FEDERAL COURT OF AUSTRALIA
Carey v Freehills [2013] FCA 954
| IN THE FEDERAL COURT OF AUSTRALIA | |
| (ACCORDING TO ATTACHED SCHEDULE) Cross-Claimants | |
| AND: | First Cross-Respondent AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Second Cross-Respondent |
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. The cross-claim, as amended on 17 October 2011, be dismissed.
2. The parties file and serve any written submissions (not exceeding 3 pages) on or before 7 October 2013 in respect of costs, failing which the cross-claimants pay the first cross-respondent’s costs of and incidental to that cross-claim.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 485 of 2008 |
| BETWEEN: | NORMAN PHILLIP CAREY & ORS (ACCORDING TO ATTACHED SCHEDULE) Cross-Claimants |
| AND: | FREEHILLS First Cross-Respondent AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Second Cross-Respondent |
| JUDGE: | KENNY J |
| DATE: | 20 SEPTEMBER 2013 |
| PLACE: | MELBOURNE |
TABLE OF CONTENTS
REASONS FOR JUDGMENT
1 At the commencement of the trial in this proceeding, the cross-claimants pursued claims against the Australian Securities and Investment Commission (‘ASIC’) as well as against Freehills. In the course of the trial, the cross-claimants and ASIC settled the matter as between them and, in consequence, orders were made by consent on 9 December 2011 dismissing the cross-claim against ASIC, with costs fixed in the sum of $75,000.
2 The cross-claim against Freehills remained, which, for the reasons stated hereafter, I would now dismiss.
3 Norman Phillip Carey, who is the first cross-claimant in this matter, founded the Westpoint Group of companies (‘the Westpoint Group’) in 1985. In these reasons, I refer to Mr Carey and the other cross-claimants as ‘the Carey parties’.
4 Until November 2005, the Westpoint Group was involved in the business of property development around Australia. The companies in the Group were linked through Mr Carey; and, as senior counsel for Mr Carey (Mr I D Martindale) observed, came to be known as the Westpoint Group “through usage rather than from the structural relationship of the companies”. The class of companies identified as part of the Westpoint Group for the purposes of the cross-claim was more confined than those generally referred to as constituting the Westpoint Group.
5 Mr Carey was not an honest and reliable witness. Given my findings with respect to the alleged presentation at the Westpoint Group’s offices in April 1998, I conclude that Mr Carey fabricated this evidence to support his case. The provenance of the presentation documents that Mr Carey produced to give verisimilitude to his account of the presentation was doubtful. More generally, Mr Carey’s evidence led me to conclude that, in the main, his evidence was either reconstructed with little and in many instances no independent recollection and/or that it was recently invented. Thus, for example, Mr Carey claimed that he could recall the April 1998 meeting clearly but was unable to recall other meetings at more proximate dates. In cross-examination, Mr Carey gave evidence about meetings with Mr Shearwood that were not mentioned in his earlier-prepared affidavit and/or were not corroborated by any contemporaneous documents. Furthermore, Mr Carey was frequently evasive in cross-examination, providing lengthy non-responsive answers or answers that were not warranted by the relevant question.
6 In giving evidence, Mr Carey was apparently motivated by a desire to blame Mr Shearwood for the financial collapse of the Westpoint Group. In evidence-in-chief, Mr Carey made statements about Mr Shearwood’s involvement in events even though, as his cross-examination made clear, he had no first-hand knowledge about the matter. His evidence that Freehills prepared the Paragon Apartments prospectus was one such example.
7 I have concluded that Mr Carey’s evidence was inherently unreliable.
8 Freehills (now Herbert Smith Freehills and, at an earlier date, Freehill Hollingdale & Page) was and remains a relatively large and well-known firm of solicitors. In these reasons I refer to the firm as ‘Freehills’. As Freehills, the firm acted for companies in the Westpoint Group from, relevantly, 1997. Andrew Shearwood was a partner of Freehills in Perth. He acted for some companies in the Westpoint Group and his role in this regard was central to the cross-claim against the firm. I refer to Mr Shearwood below.
9 Simon Jasper Bell became a chartered accountant in 1990. From 1990 until about mid 1997, Mr Bell worked for the London branch of KPMG and, later on, stockbroking and securities firms in Perth. Prior to joining a Westpoint Group company, Mr Bell had no experience in funds management.
10 In mid 1997, Mr Bell contracted with a company in the Westpoint Group to manage the syndication of a project (referred to below as the Tea Tree Plus Project). He was given the title of “General Manager Syndications”. Twelve months later, Mr Bell became an employee of a company in the Westpoint Group. In or about 1998, Mr Bell was appointed Director of Finance & Operations of the Funds Management Division (‘FMD’) within the Westpoint Group. In his capacity as Director of Finance & Operations, Mr Bell deposed that he reported to Mr Beck for funds management operations; to Mr Rundle (Group Financial Controller) for finance matters; and to Mr Carey, in respect of development project matters.
11 Between January 1998 and April 2000, Mr Bell was also a director of numerous companies in the Westpoint Group: namely, Westpoint Management Ltd (15 January 1998 – 19 April 2000); Bayview Mezzanine Pty Ltd (21 January 2000 – 19 April 2000); Cinema City Mezzanine Pty Ltd (26 November 1998 – 19 April 2000); Market Street Mezzanine Ltd (27 January 2000 – 19 April 2000); 297 Murray Street Pty Ltd (30 June 1999 – 19 April 2000); Mount Street Mezzanine Pty Ltd (8 June 1999 – 19 April 2000); and York Street Mezzanine Pty Ltd (‘York Street Mezzanine’) (26 November 1999 – 19 April 2000).
12 As between Mr Bell and Mr Carey, I have preferred the evidence of Mr Bell. I would not find Mr Bell a dishonest witness, although, as will be seen, he was an unreliable witness on some important matters. Mr Bell’s evidence indicated that he gave evidence on the basis of reconstructing what he believed was likely to have happened and was not speaking from direct recollection. Mr Bell’s actual recollection about many matters was poor. The following exchange occurred in cross-examination:
OK. Is it fair to say, after all these years, what you’ve drawn on are various facts and reconstructed it, as best you can, as to what you believe occurred? --- Based on the other documents we have looked at previously, and through the recollections at the time we put together what I believe are the facts that occurred at the time.
Mr Bell was not assisted by having kept any contemporaneous detailed written record. Thus, for example, after giving evidence about a conversation with Mr Shearwood on 6 September 1999, Mr Bell said that, other than the conversations recorded by Mr Shearwood, he had no specific recollection of any other conversations or communications about promissory notes between himself and Mr Shearwood between 6 September 1999 and 17 January 2000.
13 As between the evidence of Mr Bell and Mr Shearwood, I have preferred the evidence of Mr Shearwood. After hearing their evidence, I was left with the impression that Mr Shearwood’s recollection of the pertinent events, which was corroborated by his detailed and careful records, was much better than that of Mr Bell.
14 Graeme Rundle became a chartered accountant in 1987. Mr Rundle deposed that he was the Chief Financial Controller (‘CFC’) of the Westpoint Group from April 1997 to January 2006. Prior to working for the Group, he worked at Challenge Bank in various management positions and for the Taxation Consulting Division of Coopers & Lybrand. Relevantly, at Challenge Bank his work over the period 1990 to 1996 included handling the provision of senior debt funding to property development projects.
15 According to Mr Bell, Mr Bell reported to Mr Rundle in relation to matters of finance in his role as Director of Finance & Operations of the FMD. The FMD handled the syndication and asset management of the Westpoint Group.
16 Mr Rundle recollection of some pertinent matters was poor and he was not assisted by any detailed contemporaneous written record. His evidence was sometimes vague and his answers were, at times, evasive or apparently self-serving. Mr Rundle was not a reliable witness.
17 As between the evidence of Mr Rundle and Mr Shearwood, I have preferred the evidence of Mr Shearwood.
18 Richard Beck joined the Westpoint Group in or about 1998 as Managing Director of the FMD. Mr Beck did not give evidence.
19 By June 2000, Brian Thomas assumed Mr Bell’s role as “General Manager, Syndications” in the FMD. Mr Thomas did not give evidence.
20 Gregory John Nairn was a chartered accountant, who deposed that he had been an audit partner of PriceWaterhouseCoopers from July 1987 until March 2003. He joined the Westpoint Group in October 2003 as “General Manager – Special Projects” and, in April 2004, became a full-time employee in the same role. In July 2005, his title changed to “General Manager – Financial Accounting”. He ordinarily reported to Mr Rundle, as CFC.
21 I mention him here because he was part of the Westpoint Group personnel, who gave evidence at trial. As will be seen, however, I have not found it necessary to mention his evidence a great deal in these reasons.
22 Mr Shearwood was a solicitor with many years experience in the areas of corporate law and financial services, including corporate compliance. He became a partner of Freehills when that firm became a single national firm on 1 July 2000, having previously been a partner of Freehill Hollingdale & Page and, since 1 July 1986, a partner of Parker and Parker (a firm which ultimately became Freehills). He deposed that he had specific experience in the establishment and operation of various kinds of managed investment schemes, including those with investments in regional shopping centres and commercial property. In addition, he listed his experience as including the regulation of the financial services industry, the listing of companies on the Australian Stock Exchange (‘ASX’), capital raising activities by companies and managed investment schemes, and the acquisition and sale of a wide range of businesses and assets. In 2010 and 2011, the Best Lawyers peer review survey named Mr Shearwood as one of Australia’s best equity capital markets lawyers.
23 Mr Shearwood first became involved with Westpoint Corporation Pty Ltd (‘WPC’) in December 1997, when he acted for it on the Tea Tree Plus Project (discussed in more detail below). Over the period 1997 to 2000 he acted for WPC and Westpoint Management Limited (‘WPM’) in numerous matters.
24 Mr Shearwood was an impressive witness. He was honest and reliable. He had kept detailed and comprehensive contemporaneous written records of his work for the companies in the Westpoint Group. His evidence was given conscientiously, with a view to giving a truthful account about what he could recall. This meant that he conceded the limits of his recollection when appropriate to do so, but gave clear evidence as to what he could in fact recollect. I have generally accepted his evidence.
Brief overview of the circumstances in which the cross-claim is made
25 The Carey parties’ case was that mezzanine companies in the Westpoint Group issued promissory notes as part of their business strategy in reliance on Mr Shearwood’s advice. In particular, the Carey parties submitted that the Court should infer that, had Mr Shearwood: (1) not suggested to Mr Bell on 6 September 1999 that mezzanine finance might be raised via the issue of promissory notes; and (2) advised that the proposed issue of promissory notes would result in interests in a managed investment scheme (‘MIS’), then no company in the Westpoint Group would have proceeded to issue promissory notes as it subsequently did.
26 In opening, Mr Martindale SC stated the Carey parties’ case as follows:
[I]n late 1999, Mr Simon Bell of Westpoint asked Mr Shearwood … what alternatives there were to raising funds via a prospectus and in particular, for the purpose of raising mezzanine finance from the public for project development funding. And this request by Mr Bell was motivated not by any desire to avoid prospectus level disclosure, but out of a desire to speed up the fundraising process. Mr Shearwood advised that the promissory notes [with] the face value of at least $50,000, did not require a prospectus to be issued and were not otherwise regulated by the corporations [law] – that is to say the latest chapters for corporations law dealing with the licensed dealers selling the product would not apply and that to issue promissory notes having such a face value, the only relevant regulation was the fair trading laws such as the Trade Practices Act.
[O]n the basis of that advice, Westpoint proceeded to establish a number of mezzanine companies that issue[d] promissory notes pursuant to information memoranda and …the information memoranda were not providing disclosure prospectus level of detail. …Westpoint commenced almost immediately after obtaining the advice to issue promissory notes and over time raised a considerable volume of money … raising some $160 million by about July 2005 …
27 Some eleven mezzanine companies were ultimately established. The first in February 2000 was, so Mr Martindale said in opening, “for the purpose of the first information memorandum that was also put into circulation in February 2000 to raise $10.5 million for Bayview’s Port Melbourne development project and by May 2000, had already raised something of the order of $6 million”. This statement, as appears hereafter, was not entirely correct.
28 ASIC became concerned about the activities of the Westpoint Group at the end of May 2000 and wrote to one of the companies in the Group querying its use of promissory notes for mezzanine fundraising. Freehills replied on the company’s behalf; and, on 23 August 2000, ASIC sent a “no action letter”, as it was described in the evidence at trial, confirming that subject to any additional information coming to its attention, ASIC intended to take no further action in respect of the matter.
29 Over two years later, in September 2002, ASIC wrote to a second Wespoint Group company asking it to explain why its promissory notes were not interests in a MIS. Freehills again replied on the company’s behalf by letter dated 16 October 2002. ASIC sought senior counsel’s advice. That advice was, in substance, that the promissory notes were debentures; and, if not debentures, then interests in a MIS.
30 Early in 2003, the financial press reported that ASIC was reviewing the status and regulation of the use of promissory notes in property development schemes such as those undertaken by the Westpoint Group. The Carey parties claimed that, in early 2003, as a result of statements in the financial press, “Mr Carey called in Mr Shearwood and asked for an opinion as to the legality of the use of the promissory notes by Westpoint”. For the Carey parties, it was said that by early 2003:
Westpoint had large amounts of public funds tied up in … projects of varying stages of completion … and the promissory note – instrument was particularly unsuitable for property projects due to the requirement for the validity of a promissory note that they be payable on a fixed date. And property developments on the other hand, were notoriously prone to delay.
31 On 14 July 2003, ASIC published an Information Release indicating its on-going concerns about about the use of promissory notes for fundraising on a significant scale and subsequently informed Westpoint Group companies that it would take enforcement action consistent with this view, unless the relevant companies entered into an acceptable arrangement, preferably by an enforceable undertaking, no longer to use promissory notes in this way.
32 From July 2003 until the end of April 2004, ASIC and Westpoint Group companies negotiated to achieve resolution of their dispute. The negotiations ended in May 2004. On 10 May 2004, one of the Westpoint Group companies issued a proceeding in the Supreme Court of Western Australia (‘Supreme Court’) seeking a determination as to the legal status of the promissory notes; and, on 12 May 2004, ASIC responded, seeking (amongst other things) determination of whether representations, in an information memorandum used for promissory notes, were misleading or deceptive. Judgment in a consolidated proceeding was delivered on 19 November 2004, with neither party being entirely successful: see Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd [2004] WASC 241; (2004) 52 ACSR 168. The parties appealed. An appeal was ultimately discontinued by consent; and a cross-appeal was dismissed: see Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105.
33 On 22 November 2005, ASIC commenced proceedings in the Federal Court seeking an order for the winding up of York Street Mezzanine on the grounds of insolvency and, alternatively, on the ground that it would be just and equitable for the company to be wound up. At the same time, ASIC filed an interlocutory application for the appointment of a provisional liquidator to York Street Mezzanine. Mr Martindale SC affirmed in opening that, “[i]t was a foreseeable consequence that the Westpoint Group as a whole would collapse once action was taken to wind up one of its principal entities in insolvency”. On 23 November 2005, the directors of York Street Mezzanine placed the company in voluntary administration.
34 On 5 December 2005, ASIC filed an application seeking a winding up order against Ann Street Mezzanine Pty Ltd (‘Ann Street Mezzanine’) on the ground of insolvency and, alternatively, on the ground that it would be just and equitable to make such an order. ASIC also sought, by way of interlocutory application, an order for the appointment of a provisional liquidator to Ann Street Mezzanine.
35 On 6 or 7 December 2005, the directors of Ann Street Mezzanine and other mezzanine companies placed their companies into voluntary administration.
36 On 20 December 2005, this Court, constituted by French J, ordered that provisional liquidators be appointed to York Street Mezzanine and Ann Street Mezzanine on the basis that the companies were insolvent. By mid February 2006, the Westpoint Group had collapsed.
Case pleaded against Freehills
37 The Carey parties sued Freehills for damages caused by Freehills’ alleged negligence and misleading and deceptive conduct. The claims were said to arise from the “Promissory Note Advice”, which Freehills gave between 2000 and 2003. The Carey parties alleged that the Promissory Note Advice was constituted by four letters and an advice presented by Mr Shearwood on the following dates: 17 January 2000; 9 February 2000; 2 June 2000; 5 February 2003; and 2 September 2003. The Carey parties alleged that Mr Shearwood gave the Promissory Note Advice; and that, in accordance with this advice, in early 2000 the Westpoint Group undertook fundraising by way of promissory notes. This alleged advice formed the basis of their claims for negligence and misleading and deceptive conduct.
38 By an amended cross-claim dated 17 October 2011, the Carey parties alleged that:
(1) Freehills owed a duty of care to them.
(2) Freehills was negligent in providing the Promissory Note Advice in breach of its duty of care. (In an outline of opening, the Carey parties submitted that Freehills “gave unqualified advice that a prospectus was not required to issue Promissory Notes having a face value of $50,000 or more” and alleged that this advice was contained in the four letters written by Mr Shearwood.)
(3) Further, Freehill’s Promissory Note Advice was misleading and deceptive.
(4) The breach of the duty of care and/or the misleading and deceptive conduct caused them to suffer loss and damage as a result of the collapse of the Westpoint Group following the winding-up orders made by French J in December 2005.
(5) The loss suffered by the first, second and third cross-claimants was:
(i) the lost opportunity to publicly list their shareholding in the companies comprising the Westpoint Group; and
(ii) the loss of the value of their shareholding in the companies comprising the Westpoint Group.
(6) The loss suffered by each of the corporate cross-claimants was also the depletion in the value of their assets and loss of income by reason of the collapse of the Westpoint Group.
39 Freehills alleged that the Carey parties failed with respect to each essential element of their cause of action. This was for the following reasons:
(1) The Carey parties were not clients or persons to whom any representations were made.
(2) The Promissory Note Advice was accurate and reasonably based.
(3) The collapse of the Westpoint Group was the result of:
i. ASIC applying to wind up York Street Mezzanine and Ann Street Mezzanine on grounds of insolvency and other conduct justifying a just and equitable winding up unrelated to the Promissory Note Advice; and
ii. the winding up of York Street Mezzanine and Ann Street Mezzanine by the Federal Court on the ground of insolvency.
(4) The loss, which the Carey parties claimed by reference to the value to be added to the companies’ assets on a public float, was: (i) not substantiated by the evidence; (ii) unrelated to the Promissory Note Advice; and (ii) not a loss claimable by the Carey parties.
40 As will become apparent, it is unnecessary to resolve all the issues raised by the pleadings in order to determine that the Carey parties’ cross-claim fails.
CIRCUMSTANCES IN WHICH THE CROSS-CLAIM ARISES
41 As outlined below, Mr Shearwood was first engaged by a company in the Westpoint Group in December 1997, to work on the Tea Tree Plus Project. He worked on this project for nearly ten months. He met Mr Carey around the middle of December that year at a meeting relating to the Tea Tree Plus Project.
42 At a meeting on 5 December 1997, Mr Shearwood, in his capacity as a Freehills partner, was introduced to Mr Bell, then the General Manager of Finance and Operations of the Funds Management Business Unit in the FMD within WPC. At this meeting, Mr Shearwood and Mr Bell discussed the Tea Tree Plus Shopping Centre project (‘Tea Tree Plus Project’), which was a property development in Adelaide. Some days later, on 8 December 1997, Mr Shearwood wrote to Mr Bell concerning a proposal that Mr Bell had outlined at that meeting, “for Westpoint Corporation to promote a fixed term property trust that would own the Tea Tree Plus Shopping Centre in Adelaide”.
43 In this 8 December 1997 letter, Mr Shearwood stated that Freehills, chiefly through him, would, in conjunction with experts from WPC, “provide advice on the due diligence process and the legal requirements” involved in the proposed trust. Also in this letter, Mr Shearwood stated:
I have been involved with fund raising in the unlisted and listed property trust industry since 1982 and since then have advised management companies, trustees and underwriters in relation to the formation of and capital raisings of trusts and syndicates that have raised over $1.5 billion.
44 Mr Shearwood sent Mr Bell, at WPC, a revised letter of engagement for the Tea Tree Plus Project on or about 10 January 1998, which stated that Freehills would perform work including preparation of the prospectus and due diligence program, liaising with ASIC on licensing issues and reviewing loan documentation provided by the lender. The revised letter of engagement indicated, however, that Freehills was not the only lawyers’ firm retained by WPC to work on the Tea Tree Plus Project, because it noted that another solicitor, Richard Warren of Corke & Co, had already prepared a trust deed for the Project.
45 Freehills, again chiefly through Mr Shearwood, later also acted for WPC with respect to the “Tea Tree Plus Fixed Capital Term Property Trust”, as reflected in a timesheet narration made by Mr Shearwood on 16 December 1997, which read:
Attending on Simon Bell, Norm Carey, Nick Aitken and Steve Scudamore to discuss due diligence committee issues, prior to the holding of the first DDC meeting and general issues in relation to structuring and use of others.
46 This was also the first occasion that Mr Shearwood and Mr Carey met. There is no earlier recorded attendance by Mr Shearwood on him. (Mr Shearwood ceased work on the Tea Tree Plus Project when the property was sold on or about 9 October 1998.)
