that hasn’t materialized yet.
OPES/ANZ may have been a blessing in disguise as it provided opportunity, during a period of adversity, to perhaps re assess [sic] the way both the company and the people involved conduct business. An opportunity to develop a hierarchy in the company that is transparent in reporting, consistent and compliant. To create an environment that will not allow these circumstances to be repeated again.
I have to say that the denouncing of my involvement in Solagran was of somewhat a disappointment and hurtful considering the amount of work that I have put into the company over the years. I stand to be corrected but believe I am probably the ONE person that has placed more funds directly into the company than any other.
EGO is something that we all have and try to control. In this circumstance I believe I am more driven by recognition of my peers than anything else. The ASX announcement by Solagran made me loose [sic] some faith in probably the only company that I believe in. Now if questioned on oath, about my dealings with the company, this could compromise my very relationships with the company and the potential legal case for both. This is my legal advice.
…
I AM GOING TO MAKE SOMETHING VERY CLEAR HERE ONCE AND FOR ALL. I WOULD HAVE STOOD BY AND WATCHED THE WHOLE THING BURN AND BURN. IT WOULD HAVE DONE IF IT WAS NOT FOR MY CARE FOR VAGIF.
The embarrassment and shame would have been enough.
There was not a person in the group that would have been able to do what was needed to financially protect the position. In actual fact the position was spiralling out of control.
This is not an attack on anyone one person. This is just stating facts. I realized that all was going wrong when I had the meeting in London with Charlie. It had gone pair [sic] shaped.
68 The email continued with some ideas of Mr Khouri about the future course for the companies. He said that an independent person should be engaged to provide a strategic review. He also argued that dilution of the shareholding was not a bad thing if a large pharmaceutical company bought in because the value of the small parcels would increase to perhaps “several hundred million”. He then set out some observations about how the ANZ should be dealt with and what should be done with the proceeds of any settlement with the ANZ, that is to say, whether those proceeds should be returned to the company.
69 This email from Mr Khouri was the other email, the first being Mr Khouri’s email dated 5 January 2006, to which Dr Soultanov replied by his email dated 19 November 2009. In the email Mr Khouri makes clear his friendship towards Dr Soultanov, his resentment towards others operating the companies and his view that his contributions had not been properly appreciated.
The disposal by the ANZ of Solagran shares ends
70 On 7 August 2008 Solagran announced to the ASX that the ANZ had disposed of all of its Solagran shares.
71 On 15 October 2008 Opes went into liquidation. A class action in which Gun was one of the applicants against the ANZ was commenced on 20 October 2008. A scheme of arrangement approved by the Court and scheme creditors resolved this claim and certain other creditor’s claims affected by the collapse of Opes.
72 The scheme contemplated the payment of 37 cents in the dollar on certain creditor’s claims. An explanatory statement dated 3 July 2009 explained the scheme of arrangement. The explanatory statement set out the intention by the liquidators of Opes to pay a significant amount of the dividend payment by the end of December 2009. On 16 December 2009 an interim dividend of 30 cents in the dollar was made by the scheme administrators.
Dr Soultanov’s 19 November 2009 email
73 Gun placed central reliance in the debt claim on the following part of an email sent by Dr Soultanov to Mr Khouri on 19 November 2009:
The saga has been exhausting and to end it all I finished with Charlies help having to pay you $3m. As we discussed, I will somehow find a way, to fulfil this obligation as soon as I can. It will be honoured.
I remember our discussions regarding the 11 million or more shares you offered to use to support Solagran. You offered this in the spirit of friendship, you stated “Mick will understand” I stated that “One day when all this is done, we can sit down with Mick and I can convey my gratitude”. Even when I wished to talk directly with Mick you said “No, its ok”.
74 In fairness to Dr Soultanov, the sentence must be read in the context of the email as a whole. As it is a rather long document the full email is reproduced in appendix A to these reasons for judgment.
The meeting on 16 or 17 December 2009
75 In view of the imminent payment by the Opes scheme administrators of the first interim dividend, Mr Khouri asked to meet Dr Soultanov. Again, there is contention about this meeting which will be addressed later in these reasons for judgment. Mr Khouri said that the meeting was to ask Dr Soultanov when Solamind would pay the $3 million debt. Dr Soultanov said that Mr Khouri asked for help in the face of financial trouble.
Payment by Solamind to Mining Investments
76 By a cheque dated 22 December 2009, Solamind paid the sum of $650,000. Mr Khouri asked that the cheque be made payable to Mining Investments. He claimed that the payment was part payment of the debt of $3 million agreed by Dr Soultanov. Dr Soultanov said that it was to assist Mr Khouri out of financial trouble at the time, that there was no liability to pay the $3 million, and hence the payment was not in part payment of the alleged debt.
77 It is now necessary to examine each of the claims of Gun in the context of the surrounding circumstances just outlined.
78 The representations relied upon by Gun are pleaded in [12] of the third further amended statement of claim filed on 17 October 2011 as follows:
In or about late October or early November 2007, Soultanov, acting in his capacity as director of both Solamind and Solagran, represented to Khouri, acting in his capacity as director of Gun, that since opening the Opes EF Facility, Solamind:
12.1 had not purchased any shares in Solagran through the Opes EF Facility [Equity Financing Facility];
12.2 had not drawn down the Opes EF Facility anymore than was necessary to pay out the Tricom Debt; and
12.3 would not engage in any such conduct
(collectively Forbearance Representations).
Particulars
The Forbearance Representations were oral.
79 The case which Gun ultimately argued was that the operative representations were made in a phone call from Mr Khouri to Dr Soultanov on 7 November 2007. The allegation was that Mr Khouri asked whether the Opes account had been used to buy shares, and Dr Soultanov replied “No. Everything is as we’ve said in the August meeting.”
80 Thus, in order to understand the 7 November 2007 representations it is necessary to know what was said at the August meeting. Gun alleged that at the August meeting, in effect, Dr Soultanov gave Mr Khouri an assurance that the Opes account would not be used to buy any more Solagran shares.
81 Evidence about the meeting held on 20 August 2007 was given by Mr Khouri, Mr Pellegrino, Dr Soultanov and Mr Kilroy.
82 Evidence concerning the phone conversation on 7 November 2007 was given by Mr Khouri and Dr Soultanov. It is necessary now to consider that evidence.
The 20 August 2007 meeting
83 Mr Khouri said that Dr Soultanov came to his place in Taylors Lakes some days before the meeting of 20 August 2007 and told him that Tricom had frozen the Solamind margin lending account. Dr Soultanov asked him to come to a further meeting to discuss how to deal with the problem. Mr Khouri said of Dr Soultanov’s knowledge of how the problem had arisen “[h]e didn’t know anything; he didn’t have anything at the time”. Mr Khouri proffered his view that such an account was not necessary for Solamind as it was only required for share traders. Dr Soultanov, on the other hand, replied that it was good for directors to buy shares for market perception and also to protect Solagran from a takeover.
84 Mr Khouri said that the further meeting was held on 20 August 2007 at the office of Solagran and that Dr Soultanov, Mr Kilroy, Mr Stedwell and Mr Pellegrino were present, as well as Mr Michael McKinley, an advisor to Dr Soultanov.
85 Mr Stedwell outlined the problem. He said that he had tried to get support from the major banks but had not been successful. Mr Khouri outlined his bad experience with Tricom. He showed the meeting his Opes account portfolio statement as a way of demonstrating how such an account works. He said that there was no logic in lodging $40 million worth of shares to support a $2 million loan. Then Mr Pellegrino asked him to use his relationship with Mr Emini to secure an Opes account for Solamind. Mr Khouri responded that “[y]ou guys have to work out a way forward in financing this position other than another facility”. Mr Khouri suggested that they seek an investor to take up a shareholding in Solamind and payout the Tricom debt. Mr Khouri then explained:
Denis Kilroy said that would send a very bad message to the market, being that the directors had been buying shares; all of a sudden we have to reduce shareholdings. I said, “Well, then, the only other – ring up and find an incoming financier.”
86 Mr Khouri then rang Mr Emini who was not available. A little later he rang again on a speaker phone. Mr Khouri explained the problem to Mr Emini. Mr Emini replied that he would not have a problem bringing the Solamind account across, but would have to speak to Mr Rosenberg at Tricom. He said that ultimately it would not be a problem. Then, Mr Khouri said to Mr Emini:
“If you need any further collateral or bridging in between paying out the loan, you’ve [sic] more than welcome to use the Gun Capital account”.
87 Finally, Mr Khouri told Mr Emini that he should deal with Mr Pellegrino for all future issues concerning opening the account.
88 At the end of this apparently chronological account of the meeting Mr Khouri gave the following evidence in chief:
I turned around and said, “You’re a public listed company. The major shareholder of that company is Solamind. You’re the directors of both companies. You have an obligation to the shareholders, and you have an obligation to the company to not do these sorts of things. These things could be very nasty. This is your first experience.” So primarily because of the experience I had with Tricom, and primarily I know what these facilities can do. You know, the markets could change. So I said, “This is not going to happen again. I want an assurance.” And I said, Vagif, I hold you personally responsible because these are the shares that are for the scientists in Russia. Without these shares, without this equity, there is nothing. There is no company. There is no Solagran.” He turned around and said, “It won’t happen again, I guarantee it.” And just to be certain, I said, “I would like – when the shares come in, going by my portfolio, there’s a 25 percent LVR in there. I would like you to just lodge enough shares with enough security to cover any interest payments, and then take the rest of the security and put it to one side, so that it’s never to be used in that block.” And that was the undertaking that Vagif assured me ---
(Emphasis added.)
The 7 November 2007 phone call
89 Mr Khouri explained that on 7 November 2007, his office manager, Mr Isaac Feldman, handed him a fax from Opes which was received at 2 pm. It was a share transfer form for the purchase by Gun of the 7.5 million options from Bejjal to be signed by him. He was aware of recent ASX announcements that Solamind was buying Solagran shares. He was about to drive to the city so he told Mr Feldman to hold on to the fax until he gave him further instructions about what to do. Mr Khouri got into his car and:
I rang up Dr Saultanov [sic], and I said, “Vagif, these options are just about to go through. I’ve got to pay a substantial amount of money to the super fund that I really don’t want to do. It would be easier to take up one and a half million shares in a private placement then [sic] purchase those options that are going out to April 2008 that you’re going to get money in anyway. Either by – through Bejjal. He said, “I need the money. I don’t want to issue any more shares, and I would like you to exercise the options.” I said, “There has been some script borne [bought] of late.” I said, “Is there been any use of the Opes facility? Has there been any drawings down on the Opes facility?” He reassured me and said “No. Everything is as we’ve said in the August meeting.” 20 August meeting.
(Emphasis added.)
90 In support of this evidence, a mobile phone account record was tendered which showed a six and a half minute call to Dr Soultanov’s phone number at 2.29 pm on 7 November 2007.
91 Mr Pellegrino first recalled that Mr Khouri was very upset that Mr Pellegrino had used the Tricom account to buy Solagran shares. He was particularly critical of Mr Pellegrino. Mr Khouri said that Mr Pellegrino should know better. Mr Pellegrino said that Mr Khouri was horrified that Tricom was involved because Mr Khouri had had a very bad experience with Tricom. In cross examination Mr Pellegrino elaborated on the very strong reaction Mr Khouri had to Mr Rosenberg of Tricom. Mr Khouri indicated that Mr Rosenberg was untrustworthy and unscrupulous. Mr Khouri explained that Mr Emini of Opes was a nice person who operated in a completely different way. Mr Pellegrino then asked Mr Khouri to ring Mr Emini. Mr Emini did not say yes immediately. Then Mr Khouri showed the meeting a portfolio statement on his computer of Gun’s Opes account indicating large share and cash holdings. Mr Pellegrino said that Mr Khouri did this to assure the meeting that Mr Emini would do the right thing because Mr Khouri was a good client of Opes. Then Mr Pellegrino said:
Yes, well , then – then we got the lecture. We got the lecture from Leo of how stupid it was to borrow that much money and that, if we ever get this thing over to Opes, how I had to promise not to use any more funds and it was silly to buy shares, and if I – why wouldn’t I put the money in the company, because the company needs the money; there’s no point buying shares on market, because you’re only helping the traders and the punters, and that you’re better off, with a facility like that, having paid up the contribs or doing a placement in the company. So the company gets – so you give yourself shares exactly the same way, only the difference is the money goes into the company instead of being – going out to the marketplace, so he was giving us a lecture, basically, on that and making us promise that we would never do that again.
And what was the response from the ---?---We all nodded in agreement and, you know, said, “Of course,” you know – you know, “Just please can we get out of this issue that we’re in.”
(Emphasis added.)
92 In cross examination, the following occurred:
Now, I just wanted to say, after all that, the position sir, is this. There’s no restriction at all that you felt, when using the Opes Prime account for Solamind, in buying shares on a continuous basis after the meeting on the 20 August?---I didn’t feel restricted, no.
…
93 And in an exchange with the Court the following was said:
Was there anything said at that meeting, by anybody, that required you to limit the use of the Opes account in buying Solagran shares?---Yes. When Leo asked that we don’t buy any more shares, or use the facility other than for this purpose, we all nodded in agreement, said “Yes, Leo, of course. You know, we’ll be very careful,” etcetera, etcetera, so ---
…
Right?---Sorry. We – we all shook our heads. We all nodded in agreement, that we wouldn’t ---
…
So you nodded, and then the conversation moved on?---I think he – Leo made his point very clear, that it was a stupid thing to do.
…
What did he say?---He said, “What you should be using that facility for is to pay up your contribs, to put money into the company, so we can stand side by side, because you’re always asking me to put money into the company. So you guys need to do the same, and it’s stupid to buy money from the – buy shares from the – from the – the- the market. There’s an expression of drinking your own bathwater. There’s – there’s no way – there’s no advantage in doing that,” and – and so that was the – the vein of his conversation to us. It was very clear.
But did he make his support conditional upon you going along with that idea of his?---He saw the – he saw the gravity of the situation, and know – knew that we needed to get rid of Tricom, and so used his influence with Laurie to do that transaction, and then asked that we behave responsibly with the facility – the new facility.
Yes. That doesn’t quite answer what I’m asking?---Sorry.