Mr Shearwood is engaged on further work
47 In the two and a half year years after December 1997, during which time Westpoint Group companies decided to raise funds by way of promissory notes, Mr Shearwood acted for WPC and WPM in respect of a number of other matters. Freehills’s files described these matters as:
Warwick Shopping Centre;
Cinema City;
Centreways Arcade Syndication;
Warnbro Fair Syndicate;
Huntingdale [Village Shopping Centre];
ASX Listing Float Team;
Executive Employment [contracts];
Paragon CBD;
Market Street MIS;
Paragon Commercial;
Chocolate Factory;
297 Murray Street;
MIA – General;
Bayview Port Melbourne; and
General – AAS.
48 Mr Shearwood’s evidence, based on his review of Freehills’ files, was that much of the work touching these matters was not relevant to the present controversy. I accept this evidence. Thus, for example, work on the Centreways Arcade Syndication and Huntingdale Village Shopping Centre files involved advice about particular trust structures; work on the Warwick Shopping Centre file involved the preparation of a particular trust deed; work on Cinema City file involved considering investment structures for development on the Cinema City site; work on Paragon CBD file included advice on the stamp duty implications of a two-tier trust structure and the drafting of a trust deed; and work on Paragon Commercial file related to the conversion of a private unit trust into a regulated investment. None of this work was relevant to the present controversy. Further, as Mr Shearwood’s affidavit of 14 November 2011 disclosed, he also undertook, or was involved, in other work for Westpoint related entities, for example a Triple Cee Retail Investment Trust. None of this other work was said to be relevant to the issues in dispute.
49 The work done by Mr Shearwood, which was relevant to the cross-claim, is discussed hereafter.
50 In cross-examination, Mr Shearwood said that Freehills did not always generate a retainer letter for advice in relation to “incidental matters”. On these occasions, there was no engagement letter setting out Freehills’ specific instructions, although, as will be seen, Freehills’ instructions can be inferred from the careful records that Mr Shearwood kept at the time.
51 Some months after he was engaged to work on the Tea Tree Plus Project, Mr Shearwood received further instructions with respect to a different matter. By a letter dated 30 March 1998, WPM, again through Mr Bell, then General Manager – Syndications, sought advice with respect to the Warnbro Fair Syndicate and, in particular, “an opinion from yourselves covering the steps required to move the existing syndicate through to a public fixed term syndicate and the tax consequences for the existing syndicate members”. In consequence, Mr Shearwood advised in relation to the proposed restructuring and, subsequently, with respect to related issues.
52 Mr Carey said Mr Shearwood’s involvement in the affairs of the Westpoint Group companies was important to him at this point, specifically deposing that Freehills’ work on the Warnbro Fair Shopping Centre Project (‘Warnbro Fair Project’) was “the foundation for my belief that I could rely on Freehills to exercise the mandate I had given them to achieve the Westpoint Group’s objectives” (emphasis added). As already stated, Mr Carey was not an honest and reliable witness and I would not accept his uncorroborated evidence on this point.
The alleged April 1998 presentation
53 An alleged meeting in the April of 1998 between Mr Carey and Mr Shearwood was significant in the Carey parties’ statement of their case at trial. In their opening outline, they maintained that, at this meeting, “Mr Carey made a presentation to Freehills setting out the parameters for the overall advice that he and the Westpoint Group required”; and that “Mr Carey made clear to Freehills that he and the Westpoint Group had limited experience in the area of funds management and relied upon Freehills’ expertise in this area”. The alleged April 1998 presentation was the basis for Mr Carey’s statement about “the mandate” he gave Freehills regarding “the Westpoint Group’s objectives”: see [52] above.
54 Mr Carey alleged that, at this April 1998 meeting, he and Mr Shearwood met for a second time and that he made the presentation to Mr Shearwood, which is described below. Mr Shearwood denied that there was any such meeting between him and Mr Carey and that he had seen the presentation prior to this proceeding.
55 Mr Carey’s evidence was to the effect that, as early as 1994, he had engaged the Boston Consulting Group (‘BCG’) to provide him with a strategy to assist the Westpoint Group to transition into a larger organisation. Following advice from BCG in 1996, Mr Carey implemented a plan to transition the Westpoint Group into a public company. In his consolidated affidavit of 11 November 2011, Mr Carey deposed that “[f]rom the time I first engaged Andrew Shearwood, I had been speaking with him intermittently about the strategy which had been devised by BCG”. I do not accept Mr Carey’s evidence on this last-mentioned point. It was inconsistent with Mr Shearwood’s account of his dealings with Mr Carey. As already stated, I have preferred the evidence of Mr Shearwood to that of Mr Carey.
56 Mr Carey said that he and Mr Bell had invited Mr Shearwood to a meeting in or about April 1998, which took place at the Westpoint Group’s offices in West Perth, in effect to brief Mr Shearwood about the strategic direction of the Group. Mr Carey said that, at this meeting, he made a presentation to Mr Shearwood, in the presence of Mr Bell and Mr Rundle (neither of whom corroborated Mr Carey on this latter point). A printed copy of the alleged presentation (‘the presentation document’) accompanied Mr Carey’s consolidated affidavit. In cross-examination, Mr Carey claimed to recall contributing to the content of certain pages of the presentation document.
57 The presentation document was lengthy and relatively detailed. Under the heading “Purpose of Presentation”, the following appeared:
The purpose of this presentation is to:
1. Brief Freehill Hollingdale & Page (FHP) on the work done by BCG for NPC/Westpoint Group entities (Westpoint) 10-year strategy and on the important aspects of Westpoint’s continuing evolution through a transitional phase moving from a small business to a medium sized organisation and plans to become a larger organisation that will become a publicly listed company in the next 5 years. BCG strategy based on Lend Lease/Westfield who have been the two publicly listed co.’s who have created the largest shareholder value in the past 20 years in the same industry.
2. To instruct FHP to act for Westpoint in relation to this transition including the IPO.
3. To instruct FHP to act for Westpoint in establishing and developing a professional, profitable and valuable property & retail funds management business which will be an important component of the IPO.
4. To instruct FHP to act in relation to Warnbro Fair Shopping Centre (investment product) and other projects & properties in Westpoint’s development and investments programs.
5. Confirm FHP becoming part of the tier 1 consulting team to assist Westpoint in achieving 10-year strategy, goals and objectives.
Other firms include BCG, KPMG, FHP, BDW.
Westpoint is prepared to pay the price (value) of this tier 1 consulting team to ensure that it receives top quality work, the best advice & a successful IPO outcome.
58 A part of the presentation document headed “Property & Retail Funds Management Business Objectives”, reiterated the need for “a professional, profitable & valuable property & retail funds management business” and stated that “Westpoint property development & investment funding models require” … “[i]nvestment product – to facilitate the investment program (see funding model)” and “[d]evelopment products – to facilitate the development program (see funding models)”.
59 Significantly, the presentation document showed three types of funding models. The first was an investment funding model for use in investment properties such as shopping centres. The second and third funding models were both for use in major residential property developments. These two latter models differed in that the second funding model involved only two categories of funding – senior debt and equity – whilst the third funding model involved three categories of funding – senior debt, equity and “mezzanine debt”. As discussed below, since mezzanine funding was not discussed with Mr Shearwood until September 1999, the reference to mezzanine debt here militates against Mr Carey’s evidence that the presentation was made in April 1998.
60 I interpolate here that Mr Carey deposed that the first funding model was used in the Tea Tree Plus Project (up to sale), the Warnbro Fair Project and the Paragon Commercial syndicate, whilst the second funding model was used in the Chocolate Factory and Paragon Apartments Projects, discussed below, and which were, so Mr Carey said, completed in early 2002. The third funding model was said to have been used in later projects such as Bayview and Bayshore in Port Melbourne, York Street and part of Market Street, all of which are significant in the context of this litigation and are referred to in greater detail below.
61 Under the heading, “What we require from FHP”, the April 1998 presentation document further stated:
1. Westpoint’s current capabilities and competencies are in property development & investment.
2. Westpoint has no current knowledge, skills or experience in property and/or retail funds management.
3. FHP has demonstrated substantial knowledge, skill & experience in property & retail funds management acting for numerous clients in Australia to establish and develop property & retail funds management businesses.
4. To act for Westpoint on all aspects of its transition to build a substantial publicly listed company in the next five (5) years including the IPO.
5. To act for Westpoint in establishing and developing a professional, profitable & valuable property & retail funds management business which will be an important component of the IPO.
6. We require FHP to act for Westpoint in achieving our property & retail funds management business objectives by advising & developing
a) To establish & develop a professional, profitable & valuable property & retail funds management business which will be an important component of the IPO
b) Investment product – to facilitate the investment program (see funding model)
Development program – to facilitate the development program (see funding models)
This work will include advising & developing the required organisational capabilities including all necessary processes & systems.
7. To act in relation to Warnbro Fair Shopping Centre (investment product) and other projects & properties in Westpoint’s development and investments programs.
62 Under another heading, “Instructions to FHP”, the presentation document purported to set out Freehills’ instructions, noting also that “[a]s NPC owner/director/financially liable, FHP must report overall to NPC”. The reference to “NPC” here is clearly to be read as a reference to Mr Carey (Norman Phillip Carey).
63 In his consolidated affidavit, Mr Carey deposed in substance that, at the April 1998 meeting, he told Mr Shearwood all that appeared in the presentation document and that he would be relying on Freehills for their expertise in property and retail funds management. In particular, Mr Carey deposed:
When I was speaking to the section titled “What we require from FHP”, I said that Westpoint’s current capabilities and competencies were in property development and investment and that it had no knowledge, skills or experience in property funds management or retail funds management. I said that Westpoint would be relying on Freehills expertise in these areas.
At this point, Mr Carey clearly overstated Westpoint’s lack of expertise, bearing in mind Mr Rundle’s experience and putative knowledge. As noted already, Mr Bell too not only had experience at KPMG in London, but also in stocks and securities in Perth.
64 Mr Rundle did not give any evidence that he attended the April 1998 meeting. His affidavit did not refer to the presentation or to the meeting and there was no explanation for this omission. It can be inferred that his evidence would not have assisted the Carey parties: Jones v Dunkel (1959) 101 CLR 298 (‘Jones v Dunkel’) at 308 (Kitto J) and 320-321 (Windeyer J). In cross-examination, Mr Rundle said that he recalled first meeting Mr Shearwood in 1998 or 1999 at a meeting attended by Simon Bell at Westpoint’s offices in West Perth. He did not say that Mr Carey was present and could not recall the subject of the discussion at the meeting.
65 Mr Bell had no recollection of a meeting of the kind that Mr Carey described. Like Mr Rundle, Mr Bell did not give any evidence that he attended the April 1998 meeting. Rather, he deposed that he recalled assisting in the preparation of the presentation document but that he had no recollection of presenting or delivering that document to Freehills. Mr Bell was not cross-examined on this point.
66 As already stated, Mr Shearwood denied attending a meeting in April 1998 at which Mr Carey made the alleged presentation to him. Mr Shearwood’s evidence was that he had not attended any such meeting and that he had not seen the presentation document at any time before he was provided with it as an annexure attached to Mr Carey’s affidavit of 30 September 2011.
67 Mr Shearwood’s evidence was that, after he met Mr Carey on 16 December 1997, he did not meet him again until 21 July 2000. (On this date, he met Mr Carey and others, including Beck, Rundle and Thomas, to discuss with KPMG personnel a prospectus to be issued with respect to the Paragon Commercial MIS and a revised report prepared by KPMG concerning the Westpoint Group.)
68 I accept Mr Shearwood’s evidence that there was no such meeting in April 1998, as Mr Carey alleged, and that Mr Shearwood’s second meeting with Mr Carey was on 21 July 2000. There was no reference to an April 1998 meeting in his daily records, notwithstanding that the meeting was said to be a substantial out-of-office one. In cross-examination, Mr Shearwood said, and I accept, that he would have remembered “such a significant presentation”. Further, Mr Shearwood’s evidence is consistent with the contemporaneous documentary record that he and Freehills maintained. Mr Shearwood said in cross-examination (and I accept) that he himself created the time records, saying specifically:
… the records I created myself. I typed them into my time records myself.
69 The Carey parties did not challenge Mr Shearwood’s evidence that there was no record of an attendance of the kind alleged by Mr Carey to have taken place in April 1998. There is no reason to suppose that Mr Shearwood would have failed to record in a file note or timesheet narration his attendance at a significant meeting at which, if Mr Carey were believed, Freehills received important and specific instructions. It may be noted that the Carey parties did not challenge Mr Shearwood’s evidence about the contents of his non-billable time records or call for them.
70 Mr Carey maintained that the contents of the presentation indicated that the presentation was prepared in or around April 1998. As I am about to explain, however, the date indicia within the presentation document are inconclusive, pointing, on the one hand, to a March preparation date and, on the other, to its preparation in the latter half of the following year.
71 In closing submissions, Mr Carey relied on a letter dated 30 March 1998 from Mr Bell, WPM, to Mr Shearwood, in which Mr Bell sought Freehills’ opinion about the steps “required to move the existing [Warnbro Fair] syndicate through to a public fixed term syndicate and the tax consequences for the existing syndicate members”. Mr Carey submitted that the reference in this letter to previous discussion of the proposal regarding Warnbro Fair was consistent with the presentation being made around March or April 1998, as he alleged, because the presentation document stated that one of its purposes was to instruct Freehills to act in relation to Warnbro Fair. I accept that, having regard to the extrinsic evidence concerning Warnbro Fair, statements about Warnbro Fair in the presentation document are consistent with this part of the document having been prepared in or around March 1998. These statements indicate nothing about when the presentation document as a whole was created, finalised or whether it was ever presented to Mr Shearwood, as Mr Carey alleged.
72 Furthermore, this is not the end of the timing issue, because Mr Carey’s evidence about the April 1998 meeting is inconsistent with other evidence given by him. As noted earlier, Mr Carey’s evidence was that, at the April 1998 meeting, he referred to a third funding model involving mezzanine debt. This reference is not entirely consistent with his evidence that it was, “in or about 2000, following advice from the Boston Consulting Group, [that] Westpoint Group developed a funding model whereby it utilised mezzanine finance” (emphasis added). This latter account is far more consistent with Mr Shearwood’s evidence corroborated by a file note, which records that by telephone on 9 September 1999, Mr Bell first asked him about methods of obtaining mezzanine finance. Mr Shearwood’s evidence would be consistent with a preparation date sometime around September 1999, whilst Mr Carey’s statements about the BCG would indicate an even later preparation date. Of course, none of these considerations would indicate that the presentation was ever made.
73 It should be noted again (see [55] above) that Mr Carey did depose that, in or around 1996, he had received “a number of presentations” from BCG, that BCG had provided “strategic and management consulting services” between 1994 and 1996; and that, “[s]hortly after receiving the advice from BCG”, he had “caused the Westpoint Group to proceed to implement a plan” to move towards a public company. Mr Carey produced a letter from himself to Mr D Brownell of BCG dated 4 October 1994 in relation to Mr Carey’s interest to engage BCG as part of its growth strategy. There is nothing in this, or any other evidence to which I was directed, that contemplated the introduction of a mezzanine finance model in 1998.
74 Mr Bell’s evidence also, even if accepted, does not militate against acceptance of Mr Shearwood’s evidence. Mr Bell’s evidence was only that, at some unspecified date, he had assisted in preparing the 1998 presentation document. The fact that the document was prepared at some time by some person or persons cannot be gainsaid. The critical issues concern when it was prepared and, if presented, when and to whom. His evidence said nothing about these issues.
75 As noted already, Mr Rundle’s evidence does not assist the Carey parties.
76 Further, as already noted, I found Mr Shearwood to be an honest and reliable witness, whose evidence I preferred to that of Mr Carey.
77 For these reasons, I reject Mr Carey’s evidence concerning the meeting in April 1998 and the presentation allegedly made at that meeting to Mr Shearwood. I accept Mr Shearwood’s evidence on this issue. I find that Mr Carey fabricated his evidence about the making of the April 1998 presentation to Mr Shearwood in order to support his case against Freehills. Precisely when and by whom the presentation document as a whole was created remains unclear.
Proposed float of the Westpoint Group
78 As already indicated, Mr Carey’s evidence was that, in 1994, he approached the BCG to seek advice about the way forward for his business interests. Mr Carey contemplated a publicly listed company on the ASX. Mr Carey’s evidence was that, sometime after receipt of BCG’s advice in or around 1996, he sought to have an annual report for the Westpoint Group prepared in ASX format and set about “updating the Westpoint Group’s financial and business systems so that they matched those of a public company”. Mr Bell’s evidence, which I accept in this regard, was more specific in that he said that, around mid 1998, he set about preparing the Group’s annual report in ASX format, reviewing the Group’s structure and engaging another firm (Bojanjac Partners) to prepare a pro forma prospectus, listing plan and review of listing rules.
79 At some time in 1997–1998, advice was received from KMPG and Freehills about restructuring to facilitate the transition to a public company structure. A “float team” was formed in 1998, for the purpose of guiding the proposed listing of the Westpoint Group.
80 In September 1998, Mr Shearwood joined the float team, which comprised Messrs Shearwood, Rundle, Bell, Richard Buchanan of KPMG (Sydney) and Jorgen Elstoft of Como Consulting Group in Melbourne. The float team met on 22 September 1998, 29 October 1998, 1 December 1998, 27 January 1999, 21 September 1999 and 15 December 1999. Broadly speaking, discussions at meetings of the float team were about reorganizing the Westpoint Group and transferring the Westpoint Group companies’ business to a float entity.
81 There may have been some other meetings in March and April 1999, although nothing turns on this. Mr Shearwood deposed that “… an agenda was faxed to me on 19 March 1999 for a meeting to be held on 30 March 1999, however I have no other record of this meeting ever having been held”. Further, Mr Shearwood’s timesheet entry for 30 April 1999 indicated that a float team meeting was planned for that day, but the entry recorded “aborted phone hook-up”, indicating either that it was never held or that Mr Shearwood did not participate in a float team meeting held on that date.
82 The Westpoint Group’s immediate commitment to move to a public company structure significantly diminished after 1999. The float team did not meet again after 15 December 1999. In a letter to Westpoint Holdings Ltd dated 19 June 2000 enclosing a fees memorandum, Mr Shearwood described the matter as “in abeyance”.
83 Within the Westpoint Group itself, the float proposal may have remained alive between 2003 and March 2005 for some purposes. This may be inferred from the existence of certain documents annexed to Mr Carey’s consolidated affidavit, including (1) a presentation document called, “Westpoint Restructure – Towards a Listed Group” dated 2003 apparently prepared by KPMG; (2) a presentation document called “Westpoint Group – Transition to a Public Listed Company” dated 2003 also apparently prepared by KPMG; (3) an unsigned letter apparently from KPMG personnel to Mr Carey and others dated 20 February 2004; (4) a draft letter apparently from KPMG personnel to Mr Rundle at WPC dated 27 February 2004; and (5) a presentation document called “Westpoint IPO – Presentation to Managers” dated 4 March 2005. The author of this last-mentioned document is not indicated on the face of the document.
84 Apart from Mr Carey’s evidence, there was, however, little or no other evidence about the provenance of these documents. None of the authors of these documents gave evidence; and indeed no-one from KPMG was called as a witness. They were inadmissible as hearsay evidence; and their significance was merely the fact of their existence and supposed receipt. As already stated, Mr Carey was an unreliable witness. In the circumstances, the documents are of limited evidentiary value and I place little weight on them.
Introduction of the Managed Investments Act 1998
85 Around July 1998, the legal context in which the Westpoint Group relevantly operated changed with the introduction of the Managed Investments Act 1998 (Cth) (‘Managed Investments Act’) on 1 July 1998. Freehills prepared a paper dated 30 July 1998 and entitled “The Managed Investments Act: Overview”, outlining in general terms the impact of this legislation. According to Mr Carey, Freehills sent the paper to him, Mr Bell and Mr Rundle.
86 In August 1998, Mr Shearwood opened a file entitled “MIA [Managed Investment Act] General File” following a conversation with Mr Bell in which he agreed to send Mr Bell (amongst others) a compliance plan checklist and constitution with respect to the Managed Investments Act. Mr Shearwood deposed (and I accept) that it was his practice to open this type of file “when providing incidental advice to a client, which did not relate to a particular matter of substance”. Mr Shearwood made timesheet narrations on this file from 5 August 1998 until 9 February 2000. Some of these narrations are significant, as discussed below.
The Murray Street Project begins
87 Mr Carey claimed that the 297 Murray Street Project (‘Murray Street Project’) was contextually important to his understanding of Freehill’s advice on funds management and, in particular, the use of promissory notes to raise mezzanine finance. To assess this proposition, it is necessary to examine the evidence concerning Mr Shearwood’s involvement in the Murray Street Project and his advice in the context in which it was given. As will be seen, I substantially reject the Carey parties’ characterisation of their consultations with Mr Shearwood touching this Project.
88 In 1999, a company in the Westpoint Group acquired property at 297 Murray Street, Perth. The property was an old office building that a Westpoint Group company proposed to develop into a serviced apartment hotel. In September 1999, the proposal was to sell rooms to investors on strata titles subject to a lease to the hotel operator. In planning for the Murray Street Project, an issue arose about the applicability of ASIC’s Policy Statement 140 (‘PS 140’), published in 1999, which relevantly stated that, in some circumstances, serviced strata arrangements would, in ASIC’s opinion, constitute a MIS. This issue was the principal issue about which Mr Shearwood’s advice was sought and received in this period. At around the same time, however, Westpoint Group personnel began to explore the possibility of new ways to raise finance and, in this context in a conversation with Mr Bell, Mr Shearwood referred to promissory notes.
89 Mr Bell deposed (and I accept) that, in the second half of 1999, he “conducted … research into the ways Westpoint’s competitors were raising mezzanine finance”. Mr Bell explained that:
Mezzanine was an emerging form of finance around this time. There was a gap between the amount of money a bank would lend you and the amount you needed to complete a property project. At this time there were institutions which would offer mezzanine finance. I also met with representations of industry super funds which provided this type of funding to different groups.
90 In August or September 1999, Mr Carey asked Mr Bell (so the two men said) to speak to Freehills about fundraising for mezzanine finance. This much may be accepted.
91 On 6 September 1999, in the period he was working on the Murray Street Project, Mr Shearwood had a relatively brief telephone conversation with Mr Bell about different methods of obtaining finance, including by promissory notes. The significance of the conversation was contested. The Carey parties submitted that, in this conversation, Mr Carey and Mr Bell intended to obtain general advice concerning mezzanine finance. Freehills’ position was that, although the topic of mezzanine finance as temporary funding was raised, it was discussed in only a very general and abstract way while Mr Shearwood was working on the matter of the Murray Street Project.
92 Mr Bell gave evidence about a conversation with Mr Shearwood in which promissory notes were first mentioned. Mr Bell deposed that, in August or September 1999, Mr Carey asked him to ask Freehills whether there were fundraising “methods available to Westpoint that would not involve the time required for a prospectus”. Mr Bell said that, in late 1999, he telephoned Mr Shearwood to seek advice about ways for raising mezzanine finance that were “less time consuming and burdensome than issuing a prospectus”; and that, “[e]ither then or a few days later”, he had a conversation with Mr Shearwood in which Mr Shearwood raised the possibility of using promissory notes. Mr Bell’s evidence was that he had not previously “heard of a promissory note”. Mr Bell deposed that Mr Shearwood explained to him that a promissory note was:
… a promise to pay money at a future time. A promissory note for $50,000 or more is excluded from the definition of a ‘debenture’ in the Corporations Law. This means Westpoint can issue promissory notes to raise mezzanine finance and so long as the notes are for $50,000 or more there will be no requirement for a prospectus. So long as the promissory notes are not issued as part of a managed investment scheme all Westpoint would need is to issue an information memorandum.
93 In cross-examination, Mr Bell said that he had two specific recollections of the latter half of 1999: the first was that Mr Carey asked him to “look at alternative methods for raising capital for the mezzanine financing of projects” and the second was sitting at his desk on the telephone to Mr Shearwood, “with the Corporations Act open on my desk and we were having a look at different sections within the Act, at which point the – the promissory notes were brought up as a potential …”. According to Mr Bell:
We looked at the definition of a security. He pointed out that a promissory note was specifically excluded as a security, then gave a brief run-down of what a promissory note was, which was a – a promise to pay at a certain date in the future and that it had to have a minimum face value of $50,000. But it wasn’t governed by the Corporations Act, so therefore it wasn’t – or it wasn’t a security. It didn’t require a prospectus to be issued to issue them.
Mr Bell could not recall anything else being discussed in that telephone conversation.
94 Mr Shearwood’s evidence was that the relevant conversation took place on 6 September 1999. The conversation was general and relatively brief. Mr Shearwood said that, at this time, “Mr Bell was asking him about methods of raising finance without the need for a prospectus” because Mr Bell was “concerned about the time and cost associated with prospectus disclosure”. Mr Shearwood’s evidence was supported in part by a file note dated 6 September 1999 and a fee narration for that date. The file note referred to “temporary funding of projects pending syndication”, “mezzanine finance” and “PN”. This abbreviation was, as Mr Shearwood said, a reference to a discussion about promissory notes. The fee narration records the conversation as “[s]peaking to Simon Bell about different methods of obtaining mezzanine finance” and as lasting about 12 minutes. Mr Shearwood’s account is also generally supported by his invoices for the Murray Street Project sent under cover of a letter dated 15 December 1999. Whilst Mr Shearwood said in cross-examination that he had no precise recollection of the 6 September 1999 conversation, he did say that he could “visualise the conversation taking place”; and it was evident from his evidence that he had some limited recollection of that conversation.
95 Bearing in mind that Mr Shearwood’s account was corroborated by Freehills’ contemporaneous records, I accept that this conversation occurred on 6 September 1999 and, as I have said, during the period of Mr Shearwood’s work on the matter of the Murray Street Project. Further, I accept Mr Shearwood’s account of the 6 September 1999 telephone conversation in preference to that of Mr Bell. I reject Mr Bell’s evidence to the extent that he said that MrShearwood gave specific and unqualified advice about the use of promissory notes for raising mezzanine finance. This would have been entirely out of character for Mr Shearwood. Mr Shearwood’s evidence that the discussion was general and abstract was corroborated by Freehills’ contemporaneous records; to the extent Mr Bell’s evidence suggested it was more than this, his evidence was not corroborated by any contemporaneous written record, whether of his own making or Mr Shearwood’s. Given the passage of time, Mr Bell properly conceded that he could not recall the specific dates of conversations around this time. In purporting to recollect specific statements said to have been made by Mr Shearwood about promissory notes, I find that Mr Bell was reconstructing a conversation, which, over time, he had come to believe took place with Mr Shearwood. I accept Mr Bell’s evidence only to the extent that it is consistent with Mr Shearwood’s evidence about the conversation on 6 September 1999.
96 The evidence showed that, in late 1999, so far as Westpoint’s consulations with Mr Shearwood were concerned, the real issue of concern was whether or not ASIC would consider the Murray Street Project to be a MIS. Mr Shearwood met with Mr Bell and Mr Thomas on 3 November 1999, to discuss whether the proposed investment structure for the Murray Street Project would constitute a MIS. This is evidenced in Mr Shearwood’s file note of that date, timesheet narrations and invoices sent under cover of a 15 December 1999 letter. When it was put to him in cross-examination that, since he had no independent recollection of this meeting, then he could not dismiss the possibility that the use of promissory notes in financing was further discussed, Mr Shearwood replied in substance that he believed that he would have made some notation of such a discussion. Bearing in mind the careful entries that Mr Shearwood made at the time, I would accept his evidence in this regard. There is no reference to promissory notes in Mr Shearwood’s records for the 3 November 1999 meeting.
97 Consistently with Mr Shearwood’s evidence about the 3 November 1999 meeting, some days later, in a note dated 8 November 1999 and copied to Mr Bell, Mr Thomas, on behalf of WPM, faxed a request to Mr Shearwood for his advice about the applicability of PS 140 to the Murray Street Project. Mr Thomas’s note relevantly stated:
The details on the arrangements for the sale of the strata hotel rooms are yet to be finalised and we are awaiting advice on how to best structure the sales to not be caught in the MIS serviced strata scheme net.
To that end could you advise on the key elements to the MIS legislation and regulations that we need to look for in the arrangements between the proposed hotel operator and Westpoint plus the sale contracts between Westpoint and the strata purchasers.
Could you also please give an estimate of the time that will be expended in this brief, including the time already in WIP for the meeting Simon Bell and myself [sic].
98 I interpolate at this point that Mr Shearwood deposed that, in addition to Mr Thomas, he received instructions from Mr Bell and Mr Rundle to act for WPM, with respect to the Murray Street Project. I accept Mr Shearwood’s evidence on this point, which is corroborated by Freehill’s contemporaneous records and the written communications made by Westpoint Group personnel to Mr Shearwood. Mr Carey deposed that Mr Thomas (who was not called to give evidence) was acting on his instructions when he sought this advice from Mr Shearwood, but this was hearsay evidence and, as Freehills maintained, “neither admissible nor persuasive”.
99 In early to mid December 1999, Mr Shearwood had further conversations with either Mr Rundle or Mr Bell about the application of PS 140 to the Murray Street Project. Mr Shearwood’s timesheet narration for 1 December 1999 indicated that he met with Mr Bell and Mr Rundle on that date, and was “provided with more background information so as to give an opinion on whether a managed investment scheme would be involved”. Mr Shearwood stated, in cross-examination, that he had no independent recollection of this meeting. Bearing in mind Mr Shearwood’s evidence that he often used a timesheet narration for a file note of a meeting, there is no reason to doubt the accuracy of his entry made at the time.
100 There was a further conversation between Mr Shearwood and Mr Rundle on 7 December 1999 apparently about the MIS issue, because, on 8 December 1999, Mr Shearwood sent a copy of PS 140 to Mr Rundle, under cover of a letter bearing that date. In this letter, Mr Shearwood specifically drew Mr Rundle’s attention to the definition of MIS in PS 140, suggesting they discuss the matter further once Mr Rundle had considered the material sent to him. Further, according to his timesheet narrations, also on 8 December 1999, Mr Shearwood sent Mr Bell a copy of PS 140 and spoke with Mr Bell about it. Mr Shearwood also spoke to Mr Bell again on 9 December 1999, presumably about the same matter.
101 In cross-examination, it was put to Mr Shearwood that he could not exclude the possibility that, in the course of these conversations, there was some discussion about promissory notes. Mr Shearwood’s evidence was that he had no independent recollection of these conversations, which, given the passage of time, was unsurprising. In this context, he accepted that he could not exclude this possibility, but added “it would be instructive to look at the timesheet records to see how long that conversation was and … if it was something significant in relation to a particular item I would expect to have made a record of it”. For the reasons already stated, I accept Mr Shearwood’s evidence in this regard. There is no reference to promissory notes in Freehills’ records of these conversations and I would infer from this that there was no significant discussion of promissory notes during them. (For the reasons stated below, I reject Mr Bell’s evidence that he gave Mr Shearwood detailed information about the proposed Bayview Project and, in this context or any other, told him “we were interested in using promissory notes for the purpose of raising mezzanine finance”, as Mr Bell deposed.
102 Before advising in writing, Mr Shearwood had a further meeting to discuss the application of PS 140 on 10 December 1999, when he met with Mr Rundle, Mr Bell, Mr Thomas and Monica Pham (all of whom were Westpoint Group personnel) and Tony Balch – an expert in hotel developments. This meeting was evidenced in Mr Shearwood’s timesheet narration and file note bearing that date. Mr Shearwood also had a further conversation with Mr Bell on 13 January 2000, concerning the information he required to be satisfied that there was no MIS. There was, however, no written advice as to whether the Murray Street Project would be a MIS until 9 March 2000.
Mr Shearwood’s letter of 17 January 2000
103 In the meantime, on 17 January 2000, Mr Shearwood again discussed promissory notes with Mr Bell and the absence of a requirement for a prospectus when issuing a promissory note with a face value of more than $50,000. This is the next recorded reference to promissory notes in Freehills’ records. (There is no reference to a discussion about promissory notes at an earlier date in any other contemporaneous records, other than on 6 September 1999.) The conversation was noted as lasting 12 minutes and the timesheet narration recorded “[s]peaking to and then faxing Simon Bell with advice about avoiding the need for a prospectus when issuing a promissory note with a face value of more than $50,000”. Although at trial Mr Shearwood was unable to recall the conversation – which had taken place almost 12 years earlier – there is no reason to doubt the narration in his timesheet or that which appears in the file note. According to a contemporaneous file note, the conversation took place around 1 pm and Mr Bell requested the advice by 2.30 pm that day.
104 Mr Shearwood arranged for a solicitor working under his supervision, Joy Hsu, to prepare a letter, a sample of an “Applicant’s Undertaking” and sample promissory note, which were to be provided to Mr Bell early that afternoon. The letter was prepared by electronically cutting and pasting from a previous advice given to another of Mr Shearwood’s clients. According to a facsimile transmission record that day, the letter and the documents were faxed through to Mr Bell at 1:54 pm on 17 January 2000.
105 Both Mr Shearwood’s time sheet narration and the file note were brief, as befitted their function; and reference to them does not fully explain why the letter was sought and created. The Freehills files indicated that Mr Shearwood was asked for general information about promissory notes. The letter and accompanying documents provided by Freehills at that time did not refer to any particular project. The work was billed under the “MIA-General” file opened by the firm. Bearing in mind that Mr Shearwood’s practice was to set out his instructions in any advice he gave and that he did not refer to any existing or contemplated project in the 17 January 2000 letter, it is unlikely that any reference to any project (such as the Bayview Project: see below) was made by Mr Bell when he made his request. Indeed, Mr Shearwood’s evidence was (and I accept) that he was not engaged to work on the Bayview Project (in which promissory notes were first used) until 14 February 2000.
106 Mr Carey’s evidence as to why the advice was sought within so limited a timeframe was vague. In cross-examination, he said:
I think I instructed Simon Bell to make sure that we got legal advice in relation to the promissory notes, and that’s how [the 17 January 2000 letter] eventuated.
When asked in cross-examination whether or not he had decided to use promissory notes to raise finance at the time Mr Bell addressed his request to Mr Shearwood on 17 January 2000, Mr Carey was vague and evasive. In substance, Mr Carey’s evidence was that he relied on Mr Bell to confirm with Mr Shearwood the “legality” of using promissory notes; and that he knew nothing further about the circumstances in which the letter of 17 January 2000 was obtained. As appears below, I reject this evidence.
107 In cross-examination, when asked to state what he could recall about his conversation with Mr Shearwood on 17 January 2000, Mr Bell said:
Okay. We – in issuing the promissory note presentation, we were also working with a number of financial planner groups, for them to get them as approved products for them to issue. One of the groups that approached us on that day, stating for their compliance regime, I believe they urgently needed a letter for their compliance people so they could approve the product because they had a meeting that afternoon, to which we then – or I then contacted Andrew Shearwood and asked if they were able to get us a letter explaining promissory notes from the point of view of the financial planning groups that we were dealing with so they could be satisfied that they would then comply with their requirements under their licensing provisions.
(Emphasis added)
108 When asked whether this explained why the advice was requested “within a couple of hours or thereabouts”, Mr Bell responded:
Yes. It’s not an uncommon occurrence that planning groups would ring up and say, “Can we get a letter from the solicitors just confirming this?”
109 Mr Bell also gave evidence that neither the letter of 17 January 2000 nor the letter of 9 February 2000 (both of which are discussed below) were used for any purpose other than as part of the financial planners’ compliance regime; and that they were not documents that made him decide to use promissory notes. I accept Mr Bell’s evidence, which was on this point clear. I reject Mr Carey’s evidence to the extent that his evidence (as set out above) was inconsistent with that of Mr Bell.
110 I accept that, as Mr Shearwood said in cross-examination, the purpose of the letter was to provide a general description of promissory notes “and what they were”. This is consistent with its contents. There was no reference in the letter to any project, the facts relevant to any project, or to any information memorandum for any company’s fundraising.
111 Mr Shearwood said, in cross-examination, that he had no independent recollection of his conversation with Mr Bell on 17 January 2000 and could not recall Mr Bell telling him that the letter he sought was for the purpose of the financial planners, although Mr Shearwood did say that “it would be a little unusual that it wasn’t acknowledged on the face of the letter”. Mr Shearwood also said, in cross-examination, that the letter was prepared by ‘cutting and pasting’ from an advice prepared for another client. As already stated, I have no doubt that Mr Shearwood was an honest witness. The fact was, however, that the letter was constructed as a ‘cut and paste’, in some haste; and in such circumstances an acknowledgment of the kind to which Mr Shearwood referred might well have been inadvertently omitted. This may also explain the inclusion of the last paragraph of the 17 January 2000 letter, which might be thought out of place in a letter for financial planners although otherwise commonplace in a commercial solicitor’s letter. There is a further mistake, which was apparently the product of hasty preparation mentioned below.
112 As noted, Mr Bell’s evidence was (and I accept) that his request of 17 January 2000 was made in order to have a letter for financial planners’ compliance regime and that he specifically asked Mr Shearwood for a letter “explaining promissory notes from the point of view of the financial planning groups”. Mr Bell’s evidence on this issue was clear; and provided a credible explanation not only for the short time-frame and other circumstances relating to the creation of the letter, but generally for its contents. Further, since he made the request for the letter and dealt with financial planners in the course of his employment, I accept that his evidence on this point was likely to be more reliable than that of other witnesses on the point. Accordingly, I accept his evidence.
113 The 17 January 2000 letter, which was signed by Mr Shearwood and Ms Hsu, was addressed to Mr Bell at WPM. The letter relevantly read:
Promissory Notes
The prospectus provisions of the Corporations Law apply to an offer to subscribe for (or invest in) securities. As discussed below, promissory notes with a face value of at least $50,000 do not fall within the definition of securities.
Promissory notes – face value of at least $50,000
Whilst the definition of securities includes a debenture, which is an instrument evidencing a loan, promissory notes having a face value of at least $50,000 are excluded from the definition of debenture and accordingly, are not securities. This means that no prospectus is needed when you offer promissory notes having a face value of at least $50,000.
So long as the promissory notes are not part of any arrangement that would fall within the definition of managed investment scheme, then there are no other prospectus implications.
Whilst from a marketing point of view no prospectus is required, any offer document will need to be factually correct and not contain any misleading statements or liability could attach under the Trade Practices Act. We make some general comments on your information memorandum below.
We would not recommend any advertising on a large scale basis to attract investors in promissory notes because you will need to make it clear in such advertisements that the promissory notes are unsecured and accordingly attach some degree of risk. We would not expect this to be desirable from a marketing point of view in a short advertisement. Obviously, such issues must be made clear in any marketing document.
A number of issues must be addressed in relation to the form and substance of the promissory notes themselves:
(a) Definition of promissory note
There is no definition of the term “promissory note” in the Corporations Law. It is, however, defined in the Bills of Exchange Act 1909 (Cth) (“the Act”) as:
(1) an unconditional promise in writing made by one person to another;
(2) signed by the maker;
(3) engaging to pay, on demand or at a fixed determinable future time, a sum certain in money;
(4) to or to the order of a specified person, or to bearer.
The terms must be expressed in such a way as to provide certainty as to the date of payment. In the simplest case, that would require payment on a fixed date on the presentation of the promissory note with demand for payment.
Promissory notes may be issued with interest payable on the note at a specified rate, or with stated instalments (ie of a stated fixed amount to be paid to the bearer at fixed specified intervals).
Repayments of capital part way through the life of a promissory note is not an issue specifically dealt by the Act. There is conflicting authority on the issue of whether a note may validly express the repayment of some or all of its face value before the expiry date. However, if this is required the preferred approach seems to be that provision for early repayment of some of the capital or return of the face value should be expressed in a collateral agreement referred to as the “Applicant’s Undertaking”.
(b) “Applicant’s Undertaking”
There appears to be no barrier to the utilisation of a collateral agreement in which there may be specified certain terms and conditions upon which the promissory notes be issued. This agreement, collateral to the promissory note, may provide that:
(1) no note holder may make demand for payment until the occurrence of certain specified events, particularly that no demand is to be made until all strata lots in a subdivision are sold and settlement takes place;
(2) part repayment of the face value of the note may be made at the discretion and on terms determined by the issuer;
(3) the notes are not negotiable and not tradeable in any secondary market;
(4) only the person whose name appears on the note is entitled to payment in the terms specified on the note;
(5) once the note is endorsed for payment by the issuer, the note must be presented within a specified but reasonable amount of time. If the note is not so presented the endorser (the issuer) is discharged. This is consistent with section 92 of the Act.
(c) Form
Please find enclosed a draft promissory note and sample applicant’s undertaking.
(d) Stamp duty
The Second Schedule to the Stamp Act 1921 (WA) at item 2(1) provides that a promissory note payable on demand, at sight or on presentation attracts stamp duty of 10 cents per document. Therefore, provided that the issued promissory note is an on demand note it will attract this amount of duty.
If you have any questions in relation to the above or would like us to prepare an applicant’s undertaking that applies to specific facts you have in mind, please let us know.
A sample “Applicant’s Undertaking (draft)” and sample promissory note accompanied the letter.
114 Considered as a general description of promissory notes, the letter disclosed no error. Mr Shearwood explained in cross-examination, and I accept for the reasons he gave, that the inclusion of a refererence to making “general comments on your information memorandum” was a mistake resulting from an accidental cutting and pasting by Ms Hsu from the previous letter to another client. As Mr Shearwood pointed out, there were no comments in this letter about any information memorandum.