Did he make his support conditional upon you not spending the Opes money---?---No, your Honour.
--- on buying Solagran shares?---No, your Honour. No. It was implied, not – not specific. So that if he’s saying – sorry, if I can just interrupt. He’s saying “I’ve helped you now. Don’t do it again.” He’s just assuming that – and we’re all saying, “Yes, okay, Leo. You’re right. We won’t do that again.” He’s just assuming that we’re not going to do it again.
(Emphasis added.)
The 20 August 2007 meeting
94 Dr Soultanov said that problem was to save the Solagran shares from being lost. He said that Mr Khouri complained that he had not been consulted about the opening of the Tricom account and that he had had a very bad experience with Tricom. He said “why you have done such a silly things … [a]nd it went on and on and on. And I said, in this case, we must – to do something to save these shares”. Then, Mr Khouri rang Mr Emini. Mr Emini said that he did not think that it would be problem to open an account. Mr Khouri then asked Mr Pellegrino to prepare the necessary papers. Mr Khouri “… opened his computer, start talking about chart – chart or something and if I use even microscope, I can’t see this chart on computer”.
95 In cross examination Dr Soultanov explained his puzzlement at the situation:
But for what purpose was Opes Prime approached?---Opes Prime approached because the facility which we had with Tricom somehow either were utilised or stopped and our shares in my mind disappeared for only 2.3 million – 36 million shares and share price was around $1. I find it’s weird.
96 Dr Soultanov said that the purpose of the opening of the Tricom account was to fund the purchase of Solagran shares but the purchases were to be limited to no more than $2 million. Also, not more than 30 per cent of the shares were to be lodged as security. In cross examination the following exchange occurred:
And when you found it was more than 30 per cent, and it was all of the shares you were shocked?---I nearly died.
97 Dr Soultanov was asked about Mr Khouri’s evidence extracted at [88] of these reasons for judgment and said:
And your Honour, if I would have had such a brilliant lecture and explanation, maybe I would have accepted until I will never touch this shares anymore. It never was communicated to me in a way how it’s written. It’s a general terms, general words, general expressions, and mainly everything was addressed to Charlie doing wrong things.
(Emphasis added.)
98 In an exchange with the Court, Dr Soultanov said:
Was there any discussion about how the new Opes Prime facility was to be used?---Sir, I never heard, at this meeting, how we need to use this facility.
You say that wasn’t discussed at all?---Not at all, how to use this facility. Idea was to help to get out from this situation, how to use this facility. At this stage, everything was unclear, what type of condition, what will happen, what to do. I didn’t know anything about it. For me was, first of all, to save life and after that approach what I need to do. I’m not a – what the name is – quick reacting person. I’m trying to take stages to understand because it’s not my area expertise unfortunately.
(Emphasis added.)
99 And, in cross examination, the following exchange occurred:
So is your evidence to his Honour that the only reason that Mr Khouri was upset was that because Mr Pellegrino had opened the account with Lance Rosenberg’s company, Tricom, rather than talking to Mr Khouri?---I personally believe yes, sir.
…
But he was angry about this, wasn’t he, that it had been a stupid thing that the company had done - - - ?---Stupid things – for me it came across, it was stupid things to put all shares with this organisation, with this person with whom he had a bad experience, for small amount facility. This, sir, I can interpret his emotional state.
The 7 November 2007 phone call
100 Dr Soultanov denied the terms of the 7 November 2007 phone call. In examination in chief the following exchange occurred:
Did you have a discussion in October or early November 2007 about not drawing down on the Opes Prime facility any more than was necessary to pay out the Tricom debt, sir?---No, I never had this discussion, never heard about it, because it never was a part of the deal or agreement.
(Emphasis added.)
101 Mr Kilroy said that there was discussion about why the Tricom account had been frozen and there was a colourful discussion where Mr Khouri gave Mr Rosenberg “an almighty spray”. Mr Khouri offered to resolve the situation by asking Mr Emini to transfer the account to Opes where Mr Khouri had most of his shares. Mr Khouri then rang Mr Emini. Mr Khouri explained the position and “they both had a bit of a go at Lance [Mr Rosenberg]”. Mr Khouri said:
“Look, and if you need it, you can have – you can lean on my Solagran stock that I’ve got lodged with you …”
102 Mr Emini said “[l]ook, it should be fine”, and it was then left to Mr Pellegrino to organise anything further. There was no discussion about the number of shares to come across or the LVRs to be applied. Mr Kilroy said that it was not a long meeting and most of the time was spent on “talking about what a four letter word was best” to describe Mr Rosenberg. Dr Soultanov then expressed great relief that the problem had been sorted out.
103 Mr Kilroy said that there was no discussion about whether the account should be used to purchase Solagran shares. That had been discussed in March 2007 when the Tricom account was opened at the suggestion of Mr Pellegrino. His proposal “was to use … the equity as collateral to raise debt to purchase more equity, which resonated for me …”.
104 In cross examination Mr Kilroy explained Mr Khouri’s position in the following exchange:
He was alarmed at the financial position into which Solamind had got itself with Tricom?---What do you mean by that? What – do you mean the fact that we had a frozen account? The answer to that is yes. The fact that we had borrowed money to buy shares? No. Not at all.
But he lectured you all on your folly in borrowing this money to buy these shares?---Not at all. Not one word of lecture.
He called Mr Emini and they had their discussion?---Correct. Yes.
And after that discussion he admonished you all not to borrow more money from Opes to buy more shares?---Sorry. No, that’s not true.
And he admonished you not to leave with Opes any more shares than were necessary to secure the refinance of the account with Tricom?---No. Not – not to my recollection.
And Dr Soultanov gave those undertakings?---Again, not to my recollection.
(Emphasis added.)
105 And later the following exchange occurred:
HIS HONOUR: Can I just take you back to the meeting concerning the transfer of accounts?---Yes.
Because as I recall Mr Khouri’s evidence, and I hope this is accurate because it was some time ago, but the impression I’m left with from that evidence was that he was horrified at the fact that the account had been used to purchase shares in Solagran, that he explained to you that this was a misconceived strategy, that he would – that he sought an assurance from Dr Soultanov that it would not continue. Does that – does any of that ring true to you?---None of it resonates at all. I mean, he certainly admonished us after the thing blew up - - -
(Emphasis added.)
The 20 August 2007 meeting
106 There was a general consistency in much of the evidence of Mr Pellegrino, Dr Soultanov and Mr Kilroy about the main matters discussed at the meeting. The primary recollection was the intense criticism levelled by Mr Khouri towards Mr Rosenberg. Then, each of them recalled Mr Khouri using his computer to show them some information, the phone call made to Mr Emini and Mr Khouri’s confidence that Mr Emini would rescue the situation.
107 None of the witnesses to the 20 August 2007 meeting, other than Mr Khouri, gave evidence that Dr Soultanov assured Mr Khouri that the Opes account would not be used to purchase Solagran shares. Dr Soultanov and Mr Kilroy said that the use of the Opes account for purchasing more shares was not raised at all, and expressly denied that Dr Soultanov made any representation to that effect.
108 Mr Pellegrino said that Mr Khouri lectured those present not to use the Opes account to buy shares. Mr Pellegrino explained the responses of those present to the suggestion that the account not be used to buy Solagran shares. One response was that they all nodded in agreement and said they would be very careful. Another response was that there was an implied agreement which led Mr Khouri to assume that those present would not use the account to purchase shares. And a third response was that they all said “yes okay Leo. You’re right. We won’t do that again”. This last response comes closest to Gun’s case. However, the passage is confused because it speaks of Mr Khouri assuming that they would not buy shares again, and the response was not limited to the action of Dr Soultanov alone as was Gun’s allegation.
109 It is now necessary to examine the reliability of the evidence of the four witnesses to the 20 August 2007 meeting because there is a direct conflict of evidence on the issue of the making of the representation.
110 Mr Kilroy is the managing director of a strategy consultant business. He graduated in mechanical engineering and holds a Master of Engineering Science in Industrial Management. He was a director of Solagran from six months after its listing until February 2009. He was a shareholder of Solamind from its inception and became a director within about 12 months of that.
111 The respondents did not initially intend to call Mr Kilroy as a witness. He was, however, called by the respondents after the Court observed that he might be able to shed some light on the issues. He made his position clear thus:
I’m not here because I’m a witness for Dr Soultanov. I have no interest in the outcome of this one way or another. I have no time for the protagonists, either side of this debate. Okay? I’m here because I’m here to serve the truth and no other reason. It has already cost me dearly to serve the truth with these people. So I’m here to serve the truth. Please understand that.
112 And later:
HIS HONOUR: Yes. Mr Kilroy, there’s one issue that I think might be of assistance to me, and it derives from what you said by way of explanation of your position as between the parties. I have the impression from what you said and from other things you have said in the course of giving evidence that you’re disenchanted equally by both sides in this litigation?---Yes. And if I were to put that in – in a succinct form, I believe this company has encountered problems, or may even fail. I hope – I hope it doesn’t. I don’t know – because I think it was a wonderful technology. But – but I think the reluctance of the chairman to adopt, or to embrace and adopt what I thought were right governance principles. What might be called the greed of Mr Khouri and the ability of Mr Pellegrino – I know he’s sitting here now – to exploit the vulnerabilities that that situation created is – is the problem.
Yes?---And I – I have – I have no interest in being here. I was – I hope I don’t offend anybody by saying this, but I was not pleased when I received the – the subpoena. I did not want to be here.
…
But it was not something I wanted to do. I hold both parties in a degree of disdain and, in fact, at times it bordered on contempt. I mean, I want nothing to do with them.
Yes?---And I have no axe to grind with either of them to a greater degree than the other, if you know what I mean.
113 Mr Kilroy gave his evidence in a careful, considered, and precise way. He had a good and clear recollection of the meeting. He was independent of the parties to the litigation. I regard him as a reliable witness who gave credible evidence.
114 An assessment of Dr Soultanov’s evidence presents particular challenges. Indeed, Gun mounted a direct and vigorous attack on his credit. Much of that attack was focused on the evidence which he gave in relation to the debt claim and more will be said on that question in that context. In relation to the evidence concerning the representation claim the following are some relevant considerations.
115 Dr Soultanov is a highly qualified, clever and capable man. He has a strong commitment to his scientific and medical endeavours. On the other hand, he demonstrated little interest in the machinations of the corporate world. He appeared to have limited knowledge of, or familiarity with, matters of corporate and commercial practice. He is not a native English speaker. Although he speaks and understands English, he clearly found it difficult at times in the atmosphere of the courtroom to convey easily what he intended. He found it confronting on occasions to deal with questions about complex share transactions or with the intricacies of the operation of margin lending accounts and corporate and commercial dealings. These factors caused Dr Soultanov to give his evidence at times in a defensive and extravagantly dismissive manner. This explains, for instance, his sometimes broad denials which later evidence showed were not intended to be as all embracing as first indicated. It is more than usually important to assess his evidence as a whole and not to apply an overly literalist approach to it. At the same time, Dr Soultanov understood the essentials of the major financial or corporate events which were critical to Solagran and Solamind. Where he had that understanding his recall of the centrally important facts was precise and clear. Mainly, he gave his evidence in an open, direct, spontaneous and unrehearsed way. Considerable effort and general appreciation of the entirety of his evidence is required to come to a proper understanding of what he intended to convey. When approached in this way I regard Dr Soultanov’s evidence as generally honest, reliable and credible. In relation to the meeting of 20 August 2007, I accept his evidence that he did not say that the Opes account would not be used to buy more Solagran shares.
116 Mr Pellegrino was another witness whose evidence exhibited some unusual features. At some times his evidence was clear and rational, and he seemed to engage with the process underway in the courtroom. This was particularly so where the issues concerned specific share or financial transactions which were part of uncontentious factual narratives. At other times, Mr Pellegrino seemed distracted and confused, and his evidence was internally inconsistent. His evidence concerning the meeting of 20 August 2007 fell into this latter category. Mr Pellegrino generally appeared to give honest evidence. However, at times he stumbled into confusion which seemed to reflect a conflict between what he wanted to say and what he thought he should say out of an allegiance to Mr Khouri. That allegiance arose from some particular circumstances.
117 Mr Pellegrino accumulated a debt to Solamind of over $3 million by using the Solamind Opes account for his own benefit. The drawings were to support failing businesses in which he was involved, principally, a vineyard. This drain on the company funds was an important part of the reason that the crisis in February 2008 was so serious when Opes was contemplating reducing the LVR in Solagran shares in Solamind’s account to 10%. Dr Soultanov was critical of Mr Pellegrino’s conduct towards the companies. Mr Pellegrino, in his evidence, took full responsibility for these actions and he was clearly sorry for his own conduct. But he left Solagran with no ongoing allegiance or loyalty to it. On the other hand, he had reason to be grateful to Mr Khouri. About the time Mr Pellegrino left his employment with Solagran he was appointed CEO of BioProspect, the company in which Mr Khouri held a significant interest. Mr Khouri also supported Mr Pellegrino financially following his departure from Solagran. He lent Mr Pellegrino $1 million which has now been repaid.
118 In cross examination the following exchange occurred:
You’ve never spoken to Mr Khouri about the evidence you would give in this case, sir?---I have, but not this year. We’ve spoken about it before.
119 Mr Pellegrino’s evidence about the meeting on 20 August 2007 amounted to a clumsy attempt to maintain an allegiance to the version of facts proposed by Mr Khouri rather than Mr Pellegrino’s personal spontaneous recollection. To the extent that it differed from the evidence of Mr Kilroy and Dr Soultanov it should not be accepted.
120 The manner in which Mr Khouri’s evidence was given, the substance of that evidence, and some further circumstances lead to the conclusion that Mr Khouri’s evidence concerning the meeting on 20 August 2007 was a reconstruction of events made, whether deliberately or not, to suit the representation claim.