115 In closing written submissions, the Carey parties argued that the letter was deficient because it did not address whether the issuing of the promissory notes created an interest in a MIS such that their issue would be regulated. This was because, in the Carey parties’ words, “[i]n order to advise on the need to issue a prospectus for an issue of promissory notes with a face value of $50,000 or more it was not enough to say that such instruments were not debentures (as defined) and for that reason not securities [but rather] it was necessary to say whether their issue would [nevertheless] be an issue of securities for the only other reason that might be”. The “only other reason” here refers to whether the issuing of the promissory notes constuted an interest in a MIS. In closing oral submissions, Mr Martindale SC also directed a submission to what the Carey parties described as a failure to give “the correct advice and proper warnings” – a submission that found some limited basis in the Carey parties’ pleading.
116 I reject these submissions, which involve attributing a wrong purpose to the 17 January 2000 letter. The purpose of the 17 January 2000 letter was, as Mr Bell said, to “explain[] promissory notes from the point of view of the financial planning groups”. This is precisely what Mr Shearwood did. In this context, Mr Shearwood addressed the MIS issue in his statement that “[s]o long as the promissory notes are not part of any arrangement that would fall within the definition of managed investment scheme, then there are no other prospectus implications”. In this way, the intended audience, financial planning groups, were specifically put on notice about the MIS issue and its significance. Whether or not there was a MIS would depend on the “arrangement” pursuant to which the promissory notes were issued, which would, presumably, be known to financial planners in the financial planning groups. Presumably too, not every arrangement would be the same. If in doubt, a financial planner would need to seek specific advice on the matter. Further, it must be borne in mind that, at this time, Mr Shearwood did not know the arrangement pursuant to which any company in the Westpoint Group was proposing to issue promissory notes. The Carey parties’ argument presupposed that Mr Shearwood had been asked to advise and was advising on the question whether an issue of promissory notes with a face value of $50,000 or more would in a particular case require prospectus-level disclosure. This was not what Mr Bell sought and was not in contemplation at that time. Mr Shearwood was not asked by Mr Bell to address any specific project or fact scenario; and he did not yet know anything about the scale and the arrangements to be made by the Westpoint Group to issue promissory notes. Given the scope of Mr Bell’s request and what Mr Shearwood knew at the time, his reference to the need to pay attention to the MIS issue was reasonable and sufficient. In this letter, Mr Shearwood did not, as the Carey parties submitted, fail “to address the only legal issue raised by the client”.
117 A key plank in Mr Carey’s case was the proposition that the sample promissory note and undertaking, which accompanied the 17 January 2000 letter, were subsequently adopted and used, with “only minor variations” in the information memoranda and financing packages issued by Bayview Mezzanine Pty Ltd (‘Bayview Mezzanine’) and later mezzanine companies such as York Street Mezzanine Pty Ltd (‘York Street Mezzanine’), discussed below. As explained hereafter, however, I accept that whilst Mr Shearwood probably knew, prior to 2 June 2000, that a Westpoint Group company proposed to use promissory notes for some kind of temporary mezzanine financing, I accept that he had no knowledge of any specific project for which promissory notes were contemplated or the circumstances in which the sample documents were to be used. I accept Mr Shearwood’s evidence that that, as at 17 January 2000, he was not aware that any company in the Westpoint Group was in the process of issuing an information memorandum for an issue of promissory notes. As he said:
I don’t have any recollection or record of that and that’s something I can reflect upon now and upon which I reflected on 2 June 2000.
As noted below, Mr Shearwood’s evidence was (and, for the reasons stated below, I accept) that he did not receive a copy of an information memorandum for promissory notes until 2 June 2000.
118 Mr Carey deposed that he was provided with a copy of the 17 January 2000 letter around the time that it was received by Mr Bell; and that he “was satisfied that promissory notes were the correct product for the Westpoint Group to use to raise mezzanine finance”. Mr Carey said that he did not question Mr Shearwood’s advice. He further deposed that had he “known then that the use of promissory notes might arguably contravene the Corporations Act, I would have wanted a lot more work to be done to ensure their legality before embarking on major projects with this funding model”. I would, however, reject this evidence. As stated above, Mr Carey was neither an honest nor a reliable witness. His evidence is inconsistent with that of Mr Bell, which I have accepted for the reasons stated. In the circumstances set out above, I regard it as improbable that Mr Carey would have relied on the 17 January 2000 letter, as he claimed. I discuss the issue of reliance further below.
119 The Carey parties contended that the court ought to find that the alleged “advice” in the 17 January 2000 letter “was negligent and Mr Shearwood was negligent in giving such superficial and useless advice without finding out the facts”. For the reasons stated, in the context in which the letter was written, this allegation fails.
Mr Shearwood’s letter of 9 February 2000
120 On 7 February 2000, according to Mr Shearwood’s timesheet narration, he had a further telephone conversation with Mr Bell about promissory notes and restrictions on advisers. The conversation was recorded in his records as lasting 6 minutes. The relevant timesheet narration read “[s]peaking to Simon Bell about Promissory Notes and the restrictions on advisors”. On 8 February 2000, Mr Shearwood apparently had a further telephone conversation about promissory notes and the need for the notes to be presented in order for the holder to be entitled to payment, this time with Simone Ely, an employee of a Westpoint Group company.
121 Mr Bell deposed that during his conversation with Mr Shearwood on 7 February 2000, he had made the request that resulted in the 9 February 2000 letter “because Richard Beck had relayed to me that financial planners were asking … why the promissory notes were not ‘securities’ and he wanted a shorter letter summarising the issues” for them. In cross-examination, Mr Bell said that the 9 February 2000 letter was written in response to “a request for a slightly simplified version of that first [17 January 2000 letter] to be more widely available to a wider group of – to be part of the general due diligence file that we’ve provided to financial planners to explain what the promissory notes were”.
122 In cross-examination, Mr Shearwood said that he could recall the conversation with Mr Bell on 7 February 2000, again in the sense that he could visualise it, although he had only a vague recollection of its contents. His account of this conversation was, however, corroborated by his timesheet narration (set out above) and the letter written on 9 February 2000 (set out below). Mr Shearwood’s evidence was that he recalled Mr Bell “indicating that the question arose out of an inquiry from a financial planner”; and that, at the time he wrote the 9 February 2000 letter, he believed that it and the 17 January 2000 letter were going to be passed together on to financial planners. He did not, however, know about any particular project in which the promissory notes were to be used. Furthermore, there is no evidence that Mr Shearwood was told that the 9 February 2000 letter was to be included in a due diligence pack to be sent to financial planners. One would perhaps have expected a reference to the use of the letter in a due diligence pack in Mr Shearwood’s contemporaneous records if Mr Bell had mentioned it to Mr Shearwood. Nevertheless, by the time Mr Shearwood wrote the 9 February letter, he knew that a company in the Westpoint Group was going to issue promissory notes and sell them via investment advisers.
123 By the short letter dated 9 February 2000 (the preparation of which was recorded as taking 24 minutes), Mr Shearwood wrote to Mr Bell, at WPM, about the requirements for investments advisors in dealing in promissory notes. This letter relevantly read as follows:
Promissory notes – Investment advisers
I refer to our letter to you of 17 January 2000 which outlined the basis upon which a prospectus was not needed when offering a promissory note.
Providing the nature of the instruments being offered is a promissory note as defined, it falls outside the definition of debenture and therefore the definition of securities. This means that no prospectus is needed. It also means that, technically, the rules applicable to offering securities and giving investment advice in relation to securities do not apply.
An investment adviser’s dealer’s licence is only required in order to deal in securities and it is unlikely to impose any restrictions upon that adviser advising on or dealing in promissory notes. The adviser should, however, act as if promissory notes were securities. In particular, we refer to the know your client rule and the obligations to disclose interests in securities the subject of a recommendation.
We do not recommend any broad scale advertising in relation to the promissory notes.
If a copy of this letter is provided to any investment adviser, we suggest that it be accompanied by a copy of our letter to you of 17 January 2000, which explains the precise legal nature of a promissory note. It is important that the promissory notes are not described as unsecured loans because although in essence that is so, the legal character of a promissory note is different to what is commonly described as an unsecured loan.
Please contact me if you have any questions.
124 Again, in this letter, there was no reference to any project or any facts that might relate to a project. Like the letter written earlier in January, the 9 February 2000 letter did not relate to any particular matter and was recorded on the “MIA – General” file. Mr Carey deposed that he saw the 9 February 2000 letter when Mr Bell received it and that he discussed the letter with Mr Bell and Mr Beck.
125 Mr Shearwood said in cross-examination that, as at 9 February 2000, he did not know whether any issue of promissory notes by a Westpoint Group company would involve the offering of interests in a MIS. He said further that he could not recall whether or not he had turned his mind to this possibility. Since he had not been instructed about the arrangements pursuant to which the promissory notes were to be issued, he could not, as he agreed, have formed an opinion about the MIS issue.
126 In closing oral submissions, Mr Martindale SC submitted that, as with the 17 January 2000 letter, Mr Shearwood failed to give “the correct advice and proper warnings”. I would reject this submission for much the same reasons as stated in connection with the 17 January 2000 letter. The Carey parties particularly submitted in final submissions that Mr Shearwood should have asked for more information about the MIS issue, although the failure to ask for further information in respect of this letter (and, indeed the 17 January 2000 letter) was not pleaded. I also reject this submission. Mr Shearwood was not asked by Mr Bell or any other Westpoint Group entity representative for advice about the application of the law with respect to any particular project in connection with which an offering of promissory notes was proposed. Rather, Mr Bell asked for a shorter and simplified version of the 17 January 2000 letter that explained to financial planners why promissory notes were not securities, on the assumption that the 17 January 2000 letter would nonetheless accompany this newer straightforward version. This is precisely what Mr Shearwood gave him. In the context in which the letter was sought and provided, there was no occasion for Mr Shearwood to ask for further information. Mr Shearwood was not asked by Mr Bell for advice about the possibility that a promissory note issue might constitute an MIS, in which case Mr Shearwood would have required instructions about the arrangments pursuant to which the notes were to be issued. Mr Shearwood was not asked to address any specific fact situation; and, as noted already, he did not yet know anything about the arrangements specifically made or proposed by the Westpoint Group to issue promissory notes.
127 Further, the 9 February 2000 letter must be considered in light of the fact that Mr Bell and Mr Shearwood understood that the 17 January 2000 letter would accompany it. The 17 January 2000 letter referred to the need to pay attention to the MIS issue and, in consequence, informed the financial planners to whom it and the February letter were to be directed that the possibility that a promissory note issue might constitute a MIS had to be considered. In the context in which the 9 February 2000 letter was sought and provided, Mr Shreawood was not, as the Carey parties submitted, required to do more.
Mr Shearwood’s original involvement in the Bayview Project
128 In 1999, Westpoint Corporation set out to purchase two properties in Victoria, known as “Bayview” (‘Bayview Project’) and “Bayshore” (‘Bayshore Project’), both of which were located in Port Melbourne, as well as a property in Market Street, Melbourne, (‘Market Street Project’) and a property at York Street, Sydney (‘York Street Project’). With the purchase of these properties, Mr Carey said that he contemplated the use of new funding mechanisms.
129 In or around December 1999, Mr Bell began to prepare an information memorandum to raise $10.5 million as mezzanine finance for the Bayview Project, although Bayview Mezzanine was not incorporated until 21 January 2000 (at which time Quartz Nominees Pty Ltd (‘Quartz’) became a shareholder). Mr Bell said that “not long after this”, he also began to prepare draft information memoranda for the York Street Project and the Market Street Project.
130 The final version of the information memorandum for the Bayview Project was published to financial planners in February 2000. Bayview Mezzanine was the first of the mezzanine companies to issue promissory notes; and, by 24 May 2000, so Mr Carey maintained, Bayview Mezzanine had raised $8.4 million.
131 The information memorandum for the Bayview Project went through numerous drafts before it was published in February 2000. Mr Bell deposed that, in the course of preparing it, he had a number of conversations with Mr Shearwood, although he was unable to produce any file notes or other contemporaneous records relating to the supposed conversations. In particular, Mr Bell deposed that, in early January 2000, he sent a copy of a current draft information memorandum for the Bayview Project to Mr Shearwood to review. Mr Bell also deposed that he sent Mr Shearwood other drafts between 17 January and early February 2000.
132 Mr Bell’s evidence was that, at some unspecified time apparently after September 1999, he told Mr Shearwood that he was interested in using promissory notes for the purpose of raising mezzanine finance and, in particular, for the Bayview Project. In his affidavit, Mr Bell said that he told Mr Shearwood about the Bayview Project “including what it was, how long it was going to take to complete, what the level of senior debt would be and what the funding gap was … to fill with mezzanine finance”. In particular, Mr Bell said that, “I told Mr Shearwood that the Bayview development was to be the first of a number of projects for which mezzanine funding was needed and that it was being used as pilot”. According to Mr Bell, Mr Shearwood subsequently told him:
Westpoint can raise finance for its projects by the issue of promissory notes with a face value of not less than $50,000. A prospectus will not be needed to issue promissory notes. A single purpose company should be set up to issue the promissory notes in respect of each project and that company would issue the notes and then on-lend the monies raised to the company carrying out the development. The loan from the company which raises the money to the development company can be secured by a second registered charge and a second ranking mortgage.
133 Mr Shearwood deposed that he did not see any information memorandum for the Bayview Project until 1 June 2000 (in a fax sent on 31 May 2000), after the information memorandum had been published and promissory notes issued. This was consistent with his statements in his email of 2 June 2000 to Mr Thomas (which were not directly challenged or corrected at the time). In cross-examination, Mr Shearwood maintained his position. He said that, whilst he knew, as at 9 February 2000, that a Westpoint Group company was intending to issue promissory notes and sell them through financial advisers, he did not know the purpose or project for which they were to be issued.
134 Mr Shearwood properly conceded the limits of his recollection, but his account was essentially corroborated by Freehills’ contemporaneous records. There is no reference to any work with respect to the Bayview Project information memorandum in the records created by Mr Shearwood and Freehills about this time. It is unlikely that, if Mr Shearwood had in fact sighted a draft or final of the information memorandum at this early stage, there would have been no reference made to it in Freehills’ records. Further, Mr Shearwood’s denial in his email to Mr Thomas of 2 June 2000 (see below) of having received the information at or around this earlier time was never specifically challenged or corrected by any representative of the Westpoint Group.
135 Save for some circumstantial evidence discussed below, Mr Bell’s alternate account was not corroborated by any contemporaneous records; and, as stated as the outset of these reasons, I regard the evidence of Mr Shearwood as more reliable than that of Mr Bell, who had a tendency to reconstruct his evidence in the absence of any independent recollection. Furthermore, Mr Bell conceded in cross-examination that he had no recollection of actually providing the draft information memorandum to Mr Shearwood and, indeed, that he had very little recollection of events prior to the Carey parties’ lawyers assisting him in the preparation of his affidavit. The evidence given by Mr Shearwood on this issue is to be preferred to that given by Mr Bell. Accordingly, I reject Mr Bell’s evidence that he told Mr Shearwood about the Bayview Project in January or February 2000 and, in particular, about the proposal to raise mezzanine finance for the Bayview Project via promissory notes. I also reject Mr Bell’s evidence that he provided Mr Shearwood with drafts of the Bayview Mezzanine information memorandum around this time.
136 I therefore reject Mr Bell’s evidence from which it might be inferred that, in early 2000, Mr Shearwood countenanced raising mezzanine finance for the Bayview Project by the issue of promissory notes, providing the investors had the benefit of a substantial guarantee. The fact that a related idea had been considered by Mr Shearwood in connection with the Murray Street Project does not militate in favour of accepting Mr Bell’s evidence on this point, because the Murray Street Project did not involve the issue of promissory notes. Although Mr Shearwood subsequently defended the Bayview Project in a letter to ASIC dated 2 June 2000, on the ground that investment via promissory notes was dissociated from the Project’s success because there was a “guarantee of substance”, there is no evidence apart from Mr Bell’s evidence (see above) that Mr Shearwood gave advice to this effect in early 2000 in connection with the Bayview Project. In assessing the likelihood that he gave such advice in early 2000, the absence of corroborative evidence must be borne in mind, as well as the fact that the 2 June 2000 letter was in fact written on his client’s instructions, in response to ASIC’s questions about the information memorandum published by Bayview Mezzanine and in order to persuade ASIC that it had no need to take its inquiries further. Other references to this argument, for example in Mr Shearwood’s email to Mr Thomas also on 2 June 2000, must also be read in this context.
137 At one stage, Mr Martindale SC submitted that a change to the description of the guarantee in the Bayview Mezzanine information memorandum during the drafting phase evidenced Mr Shearwood’s participation in, or awareness of, its drafting. In particular, Mr Martindale relied on a statement in section 2 of a draft information memorandum dated February 2000 to the effect that Westpoint would provide a guarantee to Bayview Mezzanine up until both the settlement of the purchase of the property had occurred and the bank debt financing pre-sales conditions had been met. This statement was subsequently removed. By early February, the memorandum stated that the guarantee would continue until all the promissory notes had been redeemed and all interest payments made. Mr Martindale submitted that this change was “the result of the advice given [by Mr Shearwood], that it was necessary to have a guarantee … expiring only on repayment of the principal and all interest on the promissory notes in order to ensure that the payments of the promissory note holder [were] not seen as dependent solely upon the success of the project, but was independently guaranteed”.
138 The difficulty with this submission is that there is little or no independent contemporaneous reliable corroborative evidence. Freehills’ detailed records made at the time do not support the submission; and Mr Shearwood, who, as I have said, was an honest, careful and reliable witness, denied the possibility. The circumstantial evidence relied on by Mr Martindale SC is consistent with the fact that Mr Bell drafted the information memorandum for Bayview Mezzanine without seeking Mr Shearwood’s specific advice about it, but having regard to other advice that Mr Shearwood had given generally and in relation to the Murray Street Project. Accordingly, I reject the submission made by Mr Martindale SC on this point.
Freehills’ involvement in the Bayview project
139 On 14 February 2000, Mr Shearwood received instructions from WPM to act with regard to the Bayview Project. His evidence in this regard was supported by a schedule to an account for Mr Shearwood’s professional fees, dated 23 February 2000 and addressed to WPM. The schedule gave the following account of Mr Shearwood’s work for 14 February 2000:
Considering facts of 11 February 2000 in relation to master files for the due diligence on the Bayview Port Melbourne syndicate companies; speaking to Michael and sending him a fax.
140 As already stated, Mr Shearwood did not see the information memorandum for Bayview Mezzanine until 1 June 2000, after the information memorandum had been published and promissory notes issued. Although he received some details of the Bayview Project in mid February 2000, these details did not disclose the proposed use of promissory notes to raise funds. Instead, the proposal was said to be for the raising of “equity” via “shares” in “special purpose companies”, as I describe further below.
141 On the morning of 16 February 2000, Monica Pham, a financial analyst employed by a Westpoint Group company, sent Mr Shearwood a fax requesting his advice with respect to the application of the Managed Investments Act to the Bayview Project. The fax did not indicate that promissory notes would be used to raise funds. On the contrary, the fax indicated that the funds would be raised by an issue of shares as was done with the Chocolate Factory Project. Ms Pham’s fax relevantly read as follows:
Westpoint is presently preparing development syndicate prospectuses for the issue of shares in special purpose “issue promoter” companies to raise equity from individual investors to enable the promoter companies to participate in the development of 78-92 Bay Street, Port Melbourne. The equity raised by “issue promoter” companies will enable them to purchase shares in the “program vehicle” company undertaking the development (Bayview Port Melbourne Limited). A diagram of the proposed structure is attached for your information.
Consistent with your advice on the Chocolate Factory development in Sydney, Westpoint would be grateful if you could consider the proposed structure for the development at Bay Street, Port Melbourne and advise on the whether [sic] the project will be affected in any way by the Managed Investments Act.
142 The attached diagram for the proposed structure for the Bayview Project indicated that Bayview Mezzanine would provide debt of $10.5 million to Bayview Development Limited. The diagram did not mention that Bayview Mezzanine was intending to raise these funds by issuing promissory notes.
143 The Chocolate Factory development, to which Ms Pham’s fax referred, was a property development in Sydney (‘Chocolate Factory Project’). Mr Shearwood’s evidence, which I accept, was that he had earlier advised that the proposed investment structure for that project did not constitute a MIS, in circumstances where the investors were issued shares in a company, which in turn invested in a development company. Mr Shearwood was not told that a different fundraising mechanism was proposed for the Bayview Project involving the use of promissory notes.
144 Mr Shearwood replied to Ms Pham by letter dated 24 February 2000, stating:
I refer to your facsimile of 16 February 2000 and confirm that on the basis that all that will be offered to investors will be shares in a public company, there will be no managed investment scheme involved.
I also note that for as long as Bayview Port Melbourne Limited has 15 or less shareholders, that the takeovers rules in the Corporations Law will not apply to restrict a person acquiring an entitlement to more than 20% of the voting shares in that company.
145 As at February 2000, the use of promissory notes for mezzanine fundraising was not new. In cross-examination, Mr Shearwood referred to the fact that, “in the 1980s … there was a widespread use of promissory notes by clients of [Freehills] as a method of [mezzanine] financing”. In this context, Mr Shearwood also gave evidence that, on 20 February 2000, he spoke to Ed Goodwin at ASIC regarding the use of promissory notes to fund a development by another of Mr Shearwood’s clients. Mr Shearwood deposed that:
Mr Goodwin told me that ASIC would be concerned about the use of promissory notes and as a result, the other client, proceeded to issue promissory notes but ensured there were less than 20 investors and the balance of funding was raised by way of issue of debentures to excluded offerees.
146 Shortly after this, Mr Shearwood gave his first warning to Westpoint Group personnel about the use of promissory notes for mezzanine fundraising. In March and April 2000, Mr Shearwood had conversations with representatives of WPM, first with Mr Thomas and later with Mr Bell. The conversation with Mr Thomas is evidenced in the documents attached to a letter of account for 29 March 2000. In his conversation with Mr Bell in April 2000, Mr Shearwood informed Mr Bell of ASIC’s concern about the use of promissory notes and warned him about the use of promissory notes in fundraising for the Bayview Project. In particular, Mr Shearwood said that the Westpoint Corporation guarantee might make the transaction more aligned with the financing transaction than a risk transaction but “the matter was not free from doubt”. The substance of this warning is set out in an email to Mr Thomas on 2 June 2000, which referred to this earlier conversation. The 2 June 2000 email is discussed below. Mr Bell said in cross-examination that he recalled this conversation. Further, I accept that Mr Shearwood would have recalled his April 2000 conversation with Mr Bell when he emailed Mr Thomas on 2 June 2000; and that his account is likely to have been correct.
Written advice about whether the Murray Street Project was a MIS
147 As stated earlier, the first written advice given by Mr Shearwood on whether the Murray Street Project would constitute a MIS was that contained in a draft letter to Mr Bell, at WPM, dated 9 March 2000. Murray Street Project did not involve the issue of promissory notes for fundraising. In this letter, Mr Shearwood referred to the proposed structure for the Murray Street Project (which, as his letter indicated had been provided to him by fax on 3 March 2000) and continued:
You have asked us to advise whether we consider the proposed arrangement would result in investors who purchased a strata titled unit the subject of a 10 year lease to Pacific (Perth) Pty Ltd participating in a managed investment scheme. This requires a consideration of ASIC policy statement 140 dealing with serviced strata schemes.
…
In very general terms, if there is interdependency between owners then it is likely there will be a managed investment scheme. Where the return to one owner depends, in whole or in part, on the use of other investors’ strata units, through an income pooling arrangement or fairly allocating tenants, then there is likely to be a managed investment scheme.
Where there is a fixed or indexed return provided to an investor there will not be a managed investment scheme if an investor’s return does not materially depend upon the arrangement involving their unit. Investors must have the understanding that their return will materially depend upon the arrangement.
…
In summary, circumstances must clearly indicate that buyers believe it is unlikely that payment of the rent will be materially affected by whether the operator operates the serviced strata arrangement profitably.
Conclusion
[Simon – we need to discuss what the nature of the 12 month rental guarantee referred to in the diagram is. At this stage, I am not satisfied we can be concluding that the circumstances clearly indicate that buyers believe it is unlikely that the payment of rent will [be] materially affected by whether the operator operates a serviced strata arrangement profitably.
…
Although ASIC’s policy statement 140 does not contemplate it, I would have thought that where a group establishes a special purpose company in each location to operate a hotel and all the obligations of that subsidiary are guaranteed by an entity of financial substance that it would be willing to look at the position of the group as a whole and not just the operating subsidiary.]
148 Mr Shearwood gave a second written advice with respect to the applicability of PS 140 to the Murray Street Project on 1 December 2000. In a letter of that date, he wrote to Mr Rundle at WMC referring to Freehill’s draft advice of 9 March 2000 and subsequent discussions and specifically warning:
You have sought our advice as to whether or not the development you are proposing to undertake at 297 Murray Street, Perth would constitute a “managed investment scheme” within the meaning of the Corporations Law. In our view, there is limited scope to argue that the scheme is not a managed investment scheme within the meaning of the Corporations Law. (emphases in original)
149 In this 1 December 2000 letter, Mr Shearwood made it clear that his opinion depended on the facts as outlined to him. Thus, after setting out his understanding of the proposed arrangement for the Murray Street Project, Mr Shearwood asked that he be told “immediately if the above facts are incorrect or if there is any other material fact of which we are unaware, as our opinion is based solely on those facts” (emphasis added).
150 Mr Shearwood’s analysis of the law commenced with the meaning of “managed investment scheme” as relevantly defined in the Corporations Law. Mr Shearwood stated that “[i]t is our view that on a first principles analysis of the definition of a managed investments scheme, your scheme does not fit within that definition”. Critically, however, Mr Shearwood substantially reiterated his earlier advice that, in ASIC’s application of this definition in PS 140, ASIC had indicated that if a project were not to be a MIS:
[i]nvestors must have the understanding, which a promoter can make clear from the relevant marketing and other disclosure documents, that the rental return will not materially depend upon the operation of the serviced apartment complex.
Mr Shearwood’s advice went on to consider whether, as regards the Murray Street Project, the “operator” had such “financial substance” that investors would understand that their return was likely to come from it, rather than depending on the operation of the apartment complex. In this regard, Mr Shearwood stated:
In an overall sense, the Operator probably is only of financial substance if you can look at the financial strength of its [parent company].
However, due to the fact that the Operator is a single purpose company, the accounts of the Operator will not reflect that substance. Accordingly, unless the ASIC is willing to look behind the company and into the financial strengths of the controlling entity (which I am unable to determine to be the case) it may be difficult to show that Operator has satisfactory financial substance [sic].
Another possible way of demonstrating that the Operator is of “financial substance” is to provide to investors a rental guarantee from a third party which is of financial substance.
We have spoken to Ed Goodwin at ASIC who has indicated for the purposes of assessing the financial substance of an entity, regard can be had to a holding company or other associated company that provides a guarantee. In other words, it is the combined financial substance that can be taken into account.
[We understand from our discussions with you that a 12 month rental guarantee has been provided by Parkes Street Pty Ltd. This is in addition to a performance guarantee provided by Parkes Street in clause 16 of the Lease Agreement.]
We have reviewed the Profit and Loss Statement of Parkes Street as at 30 June 2000 and consider that (provided that there have been no material changes in the past financial year) [ ]. In addition, we note that it is an essential condition of the Lease Agreement that the guarantor ensures at all times that it has net tangible assets of not less than five million dollars.
The ASIC has not considered in this Policy Statement whether such a guarantee, or indeed what type of guarantee, is sufficient to demonstrate that an Operator is of “financial substance” or to demonstrate that the investor’s return (ie. the payment of the rent) is not dependant on the profitability of the services apartment arrangement [sic].
[Note: We have not sighted a copy of the 12 month rental guarantee]
…
The other test is whether this particular serviced apartment arrangement is a non-material part of the Operator’s overall business operations. Again, as the Operator is a single purpose company it is difficult to demonstrate that the serviced apartment arrangement is a non-material part of its business operations (when in reality it is the only part of its operations).
The ASIC has not considered in this Policy Statement whether the operations of the parent company or company group are to be considered when determining whether the arrangement is a non-material part of the Operator’s “overall” business.
151 Having regard to the above considerations, Mr Shearwood concluded that there was doubt about the critical issues because “the company is a single purpose company established for the operation of the Perth apartments alone”. Notwithstanding this, he ended his 1 December 2000 letter with the following comments:
Provided that it is clear to investors that their return will not materially depend on the profitability or otherwise of the serviced apartment arrangement, and this is in fact the case [it is our view that, on the ASIC’s analysis set out in Policy Statement 140, it is open to argue that the scheme is not a managed investment scheme within the meaning of the Corporations Law.]
If the scheme is not a managed investment scheme within the meaning of Corporations Law, Chapter 5C of the Corporations Law will not apply to it. In other words, you will not be required to register your scheme with the ASIC or use a responsible entity. Likewise, you are not required to register a prospectus under Chapter 5C or under the general fundraising provisions in Chapter 6D.
In passing, we note that the normal rules would apply to any information you give to investors, including that you must not engage in misleading or deceptive conduct.
ASIC first queries the use of promissory notes
152 By letter dated 29 May 2000, Blair Ussher, a senior lawyer at ASIC, wrote to the directors of Bayview Mezzanine, advising that ASIC had undertaken a review of the public offer documents issued for the Bayview Project’s fundraising venture and development project. Mr Ussher wrote as follows:
I note that these offer documents claim, in several places, that the Bayview Mezzanine promissory notes are not “securities” as defined by the Corporations Law (‘the Law’) and are not subject to regulation under the Law.
The only reasons offered in the documents, in support of these assertions, are as follows:-
(a) promissory notes are covered by the Bills of Exchange Act; and
(b) promissory notes, with a face value of not less than $50,000, do not fall within a “definition” of a “debenture” pursuant to s.9 Corporations Law.
These reasons are inadequate and cannot justify the assertion that the promissory note issue is beyond the regulatory provisions of the Law.
As you are no doubt aware “securities”, as defined by the Law, cover more than debentures. In particular the expression also includes “an interest in a managed investment scheme”.
Having examined the offer documents it is my preliminary view that the promissory note issue does fall within the managed investments scheme provisions of the Law. Accordingly, I have no option but to require your company to forward to my office a statement setting out all reasons by which it is alleged that the promissory note issue is not subject to the provisions of the Law. (emphasis added)
Mr Ussher required Bayview Mezzanine to provide the requisite statement of reasons no later than 5 June 2000.
153 On 31 May 2000, Mr Thomas faxed Mr Shearwood a copy of ASIC’s 29 May 2000 letter and a copy of Bayview Mezzanine’s information memorandum, both of which they discussed on 1 June 2000, as evidenced in Mr Shearwood’s timesheet narration for 1 June 2000. The next day, Mr Shearwood met with Mr Beck and Mr Rundle for the purpose of finalising a response to ASIC. This is also reflected in Mr Shearwood’s timesheet narration for that day.
154 Significantly, on 2 June 2000, Mr Shearwood sent an email to Mr Thomas in the following terms:
I attach a draft response to ASIC. I have checked and can find no record of having ever reviewed the information memorandum in relation to Mezzanine Finance. My file shows us as having provided advice of a general nature in relation to promissory notes on both 17 January and 19 [sic] February 2000. Our letter to Monica Pham on 24 February in response to her fax of 16 February advised that on the basis of that all will be offered to investors will be shares in a public company, that there would be no managed investment scheme involved with a capital raising by Bayview Port Melbourne Limited. No consideration was given at that time to the raising of money by Bayview Mezzanine Pty Ltd. Indirect reference was made to this in an email to Simon Bell on 21 March dealing with a query raised by Charter Bridge Davies [sic] to whether advisers dealing in promissory notes required a dealers licence.
We had general discussions with Simon Bell in April, following a concern being raised with ASIC in relation to another client and it was accepted that the fact that there was a Westpoint Corporation guarantee aligned the promissory notes more as a financing transaction rather than a risk participant in a managed investment scheme. However, as we explained to Simon Bell at the time the matter is not free from doubt. It was because of this, that we have advised on occasion such as in our letter of 9 February 2000 that there should not be broad scale advertising in relation to promissory notes because if the attention of ASIC was attracted to them, the position could well be challenged.
Having said this, as stated in the attached draft, we believe there is an arguable case that promissory notes in the present circumstances do not constitute an interest in a managed investment scheme. This assumes that the financial substance of Westpoint Corporation Pty Ltd is such that its guarantee is a meaningful guarantee and could ensure that there was no shortfall in principal or interest.
(Emphasis added)
The reference to “19 February” in the first paragraph was in error. Plainly, Mr Shearwood intended to refer to his letter of 9 February 2000.
Mr Shearwood’s letter of 2 June 2000
155 Freehill’s letter to ASIC of 2 June 2000, addressed to Mr Ussher and signed by Mr Shearwood, was in the following terms:
Promissory note issue – Bayview Mezzanine Pty Ltd
We act for Bayview Mezzanine Pty Ltd and have been asked to respond to your letter of 29 May 2000.
We note that section 92 of the Corporations Law defines securities to include debentures as well as interests in a managed investment scheme.
Your letter appears to acknowledge that the definition of debenture in section 9 of the Corporations Law excludes an undertaking to pay money under a promissory note that has a face value of at least $50,000. All promissory notes issued by Bayview Mezzanine Pty Ltd have a face value of at least $50,000 and therefore do not fall within the definition of debenture.
We note that the definition of managed investment scheme in section 9 of the Corporations Law excludes debentures.
It is an absurd result to suggest that promissory notes with a face value of less than $50,000 (and which therefore fall within the definition of debenture) are excluded from the definition of managed investment scheme whereas promissory notes with a face value of more than $50,000 fall within the definition.
Lenders to Bayview Mezzanine Pty Ltd are involved in lending money to a sole purpose finance company. This finance company then lends money to the developer of the Bayview Port Melbourne project. The Bayview Port Melbourne project is being developed by a separate company, Bayview Port Melbourne Limited. Equity investors will be offered shares in Bayview Port Melbourne Limited by a disclosure document complying with the Corporations Law. The project being undertaken at Port Melbourne is a business undertaking of the company, Bayview Port Melbourne Limited. The only interest that the company Bayview Mezzanine Pty Ltd has over the assets of Bayview Port Melbourne Limited is as a consequence of holding a second ranking fixed and floating charge over Bayview Port Melbourne Limited.
It should be noted that the return to the holders of promissory notes issued by Bayview Mezzanine Pty Ltd is guaranteed by the Westpoint group which has a combined balance sheet showing net assets in excess of $46 million. Because of this guarantee, promissory note holders are not dependent on the success of the business activities of Bayview Port Melbourne Limited for the repayment of their loan and interest thereon.
Turning to the definition of managed investment scheme, which as you are aware has 3 limbs:
(a) there is no contribution of money to acquire rights in any scheme;
(b) whilst investors loan funds are pooled, they are not used in a common enterprise and any financial benefits produced are as a result of a lending transaction and not the operation of any scheme; and
(c) there is no scheme over which anyone has day to day control. The directors of Bayview Mezzanine Pty Ltd operate the business of a company which is to borrow money and on-lend it at interest and to arrange for those loans to be repaid to the lenders, being the holders of the promissory notes. If there is a shortfall, then the Westpoint guarantee is called upon.
It is clearly the statutory intent that investors lending at least $50,000 in the form of an unsecured loan evidenced by a promissory note do not need the statutory protection of the debenture provisions of the Corporations Law. There is no scheme, for the purposes of the definition of a managed investment scheme and there is no evidence of any statutory intention to catch a lending transaction in this way when it is excluded from the definition of the debenture.
We note that in April of this year we had discussions with the managed investment section at the Western Australian regional office of ASIC in relation to whether a company issuing a promissory note with a face value of more than $50,000 could be said to be issuing an interest in managed investment scheme. The comments made support the conclusion there is no managed investment scheme for present purposes. It was stated by ASIC that there was a concern that when promissory notes were issued by a company and the repayment of loans to the holders of the promissory notes were dependent upon the success of a project operated by that company, that it could be a sign that there was a managed investment scheme involved. However, it was acknowledged that when the nature of the transaction was a financing transaction that it would not be appropriate to extend the managed investment scheme provisions that far.
It is our understanding that each of the investors in the promissory notes is experienced in investing in securities and have invested in reliance on advice from an investment adviser. If the promissory notes were securities, it could well be that each investment adviser would consider the offer did not need disclosure by virtue of the sophisticated investor exclusion in section 708(10) of the Corporations Law.
156 The Carey parties sought to make something of Mr Shearwood’s agreement, in cross-examination, with the proposition that there were “quite a lot of factual matters” that would be necessary to underpin reliance on s 708(10) and that reference to this provision in the 2 June 2000 letter was “rather hypothetical”. At this point, however, the Carey parties’ case depends on a misconstruction of the significance of the 2 June 2000 letter, since it was not, as their argument supposed, written to advise a company in the Westpoint Group. Rather, the 2 June 2000 letter was written by Mr Shearwood, on his client’s instructions, to persuade ASIC that it had no need to trouble itself further with the use made of promissory notes in fundraising for the Bayview Project. In his letter of 24 August 2000, mentioned below, Mr Shearwood later said exactly this to Mr Rundle and Mr Thomas.
157 Mr Shearwood spoke with Mr Ussher at ASIC on 19 June 2000 and, in an email the same day, reported the substance of his conversation to Mr Thomas, at WPM. This email read in part:
It seems in addition to the information memorandum dated February 2000 and the Property Investment Research Pty Ltd research report dated March 2000, that he has a publication by Tasman Asset Management Limited. It seemed in this latter publication there was some statements of fact that he was relying upon. Perhaps you could let us have a copy of it if you have it.
ASIC were taking a very general view of what a scheme is, considering it to simply be a plan of action. He considered a component of the scheme was that there was a guarantee.
…
It seems his main concern is that a loophole may be developed and exploited from the operation of the managed investment scheme provisions. He is not suggesting that he has a particular concern about this project as an investment.
158 ASIC later wrote to Freehills, by a letter dated 23 August 2000, stating that having completed its review, “[a]t this stage, subject to any additional material coming to its attention, ASIC intends to take no further action in respect of this matter”. ASIC continued:
Please note that the use of this letter as a bar to, or defence in, any civil, criminal or disciplinary proceedings is neither intended nor appropriate. This letter merely reflects that, as of its date, ASIC elected to take no enforcement action based on the information it then held.
159 The very next day, 24 August 2000, Mr Shearwood faxed a letter to Mr Rundle and Mr Thomas, attaching ASIC’s 23 August 2000 letter and warning:
You should not take this as encouragement to make further issues of promissory notes.
Whilst reliance can be placed on the sophisticated investor exclusion in section 708(10) of the Corporations Law, this was only a fallback argument that we used when dealing with ASIC.
The main argument was that the issue of the promissory notes was essentially a financing transaction, with the returns to investors not being dependent upon the financial success of the project being financed, primarily because of the Westpoint guarantee.
Before you use promissory notes for any other project, I recommend that you seek advice from us on whether the facts of that case are sufficient to justify not registering a management investment scheme and issuing a prospectus.
(Emphasis added)
160 Having regard to the tenor of this letter, this is not a case where Mr Shearwood failed to warn about the use of promissory notes. Rather, he urged his client to seek specific advice about the use of promissory notes for any other project. In cross-examination, Mr Shearwood said that his reference in the last paragraph of this letter to “any other project” was a reference to a project other than the Bayview Project. Whether or not Bayview Mezzanine continued to issue promissory notes after this point was, so Mr Shearwood said, a “decision for the risk-takers in the business”. Mr Shearwood acknowledged that he was “not slamming the door on the use of promissory notes, as long as the circumstances justified not registering a [MIS]”, in circumstances where they [i.e., the risk-takers in the business] chose to proceed, knowing the facts and the legal position as it was”.
161 The difficulty was, so Mr Carey deposed, that, by August 2000, when Mr Shearwood recommended that Westpoint Group personnel seek further advice about issuing promissory notes for another project, York Street Mezzanine was already involved in fundraising by promissory notes. As at September 2000, both York Street Mezzanine and Bayview Mezzanine had, so Mr Carey said, “information memoranda in the market and were raising funds”. As indicated below, I accept that, as Mr Carey said, both these companies were actively engaged in fundraising by this date. I do not, however, accept that companies in the Westpoint Group were somehow ‘trapped’ into the continuing use of promissory notes. Indeed, such a proposition is contrary to the Carey parties’ own argument in closing submissions that, had Mr Shearwood given them more careful advice on 3 October 2000, then “the ball might have stopped rolling or been diverted”, to use senior counsel’s phraseology.
162 Some weeks later, on 27 September 2000, Mr Shearwood and Ms Pham had a telephone conversation in which Ms Pham asked Mr Shearwood for advice about whether promissory notes were repayable on demand or at a fixed time. Later that day, Mr Shearwood sent Ms Pham copies of previous correspondence, including Freehills’ letters to WPM of 24 August 2000 and 17 January 2000, ASIC’s letter to Freehills of 23 August 2000 and Freehills’ 2 June 2000 response.
163 On the next day, 28 September 2000, Mr Shearwood gave some advice to Ms Pham. His fee narration for that date records:
Considering research on whether a Promissory Note payable at a fixed future date must be presented for payment before payment was made and advising Monica that it did not unless the terms of the PN required it; and advising that if a PN holder agreed, a new note could be issued with the consent of the holder instead of repaying the previous one.
In cross-examination, Mr Shearwood said that he had no recollection of advising that, with the promissory note holder’s consent, a new note could be issued “instead of repaying the previous one”. When Mr Martindale SC asked him whether he was “[a]ble … to say whether it’s advice about rolling over or extending promissory notes”, Mr Shearwood simply responded “[i]t appears to be”.
164 The Carey parties sought to make something of this evidence, submitting that it showed that Mr Shearwood had given “advice about rollovers as early as 28 September 2000”. This was true only in a limited sense that Mr Shearwood advised that, with the holder’s consent, a new promissory note could be issued instead of repaying a previous one. No-one argued that this advice was wrong, however; and, plainly enough, the advice did not foreshadow or in any sense countenance the large-scale rollover method that the Westpoint Group ultimately employed to fund its various development projects.