121 The situation which faced Solamind when the Tricom account was frozen was an emergency. There was an imminent danger that Solamind would lose its Solagran shares because it did not have the funds to pay out the Tricom loan. Mr Kilroy, Mr Pellegrino, and Dr Soultanov all recalled that the focus of the meeting was on how discreditably Tricom and Mr Rosenberg had acted, and also on the urgent need to find an alternative financier. At the time of the meeting there was no credible reason for concern about the way the account had been operated. The ASX announcement on 7 March 2007 advised that one reason for the Solagran shares being released from escrow was to use them as security for the purchase of shares. The debt to Tricom stood at about $2 million and the collateral lodged to support the loan amounted to nearly $40 million. Mr Khouri’s version of the alleged assurance given by Dr Soultanov makes sense in hindsight knowing what occurred later when Opes advised that it intended that the LVR on Solagran shares would be reduced and knowing what occurred when Opes failed. His evidence does not reflect the probabilities in the circumstances at the time of the meeting.
122 Further, his evidence lacked the direct, frank, and spontaneous manner of the evidence given by Mr Kilroy and Dr Soultanov.
123 There are two further factors which, whilst not determinative, support the conclusion that Dr Soultanov did not assure Mr Khouri that the Opes account would not be used to buy Solagran shares. First, within days of the meeting, Mr Pellegrino used the Opes account to continue the purchase of shares in the same way as he had been using the Tricom account. Such an immediate and blatant breach of the alleged assurance supports the conclusion that the assurance probably was not given. Then, on 21 July 2010, when the solicitors for Gun sent a letter of demand to Dr Soultanov the only subject was the debt claim and no mention was made of the representation claim at all.
124 Thus, in summary, the evidence of Mr Kilroy and Dr Soultanov in relation to the question whether Dr Soultanov gave the alleged assurance at the meeting on 20 August 2007 should be preferred. I find that Dr Soultanov did not give Mr Khouri an assurance on 20 August 2007 that the Opes account would not be used to purchase Solagran shares.
The 7 November 2007 phone call
125 The proceeding was commenced on 24 August 2010. The original statement of claim and the two following amendments pleaded that the representations were made at the meeting on 20 August 2007 and confirmed in a telephone conversation in or about late November 2007.
126 The last version of the statement of claim, the third further amended statement of claim filed on 17 October 2011, pleaded that the representations were made in or about late October and early November 2007. Senior Counsel for Gun explained that the references to the events of 20 August 2007 were deleted because they were not material facts essential for the cause of action. Those events were superseded by the conversation on 7 November 2007. The assurance alleged to have been given at the meeting on 20 August 2007 was relevant to the proof of Gun’s case but not to the pleading of it. That is to say, if Mr Khouri was concerned about the use of the Opes account to purchase shares in the meeting on 20 August 2007, it was more likely that he raised the matter again when he was about to buy the options on 7 November 2007.
127 However, the events of 20 August 2007 have a more direct relevance to the representation claim. Gun relied on Dr Soultanov’s response on 7 November 2007 to Mr Khouri’s enquiry which was in the terms – “[e]verything is as we’ve said in the August meeting”. This links the representations back to what occurred at the August meeting. I have found that at the August meeting Dr Soultanov did not give an assurance that the Opes account would not be used to purchase more shares. I also now find that Dr Soultanov did not respond to Mr Khouri’s alleged enquiry by reference to a discussion on that subject at the August meeting.
128 Mr Khouri’s account of the 7 November 2007 phone call again bears signs of reconstruction. As things stood in November 2007 there was no particular reason why Mr Khouri should have enquired about the use of the Opes account to purchase Solagran shares. It was only in the light of the contemplated reduction in the LVR in Solagran shares, coupled with the failure of Opes that, in hindsight, it would have been wise to have made the enquiry in November 2007 about the use of the Opes account.
129 Mr Khouri’s reliance on the mobile phone record only establishes that he spoke to Dr Soultanov on 7 November 2007 at 2.29 pm, but does not establish what was said. And its importance as to timing is reduced because what occurred on 12 November 2007 was the transfer of options from Bejjal to Gun. In essence this was an interfamily transaction from Mr and Mrs Khouri as equal beneficiaries in the Bejjal Superannuation Fund to Mr Khouri in his capacity as sole shareholder in Gun. The exercise of the options and payment of $1.5 million to Solagran occurred much later on 3 December 2007. If anything, this latter was the event which might have sparked Mr Khouri’s enquiry of Dr Soultanov.
130 Indeed, in the original statement of claim and the two subsequent amendments, the representations were pleaded as having been made “in or about late November 2007”. (emphasis added.) This allegation was not consistent with the purchase of the 7.5 million options on 12 November 2007. The change in the pleading from an allegation that the representations were made in or about late October and early November contributes to the picture that the representation case is a reconstruction of events, whether deliberate or not, to support Gun’s case. I do not accept Mr Khouri’s evidence that the original pleading was made without access to relevant documents and was changed when he was able to consult these documents.
131 Finally, as explained in the following section of these reasons for judgment, Mr Khouri had commercial reasons for purchasing and exercising the options. Those reasons suggest that he would have been unlikely to have been concerned to enquire about the operation of the account. Market considerations made it worthwhile to undertake the transaction and they explain why it was done without any reference to an assurance from Dr Soultanov.
132 In the previous section it was concluded that the alleged representations were not made. In this section it is assumed, contrary to that finding, that the representations were made. Gun claimed that it purchased and exercised the 7.5 million Solagran options in November 2007 in reliance on the representations. Gun calculated its loss by reference to the loss of value of those Solagran shares which were seized by the ANZ when Opes failed. The present question then is whether Gun relied on the representations when purchasing and exercising the 7.5 million options. The approach to the determination of such a question was explained by the Full Court in Haros v Linfox (2012) 287 ALR 507 at [57] as follows:
The person making the claim must prove the causal connection between the misleading and deceptive conduct and the loss or damaged claimed. That is to say, that person must prove that he, she or it suffered loss and damage “by” the conduct...That causal connection is normally proved by establishing inducement by the misleading and deceptive conduct to act in a way that results in detriment to the person so acting. There are some cases in which that inducement can be the subject of an inference drawn by the court, rather than a finding of fact based on evidence.
133 For the following reasons, Gun has not established that Mr Khouri was induced to procure Gun to buy and exercise the options by the representations. Further, no inference should be drawn that Mr Khouri on behalf of Gun was induced to purchase and exercise the options by the alleged representations.
134 Mr Khouri said, following his evidence as to the making of the representations:
I felt reassured that I didn’t think Vagif would lie to me or tell me otherwise something that wasn’t true. He was a director and chairman of an Australian listed public company and he was my friend. So I didn’t think that anything like that would happen, you know, that I had any reason to doubt him after that.
…
Had the facility been disclosed that all these shares had been used in the Solagran facility using an Opes facility, well, I can you, there’s no way I would have exercised or caused anyone to buy those options and put money into the company, knowing the situation it was. Disclosure was so important, and there was none of that.
(Emphasis added.)
135 This evidence should not be accepted. It amounts to a reconstruction of events with the benefit now of the failure of Opes and the consequent loss of part of the value of at least some of the Solagran shares. On the whole of the evidence it is unlikely that the representations would have deterred Mr Khouri from the transaction. He was committed to a beneficial commercial course at the time.
136 The Solagran share price languished for some years prior to 2006 in the area of 20 cents. It climbed steeply in early 2007 reaching $1 in April and nearly $1.50 in May. It traded around $1.10 to $1.25 for the rest of the year. It was not unusual for the daily volume to reach 400,000 to 600,000 shares, but the volume regularly reached around 150,000 to 200,000.
137 At the beginning of 2007, as the price began to rise steeply, Gun held around 9 million Solagran shares. By the end of June it had sold over 6 million of them. Gun sold most of these shares into the peak of the market. When the share price was at these unprecedented high levels, on 5 July 2007, Gun exercised 2.6 million 20 cent options which it had acquired free of charge in 2004. Mr Khouri agreed that this “was a very good transaction as far as the economics is concerned”. Gun kept selling its Solagran shares throughout 2007 and disposed of another approximately 1.5 million shares during the rest of the year. Gun made millions of dollars from trading in Solagran shares in this period. The figure of $9 million came out in evidence but it is not entirely clear whether that figure was of revenue or profit on the trading. Even if it were only a revenue figure, it is clear that Gun paid relatively little for the shares and its profit would in any event have certainly exceeded $5 million or $6 million and perhaps more.
138 Gun paid Bejjal $7.4 million for the 7.5 million options and then exercised those options at 20 cents each for a total of $1.5 million paid to Solagran. On 3 December 2007, when Gun exercised the options the shares were trading at $1.18. Whilst Gun had paid $7.4 million to Bejjal for the options, that transaction was, in essence, an interfamily transaction. Mr and Mrs Khouri were the only people with interests in the Bejjal Superannuation Fund, and Mr Khouri was the sole shareholder in Gun. In terms of the Khouri family, the transaction meant that it acquired shares which were trading at $1.18 for 20 cents. As with the exercise of the 2.6 million options in July, this was a beneficial commercial transaction. Mr Khouri explained what he intended to do with the shares:
And your anticipated position was that you would sell them and take a profit on the sale, wouldn’t you?---Yes, I expected that.
Yes. So – and then you began to sell, didn’t you?---Continued with the plan that I had always had.
139 And, Mr Smith explained another aspect which Mr Khouri had mentioned to him:
Mr Smith, was it ever explained to you by Mr Khouri why the transaction was necessary or desirable from his point of view?---He saw it as an opportunity to take the – the view that Gun could do more things, I think, with taking active positions in companies such as the one in question at the moment, whereas, you know, the super fund brings with it lots of goals and objectives relating to retirement planning circumstances and priorities. So, notwithstanding that individuals can have a self-managed super fund and a business, or an investment company, the goals in one entity, being the super fund, can be totally separate and distinct, if you like, to meet those longer term requirements, and he felt that they would be better off outside that – that entity, and – and in the entity called Gun Capital Management.
140 But, importantly, Mr Khouri had a significant interest in BioProspect. It wished to develop bioeffectives for use in animal husbandry. In August 2007, BioProspect entered into a development agreement with Solagran for this purpose. Mr Khouri’s confidence in this project was a motivation for Gun to purchase and exercise the options. He explained:
[W]hy did you decide the [sic] cause Gun to buy these options from Bejjal?---Part of the reason was I had a development agreement with BioProspect and Solagran and the facility in Tomsk to get that up and running would have been a positive step. The company is moving positively. I was reasonably positive on Solagran’s future and the path it was going. We now had a facility to produce commercial quantities of the product, there was now a chance that we were going to utilise some of that product in the horse trials that we were conducting. So there was – seemed like a real business developing with the product moving forward. I was comfortable on that point of view and the fact that I was also selling down my shares, so I thought it’s just going to take a little bit longer to sell.
141 Having seen and heard Mr Khouri give evidence about the factors which were important to him in entering into the transaction to purchase and exercise the options, I find that he regarded the commercial opportunity as so valuable to Gun and Bejjal that he would have proceeded in the same way even if Dr Soultanov had told him about how the Opes facility had been used between 20 August and early November 2007.
142 It was also argued against Gun that Mr Khouri had actual knowledge that Solamind had purchased Solagran shares between August and November 2007 using the Opes account. There is force in this submission.
143 At this time Mr Khouri was being paid $5,000 per month as a financial consultant to Solagran. The share purchases were a very significant financial outlay for Solamind. It is probable in these circumstances that Mr Khouri learned of the purchases at least in fulfilment of his role as financial consultant. Additionally, the purchases were publicly announced to the ASX as they involved purchases by a company, Solamind, in which directors of Solagran held interests. Mr Khouri agreed that he saw some of the announcements but could not recall if he saw others. Again, in his capacity as financial consultant to Solagran, Mr Khouri is likely to have been aware of the purchase of Solagran shares by Solamind. Importantly, in the course of 2007, Mr Khouri had traded Solagran shares in large volumes. The Solagran holdings constituted a significant part of Gun’s wealth. It is probable that he kept a close eye on activity in the market and the factors which impacted on the value of Solagran shares. Mr Khouri did not give the impression of a person who was content to rely in his financial dealings on assurances from Dr Soultanov. Mr Khouri regarded Dr Soultanov as a friend, but also as a person with little knowledge, interest, or competence in matters of commerce or finance. Furthermore, the reason Mr Khouri had been approached in October 2007 by Mr Stedwell to exercise the 10 million options earlier than the April 2008 exercise date was to provide funds to Solagran which it did not otherwise have in order to complete the building of the factory in Russia in which production of bioeffectives was to be undertaken. That would have alerted Mr Khouri to the fact that Solamind did not have ready funds, in particular, to engage in the purchase of Solagran shares without the assistance of borrowed funds. If it were necessary to do so I would find from these circumstances, on the balance of probabilities, that Mr Khouri knew that Solamind purchased Solagran shares between August and October 2007 using funds from the Opes account. Even if the alleged representations were made, this is an additional reason why Mr Khouri did not rely on them when Gun bought the 7.5 million options from Bejjal and then exercised them.
144 Finally, it was argued against Gun that Mr Khouri agreed that the purchase of the options from Bejjal occurred before the alleged representations were made on 7 November 2007. Mr Khouri received the valuation of the options on 2 November 2007. Mr Khouri explained the circumstances in which he agreed with Mrs Khouri and Mr Smith that Gun would purchase the options as follows:
They said, “We don’t want to sell – exercise them at this stage. However, we would consider, you know, if someone came along and made us an offer, or if you want to buy them.” I said, “Well, if I want to buy them, what’s the process, Jerome [Smith]?” Jerome replied that we would have to get a Black and Scholes model to keep them at arm’s length and for compliance. Anne turned around and said, “If you’re going to buy one part of it, I want it all gone,” so I turned around and said, “Well, if that’s what it’s going to take, I don’t have a choice.” So the understanding at that point in time was I buy the whole lot and every point in time I would get a valuation.
…
we agreed that – they wouldn’t just get the valuation unless I agreed to purchase it, so the – the document represents the cost value for the seven and a half million options and what amount of money I would have to forward for it. So it was basically to keep everything that I was doing with my wife and myself and my super fund at arm’s length and make sure that I didn’t ruin the relationship any further than I already did.
(Emphasis added.)
145 On the basis of this evidence, on the balance of probabilities, I find that Bejjal and Gun were committed to the purchase of the 7.5 million options at least by 2 November 2007 before the alleged representations were made.
146 If the representations were made as alleged, then, I find that Mr Khouri, acting on behalf of Gun, did not rely on them in deciding to purchase the options and to exercise them.