165 Indeed, the evidence was that, on 28 September 2000, Mr Shearwood not only emailed Ms Pham a note detailing in an unexceptional way when a promissory note was repayable, but in an accompanying email again warned:
I can’t emphasise enough my previous written and verbal comments of the risk you run if promissory notes cannot be regarded as a pure financing transaction. When repayment is dependent on the success of the development they are funding, this will not be the case and you will be issuing interwests [sic] in a managed investment scheme, in breach of Corporations Law - unless the scheme is registered and you issue a prospectus.
(Emphasis added)
In this email of 28 September 2000, Mr Shearwood added:
Please do not issue any document referring to promissory notes which includes the name of this firm.
166 Mr Shearwood deposed that he made this latter statement because, when he first saw the information memorandum for the Bayview Project on 1 June 2000, he had noticed a reference in that document to “Freehill Hollingdale & Page” as the solicitor. Mr Shearwood explained that, at that time, Freehills’ policy was that the firm’s name should not be included in any offer document, such as a prospectus, unless the firm was responsible for the drafting of the document or otherwise consented. Mr Shearwood said (and, as stated above, I accept) that Freehills had not prepared the information memorandum for the Bayview Project or consented to the use of its name.
167 Mr Shearwood’s emailed warning was immediately communicated to Mr Carey. This is apparent from a fax dated 28 September 2000 sent to Mr Carey by Leon Boyatzis (a WPM employee working in the funds management area on new fund raisings including prospectuses). In his fax, Mr Boyatzis “asterisked” the warning in a printed copy of Mr Shearwood’s email to Ms Pham of 28 September 2000 and stated “This supports the theory that he [Mr Shearwood] is a bit nervous on this whole issue”.
168 On 22 December 2000, Mr Shearwood himself faxed his email of 28 September 2000 to Mr Thomas. As we shall see, Mr Shearwood reiterated his warnings about the use of promissory notes in 2001 and 2002.
169 York Street Mezzanine was incorporated on 22 November 1999 and Quartz Nominees Pty Ltd became a shareholder. Mr Carey deposed that the final version of the information memorandum for the York Street Project was published to financial planners in February 2000 and, in support of his evidence that, by 31 May 2000, York Street Mezzanine had raised $610,000, Mr Carey produced a document entitled “York Street Mezzanine Pty Ltd – promissory notes on issue analysis”, which was said to be copied from the general ledger for each year.
170 A time sheet narration for 12 June 2000 indicated that, by 12 June 2000, Mr Shearwood knew at least that York Street Mezzanine was intending to issue promissory notes. A narration made by Mr Shearwood for 12 June 2000 recorded “Speaking to Adrian Cook about issuing promissory notes to a Muslim investor in York Street Mezzanine finance without paying interest”.
171 Mr Bell stated, and I accept, that the original draft information memorandum for the York Street Memorandum Project was expressed as intended to raise $10 million in promissory notes. His evidence on this point was corroborated by a copy of a draft information memorandum stating as much.
172 A difficulty in the evidence about York Street Mezzanine arises at this point, however, because Mr Shearwood’s evidence was, and I accept, that he was not instructed to consider an information memorandum for the York Street Project until September 2000. This information memorandum, also to be issued by York Street Mezzanine, was expressed as intended to raise $15 million in promissory notes. Mr Shearwood’s evidence indicated that he did not receive any instructions to advise about the fundraising being undertaken by York Street Mezzanine until September 2000 (with the exception perhaps of a specific and limited communication on 12 June 2000). On the assumption that the evidence as to York Street Mezzanine’s earlier fundraising efforts in 2000 is to be accepted, then Mr Shearwood’s advice was apparently being sought in September 2000 with respect to a subsequent information memorandum and a later attempt at fundraising for the York Street Project. I accept that Mr Shearwood’s advice was not sought about the earlier information memorandum expressed as intended to raise $10 million and, as appears below, he was not given specific details about contemplated fundraising for the York Street Project prior to 29 September 2000.
173 Mr Shearwood’s evidence is supported by a fax from Ms Pham sent on 29 September 2000, under cover of which Ms Pham sent him a copy of an information memorandum for the York Street Project, as well as his written response at the time. In the fax sheet accompanying the information memeorandum, Ms Pham described the memorandum as “prepared by Westpoint for the raising of mezzanine finance by way of the issue of Promissory Notes for the Scots Church in Sydney”. (“Scots Church” was a reference to the York Street Project.) In particular, Ms Pham stated:
The document has been prepared based on advice provided by Freehills to date. Your comments on the draft by Tuesday, 3 October 2000 would be appreciated.
(Emphasis added)
174 The Carey parties did not call Ms Phan to give evidence, whether to explicate her reference to “advice provided by Freehills to date” or otherwise. No explanation was offered for the failure to call her. An unexplained explanation to call a witness may in appropriate circumstances lead to an inference that the evidence of that witness would not have assisted that party’s case: see Jones v Dunkel at 308. In some circumstances, the inference will not be available or, if available, of limited significance: see, for example, Fabre v Arenales (1992) 27 NSWLR 437 at 449-450. In the present case, I would infer that the Carey parties did not call Ms Pham because her evidence would not have assisted their case.
175 On 3 October 2000, Mr Shearwood replied (again by email) saying:
1. In the time available, I must confine my comments to whether or not the promissory notes constitute an interest in a managed investment scheme.
2. We have previously discussed the fact that the issuing of Promissory Notes must be purely a financing transaction and the repayment of the notes must not depend upon the success of the Scotts [sic] Church development. The structure you have used is the same as for the Port Melbourne project that was scrutinised by ASIC. The existence of a guarantee from “Westpoint” was relied on to argue that it was a purely financing arrangement, rather than participation in a development. ASIC appears to have accepted that this means there is no interest in a managed investment scheme involved in the case of Port Melbourne and logic would suggest that ASIC should accept this here too. However, this depends upon the financial position of “Westpoint”. If there is a strong balance sheet backing the guarantee, then there is an arguable case that the promissory notes do not constitute an interest in a managed investment scheme. I can give you no assurance that ASIC would not take a different view if it were to consider this matter again.
…
5. I make no comment on the remainder of the document other than to say you should conduct prospectus standard due diligence and verification, designed to ensure, amongst other things, that the document contains no misleading statements or material omissions. This is particularly important in the context of the financial position of the guarantor, the “equity” in the project and the risks faced by noteholders.
(Emphasis added)
176 Mr Carey deposed that, after receiving this advice, he had discussions with Messrs Rundle and Thomas regarding the guarantee to which Mr Shearwood referred and that they later caused a further group of entities within the Westpoint Group to guarantee the loans from the mezzanine companies to the development companies to “ensure” the adequacy of the “financial substance of the guarantee”.
177 The proposition in the 3 October 2000 email that it was “arguable” that the existence of a substantial guarantee made the arrangement a “purely financing” one as opposed to “participation in a development” had, as Mr Shearwood apparently acknowledged (in the context of being cross-examined on the 2 June 2003 letter) its origins in an analogy with PS140 (although, of course, PS140 did not concern the use of promissory notes to fund a property development project). In final submissions, the Carey parties argued that Mr Shearwood’s advice in the 3 October 2000 email was “wrong and negligent”. This latter allegation did not, however, form part of the amended cross-claim. In particular, in the amended cross-claim, the Carey parties did not allege that the 3 October 2000 email was part of the Promissory Note Advice. The allegation that the advice in the 3 October 2000 email was negligent was not made until final submissions some 4 months after the trial had commenced and some 5 months after the cross-claim had been amended. In a trial such as this one was, it would be unfair to the respondent and not in the interests of justice to entertain this submission at such a late stage. I would not therefore do so.
178 In any event, the Carey parties’ argument depended on a judgment of this Court, delivered some 6 years after the email of 3 October 2000 was written. In substance, the Carey parties contended that Mr Shearwood should have made the same analysis as Finkelstein J in Financial Industry Complaints Ltd v Deakin Financial Services Pty Ltd (2006) 157 FCR 229 at 245-247 and concluded that there was a MIS involved in the issue of the promissory notes by York Street Mezzanine. The fact that Mr Shearwood did not adopt the same process of reasoning as did Finkelstein J some 6 years later is not enough to make out a claim of negligence. If, moreover, it was necessary to determine the issue, I would not regard Mr Shearwood’s approach as “wrong and negligent” in the sense that he focussed on an irrelevant issue, as the Carey parties alleged in their final submissions. In focussing on the the substance of a guarantee by another Westpoint Group entity, Mr Shearwood identified an issue as to whether the existence of such a guarantee meant that the promissory note holders were not dependent on the success of the scheme, which meant that the statutory definition of a MIS was not satisfied because they could not be said to have acquired benefits produced by the scheme. Whether or not this was correct, it was an approach that was at least, to use Mr Shearwood’s words, “arguable” and, indeed, was adopted by Mr Bannon QC in giving his advice at a later date. At no point in this email or at any other time did Mr Shearwood express any strong degree of confidence in this argument and, both before and after sending this email, he gave clear warnings to Ms Pham and others about the use of promissory notes to raise mezzanine finance.
179 Although Mr Shearwood did perform some further work in relation to York Street Mezzanine, he was never asked to consider the adequacy of the loan guarantee to which Mr Carey referred. Thus, for example, a time sheet narration for 6 November 2000 recorded “[c]onsidering risk factors statement for York Street Mezzanine finance and letting Brian Thomas have my comments”. In cross-examination, Mr Shearwood said that he could not recall his attendance on Mr Thomas or the comments he gave to him, but “expected” that his reference to “the risk factors statement for York Street Mezzanine finance” was a reference to an aspect of the offering document which dealt with the disclosure of risk to an investor.
180 Further, in closing oral submissions, Mr Martindale SC criticized the 3 October 2000 email to Ms Pham on the basis that “[i]t failed to either stop [the ball] rolling or divert it, or divert its course”; and submitted, in substance, that Mr Shearwood missed “his opportunity to really put some red lights up”. The 3 October 2000 email was not, however, pleaded as part of the Promissory Note Advice on which the Carey parties’ negligence and misleading and deceptive conduct case depended. Its sufficiency was not specifically impugned until these closing submissions months after the trial had begun. Further, Mr Shearwood’s concerns about the use of promissory notes had already been clearly conveyed to Ms Pham some days earlier, by an email on 28 September 2000; and, in any event, the 3 October 2000 email was clearly not, as Mr Martindale SC put it, “a blessing” on the use of promissory notes. Rather, it made very clear that there were real risks attaching to their continued use.
181 Significantly, however, on 22 December 2000, Mr Shearwood faxed to Mr Thomas a copy of his 28 September 2000 email to Ms Pham warning about the use of promissory notes other than as “a pure financing transaction” (as well as the file note of 27 September 2000 concerning the date on which promissory notes were repayable).
Other mezzanine companies and projects
182 According to Mr Carey, Market Street Mezzanine Pty Ltd (‘Market Street Mezzanine’) was incorporated on 27 January 2000 and, once again, Quartz became a shareholder. Also according to Mr Carey, the final version of the information memorandum for Market Street Mezzanine was based on that for York Street Mezzanine and was published to financial planners in or about December 2000. I pause here to note that neither counsel for the Carey parties nor for Freehills drew my attention to some inconsequential ambiguity in the company names and document dates relating to the financing of the Market Street Project. For the sake of clarity and to demonstrate that nothing turns on the conflict in the documentation, I detail these ambiguities briefly here. The first ambiguity is in relation to the exact date of issue of the information memorandum. Mr Carey's undisputed account was that the Market Street Project information memorandum was published to financial planners in or about December 2000. Mr Bell's affidavit confirmed that he was responsible for drafting the memorandum issued by Market Street Mezzanine to raise $8.5 million by way of promissory notes. Annexed to Mr Bell's affidavit with reference to his statements regarding the $8.5 million promissory note issue was, however, a document with relevantly different details. This document was an information memorandum issued in relation to the Market Street Project, but for the raising of $20 million by way of promissory notes with a date on the very back page of “22.1.03” which one may assume for present purposes was 22 January 2003. The second ambiguity was in relation to the correct name of the company created for the purpose of raising mezzanine funding in 2000. Again, somewhat confusingly, the information memorandum annexed to Mr Bell's affidavit names Market Street Mezzanine Ltd (not Market Street Mezzanine Pty Ltd) as the relevant entity. Market Street Mezzanine Ltd is also the company name appearing at the head of the ASIC company extract annexed by Mr Carey to his affidavit as evidence of the incorporation of Market Street Pty Ltd on 27 January 2000.
183 The information memorandum annexed to Mr Bell’s affidavit cannot be taken to be the document that either he or Mr Carey described in their affidavits. Rather, this document most likely related to a later proposed issue (or issue, it makes no difference) of promissory notes after Market Street Mezzanine had changed its status and name to Market Street Mezzanine Ltd sometime after October 2001. Such a change of status was expressly foreshadowed in a letter of engagement annexed to Mr Shearwood's affidavit and sent by Freehills to Mr Rundle on 15 October 2001. This explanation of the inconsistency also coheres with a different retainer letter from Freehills to Mr Rundle annexed to Mr Carey's consolidated affidavit dated 17 January 2002, which stated that Market Street Mezzanine Pty Ltd's “status is to be changed to ‘Limited’”. I note, without exploring the matter further, that Mr Carey deposed that Market Street Mezzanine Ltd was incorporated in January 2002, also to raise mezzanine finance, but according to Mr Carey, by way of “debentures”. A more accurate description would probably have been that Market Street Mezzanine Ltd assumed its status in January 2002. A change of status (as opposed to the creation of two simultaneously existing companies) would also explain more readily the name ‘Market Street Mezzanine Limited’ at the head of the ASIC company extract also annexed to the affidavit of Mr Carey with its registration date at 27 January 2000. Ultimately, no relevant fact or point in issue is affected by the ambiguity raised by the information memorandum annexed to Mr Bell’s affidavit or the name at the head of the company extract. Unhelpfully, the relevant page of the company extract where such a status change would have occurred was not filed by the Carey parties. I accept, as did both counsel during the proceeding, that the relevant promissory note issue is in this instance that issued by Market Street Mezzanine Pty Ltd with an information memorandum published to financial planners in or about December 2000. It is this issue which is relevant to the factual matrix within with the promissory note advice is said to have been provided.
184 On 7 August 2001, Bayshore Mezzanine Pty Ltd (‘Bayshore Mezzanine’) was incorporated under Mr Carey’s direction and, again, Quartz became a shareholder. In September 2001, Bayshore Mezzanine issued an information memorandum seeking to raise $20 million in mezzanine finance and began raising funds.
185 Ann Street Mezzanine Pty Ltd (‘Ann Street Mezzanine’) was incorporated under Mr Carey’s direction on 18 November 2002 and, again, Quartz became a shareholder. According to Mr Carey, the information memorandum for Ann Street Mezzanine was published to financial planners seeking to raise $25 million in mezzanine funds in or about December 2002. Again, I note that there is some ambiguity about this, as the very back page to the information annexed to Mr Carey’s affidavit bears the notation “V2 22.1.03”. Nothing, however, would seem to turn on this discrepancy.
186 Broadly speaking, each mezzanine fundraising via promissory notes was done using the same structure. Mr Carey deposed that a mezzanine company was established; the funds were raised via promissory notes; and a loan, supported by guarantee, was made from the mezzanine company to the relevant development company. After 3 October 2000, there was, so the Carey parties submitted in closing submissions, a group of guarantee companies, rather than simply WPC. Each information memorandum contained forms of an applicant’s undertaking and promissory note substantially in the form attached to Mr Shearwood’s letter of 17 January 2000.
August & November 2001: Mr Shearwood’s promissory note warnings
187 Notwithstanding Mr Shearwood’s warnings, Freehills was not asked to provide advice about the ramifications of raising funds by promissory notes until approached by Mr Beck on behalf of WPM on 15 August 2001. On 15 August 2001, Mr Shearwood met with Mr Beck and others from the Funds Management Division of WPM to discuss the risks associated with issuing promissory notes to raise funds for mezzanine finance. Mr Shearwood confirmed the concerns that he had previously expressed about this use of promissory notes.
188 After the meeting, Mr Shearwood sent Mr Beck at WPM a letter dated 17 August 2001, to which he attached copies of previous letters or emails in which he had expressed concerns about the use of promissory notes and described them as follows:
(a) our letter to Simon Bell dated 17 January 2000, explaining that a promissory note having a face value of at least $50,000 was excluded from the definition of debentures and, so long as it was not part of an arrangement that would constitute a managed investment scheme, then there would be no prospectus implications for an issue of promissory notes. This letter also describes what constitutes a promissory note;
(b) our letter dated 2 June 2000 to ASIC in response to a query by ASIC in relation to the Bayview Mezzanine financing document, apparently in response to a complaint;
(c) ASIC’s letter dated 23 August 2000 as a result of the conclusion of its investigation into Bayview financing;
(d) our letter of 24 August 2000 enclosing ASIC’s letter of 23 August discouraging you to make further issues of promissory notes without more detailed advice from us;
(e) an email to Monica Pham of 28 September 2000 attaching a copy of an internal file note discussing technical aspects of promissory notes. Again, this email emphasised our concern that any issue of promissory notes must be regarded as a legitimate financing transaction otherwise you will breach the Corporations Law;
(f) our email to Monica Pham dated 3 October 2000 providing limited comments on the York Street Mezzanine document. I note this is the first time we had ever been asked to comment on an offer document relating to promissory notes and our email did not constitute a sign-off on the document but rather, raised a number of serious matters that needed to be considered. We are not aware of whether those matters were considered.
In summary, you should be guarded in stating what advice Westpoint Management Limited has received from Freehills. We have always been at great pains to point out that the repayment of the promissory notes must not be dependent upon the success of any underlying project that they fund. There must be a pure financing transaction. If you rely upon a Westpoint guarantee to support the fact that there is a pure financing transaction, not dependent upon the success of a property development, then there must be guarantees in place from assets of sufficient substance to meet obligations under that guarantee. We are not in a position to comment on whether Westpoint is in that position.
We are also concerned to learn that large sums of money have been raised by issuing promissory notes and whether those investors have been made aware of the risks associating with investing. As a fall back strategy I have previously suggested that reliance be placed on section 708(10) of the Corporations Act which provides an exclusion from the need for a prospectus if securities are, in fact, being offered. In this situation, a licensed dealer in securities would take responsibly for ensuring that an investor was sufficiently “sophisticated” not to need the benefit of a disclosure document.
Please bring the attached correspondence to the attention of all directors of any Mezzanine finance company that you establish.
I have considered the terms of the Financial Services Reform Bill and note no changes to the definition of debenture and the associated exclusion relating to promissory notes with a face value of more than $50,000 are proposed. Nor is there any relevant change proposed to the definition of managed investment scheme.
(Emphasis added)
189 Mr Carey deposed in substance that he relied on this and Mr Shearwood’s previous advice as saying that the strength of the guarantee was the critical factor in ensuring the promissory notes were not interests in a MIS. Mr Carey’s evidence at this point entirely disregards Mr Shearwood’s clear statements about his concern, which, as noted earlier, had also been brought to Mr Carey’s attention by Westpoint personnel. For this and other reasons, I would not regard this evidence of Mr Carey as credible.
190 Some months later, on or about 19 November 2001, Brian Millmore, a compliance officer with the Westpoint Group asked Mr Shearwood to advise on the effect of the new Financial Services Reform Act 2001 (Cth) (‘FSRA’) and whether issuing promissory notes might be subject to its provisions relating to disclosure and licensing. Mr Shearwood provided his advice in an email on 23 November 2001, stating that in his view promissory notes would not be caught by the disclosure and licensing provisions of that Act. Significantly, though, Mr Shearwood added in his covering email that:
… I refer to my letter of 17 August 2001 to Richard Beck in relation to the risks associated with issuing promissory notes, a copy of which is also attached.
May 2002: Mr Shearwood’s further promissory note warning
191 A fee narration for 23 April 2002 recorded a meeting between Mr Shearwood, Mr Beck, Mr Bell and another individual on that day “about rolling over Promissory Notes and the legal issues arising out increasing [sic] the level of mezzanine debt funding from the published level at the time some investors invested”.
192 In cross-examination, Mr Shearwood said that he recalled this meeting and described it as:
… a meeting at which Richard Beck in particular was outlaying the fact that they had raised more promissory notes – that the amount that had been raised under information memoranda for promissory notes was more than represented, and there was a discussion about that.
This was the matter of over-subscriptions, which was to become of even more pressing concern in September 2003.
193 On the basis of this evidence, the Carey parties submitted that Mr Shearwood advised “on over-subscriptions in April 2002”. This may be accepted in the limited sense that at this meeting Mr Shearwood identified the legal issues related to the fact of over-subscription. The Carey parties did not argue, however, that Mr Shearwood’s advice in this regard was mistaken. Mr Shearwood’s evidence indicates, moreover, that he was, in his own words, “dealing with the facts after it had happened” and that, on instructions, “an argument … was developed” to deal with those facts.