147 It follows from these reasons that Gun has not established the representation claim.
148 In summary, on the balance of probabilities:
(a) the alleged representations alleged to have been made on 7 November 2007 were not made;
(b) alternatively, if the representations were made then Mr Khouri, acting on behalf of Gun, did not rely on them because:
(i) the sole reason for the purchase of the 7.5 million options was the commercial benefit to be obtained by Gun from the transaction; and/or
(ii) Mr Khouri knew that Solamind had been purchasing Solagran shares between August and November 2007 using the Opes account; and/or
(iii) the agreement by Gun to purchase the 7.5 million options from Bejjal was made before 7 November 2007 when the alleged representations were said to have been made.
149 The agreement giving rise to the debt claim was pleaded in the third further amended statement of claim as follows:
27 In or about late April 2008, Soultanov for and on behalf of Solamind entered into an agreement with Khouri for and on behalf of Gun (Share Acquisition Agreement), on the following terms:
27.1 subject to the condition at paragraph 27.2 below, Solamind would pay Gun $3 million (Gun Fee) in consideration for:
27.1.1 Gun and its nominees acquiring shares in Solagran being sold by ANZ or its subsidiaries to recoup moneys advanced by ANZ to Opes; and
27.1.2 Gun providing Solamind and Solagran with strategic corporate advice generally, as well as strategic advice with respect to reacquiring the March Solagran Shareholding [Solamind’s shareholding in Solagran as at 27 March 2008].
27.2 the Gun Fee would only become payable when:
27.2.1 Solamind’s then financial position had improved; or
27.2.2 Solamind had obtained monetary compensation for the loss of its March Solagran Shareholding, whichever happened sooner; and
27.3 upon either of the events referred to in paragraph 27.2.1 or 27.2.2 happening the entire Gun Fee would become immediately due and payable to Gun on demand.
Particulars
The agreement was oral and was made during a conversation between Soultanov and Khouri at a meeting in or about late April 2008 at Khouri’s office at The Strand, Williamstown, Victoria, at which Mr Peter Adrian Stedwell, then a director of Solagran, and Pellegrino were also present.
150 Gun’s written submissions summarised the major issues relating to the debt claim as follows:
In the meeting of 21 April 2008, Solamind engaged Gun to provide certain services in consideration of an agreement to pay $3M. Dr Soultanov denies this meeting entirely. Yet, by a letter dated 19 November 2009, he admitted the existence of the debt in unequivocal terms. Then, a few weeks later, he procured Solamind to pay $650,000 of it. This could only be because the debt was owed.
151 In this section of the reasons for judgment, the issues referred to in the submissions of Gun, namely, the 21 April 2008 meeting, Dr Soultanov’s alleged admission and the alleged part payment are discussed, as well as the conversation which occurred on Mr Pellegrino’s departure from Solagran which also bears on the making of the agreement.
The 21 April 2008 meeting
152 Evidence concerning this meeting was given by Mr Khouri, Mr Pellegrino and Dr Soultanov.
Mr Khouri’s evidence
153 Mr Khouri said that Dr Soultanov rang him and asked for a meeting. Then, Dr Soultanov, Mr Stedwell, Mr Pellegrino and perhaps Mr Kilroy came to his house in Taylors Lakes (not as pleaded, at Mr Khouri’s office in Williamstown). There was a discussion about the failure of Opes and the need for funding for Solagran. Mr Stedwell said that the company could not get funding whilst the ANZ was on the share register. He said that the company needed Mr Khouri’s help to try and get the position back. After more discussion Mr Khouri expressed unwillingness to be involved. In evidence in chief Mr Khouri described what happened then as follows:
Then Peter [Stedwell] said “What was it going to take to get you back on board?” I said “Look, for me to rectify the issues and the assets that I lodged for Exchange Minerals and for the cross-collateralisation of Mining and Gun, the cash that we had in there.” I said “Look, forget about me, but at some point in time I have to make good to these parties in the future.” I said “A minimum of $3 million.” And at that point in time Vagif got up and went off his head. He goes “This is not my problem. Charlie should be paying this.” I said “Well, I don’t need to do anything. I will just stay where I am. You guys go off on your merry way.” You know, we, sort of, just went along. Yes, it’s because – it was just nerve-wracking [sic], the whole experience. So then to finish it off they – Vagif agrees and then Peter intervenes - - -
Sorry, agrees with what?---Agrees to the $3 million payment at that meeting. And the agreement was when their position got better or when they received compensation from the – from any compensation payment from the administrator or anything left over. And, your Honour, it wasn’t like I said “Look, just write a cheque now for 3 million.” It was just when it happens, that’s a condition of me moving forward from here and doing anything for you.
(Emphasis added.)
154 As to the calculation of the $3 million, Mr Khouri gave the following evidence in chief:
Well, are you able just to explain, in summary, Mr Khouri, how it is that you got to the $3 million figure?---Well, the 3 million, in my mind, was I had to somehow replace those [Greenland] options to Mr Shemasian. And the acquisition of them in the market represented about $6 millions [sic] when ANZ sold them. So for me to replace them - - -
Sorry, just – they were $10 million market value when they went in?---Yes.
And when you say acquisition was $6 million, what do you mean?---To acquire them back in the market. When they were sold by ANZ, it was around 6 or $7 million thereabouts. So to acquire them back it was that figure. I have an interest in the options so I figured, if I could – I’m not worried about myself, but as long as Mr Shemasian gets his – some funding back out of it, I would be happy. So that was how I arrived at the figure, with - - -
(Emphasis added.)
…
But in explaining to the meeting about how you – why you said 3 million was what they should come up with, what did you say to them?---I said to them that a combination of everything that had transpired with putting the [Greenland] options in that would normally not have been in there, the cash that was still lodged in the Mining Investment account represented about a million dollars and the cash that was in Gun. So it was a combination of all. I just picked that number as a global number on all three parties that assisted, and that’s how the number came about. I didn’t know what sort of compensation we were going to get from Opes, but that was a number that I picked in relation to that, your Honour.
(Emphasis added.)
155 As to the condition of the alleged agreement which obliged Mr Khouri to provide strategic advice, first, Mr Khouri said, after giving evidence about the agreement to pay $3 million, “[a]nd I can’t recall anything else after that. I think that was the end of the meeting and - - -”.
156 But then the following exchange occurred in evidence in chief:
Yes, well, where was it left at the end of meeting?---It was left that they would be in touch with me, and I would be assisting them in strategic advice as to how the best way to capitalise the money, work on acquiring the shares, put a strategy together, and help them with further funding requirements if they needed it through the option exercise.
157 Mr Khouri also relied on an entry in his diary for 21 April 2008. The entry recorded that BioProspect had a market capitalisation of $10 million, had 487 million shares on issue, and held $4.8 million in cash. Mr Khouri said that he made the note of the cash holding during the discussion about the possible assistance which could be provided to Solagran by BioProspect.
158 Mr Khouri gave the following evidence about the location and timing of the meeting:
So do you recall when this meeting takes place?---It was early afternoon during my work day up at the offices in Taylors Lakes.
On 21 April?---Yes, your Honour.
And why do you – is there any reason you’re able to recollect that date?---I recall because we were moving some cars in the workshop and we sat outside on the veranda of the porch.
Mr Pellegrino’s evidence
159 Mr Pellegrino gave a generally similar account of the meeting as Mr Khouri on the issues to which he referred. His account was shorter than Mr Khouri’s and omitted some of the subjects which Mr Khouri covered. Evidence of the critical discussion about Mr Khouri providing assistance went as follows:
And so Peter [Stedwell] stepped in and said “Look, Leo, you know, we – we really need some assistance with this – with this buy back and we’re not going down the takeovers-panel way. We’re not going to issue more shares. This is the way we’ve decided that we’re going to save the company” and gave reasons for it. Leo said “Listen, you know, for a start, I’m down $6 million, at least, and half of that’s not even mine. It’s Mick Shemasian’s. So I want at least that back at some point”. And the chairman basically said “Listen, you know that when I’ve got that money, you will get it.”
…
How was the meeting left, then? What – how did it – what was the outcome?---Well, the meeting was left that Leo would assist us, but on the basis that he got a least compensation for part of his loss at some point. Or, you know, at least get some indication that he would get the money he had lost or the Mick Shemasian-factored loss that he owed back to Mick.
(Emphasis added.)
160 As to the calculation of the amount of $3 million, Mr Pellegrino gave evidence in chief as follows:
“At the end of the day”, he says, “I’ve lost the GGGs [Greenland options]. That’s $12 million”, he said. “Now, don’t worry about me. But I owe Mick half of that”. He said “Now, you know, we might probably get our position back to some degree from – from the ANZ if they appoint a liquidator or whatever. But I’m still down – at least half of that, I have to back to Mick Shemasian, at least half”, he said. “So I’m down ”
…
How much was that? ---Well, it worked out to be about $3 million. The GGGs [Greenland options] were worth 12 when they were put up, and Mick was half of that, but they were – somewhere along the line there was a calculation that not all of that was lost. There was going to be something come back from either a liquidation payment or something. Like, there wasn’t no value in it. There was some value there, and – but the amount that it came to was at least half of that, at least half of what was owing to Mick Shemasian.
(Emphasis added.)
161 As to the timing of the meeting, Mr Pellegrino said that it occurred “a couple of weeks after we went to the Logie-Smith Lanyon meeting” which he placed almost immediately on his return from London. That seems to have been on 1 or 2 April 2008.
162 As to the condition of the alleged agreement which obliged Mr Khouri to provide strategic advice, Mr Pellegrino gave no evidence in chief, but said in cross examination:
Right. Well, this is a meeting in which there’s some discussion about Gun providing to Solamind and Solagran strategic corporate advice generally. Do you recall that discussion?---Leo was complaining that he never received – never got the respect of even the payment. He had not been paid for months.
But you don’t recall any strategic corporate advice given by Gun to Solamind or Solagran after this period, do you?---Leo was always willing to give corporate advice.
What advice did he give?---I don’t know. It’s all sorts of things.
Well, what – like what?---You mean in relation to the ANZ bank?
No, whatever you can recall?---Well, Leo, for instance, was of the opinion that we shouldn’t buy back the shares from the ANZ bank. He was - - -
Should not?---No, he still wanted us to, you know - - -
Capital raise?---Capital raise, issue more shares, do that sort of thing, you’re still, you know, ready to help, to do that.
Dr Soultanov’s evidence
163 Dr Soultanov’s version of the central events was as follows:
… one day when we met in Taylors Lakes, Charlie took me there and first time, Leo told me, “I believe settlement is happening. You owe me 3 million.”
What did you say in response?---I said to him, “It is very interesting surprise. Why 3, not 30?
Yes?---“Because you owe me 3 million for everything what I have done to the company and Charlie can confirm.” And I said, “Charlie, are you serious about this?” He said “Nothing wrong to give him 3 million. Man did so many things to you.”
Yes?---I said, “It is very, very interesting. It is a phenomenal action to create out of blue 3 million and put on me.” For me it looked like a competition between two people. One got already, another also wants.
HIS HONOUR: When did this happen, the Taylors Lakes meeting?---It was late October your Honour.
2000 and ?---9
9?---Yes. Just before it - - -
Did Mr Khouri explain what the $3 million was for?---Well, Mr Khouri puts many things together for backing up company, helping company out, keeping LVR above, I don’t know, above certain level or something. It is, for me, all these things not realistic. It is just they right to 3 million. I just only was surprised it was pretty modest. He could have asked for 30, he could have asked for 10.
But did he explain how he arrived at the 3 million?---To me? Under no circumstances he can explain to me because he didn’t have any ground.
Did he refer to Mr Shemasian in that conversation?---He mention in conversation about backing up the company with some shares which belong to him, to his – but it was mixture. It is nice and tangible. I didn’t have any agreement, I didn’t have any paper. I didn’t have any explanation.
At the end of that conversation, did you agree to pay him the 3 million?---Never. What for?
So what was your response to him when he said 3 million?---I walked away. I was very disappointed and walked away, but I was very disappointed. I said to Charlie, “You act like a traitor.” I said to Charlie. He’s here.
What was the reason for the meeting being held?---To hear, 3 million I must pay to Leo, because we are getting 9 or 9 and a half million from settlement and he believes he is only one who save me to get this money back, like Charlie today explain it was good thing to do. Nobody told me a good thing to do, not to spend this amount of money towards the shares, which is what wasn’t necessary …
(Emphasis added.)
164 Dr Soultanov said that he did not ask Mr Khouri to write a report in June 2008 on the trip to Russia by way of providing strategic advice in accordance with the alleged agreement. He explained in cross examination as follows:
When you were in Russia, you had lots of discussion with Mr Landau and Mr Khouri about a strategy to deal with ANZ being on the Solagran register?---I had with Mr Khouri mainly, and one day Mr Landau, about so many facts and problems everything what’s between them in relation to Solagran it was mixture. My communication with Mr Khouri for days was one of the most exhausting battles. It’s nothing to do with constructively, it’s nothing to do with way forward, it’s nothing to do with profession advice, I only heard, “Your people don’t know what they are doing, you must put money in the company instead of buying back ANZ.” And everything, everything, everything. He wanted always to give me advice and I made very clear for him, it’s Peter Stedwell, Denis Kilroy, their doing, they’re talking to people, they have strategy, it’s a company strategy.
(Emphasis added.)
Dr Soultanov’s alleged admission
165 Gun relied heavily on what it argued was an admission by Dr Soultanov of the agreement. On 19 November 2009, Dr Soultanov wrote to Mr Khouri in an email:
The saga has been exhausting and to end it all I finished with Charlies help having to pay you $3m. As we discussed, I will somehow find a way, to fulfil this obligation as soon as I can. It will be honoured.
(Emphasis added.)
166 It will be recalled that the email was a response by Dr Soultanov to the emails from Mr Khouri dated 5 January 2006 and 10 June 2008. Something of the situation in which the email was written can be gleaned from its concluding paragraphs:
Throughout this journey, you agree readily to so much from different parties at different times. I am unsure if you have done anything to really protect me. This chain of events seems to have given you the opportunity to fan the flames of discontent and support Charlie. I have no problems whatsoever with the allegiance to Charlie you are now showing. However if you reflect on the facts, the history of past behaviour, levels of honesty and integrity shown, surely you would act differently?