194 Within about a month after this meeting, Mr Shearwood repeated his warning about the use of promissory notes in an email dated 28 May 2002 to Mr Bell, when he advised that “promissory notes would not be caught by the disclosure and licensing provisions of the FSRA … unless they were part of a managed investment scheme”, but specifically added:
In this regard I refer to my letter of 17 August 2001 to Richard Beck in relation to the risks associated with issuing promissory notes, a copy of which is also attached.
A copy of Mr Shearwood’s letter of 17 August 2001 accompanied both his emails of 23 November 2001 and 28 May 2002.
195 On 20 September 2002, Andrew Moore, a lawyer with ASIC, sent a letter to the directors of York Street Mezzanine, stating that ASIC had reviewed the information memorandum “for an offer of promissory notes in respect of ‘Mezzanine Finance’ of $20 million” for the York Street Project and required an explanation as to why the fundraising did not constitute a MIS regulated by the Corporations Act. The letter further stated:
Based on this review, ASIC has formed the preliminary view that the promissory note offer may be regulated under the Corporations Act (“CA”) as an offer of interests in a managed investment scheme.
The Information Memorandum states that “Promissory Notes are not securities as defined by the Corporations Act (Section 9 “Debentures”) and therefore are not covered by Corporations Act”. It appears that the promissory notes issued are excluded from the definition of “debenture” as they each have a face value of at least $50,000.
However the investments offered may constitute interests in a “managed investment scheme” as that term is defined in CA s 9, given that the definition excludes “debentures”.
It is not suggested that all offers of promissory notes with a face value of at least $50,000 are, without more, interests in a managed investment scheme. However, the Information Memorandum appears to offer investors an opportunity to contribute their monies to be pooled and utilised in a specific property development pursuant to a scheme (ie a program or plan of action) described in the Information Memorandum. Further, it appears that YSM has day to day control over the operation of the scheme.
I note that there are a number of cases in which benefits generated through “lending” type transactions entered into by investors appear to have met the “benefits produced by the scheme” element of the “managed investment scheme” definition: see for example ASIC v Hutchings (2001) 19 ACLC 1454 at 1459 (following Waldron v Auer [1977] VR 236); ASIC v Knightsbridge Managed Funds Ltd & Ors [2001] WASC 339.
Accordingly, please advise me as soon as possible in writing of the basis on which YSM asserts that the offer of promissory notes is not regulated under the CA. If it is contended that there is a “managed investments scheme” within CA s 9 but that CA Chapter 5C does not apply (for example, because the relevant investors are “sophisticated investors”) please specify the reasons for that contention.
196 By fax dated 26 September 2002, Mr Beck (on a WPM fax cover sheet) requested Mr Shearwood to respond to ASIC’s letter. On 1 October 2002, Mr Shearwood gave consideration to this letter, recording the following in his timesheet narration for that date:
Consider letter from ASIC to Richard Beck re promissory note issue; considering cases referred to in letter; asking Richard to send in a copy of the information memorandum.
197 Three days later, on 4 October 2002, Mr Shearwood had a telephone conversation with Mr Moore at ASIC. Mr Shearwood’s contemporaneous file note (which recorded WPM as the client) included Mr Shearwood’s note that:
I emphasised that our client was firmly of the view that because there was a guarantee from a company of substance that there was no financial dependence upon the success of the project being funded and therefore there was not a managed investment scheme involved. Andrew [Moore] felt there could be other elements that resulted in there being a managed investment scheme.
…
I said there was a possibility of section 708(10) applying and that even [if it] was a scheme that would otherwise require registration, this would provide an exemption. If this was the case, he would like information about the investor profile.
I also raised the possibility that Westpoint might be switching to debentures as a method of raising funding and this might make his current enquiries academic. He would be interested to know about this as well. I said that even if they were, I felt sure that Westpoint would want to get confirmation that the device of a promissory note could be used, without breaking the law, in certain circumstances.
Mr Shearwood’s evidence was that his statement concerning a switch to debentures as a method of fundraising was consistent with his instructions at the time.
198 By a fax dated 15 October 2002, Mr Shearwood sent Mr Beck at WPM a draft response to ASIC for review; and, having received Mr Beck’s approval, he responded to ASIC on behalf of York Street Mezzanine by letter dated 16 October 2002.
199 In this letter of 16 October 2002, Mr Shearwood repeated many of the submissions that were contained in his 2 June 2000 letter respecting the Bayview Project. The later letter did, however, introduce a fresh argument about s 765(A)(1)(h)(i) of the Corporations Act. After noting that “[i]t is arguable that by issuing promissory notes, YSM may be dealing in finance products under section 766A of the Corporations Act”, Mr Shearwood argued against this proposition, saying:
… section 765(A)(1)(h)(i) [of the Corporations Act] specifically excludes a “credit facility” from the definition of a financial product. Regulation 7.1.06(1)(a) provides that a credit facility includes the provision of “credit” for any period. “Credit” is defined in sub-regulation 7.1.06(3)(b)(xi) to include issuing, endorsing or otherwise dealing in a promissory note. As a result, a promissory note is not a financial product under the Corporations Act.
200 Mr Shearwood’s 16 October 2002 letter concluded:
On the basis of the reasons set out above, we do not consider that YSM is issuing interests in or operating a managed investment scheme. Therefore, we are of the opinion that YSM’s issue of promissory notes is not regulated under the Corporations Act.
201 In late January 2003, a number of articles appeared in the press relating to ASIC’s investigations into property-related investment schemes. Prompted by these articles, on 30 January 2003, Mr Shearwood attended a meeting with Mr Carey, Mr Rundle and Mr Beck. The first entry on a new Freehills’ file for WPM called “Promissory Notes” recorded this meeting. The timesheet narration was:
Meeting with Norm Carey, Graeme Rundle and Richard Beck (in part) to discuss recent press about ASIC and political concern about promissory notes and mezzanine debt; agreeing to prepare a strategy paper.
202 Mr Shearwood and Mr Carey gave different accounts of this meeting. In his 11 November 2011 affidavit, Mr Carey deposed that at this meeting he told Mr Shearwood that:
I am very concerned about all this. I have had a gut’s full of ASIC saying this is illegal when you told me they are legal. We are not playing games here. There is a lot of money involved, we’ve got retail investors involved, senior lenders and major banks and I have given personal guarantees. I want you to confirm to me, once and for all that they are totally legal.
According to Mr Carey, Mr Shearwood replied that:
Norm, nothing’s changed about my legal advice. The promissory notes are totally legal because the loans are supported by substantial guarantees.
203 Mr Carey deposed that, in addition to the strategy paper, at this meeting Mr Shearwood agreed to provide him with “confirmation of his advice in writing”. Mr Shearwood said nothing of this request in his evidence; and instead he referred to an email request made by Mr Rundle on 3 February 2003, which asked (on behalf of Mr Carey) if, “in providing our draft strategy paper you could also provide a separate one page letter confirming why we are currently complying with the law as it stands” (emphasis added).
204 Mr Shearwood’s evidence was that he met with Mr Carey, Mr Rundle (and Mr Beck for part) to discuss the recent press reports and that, at the meeting, he agreed to prepare a strategy paper in response to ASIC’s concerns. Mr Shearwood deposed that:
This was the first time I had spoken to Norm Carey about promissory notes and at the meeting we discussed whether we could distinguish Westpoint from others in the market that were issuing promissory notes.
In cross-examination, Mr Shearwood said that “there was a general discussion about the law” at this meeting and that he saw “no reason why” he would not have stated “any reservations” about the law at that meeting.
205 For the reasons I am about to state, I prefer the evidence of Mr Shearwood to that of Mr Carey; and reject Mr Carey’s evidence to the extent that it is inconsistent with that of Mr Shearwood. In cross-examination, Mr Shearwood recalled the 30 January 2003 meeting in the sense that he had “an independent, general recollection of the context of the meeting and what was discussed, but not precise details”. Mr Shearwood’s evidence is borne out by his time sheet narration, set out above.
206 Mr Shearwood denied that he said the words as alleged by Mr Carey, adding “[t]hey just wouldn’t be used – the words that I would use”. I accept Mr Shearwood’s denial, in part, because I accept that he would not have used language of this kind and, in part, because Mr Shearwood had not previously made unqualified statements of this kind to a client in the Westpoint Group. There was no reason for him to depart from his customary approach at this meeting. Further, the manner in which Mr Shearwood gave his evidence at trial made it plain that, in a professional context, he would not make broad, unqualified statements of this kind. Moreover, Mr Shearwood’s timesheet narration notes an instruction to prepare a strategy plan, but not an advice, whether a “one pager” or otherwise. Mr Carey did not produce any contemporaneous note of this conversation that might have supported his account.
207 It is improbable that Mr Carey would have proceeded on the basis that Mr Shearwood had given him unqualified advice that the Westpoint Group’s use of promissory notes was “legal” after Mr Shearwood had already expressed serious concerns in writing on numerous occasions about this use; and that Mr Shearwood would have expressed unqualified advice as to the legality of this use of promissory notes when he had already expressed serious concerns on a number of occasions.
208 Further, Mr Shearwood’s evidence is in part corroborated by Mr Rundle’s evidence. When Mr Rundle was initially asked in cross-examination what was discussed at the 30 January 2003 meeting, he said that:
[W]e were discussing culminating the position – our position on promissory notes in a – and ASIC’s interest in them into an overall strategy paper going forward for the group, and that Norm wanted that all encompassed in one paper.
Mr Rundle’s evidence was that, at the meeting, Mr Shearwood said that the promissory notes “… were legal, but the position was arguable”.
209 Subsequently, in cross-examination, Mr Rundle said that he had no specific recollection of the meeting; but that he recalled Mr Shearwood being requested to provide a draft strategy paper and merely thought that he had also been requested to provide a letter of advice. Mr Rundle’s evidence was that this ‘letter of advice’ was “so that we could use that letter if we needed to show it to banks or financial planners because it formed part of the overall strategy and his advice and going forward”.
210 Whether or not the request for the one page advice was made at the meeting or, as I consider more likely, by Mr Rundle’s email of 3 February 2003 (which did not refer to an earlier request) does not matter. What does matter is that Mr Rundle gave clear evidence, which I accept, about the purpose of that advice.
211 As explained above, on 3 February 2003, some 4 days after the meeting, Mr Rundle emailed Mr Shearwood, saying:
Following on from our meeting last Thursday, Norm has asked if in providing your draft strategy paper, you could also provide a separate one page letter confirming why we are currently complying with the law as it stands as compared with others in the market who are attempting to raise funds in a similar way. ie. value of guarantee.
(The email letter confirmed that the strategy paper was requested at the meeting but “also” requested a one-page letter, stating, not confirming, with what it should deal.)
212 Mr Shearwood responded to Mr Rundle by an email on 5 February 2003, attaching “a draft strategy paper as discussed at our meeting last week” and “also … the “one page” opinion you asked for”.
213 The draft strategy paper, clearly headed “Discussion Draft”, stated that it dealt with:
… the proposed strategies for the Westpoint Corporation Pty Ltd group of companies (Westpoint) in relation to its fundraising activities through promissory notes given the recent press indicating that the Australian Securities and Investments Commission (ASIC) will be reviewing the disclosure and regulation of promissory note offers to the public in relation to mezzanine finance property schemes.
214 After discussing possible regulatory action, the draft strategy paper made a number of recommendations, including that:
The initial strategy should include a review by Freehills of all the current documentation relating to promissory note fundraising by companies in the Westpoint group. This will identify which projects are of high risk of being targeted by ASIC and will enable Westpoint to establish a further strategy for dealing with any possible issues of concern.
(The draft strategy paper went through further iterations in March and June 2003.)
215 Mr Shearwood’s email of 5 February 2003 also separately attached the one-page letter requested. This letter was dated 5 February 2003; it was addressed to Mr Carey at WPC; and was in the following terms:
York Street Mezzanine Pty Ltd and Bayview Mezzanine Pty Ltd – Offer of Promissory Notes
We have been asked to confirm that the offer of promissory notes by York Street Mezzanine Pty Ltd (YSM) and Bayview Mezzanine Pty Ltd (BM) comply with the law as it stands.
The Corporations Act regulates “securities” which are defined in section 92 of the Corporations Act to include debentures as well as interests in a managed investments scheme.
The promissory notes issued by YSM and BM do not fall within the definition of “debenture” as each note has a face value of at least $50,000.
It is our understanding that each of the offers has the following characteristics:
1. Lenders to YSM and BM are involved in lending money to a sole purpose finance company.
2. YSM and BM then lend money to the developer of the property project who is a separate company.
3. The only interest that YSM or BM has over the assets of the company which owns the development is as a consequence of holding a second ranking fixed and floating charge over that company.
4. The return to the holders of promissory notes issued by YSM and BM is guaranteed by the Westpoint group. Because of this guarantee, promissory note holders are not dependent on the success of the business activities of the company which owns the development for the repayment of their loan and interest thereon.
As the repayment of loans to the holders of the promissory notes are not dependent upon the success of the project by virtue of the Westpoint guarantee and the nature of the transaction as a financing transaction, the promissory notes do not fall within the managed scheme provisions of the Corporations Act.
Further we note that YSM are not dealing in financial products under section 766A of the Corporations Act because a promissory note is not a financial product under the Corporations Act.
We confirm that when we have previously responded to ASIC’s queries in relation to these promissory note offers, ASIC does not appear to be taking further action in respect of the matters.
216 Mr Shearwood deposed that the letter set out the basis on which it was contended that the promissory notes issued by Westpoint Group companies complied with the law. This is consistent with Mr Rundle’s evidence that he requested the letter for banks and financial planners.
217 In keeping with this purpose, Mr Shearwood’s evidence was that this letter was in the nature of a draft. In cross-examination, Mr Sheawood agreed that the letter was “unqualified” advice but what he meant by this must be understood in the context of his evidence as a whole. It would have been clear from Mr Shearwood’s previously expressed concerns (which were most likely re-expressed to Mr Carey at the meeting on 30 January) and repeated warnings that he did not intend to say that the letter was a final and definitive statement of his advice to his client. When Mr Shearwood’s description of the letter as “draft” was challenged in cross-examination on the basis he did not describe it as such at the time, Mr Shearwood said:
Well, it’s not signed. It’s attached to an email. An opinion would be signed and PDFed and attached to an email if it was issued.
When asked whether there was anything in the email that drew attention to the fact the letter was merely “draft”, Mr Shearwood replied:
Well, when you read the words there’s not, is there, but the context surrounding the provision of both these documents needs to be considered.
(Emphasis added)
He went on to say:
I considered it to be a draft then. I didn’t consider it to be final advice, and the context surrounding the provision of these two documents was very much a development of strategy and a response to ASIC.
(Emphasis added.
When it was put to him that he saw it as “a rehearsal of an argument”, Mr Shearwood said:
I don’t know that I would describe something that way, but I certainly believe it was in the context of preparing a strategy and developing a response to ASIC as a result of media reports of what their attitude was, which is what had led to the meeting on 30 January.
218 Challenged about whether Mr Carey and Mr Rundle should have realised that it was not his finalised opinion, Mr Shearwood reiterated:
Well, I’m saying they were at the meeting on 30 January, and they were aware of what was going on here. It was the development of a response to issues raised by ASIC.
(Emphasis added.)
I accept Mr Shearwood’s evidence as set out above.
219 I accept that Mr Shearwood discussed his view of the law with Mr Carey and Mr Rundle at the meeting on 30 January 2003. Mr Shearwood’s evidence in this regard is corroborated by Mr Rundle. It is more probable than not that, as a lawyer retained by companies in the Westpoint Group, Mr Shearwood would have thought it necessary to outline the relevant law for their benefit and, given his previous qualified statements about the use of promissory notes, he would no doubt have restated his concerns.
220 Further, Mr Rundle’s request for a “one page letter” must be understood in the context in which it was made. That is, in or following a meeting with Mr Shearwood, at which Mr Carey and Mr Rundle discussed a future strategy and response to ASIC’s reported concerns about the use of promissory notes for mezzanine fundraising. The request was, moreover, for a “one page letter”, indicating that, more likely than not, Mr Carey and Mr Rundle were seeking a short version of the defence of the use of promissory notes, which might shown if this use was to be queried. This is entirely consistent with Mr Rundle’s evidence (which I accept) that the letter was “just” to “use … if we needed to show it to banks or financial planners”. In this context, Mr Carey and Mr Rundle would have understood at the time that the “one page letter” did not represent all of Mr Shearwood’s opinion on the subject; and that the letter was a short statement of the best case that could properly be made to justify the promissory notes issue by Bayview Mezzanine and York Street Mezzanine, as the heading to the letter indicated.
221 In this context, Mr Carey’s statement that, on receiving the letter of 5 February 2003, he was “satisfied once again, that what we were doing was totally legal”, is simply not credible; and I reject his evidence. In any event, as already stated, I found Mr Shearwood to be an honest and reliable witness, whose evidence I preferred to that of Mr Carey.
222 The Carey parties submitted that it made no difference whether the advice was, as Mr Carey said, for the Westpoint Group’s own internal purposes or, as Mr Rundle said, to be shown if needed to banks and financial planners. I reject this submission. On Mr Rundle’s version, the letter was not Mr Shearwood’s advice to Westpoint Group entities as to whether or not in his opinion their use of promissory notes was “legal”. Rather, the letter of 5 February 2003 was a short statement in defence of their use of promissory notes, to be provided, if needed, to banks and financial planners. The Carey parties’ allegation that Mr Shearwood’s alleged “advice” was “wrong and negligent” fails because the letter was not in fact “advice” as this allegation would have it.
223 On 20 February 2003, ASIC replied to Mr Shearwood’s 16 October 2002 response, stating that ASIC had obtained an opinion from senior counsel to the effect that the interests offered by York Street Mezzanine were debentures or an unregistered MIS. The letter stated that:
As advised today this matter is to be further reviewed by ASIC’s Enforcement Directorate to determine what further steps are necessary or appropriate in order to secure compliance with the CA. I shall revert to you again at that time.
Finally, I confirm your request for a copy of senior counsel’s opinion in order to expedite the resolution of the issues. I shall revert to you in relation to this aspect of the matter shortly.
224 As evidenced by the letter, Mr Shearwood requested a copy of senior counsel’s opinion, but this request was later refused.
225 When Mr Shearwood received ASIC’s letter of 20 February 2003, he faxed a copy to Mr Rundle. In a telephone call the next day with Mr Carey and Mr Rundle, Mr Shearwood discussed obtaining an opinion from senior counsel about the use of promissory notes for mezzanine finance. A further recommendation to this effect was made in the draft strategy paper of 19 June 2003.
Mr Shearwood briefs senior counsel
226 On 19 June 2003, Mr Shearwood met with Mr Carey, Mr Rundle and Mr Beck regarding the strategy paper, and Mr Shearwood was instructed to obtain senior counsel’s opinion. On 23 June 2003, Tony Bannon SC was briefed to give advice.
227 On 4 July 2003, Mr Bannon SC provided his written advice to Mr Shearwood that the interests offered under the York Street Mezzanine information memorandum were not securities, an interest in a MIS or financial products under the Corporations Act.
228 During the latter half of 2003, ASIC intensified its investigations into the companies in the Westpoint Group and served numerous notices to produce on entities within the Group.
229 On 14 July 2003, ASIC published media and information release IR03/16 relating to promissory notes in which it stated that it was concerned “about complex arrangements involving promissory notes” that:
● are accompanied by other promises about how the money loaned may or will be repaid;
● may reasonably be considered to express or contain a representation or agreement that the investment returns will be produced by an underlying specific investment or the performance of some specific commercial activity;
● are not liquid, cannot easily be traded and are not designed to raise short term finance to manage day to day liquidity issues; and
● are directed primarily at the retail clients.
ASIC stated that in its view an arrangement was likely to involve the offer of financial products if investors’ money, raised through the offer of promissory notes, was used partly to fund the purchase and development of property and investors were led to understand that repayment was dependent on the success of the development.
230 On 23 July 2003, Mr Shearwood and Mr Rundle met ASIC representatives, who told Mr Shearwood and Mr Rundle that ASIC “had funding and approval to take enforcement action or to reach a settlement in relation to the promissory notes by Westpoint”. Mr Shearwood recorded ASIC’s concerns in a contemporaneous file note, as follows:
2.1 Accounting issues
ASIC had accounting concerns and wished to ensure that they investigated the “money trial” so as to ensure that the money was used for the purpose for which it was raised. In addition to ensuring that the mezzanine finance companies lent money to the relevant development company, they were concerned to look at the source of money used to pay commission.
2.2 To review representations made
They wanted to ensure that the documents put in place reflected representations in the relevant information memorandum. This was one reason for looking at the documents provided under the notice to produce.
2.3 “Business risks”
In particular, he mentioned the Inner-city residential property market and the concern that there was a bubble which was about to burst which could result in investors suffering a loss.
231 As an alternative to enforcement action, Mr Shearwood noted that ASIC’s representatives advised that they had considered “overlaying a debenture deed on top of the promissory notes or involving a management investment scheme” but thought “a debenture deed would be best”. Under the heading, “Other matters”, Mr Shearwood recorded that there was also discussion about “the possibility of investors being offered the ability to transfer their notes into the Westpoint income fund”.