Your sense of loyalty, truth and allegiance seem to be able to shift with such ease. You are never still Leo, always on the move in terms of strategy, story, thought or action. Sincerity, truth, integrity, these are immoveable aspects of my life and ethos, and as such are at odds with yours. Maybe it is this pivotal difference between us that is at the foundation of our current misunderstanding.
I believe you are a driven man, I respect you for your strength and survival. Yet somehow you feed off any discord or uncertainty within a business environment. Instead of taking stock, reflecting, staying true and in the stillness of the moment coming to a consensus and plan to move forward you opt to fly around in a frenzied manner like a moth in search of light. Never staying long enough in one place to satisfy yours or anyone else’s needs.
I have tried in this letter to be open and honest with what I know and what I feel. I have tried to communicate from the heart, without thinking of the final outcome or reaction. I never distanced myself from your letters Leo, I analysed them, reflected on them and finally responded to them.
If I did not have something special in my heart for you, I would not have taken the time to respond in this detailed manner. This letter to you, is for you, from a friend who knows how to be a friend.
This is full reply to your letters, comments and actions. I will not do this again, you may throw it out, dismiss it, argue, do what you will in the knowledge I have fulfilled my promise and obligation.
It has not been an easy exercise, it has taken much of my time and also the time of the person who has helped me write this in English.
Now it is done. It is for you, for your future, for your spiritual growth.
(Emphasis added.)
167 Gun contended that Dr Soultanov’s explanation of the meaning of the paragraph of the email set out in [165] of these reasons was untenable and reflected generally on his credit.
168 Part of Dr Soultanov’s explanation appears in the following exchange in cross examination:
Do you agree that anyone just reading that paragraph would draw the conclusion that you were intending to honour the obligation to pay the $3 million at the date of this letter?---I don’t believe. It was sarcastic expression.
Well, do you agree with what I’m suggesting to you, that anyone reading that paragraph would draw the conclusion that you were intending to honour the obligation to pay the $3 million?---I don’t agree with you, sir.
Why not?---Because it’s a sarcastic expression. It’s a first. And, second, these things never happened. I never agreed about anything. I never saw any agreement. I never saw any suggestion before I met with Mr Khouri in Taylors Lakes in the end of the October about the existence of my debt for three million.
So did you mean that paragraph not to be taken seriously?---It can’t be taken seriously because out of blue suddenly I became owner of three million debts on a basis of what.
Well, why did you say, “It will be honoured” in the last sentence?---It will be honoured because of full sarcasm. It will be honoured in a sense if you are capable - how I expressed yesterday - create something unusual I only can bow to this one and express my phenomenal satisfaction so-called or impression.
169 Dr Soultanov further explained his position in an exchange with the Court as follows:
How do you get - I mean, you’re a scientist. You deal in logic. And the logic of your starting point that the $3 million is cooked up, the logical next step is, “I will not pay it”. But your logic - somehow you’re trying to explain to the court, your logic is, “It’s cooked up. It’s such an extravagant claim” that you then say, “I will honour it because it’s so incredible”?---It’s - your Honour, logically doesn’t make sense how you are putting to me. But my first sentence was - is “help of Charles Pellegrino”. With help of Charles Pellegrino, they created story.
Yes?---And they presented this story to me. And my sarcasm was if people can come with such an unusual creation, I am honouring in my sentence their creativity, but not the fact of me owing money to them. It never was a fact and it never was
discussed about me owing $3 million to Mr Khouri under no circumstances. It came awkward definitely. I would have been maybe more precise in my expression. It’s a fact also. But it came how it came, unfortunately.
170 Then, further, in cross examination the following exchange occurred:
I want to suggest to you, Dr Soultanov, that the two paragraphs I’ve been drawing your attention to are very embarrassing for you in this proceeding?---Yes, I feel embarrassed. You’re right.
And you’ve just concocted this story about sarcasm to hide the fact that you’ve plainly acknowledged the obligation for Solamind to pay $3 million?---I can’t argue, it’s your point of view, sir.
Well, what do you say to that?---I said exactly how it was. I can’t add more to it, sir. I am in a court, I am honest man, I’m giving my honest answers. I recognised my mistake, I didn’t put it well how it’s supposed to be, but I know this cooked up story.
171 Dr Soultanov explained that the email was written by his assistant Ms Wiltshire in conjunction with him. He described the process in cross examination as follows:
And how did that work, did she prepare drafts of it which you reviewed?---I – usually I am participating on explanation of my view, my comment. After that she’s drafting it, after that I’m trying to check and find out to which degree it reflects to my thoughts, and after that when I’m more or less satisfied, we are moving forward.
172 The process took, on and off, between four and six months. The language of the email was Ms Wiltshire’s language. She started working for Dr Soultanov at the end of 2008 or the beginning of 2009 and was not with him when many of the events referred to occurred.
Conversation on Mr Pellegrino’s departure
173 A conversation about Mr Khouri’s claim to payment of $3 million occurred when Mr Pellegrino left the employment of Solagran on 11 November 2009. Dr Soultanov’s evidence in chief was:
I said, “By the way, before you go, you owe company money. When are you planning to pay back?” He said, “I don’t have the money.” I said, “What do you mean, you don’t have the money? But you took more than 3 million from the company. Are you planning to pay it back?” He said, “I don’t know.” I said, “Let’s assume hypothetically, are you planning to pay this money back?” “I can’t promise you anything.”
Yes?---I said, “Do you think, you took 3.2 million, Leo wants 3 million.” I said, “It’s a bad business for both of you.”
Yes?---And I said, “You helped Leo to demand 3 million from me out of blue. You took 3 million and left me with all problems and now you are leaving the company. How do you feel about it?” He said, “If you don’t like, don’t pay to him.” It was his words.
(Emphasis added.)
174 Mr Croll started work as the Chief Financial Officer of Solagran in October 2009. He was present with Dr Soultanov when Mr Pellegrino left Solagran. He relayed the relevant part of the conversation in evidence in chief thus:
Following that Dr Soultanov asked Mr Pellegrino, “Now, Charlie, what do you wish to do about the – the $3 million that you owe Solamind?” Charlie said at the time, “Well” – his first – his first response was that he didn’t believe he owed Solamind anything, given the work he had done in trading Solagran stock and, therefore, Solamind had received – would receive by the Opes Prime distribution a greater amount than it otherwise would have received. He then went on to say that he didn’t have the money in any event, and that Dr Soultanov could make him bankrupt if he wanted to. Dr Soultanov said that wasn’t his intention, and said something along the lines to Charlie that, “Well, perhaps one day, if you have the money, you will repay Solamind.” And then, you know, almost the close of the meeting – was a very short meeting – Dr Soultanov said to Charlie, “And somehow, Charlie, with your assistance, Leo believes” – Leo being Mr Khouri – “believes that I owe him $3 million.” Charlie’s response was, “If you don’t want to pay, you don’t need to pay.”
(Emphasis added.)
175 Mr Croll was an impressive witness. His recall was clear and precise, and his manner open and direct. Although employed by Solagran, there was no trace of partisanship in the evidence he gave.
176 Mr Pellegrino’s evidence was:
What did you say?---I was leaving the boardroom. It was my last day there, and I had just received a payment of $100,000 cash and 1.2 million Solagran shares, and that comment was made to me about, you know, “of course, and I’m still going to have to pay your friend Leo the 3 million.”
Dr Soultanov said that?---Yes. And I said to him, “Well, you know, you do what you want to do at the end of the day, because you always do anyway.” That’s what I said to him.
(Emphasis added.)
177 On 22 December 2009, Solamind paid $650,000 at the direction of Mr Khouri, to Mining Investments. Gun’s case is that this sum was a part payment of the $3 million debt. Dr Soultanov said that the payment arose from a separate transaction altogether.
Mr Khouri’s evidence
178 Mr Khouri gave evidence that he asked to meet and met with Dr Soultanov to ask him when he was going to make payment under the agreement following the first interim dividend soon to be paid by the Opes scheme administrators. At the meeting Dr Soultanov said “as soon as the cheque comes and the funds come, I will organise the payment”. Later in his evidence Mr Khouri described another meeting a few days later thus:
I explained to him that I needed the funding that we agreed to, and that if he could organise a payment. And he said, “Look, everything has been organised, and David Croll will be in touch with you in the next couple of days, and there will be a cheque that will be issued to you.”
179 Then, still in 2009, Mr Croll visited him at his Williamstown address. Dr Soultanov sent him to speak to Mr Khouri to get an understanding of some of the events going back to August 2007. There was discussion with Mr Croll about payment as follows:
Did he say what payment – what the amount of the cheque would be?---I recall he said somewhere in the vicinity of 650, and as it turns out, that was the payment of the cheque, but I wasn’t 100 per cent sure. He goes, “Look,” he didn’t know himself, he said, but Dr Soultanov is going to make a cheque – a substantial cheque to you, a part payment, and then the balance. He didn’t indicate – and I was a bit confused. I didn’t think it was a part payment that it was going to be, it was going to be a final payment, a full payment of the outstanding fees.
180 In cross examination Mr Khouri could not recall whether the later meeting occurred in a restaurant. He said “… my recollection is not that clear on that particular meeting”.
181 He was asked whether he described to Dr Soultanov that he was under a lot of financial pressure including associated with tax and replied:
Well, we discussed the issues that surrounded us due to all these challenges that were in front of us, but I didn’t – you know, I’ve also received some payments at that point in time through GCM [Gun], so that would have been sufficing to pay what we needed to pay. But, you know, in saying all that, we had some pressures that were around us at that time, with the days after an assessment by the Australian Tax Office – well, they’ve gone from a position to assessment of around about $11 million – 10.7 from the super fund.
182 He denied that he asked Dr Soultanov for help or that he became emotional. He said, “I asked for part of the payment of the agreement that we had struck in 21 April”.
183 On 20 December 2009 Mr Khouri emailed his office manager, Mr Feldman, saying:
Can you ring David Croll
Ph 0438733335
David is going to issue a cheque for 650K to mining investments.
Can you give him the details and organize to pick it up and have it banked.
This payment is for the help in keeping solamind out of margin call during the hard times of the market downturn.
(Emphasis added.)
184 Also on 20 December 2009, Mr Croll sent a text to Mr Khouri indicating that on Dr Soultanov’s instructions Mr Croll also needed to finalise payment of some outstanding consulting fees owing to Gun. On 21 December 2009, Mr Feldman emailed Mr Croll an invoice for the outstanding consulting fees amounting to $38,500.
Dr Soultanov’s evidence
185 Dr Soultanov’s evidence was that a meeting occurred at the Wasabi Restaurant near his clinic on the day before he left for the United States on 16 or 17 December 2009. He told what happened in evidence in chief as follows:
He – he started telling me, has a very difficult time with Taxation Office. I heard about it before, when I visited him a long, long time ago in his house on Strand and he said his financial situation is very difficult and Solamind just about to get money or got money. He knew better than me when we will get money because I am not very money-oriented person, unfortunately. And I listened to his story and he said so far he already spend closer to 680,000 for accountant, legal fees and everything, everything, and he need financial help. I said, “But, Leo, you have so many good friends, you have so many people with money, you have so many acquaintances who know how to make money, why you asking from me.” “But you are my friend, I helped you many times. I need now your help to help me.” because everyone turn their back to him. He was very pale, he was very nervous, he was very upset. He was tear-ish – even he trying to represent himself like a gladiator here, but he was tear-ish and I like it in him because I believe something human came on the surface. And I said to him, “But how come you are asking me to help you financially whilst you have so many people around you?” He said, “But, again, not many people you know when you need can help you.” I said, “True, Leo, I know. Let’s see what I can do about it.” He said, “By the way, you owe me, consultancy fee.” I said, “ Leo, I thought it was a resolved long time ago.” … I said, “I will pay this one and plus I will think what I can do to help you.”
(Emphasis added.)
186 Dr Soultanov then spoke to the major Russian shareholders in Solamind and told them that Mr Khouri needed assistance. They agreed with Dr Soultanov’s proposal to assist Mr Khouri. Dr Soultanov then told Mr Croll to pay the $650,000 which was approximately the amount of legal and other fees which Mr Khouri said he needed to pay.
187 As to the nature of the payment, Dr Soultanov said to Mr Khouri when the payment was made “[o]ne day, if you feel right obligation, maybe you will bring money back”.
188 When asked by the Court if the money was a gift he said:
Was it a gift?---No, no, no. It wasn’t gift. I don’t know how it was allocated, your Honour. Maybe it’s like loan. I don’t – I don’t recall this one. I don’t know.
189 In cross examination Dr Soultanov was asked whether the payment was a loan and he replied:
I didn’t regard it like a loan. I gave money to Leo to help him to deal his problems. But I made clear for him, “one day it will be very good for you to consider to pay it back”.
190 Dr Soultanov’s account raised the question why Dr Soultanov would help out Mr Khouri when, on his version, in October 2009, Mr Khouri had made an unjustified claim for $3 million. In an exchange with the Court, Dr Soultanov explained:
So you left the Taylors Lakes meeting angry with Mr Khouri?---Very.
Then six weeks later, he comes to you and says, “I need $650,000”. Was there any response by you to him to say, “Listen, six weeks ago you came up with this nonsense with Charlie. I’m not going to pay you a penny. I’m not going to listen to your troubles. Just get out of my life”?---Your Honour, story finished badly. After a while, Mr Khouri called me again. He can call out of … that talk about again like nothing happened. Unfortunately, it’s his strong and maybe weak side of his character. And he said, “I would like to meet and talk to you”. I said, “Leo, about what?” He said, “About my problems”. I said, “Okay. We can do it if you need my help because history of all relationship”. And we went to Wasabi and he started talking about his problems. And he - - -
But why when he approaches you and says, “I want to talk about my problems” – why wouldn’t your response have been, “You and Charlie have stabbed me in the back. I don’t want to hear about your problems or anything about you”?---But, your Honour, it was history of relationship. He many years was main shareholder. He – we established some type of relationship and we talk about many things and everything. Unfortunately, I don’t have in me such a strength to dismiss everything, to move away. I decide I must listen to person to his problem. And when through explanation of everything he mentioned three million again, this time I had bad reaction. I said to him, “Forget about three million. What you’ve done with Charlie will never will be accepted. But – but if you’re in trouble, I am more than happy to do what I can I do.”
191 Mr Croll gave evidence that he received a call from Dr Soultanov as Dr Soultanov was about to leave for the airport. Dr Soultanov said:
“I would like you to arrange for payment to – to Mr Khouri, to Leo, of $650,000. I’m helping Leo out, and this will help to neutralise matters.”
(Emphasis added.)
192 Mr Croll did not ask anything more about the transaction and thought that it was a private matter between Mr Khouri and Dr Soultanov. Mr Croll said:
Subsequently, Vagif mentioned that he – Dr Soultanov mentioned that he had met with Leo, and Leo had a lot of issues with the Tax Office, and that Leo – Leo was looking for financial assistance, that nobody else would help him, and Dr Soultanov chose to actually help him out financially with the 650.
So this was a conversation with Dr Soultanov and you?---On his return, yes.
Do you know when and where, and how it came about?---It would have – it – it came about because, following his return from the US, and following my visit to – to Leo’s house, Leo was still chasing more money, and Vagif – Dr Soultanov never, you know, considered he owed Mr Khouri $3 million at all, and he had sought to help out Mr Khouri with $650,000 from part of the proceeds from the Opes Prime administration.
(Emphasis added.)
193 Mr Smith gave evidence that Bejjal was served in November 2009 with a notice of non compliance by the Australian Tax Office (ATO). He said it was an onerous notice and came as “a very significant shock and surprise”. On or about 3 December 2007, the ATO commenced a tax audit of Bejjal. Mr Smith’s firm carried out the work in relation to the audit. In December 2009, the ATO garnisheed assets of Bejjal amounting to $10.7 million and about $500,000 worth of blue chip shares were sold to meet the garnishee.
194 Mr Smith gave his evidence by videolink away from his office. As a result he was not able to confirm whether the professional fees of his firm amounted to between $600,000 and $800,000, but said they were “a very significant sum of money”. He said “anyone asked to pay those sort of fees would be under distress”.
195 Mrs Khouri said that the tax audit was a concern for her but she had other concerns in her life. She said Bejjal had healthy funds.
Consideration
The 21 April 2008 meeting
196 Mr Khouri, Mr Pellegrino and Dr Soultanov all said that there was a meeting at which Mr Khouri made a claim for $3 million and all say that the figure requested was said to have a relation to Mr Shemasian’s loss. The essential disagreements are when the meeting occurred and whether Dr Soultanov agreed to pay the amount claimed.
197 The timing of the meeting is critical. If it occurred in October 2009 as Dr Soultanov said, then the consideration for the agreement which Mr Khouri asserted, namely, the assistance which Mr Khouri was to provide in buying back the ANZ shares in Solagran, was past consideration.
198 Mr Khouri and Mr Pellegrino placed the meeting in April 2008 before Mr Khouri took steps to regain Solagran shares from the ANZ, and they claimed that the purpose of the meeting was to seek Mr Khouri’s assistance in that exercise. Dr Soultanov said that the meeting at which the first mention of a claim for $3 million was made was in October 2009 and coincided with the imminent payment of the first interim dividend by the Opes scheme administrators.
199 Mr Khouri’s evidence as to the timing of the meeting, which is extracted at [158] of these reasons was unconvincing. When first asked to recall when the meeting occurred he replied that it was early afternoon. The date of 21 April 2008 was put to him as a leading question to which he assented. He was asked how he recalled the date. He responded that it was because he was moving some cars in the workshop and that they sat outside on the veranda. The impression which Mr Khouri gave was that he did not recall the date and that he sought to bolster his assent to the leading question by reference to several concrete incidents. Those incidents, however, provide no basis to assist his recollection of the date. They are everyday occurrences which have no link to the particular date in issue.
200 No more assistance in fixing the date of the meeting is provided by reference to Mr Khouri’s diary note of 21 April 2008. The mention of the cash reserve of BioProspect does not expressly connect the diary entry to the meeting. In view of the general unreliability of Mr Khouri’s evidence, his explanation of the connection should not be accepted. Rather it is a further example of an attempt to reconstruct events by calling in aid some apparently objective evidence of the event. As with other instances previously mentioned in these reasons for judgment, the apparently objective evidence relied upon is inadequate to serve the purpose. Indeed, the startling factor about the diary entry is that it failed to record the main alleged outcome of the meeting, namely, the obligation to pay Gun $3 million.
201 Mr Pellegrino placed the date by reference to a meeting which he attended and which occurred on this return from a trip to London. For reasons explained at [116] – [118] Mr Pellegrino’s evidence should be approached with caution.
202 On the other hand, Dr Soultanov gave a direct and spontaneous answer to the question about the date of the meeting. He placed it in October 2009. Apart from the way in which Dr Soultanov gave this evidence there are other considerations which support the conclusion that the meeting occurred in October 2009.
203 It is significant that Mr Khouri described the payment of $650,000 made in December 2009 in an email to his office manager on 20 December 2009 as “for the help in keeping solamind out of margin call during the hard times of the market downturn”. Mr Khouri did not describe the payment as being for assistance in purchasing back shares from the ANZ. And it is that latter purpose which links the meeting to April 2008, that being the time when the repurchase program was under discussion. If the payment was not for assistance in repurchasing shares from the ANZ, then there is no particular reason why the alleged agreement to pay would have occurred at the time when Solamind wanted to get the ANZ off the register.
204 The reason provided by Dr Soultanov for the meeting is more plausible. It was known to the parties that the Opes scheme administrators would pay an interim dividend of 30 cents in the dollar in December 2009. Solamind stood to receive a large cash payment from the Opes scheme administrators and, consequently, this was an opportune time for Mr Khouri to make a claim for the assistance he had given.
205 Some insight into the likely date of the meeting at which the claim for $3 million was made is provided by reference to the way in which the figure of $3 million was arrived at.
206 Both Mr Khouri and Mr Pellegrino gave evidence that the $3 million was calculated by reference to the loss which Mr Shemasian incurred as a result of the deposit of the Greenland options into the Exchange Minerals Opes account.
207 When Mr Khouri was asked directly about the method of calculation of the $3 million he said that in April 2008 the ANZ was selling the Greenland options into the market for about six or seven million dollars. Thus, $3 million was necessary in order to acquire back Mr Shemasian’s half share from the ANZ. Mr Khouri said that he did not take into account any dividend which might be paid by the Opes administrators because he did not know what amount of compensation he would receive from them.
208 This is an unlikely explanation of the way in which the $3 million was arrived at. The reason for the loss of value of the Greenland options was that they were deposited into the Opes account. There was no reason for Mr Khouri to have chosen the date in April as a moment to assess Mr Shemasian’s loss. Mr Khouri’s evidence on this matter was contrived. It was a reconstruction of events, whether deliberate or not, which suited the case of Gun.
209 The more probable position was reflected in the evidence given by Mr Khouri about the making of the agreement when his attention was not directly focused on the method of calculation of the $3 million. Then he related the payment to the compensation to be received from the Opes administrators in part of the passage extracted at [153] of these reasons for judgment. Mr Khouri said:
“the agreement was when their position got better or when they received compensation from the – from any compensation payment from the administrator or anything left over”.
210 Mr Pellegrino said at one point that the $3 million was calculated by starting with the value of Mr Shemasian’s interest in March 2008 “when they were put up”, namely, half of $12 million, amounting to $6 million. Then, Mr Pellegrino said, Mr Khouri allowed for compensation from the Opes administrators of about $3 million, leaving a resulting loss of about $3 million. The starting point of the calculation, the value of Mr Shemasian’s interest in March 2008, is more likely because it is a rational basis from which to calculate the loss which he suffered. Mr Pellegrino’s evidence to this effect on the matter was more plausible than Mr Khouri’s and should be accepted.
211 It is then unlikely that the calculation of $3 million as the amount of the loss incurred by Mr Shemasian would have been made before 3 July 2009. On the evidence this was the date of the explanatory memorandum relating to the Opes scheme of arrangement. It stated that the scheme contemplated a return of about 37 cents in the dollar. Although Mr Khouri said that the Greenland options were worth around $12 million in March 2008 and Mr Shemasian’s loss was half of that, namely, $6 million, when Opes collapsed and the ANZ was selling the options, Mr Khouri was speaking in global terms. In a footnote in the submissions of Gun, Mr Khouri’s evidence about the value of the options is compared with the Opes portfolio statement of Exchange Minerals with transactions shown up to 27 March 2008. The statement shows that 60,000 Greenland options had been sold from the 12 million deposited into the account on 12 March 2008. As at 27 March 2008, when Opes collapsed, the portfolio statement shows that there were 11.94 million options remaining valued at 85 cents each, a total of $10.149 million. Mr Shemasian was entitled to 5.97 million Greenland options worth 85 cents each at the date of the Opes failure, a total of $5.0745 million. A dividend of 37 cents in the dollar would return Mr Shemasian $1.878 million. His loss on 5.97 million Greenland options would then amount to $3.197 million. In April 2008 Mr Khouri did not know the amount of the likely dividend to be paid by the administrators of Opes. The estimate of Mr Shemasian’s loss on the Greenland options as a result of the Opes failure was only known from July 2009. This means that any discussion involving an assessment of his loss at about $3 million would have occurred after July 2009 and not in April 2008.
212 I find that the meeting at which the claim for $3 million was raised occurred in October 2009. If the consideration was, as asserted by Mr Khouri, that Gun would provide assistance and advice in relation to the buy back of the ANZ holding of Solagran shares, then the consideration was past consideration, and thus, unable to support the agreement alleged.
213 But, independently of the issue of timing and consequent lack of necessary consideration, the evidence as to the making and terms of the agreement is scant and not persuasive. I find that Gun has not established on the balance of probabilities that the agreement as alleged was made. Even accepting that the exchanges were made in a commercial environment and that commercial people may not attend to every matter of detail in commercial discussions, the evidence of the agreement was little more than a passing mention in a conversation in which Mr Khouri said that he would assist in repurchasing shares in return for the payment of $3 million when Solamind was in a position to pay. There was no discussion about the extent of the assistance to be provided. Was Mr Khouri’s obligation discharged if he bought 1,000 shares, 10,000 shares or 1 million shares? And was the assistance to be provided within a specified time period. There was no obligation to retain the shares for any stipulated time. Further, the transaction was for a very large sum for these parties. It is difficult to accept that a serious bargain involving the payment of $3 million, particularly where payment was deferred, would not be recorded or at least evidenced in writing at about the time it was made. The parties were familiar with reducing agreements to writing. By a written 12 month consultancy agreement dated August 2007 Mr Khouri was obliged to provide strategic advice to Solagran and was to be paid $5,000 per month for such advice. There was also a development agreement entered into in August 2007 between Solagran and BioProspect to evaluate and develop commercial opportunities for bioeffectives.
214 Mr Khouri’s evidence concerning his obligation to provide strategic advice was given almost as an afterthought. After giving evidence concerning payment of the $3 million he said that he could not recall anything more about the meeting. Only when further pressed did he refer to his obligation to provide advice. Mr Pellegrino’s evidence suggests that Mr Khouri was always seeking to have his views recognised and his contributions appreciated, but his evidence does not support the case that Dr Soultanov agreed that Mr Khouri would provide strategic advice in return for the payment of $3 million. Dr Soultanov’s evidence concerning discussions with Mr Khouri in Russia on the trip in May / June 2008 are consistent with Mr Pellegrino’s evidence.
215 The only written advice concerning the strategy to reacquire the ANZ holding in Solagran shares which Mr Khouri provided was by Mr Khouri’s email dated 10 June 2008 which is partly extracted at [67] of these reasons for judgment. The email addressed ideas for the future of Solamind and Solagran in the circumstances of the Opes collapse and of the ANZ holding of Solagran shares. Mr Khouri introduced the latter part of the email which addressed these matters as follows:
Well these are my views for what they are worth. I have listened to everyone and this is what I have come up with:
And then he stated:
Solagran is unique in that the participants basically don’t have the funds to purchase the shares or payout the loan at this stage.
216 The subject matter of the email was the future of Solamind and Solagran. If one of the ways in which the future was to be secured was by Gun being bound to acquire Solagran shares from the ANZ holding, this written advice would have been a natural occasion for Mr Khouri to have mentioned the fact. The lack of reference to any such obligation supports the conclusion that no such obligation existed. In addition, there is no reference in the email to the fact that the advice in the email itself was provided as part of Mr Khouri’s obligation to provide advice.
217 Further, at the time of the making of the alleged agreement to provide strategic advice, Mr Khouri was already bound by the consultancy agreement under which Mr Khouri was obliged to provide strategic advice including “in regard to fund raising”, and he was paid $5,000 per month for the period from August 2007 to July 2008 for this advice.
218 Commercial parties are entitled to reach any bargain they choose. However, in judging whether an agreement was made, a lack of commerciality of the transaction may point to a conclusion that there was no agreement. In April 2008, Mr Stedwell came up with the strategy of approaching friendly Solamind supporters to encourage them to buy back the Solagran position from the ANZ. Mr Stedwell and Mr Pellegrino were very active in pursuing this strategy. Mr Khouri was only one of a number of supporters who were approached and responded. It is improbable that Dr Soultanov would have agreed to pay such a large sum for the assistance to be provided by Mr Khouri in those circumstances and when the scope of the obligation was left so largely undefined.
Dr Soultanov’s alleged admission
219 Gun contended that Dr Soultanov’s email expressly admitted the agreement to pay $3 million and Dr Soultanov’s denial of the agreement was inconsistent with this admission. Gun further argued that there was no way of reconciling the email with Dr Soultanov’s denial with the agreement. His suggestion that the relevant words in the email were used in a sarcastic sense was contradicted by the plain meaning of the email.
220 Gun used Dr Soultanov’s email and his explanation of it as the centrepiece of an attack on Dr Soultanov’s credit as a witness. To do justice to the scope of Gun’s attack on Dr Soultanov’s credit it is appropriate to digress for a moment from the issue of the alleged admission and refer to another instance on which Gun relied to impugn the credit of Dr Soultanov as a witness.
221 In fact, this example provides an illustration of the need to read Dr Soultanov’s evidence as a whole. It also shows why the attack on Dr Soultanov’s credit was generally misplaced. The discussion should be read as a further elaboration of the same issue addressed in part in [114] – [115] of these reasons for judgment.
222 Considerable time and effort during the hearing was devoted to the details of how the Exchange Minerals Opes account was cross collateralised with the Solamind Opes account, and of the details of the transaction whereby the Greenland options came to be lodged in the Exchange Minerals Opes account to avoid a margin call on the Solamind Opes account as a result of the threatened reduction in the LVR applicable to Solagran shares.
223 Dr Soultanov gave evidence in cross examination concerning his knowledge of the events surrounding Mr Khouri arranging for the Greenland options to be made available. The cross examination began with a reference to the passage in Dr Soultanov’s email immediately following the reference to $3 million set out in the extract from the email in [165] of these reasons for judgment. That sentence stated:
I remember our discussions regarding the 11 million or more shares you offered to use to support Solagran.
224 The cross examination continued:
You are referring in that sentence to the discussions that occurred in late February 2008 at your clinic whereby Mr Khouri agreed to arrange for additional collateral to be put up to support Solamind?---It has never occurred in my clinic this type of discussion, sir.
Yesterday when you were giving evidence, you made no mention of any discussions at your clinic. Is your position to his Honour that you’re confident that no meetings occurred at your clinic in late February or early March 2008?---In my clinic we had the meeting, and at this meeting we had Leo Khouri, we had Peter Stedwell, Dennis Kilroy, Charles Pellegrino, myself, Terry Punshon. Then we discussed what has happened with change in LVR to 10 per cent.
…
Now, in this sentence where you say:
I remember our discussions –
Do you know that sentence?---Yes, sir.
Yes. You’re referring to the discussions at the clinic, I suggest?---You can suggest, but it has never happened in my clinic.
Where you refer to the “11 million or more shares”, you’re referring to the securities which have come to be known in this proceeding as the “Greenland Options”?---I never heard about this one, sir.
What do you say to his Honour you were referring to with the words “11 million or more shares” in this letter?---In this letter, I am referring to 11 or more million shares, then I heard in one of the conversations with Leo, then I asked him, “What does it mean?” He couldn’t explain to me. He said he just did it because he wanted to do it. Friends must do these things. I couldn’t understand what does it mean.
You’ve just referred to a discussion with Mr Khouri?---Yes.
When do you say that discussion occurred?---I don’t remember at all. With Leo I had so many discussions, so many statements, it’s really difficult to recall any specific things in relation to this one.
…
It’s very clear, I suggest to you, that when you say:
I remember our discussions regarding the 11 million or more shares you offered to use to support Solagran –
that you’re referring to discussions that occurred prior to the act of using those shares?---Using those shares where?
To support Solagran?---I don’t know about it. I never had knowledge about it. I never was instructed properly about it. I never asked Mr Khouri to do something to support the company, and I believe it’s a very obvious statement and position of mine.
So do you say to his Honour that “the 11 million or more shares”, is that referring to the Greenland Options?---I never mentioned Greenland, because I learnt about Greenland when I was here the first time.
(Emphasis added.)
225 In the written submissions Gun contended on this issue and in relation to Dr Soultanov’s evidence just referred to:
4.4.22 The only witness to this conversation who denied it was Dr Soultanov. Remarkably, he gave no evidence of these meetings in the course of examination-in-chief. When pressed under cross-examination, he admitted one of the meetings, though it is not clear which one. Yet he denied vehemently the conversation in which the cross-margin was discussed. He did so even though the conversation was attested to by Solamind’s own witness, Mr Kilroy, and by every other witness who had been there. In that light, Dr Soultanov’s denial reflects adversely on his credit.
[Footnotes omitted]
226 The central point made in this submission was that Dr Soultanov’s evidence could not be accepted because he denied the conversation in which the cross collateralisation was discussed at a meeting in his clinic, and that this was contrary to the evidence of the other witnesses who attended the meeting.
227 This analysis takes too limited a view of Dr Soultanov’s evidence on the matter. Dr Soultanov accepted that there was a meeting in his clinic about the reduction of the LVR. What he denied was that there was a discussion at the meeting about making the “11 or more million shares” available to prevent the Solamind Opes account going into margin call. Although Dr Soultanov did not articulate the reason for the distinction, it is obvious. The way in which the cross collateralisation was to be achieved, and the selection of the Greenland options as part of the package of securities to be used, only happened after the meeting. No other witness said that the Greenland options transaction was discussed in terms at the meeting in March 2008. There is no reason to question Dr Soultanov’s credibility by reference to the way in which he addressed this issue.
228 In the evidence extracted there is an example of the danger of taking one answer given by Dr Soultanov out of context. In the first emphasised answer, Dr Soultanov seems to deny knowledge of the cross collateralisation by use of the Greenland options. In the second emphasised answer, he appears to admit the transaction. It is only in the latter part of the passage that it becomes clear that Dr Soultanov was drawing a distinction between his knowledge about cross collateralisation on the one hand, and, his knowledge about the use of Greenland options to achieve the cross collateralisation, on the other hand. He accepted that he was told about the transaction, but not that he knew the name of the securities used.
229 Against those general observations about the proper approach to Dr Soultanov’s evidence, it is time to return to consideration of the alleged admission of the debt claim contained in Dr Soultanov’s email.
230 The first thing to notice about this admission is that it is not linked to a meeting held on 21 April 2008. It is not evidence of an admission of the alleged obligation undertaken on the day. It is, however, consistent with an agreement on that date.
231 It is necessary to take into account the paragraph which immediately follows. That paragraph stated:
I remember our discussions regarding the 11 million or more shares you offered to use to support Solagran. You offered this in the spirit of friendship, you stated “Mick will understand” I stated that “One day when all this is done, we can sit down with Mick and I can convey my gratitude”. Even when I wished to talk directly with Mick you said “No, its ok”.
232 This paragraph is a reference to the cross collateralisation of the Solamind account with the Exchange Minerals holding of Greenland options. The proximity of the two paragraphs suggests that any obligation undertaken was in return for the cross collateralisation provided through the efforts of Mr Khouri. This linkage is inconsistent with Gun’s case. Gun alleged that the $3 million was payment in return for Mr Khouri assisting through Gun and Bejjal to buy back the Solagran position held by the ANZ. Not only is this passage inconsistent with Gun’s case in that respect, but it supports the conclusion that any consideration was past consideration.
233 Even if the admission did relate to the 21 April 2008 meeting, there are other reasons why the admission was not an admission of an agreement to pay $3 million which was legally binding and enforceable.
234 Dr Soultanov’s evidence about the email was clear on one issue, namely, that he did not mean it to say that there was an agreement to pay $3 million which amounted to a legal obligation.
235 His evidence about what he did mean was not so clear. The question is whether that evidence supports a conclusion that Dr Soultanov is not a credible witness and that his denial of an agreement was false.
236 Dr Soultanov was in a difficult position when he was questioned about the email. He was aware that the language used could be read as showing that there was an agreement. He was uncomfortable giving evidence at times because he had to explain many issues of a commercial nature about which he understood little, and yet his position as executive chairman of Solagran meant that he was expected to know these things. He frankly and directly told the Court of his apprehension flowing from his self acknowledged limitations in his commercial understanding.
237 Furthermore, Dr Soultanov’s values and thought processes are not commercially oriented. He might be described, like his practice of medicine, as an alternative thinker. He places paramount importance on integrity, loyalty and selflessness. I accept from his evidence as a whole that these are genuine motivations of Dr Soultanov. His thoughts, even if expressed by a fluent English speaker, sound different, unusual, and even quirky. The limitations on his command of English made it hard for Dr Soultanov to convey his explanation of the motivation of this part of the email.
238 The sense of Dr Soultanov’s evidence about the debt claim is that Mr Khouri urged him to pay $3 million in recognition of the help given by Mr Khouri to the companies over the years but, in particular, for assistance in providing extra security when the LVR was to be reduced. Mr Pellegrino, who not long after was given employment in BioProspect, a company in which Mr Khouri had a significant interest, supported Mr Khouri’s urgings. Dr Soultanov did not believe that the payment was justified. He was angry that Mr Khouri and Mr Pellegrino had combined to urge him to make it. On the other hand, he had developed a deep friendship over years with Mr Khouri and Mr Khouri had reciprocated as a friend on many occasions with financial support and advice. Dr Soultanov recognised that Mr Khouri expected appreciation and accepted that Mr Khouri thought he should be financially rewarded for his efforts.
239 When Ms Wiltshire wrote in the email that the obligation would be honoured, those words accurately conveyed the meaning that Dr Soultanov accepted a moral obligation which stemmed from his code of loyalty and friendship that if Mr Khouri believed he should be paid Dr Soultanov should recognise this desire in Mr Khouri and respond as a friend by complying with that wish.
240 The email was a heartfelt communication to a friend. It acknowledged that Mr Khouri offered the support to Solamind in a spirit of friendship. The context of the email as a whole suggests that the obligation to pay $3 million was not a reference to a legal obligation but to a response by a friend. In the same way, the third last paragraph of the email speaks of the sending of the email as fulfilling an “obligation” to reply to Mr Khouri’s emails.
241 To read the email as referring to a non-commercial, non-legally binding willingness to pay $3 million as a response to a friend is consistent with Dr Soultanov’s way of operating. He was motivated by a sense of integrity and loyalty. He did not analyse situations in terms of legal entitlements but rather how one person should respond to another. His response on this occasion reflected his long association with Mr Khouri in which Mr Khouri regarded Dr Soultanov as a healer and a mentor. So much emerges from their email exchanges. In the same way, when Mr Pellegrino ran into trouble financing his vineyard and other business ventures, Dr Soultanov allowed him to take over $3 million from Solagran funds to support his enterprises. This was an act of support without commercial logic. When Mr Pellegrino left Solagran he still owed the debt of around $3 million. Notwithstanding this Dr Soultanov made a parting payment of $100,000 and 1.2 million shares. The reason in Dr Soultanov’s mind was:
… he worked on many years, we never paid to him, he did a lot of good things to the company, it is no question about it.
242 When questioned about the alleged admission in the email, Dr Soultanov consistently denied that he intended the email to be admission of a legally binding agreement to pay $3 million. This denial should be accepted.
243 The evidence that the paragraph in the email was written sarcastically can be explained. Dr Soultanov was aware of the danger that the words of the email could be read literally against his interest. He was embarrassed that this danger had arisen. He freely admitted that embarrassment in his evidence. He was under pressure in cross examination because he was confronted with many questions about matters of commerce and finance with which he was not familiar. He was also hampered by an imperfect command of language particularly in expressing his answers to questions. His resort to the sarcasm explanation was his way of emphasising that the agreement did not exist. This was a clumsy way of expressing his position. It was also inaccurate as a matter of English language expression. The clumsiness in expression is understandable by reference to Dr Soultanov’s situation under pressure, embarrassment, and equipped with restricted linguistic skills. I do not accept Gun’s argument that the explanation was a deliberate falsehood. It was Dr Soultanov’s way of explaining his denial of the agreement.
244 However, even if the explanation of the wording of the email was false, I am not satisfied on the balance of probabilities that Dr Soultanov’s denial of the agreement was false.
245 The reason why Dr Soultanov had come to the view by November 2009 that it would be a proper response to Mr Khouri to recognise his desire for financial and personal recognition and why Mr Khouri thought he should have that recognition might be explained by the evidence of Mr Pellegrino as follows:
[a]ll of us are actually better off for the fact that Opes Prime collapsed because the share price never recovered and the share market went down generally and, in fact, when I received those shares as I left, I sold them for 25 cents. Now, had I had my - take Solamind, for instance. If Solamind had its shares, call them 30 cents, then they would have had, given the position that was Opes Prime facility was, being $9 million debt and so on, the net value of the Solamind holding being 40 million shares at 30 cents to 12 million, minus the nine of debt, it was three but the fact remains that in actual - that what was given was nearly $10 million in cash to Solamind and that was only because the loan devalue ratios were held up at around that 90 cent value on the drop dead date and from that, everyone benefited. I benefited because otherwise I would have been in margin call, whereas I didn’t pay the 2.2 million back that I owed Opes or ANZ and, in actual fact, I received the 1.8 million eventually when all the payouts happened. So I actually - it’s as if I sold my Solagran shares for 50 cents each, when I wouldn’t have got anywhere near that and, in actual fact, the company is in suspension now, so if anyone who still has those shares or held them, they’re not looking very good but if they got cash from Opes Prime beforehand, which they - we did - you’re looking pretty good. And so by the time I had left, Dr Soultanov knew that he was going to receive near and abouts $9 million, so I don’t think he was too aggrieved by the whole circumstances, in hindsight.
246 Gun submitted, in reliance on the rule in Jones v Dunkel (1959) 101 CLR 298 (Jones v Dunkel) that the unexplained failure to call Ms Wiltshire supported an inference that her uncalled evidence would not have assisted Solamind’s case that the admission in the email was meant sarcastically.
247 Ms Wiltshire could not have given admissible evidence as to Dr Soultanov’s intentions. She could have given evidence about discussions with him concerning his intended meaning because she was composing the email on his instructions.
248 It is not clear from the evidence that such a discussion occurred. The only basis is the following exchange in which Dr Soultanov does not give a responsive answer:
Did you discuss with Ms Wiltshire that you only intended this paragraph to be meant sarcastically? --- She knows it 100 per cent because she said to me, “It doesn’t come across very well in English”. I said I believe Leo will understand what do I mean.
249 If this exchange is regarded as implicitly accepting that there was such a discussion, it is necessary to examine the operation of the rule in Jones v Dunkel in relation to evidence about the discussion.
250 It is true, as submitted by Gun, that the failure to call Ms Wiltshire supports the inference that Dr Soultanov did not have a discussion in which he said that the admission was meant sarcastically. However, the rule in Jones v Dunkel does not compel that an inference unfavourable to Dr Soultanov must be drawn. In relation to a like submission Hill J in Flack v Chairperson, National Crime Authority (1997) 80 FCR 137 said at 149:
There is nothing in Jones v Dunkel, or for that matter the numerous cases which have followed or applied it, which supports so wide a proposition. It may well be the case that where two inferences are equally open one favourable and one unfavourable, and the evidence of the witness might confirm one inference, that the failure of that witness to give evidence would lead to the conclusion that the other inference should be drawn. That may follow from the proposition that it can be assumed that the evidence of the witness who fails to give evidence would not support the witness' case. But except in a case where the inferences are equally open, each case will involve the Court weighing up all the relevant evidence to determine whether an inference should be drawn. Put another way, I do not think that Jones v Dunkel will ever lead to the conclusion that where there are competing inferences one inference will, in all cases, of necessity have to be accepted by the Court where the inference to be drawn does not depend upon evidence which the non-participating witness might give, or even where it might, if other evidence justifies the drawing of the inference.
(Emphasis added.)
251 The same point was explained in Morley v Australian Securities and Investments Commission (2010) 274 ALR 205 at [634] as follows:
The first matter was the familiar, although often misunderstood, Jones v Dunkel reasoning from a party’s unexplained failure to call a witness the party would be expected to call. The fact-finding tribunal may infer that the evidence of the absent witness would not assist the case of that party, or it may draw with greater confidence an inference unfavourable to that party. There is no compulsion to reason in either way. The reasoning cannot make up for absence of proof: before there can be greater confidence in an inference unfavourable to a party, the inference must already be available on the evidence. Conversely, if the party’s case is otherwise proved, the inference that the absent witness would not assist the party’s case does not detract from the proof.
(Emphasis added.)
252 In the present case there was evidence which I accept which proved what Dr Soultanov meant by the expression used in the email. Any inference from the failure to call Ms Wiltshire does not detract from that proof.
Conversation on Mr Pellegrino’s departure
253 The evidence of Dr Soultanov and Mr Croll concerning the conversation on Mr Pellegrino’s departure from Solagran supports the view that Mr Pellegrino did not regard the claim by Mr Khouri as arising from a legal obligation. Mr Pellegrino’s oral evidence is open to that view but is not as clear. To the extent that it suggests that Mr Pellegrino regarded the obligation to pay $3 million as legally binding it should not be accepted.
The payment of $650,000
254 The alleged part payment of $650,000 does not assist with the establishment of the date of the claim for $3 million. Alone, it is consistent with either an obligation undertaken on 21 April 2008 or an obligation entered into in October 2009. I have found that Dr Soultanov did not agree to pay the $3 million on 21 April 2008. Rather, Mr Khouri raised the issue for the first time in October 2009. The alleged consideration, namely, Mr Khouri’s assistance in buying back the Solagran shares held by the ANZ, was past consideration. In view of these findings, even if the payment of $650,000 was a part payment of the $3 million, it was a part payment of a promise which was not legally binding because it was not supported by consideration.
255 However, Gun faced a further obstacle in relation to the alleged part payment. Dr Soultanov said that the payment was not a part payment of the $3 million but a payment arising from separate and distinct circumstances. He said that the request in December was a plea for help from an erstwhile friend in distress. This request was quite separate from what Dr Soultanov regarded as the unjustified claim made in October.
256 Even though Gun and Bejjal were also to receive substantial amounts by way of an interim dividend from the Opes administrators, and there was fleeting mention in Mr Khouri’s evidence that Gun lent Mr Pellegrino one million dollars in December 2009, I find that Mr Khouri felt under financial stress as a result of the audit by the ATO, the associated bill for professional costs, and the garnishee by the ATO against the Bejjal Super Fund. Mrs Khouri’s evidence that the funds of Bejjal were healthy was in general terms. Mr Khouri’s evidence was specific and came from a greater familiarity with the financial affairs of the Khouri family. Mr Smith’s evidence provides some support for the high level of financial stress being experienced by Mr Khouri. Then, the amount of the support given by Dr Soultanov reflected the amount of the liability for the professional costs which Mr Khouri had to pay at the time. In these circumstances, I find that it is probable that Mr Khouri needed help in a difficult financial situation and asked Dr Soultanov to assist.
257 The provision of assistance was consistent with the way Dr Soultanov operated. He was concerned to help out a person with whom he had long association and with whom he had shared positive experiences. His way of thinking was entirely non commercial. In this transaction he was not motivated by commercial considerations. This is demonstrated by Dr Soultanov’s description of the nature of the transaction. He explained that the payment was not a gift and was not a loan, but a payment which Mr Khouri may regard it as right to repay in due course. He did not know how it was allocated in the books of Solamind. Although Gun relied on this factor to call into question Dr Soultanov’s evidence, the point was a weak one because there was no evidence that an asset of $3 million was recorded in Gun’s own books of account.
258 Gun argued that Dr Soultanov’s evidence about the meeting held on about 17 December 2009 was false, and Gun relied on a number of specific criticisms. It contended that Dr Soultanov changed his story about what occurred at the meeting. In examination in chief he said nothing about Mr Khouri mentioning the claim to $3 million, but in response to a question from the Court in the course of cross examination, Dr Soultanov said:
And when through explanation of everything he mentioned three million again, this time I had bad reaction. I said to him, “Forget about three million. What you’ve done with Charlie will never will be accepted. But - but if you’re in trouble, I am more than happy to do what I can I do.”
259 The full context of this remark can be seen in the passage extracted at [190] of these reasons for judgment. The criticism is not soundly based. The examination in chief focused on the payment of the $650,000. Reference to Mr Khouri’s mention of the $3 million was tangential to the evidence being given at that point. On the other hand, Dr Soultanov’s response to the Court was from a direct enquiry about the relationship between the payment of $650,000 and the claim to $3 million. Whilst the mention of the claim to $3 million was an unimportant detail on the first occasion, it was the very point of the exchange on the later occasion.
260 Then, Gun submitted as further evidence of the falsity of Dr Soultanov’s evidence on the issue, that Dr Soultanov gave differing justifications for the payment of the $650,000. Gun’s written submissions stated at [4.3.3(d)]:
In the course of cross-examination, Dr Soultanov’s description of the justification for the payment then shifted to a payment to end the relationship with Mr Khouri by settling all financial dealings between them. A donation towards Mr Khouri’s accountancy and legal fees of $680,000 is one thing. A payment to settle a claim for $3M or a “relationship” with Mr Khouri is quite another.
261 This submission seeks to build on an answer given by Dr Soultanov in response to a question from the Court in the following exchange:
So he mentioned the three million at the Wasabi restaurant?---In the end of the conversation, after I said, “I will try to help you”. He - I said, “It’s nothing to do with three million. It’s my personal help to you to finalise all my relationship with you”. It’s exactly how we finished, sir.
262 A series of questions in cross examination suggested that the finalisation was a reference to the discharge of an obligation to pay the $3 million. At the end of the questioning Dr Soultanov made his position clear as follows:
Do you now say to his Honour that you said to Mr Khouri at the Wasabi Restaurant that if a payment was made that would clear all the debts between you?---Not debts; it’s finalise all my relationship with him.
263 The meaning of this evidence read in context and as a whole does not support the contention that the payment was to finalise the payment of the $3 million. Rather Dr Soultanov regarded the assistance as marking the end of the personal relationship between them. This evidence was not a shift in Dr Soultanov’s position about the reason for the payment. His evidence was that the reason for the payment was to help out a person to whom he had been close and who was in difficulty. At the same time Dr Soultanov recognised that the relationship was over. Dr Soultanov put it more clearly when he related part of the conversation with Mr Khouri at another point in the cross examination:
I said to him, “I will help you. Take into consideration all our history and relationship, and we’re finished. We’re finished.”
264 Gun also argued that the fact that the payment of $650,000 was made to Mining Investments supported its case. This was a company in which Mr Shemasian had an interest. Gun argued that the destination of the payment demonstrated that the payment of $650,000 was part payment of the $3 million because that sum was calculated as the loss incurred by Mr Shemasian on the Greenland options.
265 The evidence established that Mr Khouri asked that the cheque for $650,000 be made out to Mining Investments. Dr Soultanov responded to this request. Mr Khouri did not explain the reason for the request. The destination of the payment in these circumstances does not assist in proof of an agreement because the alleged agreement was to make a payment to Gun. It had no legal obligation to pass on the payment to Mr Shemasian. Further, a payment to Mining Investments would not necessarily flow even indirectly, to Mr Shemasian. Mr Khouri explained the shareholding in Mineral Investments as follows:
Mining Investments was owned 40 per cent by Mr Shemasian. Another colleague of his owned 20 per cent. I owned 20 per cent directly and my lawyer at the time – well, my lawyer, Toufic Rahi, who is a – my Lebanese lawyer was a shareholder as well as a director, co-director.
Furthermore, the Greenland options had been provided, not by Mining Investments, but by Exchange Minerals.
266 In relation to the important question whether Dr Soultanov made the payment as an assistance to Mr Khouri rather than in discharge of a legal obligation, Mr Croll’s evidence supported Dr Soultanov’s version of events. As in his earlier evidence, Mr Croll impressed me as a reliable witness.
267 Again on this issue, Dr Soultanov gave his evidence spontaneously and directly and without apparent calculation. His account of the meeting of about 17 December 2009, and the payment of $650,000 given by Dr Soultanov should be accepted. Mr Khouri’s account, on the other hand, was sparse and reflected elements of contrivance.
268 There are some features of the performance of the alleged agreement which confirm the view that there was no binding obligation on Gun to repurchase the ANZ holding of Solagran shares or to provide strategic advice.
269 I accept Dr Soultanov’s evidence that when Dr Soultanov and Mr Khouri discussed the affairs of Solagran and Solamind in Russia, Mr Khouri was not discharging a legal obligation to provide strategic advice but rather aggrandising himself by denigrating Mr Pellegrino, Mr Stedwell and the other people operating the companies. The terms of Mr Khouri’s email of 10 June 2008 also support this view. Although the email asserts that it was not a personal attack on the people running the companies, that is what it was. Mr Khouri sought recognition for his own contribution to the companies, and personally criticised others involved in the operation of the companies. Mr Khouri added some ideas about the future of the companies which reiterated his well known attitudes about the way the companies should be operated. The email was a continuation of Mr Khouri’s consistent conduct of personal attack on others and search for recognition for what he regarded was his significant contributions to the companies. The same approach can be seen as far back as in his 2006 email. By June 2008, Mr Stedwell had formulated a strategy to respond to the Opes failure. The plan was to approach friends of Solamind to persuade them to buy back the ANZ holdings. That strategy was formulated whilst Mr Khouri and Dr Soultanov were in Russia. It was reported to them but devised by others. By the time of the email the strategy had been formulated, was in place, and was being executed by Mr Stedwell and Mr Pellegrino. The email does not evidence the discharge of an obligation by Mr Khouri to provide strategic advice. Reliance on the email was a construct upon which Mr Khouri sought to bolster his case for the payment of the $3 million.
270 Further, the share transactions upon which Gun relied as resulting from performance of the agreement are explained by other more probable reasons. The three transactions which Mr Khouri said were undertaken in return for the agreement to pay $3 million were transactions of commercial benefit to Mr Khouri and his companies. I find that he did not enter into those transactions as part of an obligation to do so but rather solely for his own commercial reasons. The purchase by Bejjal of the balance of 2.5 million options yielded an immediate profit of about $475,000. When Mr Smith was asked for the reason Bejjal bought back into the market after earlier disposing of Solagran shares, he said, “[y]es, I think the reasoning, as I recall it, was that there was an opportunity”.
271 Of course Mr Smith was not speaking for Gun. However, there is some significance in the fact that his response related to the commercial advantage of the transaction rather than to any promise by Gun to procure the purchase of the Solagran shares by Bejjal.
272 The other two transactions were together profitable although to a lesser degree. Also, the purchases benefited Mr Khouri beyond the immediate financial return. They secured control back to Solamind and its friends. This was important to Mr Khouri in order to protect his investment in BioProspect, and to further the development agreement project about which he was positive. The fact that Mr Khouri undertook these transactions does not assist in proving that there was an obligation on Mr Khouri to buy back the position from the ANZ.
Conclusion
273 It follows from these reasons that, Gun has not established the alleged agreement by Dr Soultanov to pay $3 million to Gun.
274 Further, in summary, I find on the balance of probabilities that:
(a) (i) a claim to payment of $3 million was first made by Mr Khouri in October 2009 in anticipation of the first interim dividend payable by the Opes administrators;
(ii) Mr Khouri asked for the $3 million for his efforts in providing additional security in March 2008 to prevent a margin call on the Solamind Opes account and related accounts when Opes intended to reduce the LVR on Solagran shares to 10 per cent;
(iii) At the October 2009 meeting, Dr Soultanov rejected the claim;
(iv) If, which is not accepted, Dr Soultanov agreed to pay the $3 million at this time, the consideration was past consideration and hence legally unable to support an agreement to pay the $3 million;
(b) By the time of Dr Soultanov’s 19 November 2009 email the friendship between Dr Soultanov and Mr Khouri had come to an end. The email was a stocktake of the years of their friendship. Dr Soultanov intended then to make the payment as an act of decency in recognition of the past relationship, but not as a legal obligation; and
(c) The payment of $650,000 was separate from the claim to $3 million. It was a payment made by Dr Soultanov to an erstwhile friend in financial distress. It was not a part payment of the claim to $3 million.
275 Solagran and Solamind filed a cross claim against Gun and Mr Khouri alleging various causes of action including negligence and misleading and deceptive conduct arising from Mr Khouri’s role as a financial consultant in relation to the opening of the Opes account, and they also made claims for the repayment of $650,000 paid to Mining Investments.
276 In final submissions, senior counsel for Solagran and Solamind explained that the Solagran shares had been suspended from trading and consequently, so it was said, it was not possible to ascertain any amount of loss and damage arising from the causes of action pleaded in the cross claim. The matter was not further elaborated but should be regarded as, in effect, an abandonment of the cross claim.
Conclusion
277 It follows from these reasons that the claim and cross claim should be dismissed.
278 The parties agreed that the question of costs should be determined following the handing down of these reasons for judgment. Thus, the question of costs will be reserved and listed for hearing on a date to be fixed.
I certify that the preceding two hundred and seventy-eight (278) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North. |
Associate:
APPENDIX 1