232 Two days later, on 25 July 2003, Mr Shearwood discussed the debenture deed process with Mr Carey and Mr Rundle. It is plain enough from the letter that Mr Shearwood subsequently sent on 28 July 2003 that he believed that the Westpoint companies were about to take steps to issue debentures to replace existing promissory notes. In a letter of that date, Mr Shearwood sent Mr Rundle at WPC a fee estimate and statement of the scope of the work required to issue debentures to take the place of the promissory notes. In this letter, Mr Shearwood observed:
We have been working with you in relation to the manner of regulation of promissory notes issued by various special purpose vehicles within the Westpoint group and in particular, negotiations with the Australian Securities & Investments Commission (ASIC) arising out of ASIC’s belief that the promissory notes issued should be regulated as debentures.
Notwithstanding the opinion Westpoint has obtained from senior counsel that the promissory notes issued by York Street Mezzanine Pty Ltd are not securities or regulated financial products, in order to avoid the risk of disruption to your fundraising activities, you propose to prepare to issue debentures to take the place in the short term, of promissory notes. In parallel with this work, you would also prepare the documentation to “overlay” a debenture deed on promissory notes currently on issue, in anticipation of this forming the basis of the negotiated settlement with ASIC.
233 On or about 8 August 2003, ASIC sent Mr Shearwood a preliminary draft of an enforceable undertaking. In response to ASIC’s email enquiry on 19 August 2003 about the enforceable undertaking, Mr Shearwood emailed on 20 August 2003, to “confirm that Westpoint [was] making progress towards issuing regulated products for new projects to take the place of the issue of promissory notes”. His 20 August 2003 email added his understanding that:
The Westpoint Income Fund, which is a managed investment scheme, will be used as well as the issue of debentures by mezzanine finance companies. ….
Mr Shearwood also foreshadowed that Westpoint Group directors wanted to make a presentation to ASIC about the Group’s business and the use of promissory notes.
234 On 2 September 2003, the foreshadowed presentation was made to ASIC at a meeting attended by Mr Rundle, Mr Beck, John Dixon (a mezzanine company director), Michael Lurie (a solicitor separately representing the directors of the mezzanine companies) and Mr Shearwood.
235 The presentation indicated that there were two completed projects (Bayview and Murray Street), five advanced projects (York Street, Market Street, Bayshore, Bayview Heritage and Ann Street) and two new projects (Cinema City and Emu Brewery). There were ten slides. One bullet point on one slide stated “Recent definitive Senior Counsel opinion”. A bullet point on another slide read “Always acted in good faith on legal advice”. A third slide included a bullet point that read “Current Mezzanine Product – Freehills Legal advice”. Finally, under a slide headed “Westpoint’s Position”, a bullet point stated “Commitment to proceed with transition over a reasonable time”, signifying that companies in the Group would replace promissory notes issues with debentures. This accords with Mr Rundle’s recollection.
236 Mr Rundle’s affidavit evidence was that he was present at the meeting when the presentation, which had been prepared by Mr Carey, Mr Beck and himself, was made. Mr Rundle said the Mr Shearwood presented the slideshow and that, in the course of the meeting, Mr Shearwood said that the Westpoint Group was “in the process of converting to regulated product” and “had debentures for the Market Street Project” and “had commenced the Westpoint Income Fund”. It was not suggested that Mr Shearwood made these statements other than on instruction from his client. Mr Rundle added that at this meeting there was an attempt “to come up with an agreed program to transition to regulated product” and that there were “discussions about about entering into an enforceable undertaking”. In cross-examination Mr Rundle confirmed the slide presentation and that “Westpoint was saying to ASIC they proposed to transition out of promissory notes and into regulated fundraising measures”.
237 Mr Shearwood’s affidavit evidence was that there was a presentation to ASIC at the meeting on 2 September 2003. He otherwise relied on his contemporaneous handwritten notes made at the meeting (in their original and type-written form). Mr Shearwood’s notes confirmed that there was a discussion between the representatives of the Westpoint Group and ASIC about ASIC’s concerns with the Group’s fundraising method, especially the function of the promissory notes and rollovers, and that there was also a discussion as to how the Group might transition out of this type of fundraising.
238 Mr Carey deposed that he had “some input into [the] presentation and also read the final version before it went”. Other evidence established that Mr Carey did not attend the meeting on 2 September 2003 and was therefore unable to say what Mr Shearwood said at the meeting. In any event, Mr Carey’s evidence in cross-examination made it clear that he was relying on Mr Rundle’s participation and evidence to make good this part of the Carey parties’ case.
239 The amended cross-claim alleged (at paragraph 25) that at this meeting Mr Shearwood:
… confirmed that:
a. the issue of Promissory Notes was and always had been “totally legal”.
b. Promissory Notes in the form issued by the Mezzanine Companies were not interests in a managed investment scheme.
c. this opinion was confirmed by extensive research and advice provided by Andrew Shearwood of Freehills in 1999 before any Promissory Notes were issued (the “2 September 2003 Advice”).
240 There was, however, nothing either in Mr Shearwood’s or in Mr Rundle’s evidence nor in the body of the Powerpoint presentation that supported these allegations. Ultimately, the Carey parties appear to have relied on that part of the presentation that read “Current Mezzanine Product – Freehills Legal advice”. I would not infer from this brief bullet point that Mr Shearwood “confirmed” any of the matters alleged in the Carey parties’ pleading. Further, at this meeting, Mr Shearwood was representing his client in a conciliatory and defensive mode to negotiate a resolution of ASIC’s concerns and to dissuade ASIC from intervening further or from instituting court proceedings. In these circumstances, I would not infer that Mr Shearwood was giving advice to any Westpoint Group entity or to any of the Carey parties, or that any of them would have understood that he was giving such advice to them.
241 I find, therefore, that the allegations in paragraph 25 of the amended cross-claim were not made out. There was no advice to the effect alleged given by Mr Shearwood to Mr Carey or any of the Carey parties or any Westpoint Group entity at the meeting with ASIC on 2 September 2003.
242 The Promissory Note Advice, which is said by the Carey parties to give rise to their claims in negligence and misleading and deceptive conduct, concluded with the supposed advice of 2 September 2003 allegedly contained in the presentation made to ASIC.
243 The events after this date are relevant only in so far as they explain the current proceeding and bear, in a general way, on the foreseeability, causation and loss and damage issues.
244 Between September 2003 and April 2004, Freehills, acting for the Westpoint Group companies, sought to reach agreement with ASIC, on the basis that the companies would transition away from the use of promissory notes. The Westpoint Group companies sought time for this to occur, but ultimately time expired without them having ended their use of promissory note fundraising or “rollovers”.
245 By a letter dated 9 September 2003, Mr Shearwood wrote to ASIC setting out the basis on which the Westpoint Group proposed to transition out of promissory notes and, in particular, to “confirm the circumstances in which the relevant Westpoint companies propose[d] to stop issuing promissory notes for Emu Brewery and Cinema City” (as these two projects were called by the parties both then and now). The 9 September 2003 letter relevantly continued, as follows:
Westpoint remains of the opinion that the issue of promissory notes by Westpoint mezzanine finance companies does not constitute a regulated financial product.
2 Strategic direction
Notwithstanding the above, for sometime, Westpoint has been progressing, from a strategic point of view, to introduce regulated products that will take the place of promissory notes. …
3 General proposition
Westpoint is moving to an environment where it will no longer issue promissory notes. However, it needs time in order to complete that transition.
It wishes existing advanced projects to be grandfathered. It will not issue further promissory notes in relation to future projects or Cinema City development. And it will stop issuing promissory notes on the Emu Brewery development once a debenture prospectus has been issued.
The holders of Emu Brewery promissory notes would be offered the opportunity to “opt-in” to a debenture, once the debenture prospectus has been issued. Westpoint will use its best endeavours to arrange for the issue of such a prospectus.
…
4 Project categories
We identified 9 Westpoint projects where promissory notes have been issued and categorised them as follows …
4.1 Complete
Bayview and Murray Street. Mezzanine Finance has been repaid.
4.2 Advanced
York Street, Market Street, Bayshore, Bayview Heritage and Ann Street.
4.3 New Projects
Cinema City and Emu Brewery.
5 Future projects
Promissory Notes will not be used as a method of funding future projects.
6 Advanced projects
Commitments have been made to issue promissory notes to further investors in Ann Street. Apart from this, any future issues of promissory notes for advanced projects would only be where there was a repayment of money to an existing holder of a promissory note who elected to reinvest in a new promissory note. In other words, there would be no promissory notes issued for “new money”.
7 New Projects
7.1 Cinema City
No new further promissory notes will be issued. Notwithstanding this, work on a debenture prospectus is currently underway.
7.2 Emu Brewery
Once a debenture prospectus has been issued for this development by Emu Brewery Finance Limited, no new promissory notes will be issued. …
The reason for the distinction between Cinema City and Emu Brewery is that the Cinema City development has no major commitments for the development of the site which are dependent upon promissory notes, from a cashflow point of view.
…
In relation to Emu Brewery, … [s]ubstantial expenditure commitments have been made and the cash flow to fund these major commitments will be prejudiced if the proceeds from the issue of promissory notes were not available.
Further, if the issue of promissory notes was to stop as a result of negotiations with you, we consider there will be a reputational risk for the development of the site that could have significant financial implications. … Current expectations are that a prospectus will be available for an issue of debentures within approximately 7 weeks, and in view of Westpoint’s stated intention for the investors in promissory notes to “opt-in” to the debenture regime once it is available, we do not consider there are any issues of regulatory concern.
Although our client has registered the Westpoint Income Fund as a managed investment scheme and a product disclosure statement will be issued shortly, it will take some time for this investment product to gain acceptance in the market place and to become available as a source of funding for the development of sites which is an alternative to either promissory notes or debentures.
The holders of promissory notes would be offered the opportunity to “opt-in” to a debenture, once the debenture prospectus has been issued. Westpoint will use its best endeavours to arrange for the issue of such a prospectus.
…
246 ASIC replied to Mr Shearwood by a letter dated 10 September 2003, stating that “ASIC would like to carry out a review of the competed [sic] and advanced projects, as defined in your letter of 9 September, commencing next week”. The letter concluded “ASIC is in the course of considering a response to your client’s proposals for the new projects and … anticipate[s] being in a position to respond to you by early next week”.
247 In a further “without prejudice” letter dated 12 September 2003 to Mr Shearwood, ASIC stated that it disagreed with the advice of Mr Bannon SC and had identified two specific matters that were not addressed. The letter said that ASIC reserved its position with respect to completed and advanced projects, reiterating that it would “need to conduct a review of those projects as soon as possible”. Under a heading “New Projects” ASIC stated:
I note your client’s intention not to issue any further promissory notes in relation to future projects or the Cinema City project.
As regards the Emu Brewery project, I note your client’s intention to continue raising funds through promissory notes until a debenture prospectus is issued, and then it will stop issuing promissory notes. The holders of Emu Brewery promissory notes will be offered the opportunity to opt-in to a debenture issue once the debenture prospectus has been issued.
In ASIC’s view, with a few amendments, your client’s position as regards the Emu Brewery project would be sufficient for ASIC not to need to take immediate enforcement action to prevent Emu Brewery Mezzanine Pty Ltd (“EBM”) … from issuing further promissory notes. Specifically, if your client were to propose the following approach, that would be acceptable to ASIC:
1. In any event, no promissory notes would be issued by EBM after 31 December 2003.
2. Notes would only be issued by EBM for cash consideration. In other words, there would be no rollovers.
This should not be much of an issue given the stated need of Westpoint for additional funds for the Emu Brewery project, whereas rollovers do not result in any additional money coming into the Westpoint Group.
3. In addition to the Information Memorandum, before accepting any money EMB would provide prospectus note holders with a copy of:
(a) the audited accounts of EBM …;
(b) the audited accounts of the Emu Brewery Trust …;
(c) the audited accounts of Westpoint Corporation Pty Ltd …; and
(d) a valuation of the Emu Brewery project.
…
4. Before accepting any money from a note holder, EBM will advise the noteholder in writing of its intention to issue a debenture prospectus, and of the nature of the opt in right.
5. The additional information in paragraphs 3 and 4 should be given to all existing EBM note holders, who should also be given the right to opt in to the debenture issue.
6. Before undertaking any further fundraising, EBM will provide ASIC with copies of the:
(a) Executed and stamped guarantee executed by Westpoint in favour of EBM; and
(b) Executed and stamped fixed and floating charge held by EBM over the assets of the Emu Brewery Trust.
…
Your client’s position as regard to the Cinema City and Emu Brewery projects would need to be confirmed in an enforceable undertaking
…
248 Whilst nothing apparently turns on the matter, on 18 September 2003, Mr Shearwood sent a supplementary brief to Mr Bannon SC requesting his advice on the two additional issues raised by ASIC. Senior counsel gave his written advice on 21 November 2003, a copy being subsequently sent to ASIC.
249 In a telephone conversation on 22 September 2003, Mr Shearwood was told by Mr Dixon (a mezzanine company director) that the 30 June 2003 accounts for (1) Market Street Mezzanine showed mezzanine finance at $52.665 million, not $20 million; (2) Bayshore Mezzanine at $25.8 million, not $25 million; and Ann Street Mezzanine at $29.074 million, not $25 million. Mr Shearwood subsequently had a meeting to discuss over-subscription with the mezzanine company directors (Mr Dixon, Mr Beck and Lynnette Schiftan) on 30 September 2003, prior to another meeting with ASIC on 2 October 2003. A note made at the top of Mr Shearwood’s file note for the 30 September also indicates that Mr Rundle and Mr Carey attended the 30 September meeting.
250 On 2 October 2003 Mr Shearwood and Mr Lurie met with ASIC’s representatives to discuss the rollover of investments into the Emu Brewery Project and whether new investors in the Ann Street Project should be permitted after 31 December 2003. On 9 October 2003 ASIC sent Mr Shearwood another “without prejudice” letter stating that it did not agree that existing investors should be allowed to rollover investments into the Emu Brewery Project without repayment of the investment (via a cheque or the like) and then reinvesting; and that it required that no new promissory notes be issued with respect to the Ann Street (or any) Project after 31 December 2003.
251 Mr Shearwood drafted a response, which Mr Rundle forwarded to Mr Beck and Mr Dixon under cover of an email dated 7 November 2003 (copied to Mr Carey and Mr Shearwood). The covering email stated:
As you are aware, Andrew Shearwood has been liaising with [ASIC] regarding our response to ASIC’s position with re our transition to regulated products. Importantly, ASIC seem to have retreated from their position of requiring us to enter into an EU. They do however, want us to set out the steps we intend taking to make the transition in some sort of “open letter” to ASIC.
252 Mr Shearwood sent the finalised response to ASIC on 18 November 2003. In this letter, Mr Shearwood: (1) set out the steps that a mezzanine company would take to achieve the transition to a position where no new promissory notes were issued; and (2) addressed the two additional issues that ASIC had raised in its letter of 9 October 2003. Amongst other things, this letter also said:
1. Rollovers
You have indicated that ASIC has no objection to investors in other projects investing in the Emu Brewery project. However, any investment should occur by the investor being repaid their investment (by a cheque or the like) and then reinvesting it. …
This is not acceptable to our client.
Where an investor has the opportunity to receive cash he should be allowed to invest the cash in an EBM promissory note. The task of sending cash to an investor who then has to bank the cheque and draw a new cheque to reinvest in the new promissory note results in unnecessary administration and cost. Emu Brewery Mezzanine Pty Ltd (EBM) and the issuer (the First Issuer) of the initial promissory notes will only act to effect a rollover where the investor has given them an express written authorisation to do so. EMB is willing to offer a 7 day cooling off period after the further promissory note has been issued, for the holder to be permitted to have their money repaid early.
…
The concept of a rollover … is no different to where master trusts, wrap accounts or other investments such as superannuation have a switching option, allowing an investor to switch from one investment to another or from one fund to another without the investor physically receiving the cash which is to be reinvested in their hands which is then reinvested.
…
Your suggestion that the investment must be evidenced by the payment of cash, rather than the making of book entries, ignores the fact that the legal liability to repay the investor shifts from one company to the next … and accords with industry practice in relation to rollovers of the type referred to above.
Ann Street
It is noted that although we had categorised Ann Street as an advanced project, you require any remaining investments and promissory notes in Ann Street to be treated in the same way as the Emu Brewery Project.
For the reasons set out below, we remain of the view that Ann Street should be treated as an advanced project:
(a) the level of pre-sales has exceeded 50%;
(b) commitments have been received for all necessary mezzanine finance;
(c) no promissory notes will be issued after 31 January 2004 in respect of these commitments;
(d) senior debt finance is in place from the Howard Mortgage Trust as lender for the land component;
(e) expressions of interest have been received from lenders interested to provide the senior debt finance for construction. …
(f) it is clearly distinguishable from the Emu Brewery Project.
2. Completed projects
The Bayview and 297 Murray Street projects have been categorised by us as completed projects because no promissory notes remain on issue. Investors have either been paid or their promissory notes have been redeemed and invested in another project. …
3. Advanced projects
…
As we have explained to you, no new money is being raised into York Street, Market Street or Bayshore although investors may be requested to “extend” their investment in these projects without having to be repaid. We note from your letter of 9 October 2003 that you do not have any objection to this provided investments stay in the same project.
In relation to Bayview Heritage, the raising of money by promissory notes is 80% complete.
4. New projects
Cinema City
As previously stated, Cinema City will not issue further promissory notes. …
5.1 Emu Brewery
In relation to Emu Brewery, it is proposed that EBM will change its status to a public company and issue debentures pursuant to a prospectus lodged with ASIC. For the reasons set out below, we have been instructed to ask you to agree to extend the period during which EBM may continue to raise funds by issuing promissory notes from 31 December 2003 to 31 March 2004 …
Despite this request, It [sic] remains the objective for EBM to stop the issue of promissory notes as soon as practicable after 31 December 2003 and for any further money raised after this date to be by way of an issue of debentures pursuant to a regulated product.
…
253 The very next day ASIC responded to Mr Shearwood, asking whether Westpoint companies would be willing to prepare an open undertaking “setting out the steps they propose[d] to take to bring their affairs into a position in which there are no new promissory note investments after whatever date is settled upon”; and emphasizing that “the [Westpoint companies] need to provide a timely response to the issues” raised and that “the continuing fundraising on the Emu project pending resolution of the current issues is of concern to ASIC”.
254 On 3 December 2003, Mr Lurie, the solicitor for the mezzanine companies, confirmed to Mr Shearwood that the promissory notes issued by Market Street Mezzanine represented significant over-subscription. As an internal Freehills file note of 4 December 2003 shows, Mr Shearwood appreciated that this meant that the Market Street prospectus misrepresented the true fundraising situation and the nature of the risk to which mezzanine note holders were exposed. On 15 December 2003, Mr Shearwood emailed Mr Rundle a draft letter of advice, and copied the email to two others, including Mr Lurie.
255 On 18 December 2003, Mr Shearwood responded to ASIC, indicating that a prospectus for the Emu Brewery Project could be expected by 28 February 2004, and that “the Westpoint Companies are prepared to undertake not to issue promissory notes for the Emu Brewery project” after that date. Other undertakings not to issue promissory notes were offered for the Ann Street and the Bayview Heritage Projects. Also on 18 December 2003, Mr Shearwood sent a draft letter to ASIC, providing details of a proposed letter of undertaking to be given “by Freehills on behalf of the development entities and Michael Lurie on behalf of the mezzanine entities within the Westpoint Group”. Notwithstanding this, no undertaking was formalised at this point.
Continuing negotiations with ASIC
256 Negotiations between ASIC and the Westpoint Group companies, via Mr Shearwood and others, continued well into April 2004, when in a letter dated 13 April 2004, ASIC stated that it required the Westpoint companies formally to undertake by the close of business on 20 April 2004 that they would cease all fundraising by promissory notes.
257 No debenture prospectus for the Emu Brewery Project was in existence by the end of February 2004. ASIC wrote to Mr Shearwood about this on 19 February 2004, stating that:
For some time now, your client have [sic] been on notice that ASIC has had concerns about the promissory note fundraising currently being carried out by E[mu] B[rewery] M[ezzanine Ltd]. Specifically, ASIC is of the view that these promissory notes cannot be issued without a debenture prospectus. There has been no debenture prospectus in existence for the EBM promissory notes since these notes first started being promoted in mid 2003.
Your clients have advised ASIC (and have indeed made public statements) that they intend to replace current promissory note issues with regulated investment products. They requested ASIC to defer taking enforcement action so that they did not have to cease fundraising using the promissory notes before commencing to raise funds using a debenture prospectus. I advised that ASIC would do so, but that in any event the promissory note fundraising would need to have ceased by, initially 31 December 2003, and subsequently 31 January 2004.
…
As at the date of this letter no debenture prospectus has been lodged. Neither has EBM advised ASIC that it has ceased fundraising by issuing the promissory notes.
ASIC warned that:
[U]nless EBM advises ASIC by the close of business on Thursday 26 February 2004 that it had ceased fundraising either by “rollover” or “new” promissory notes issues, ASIC will take immediate enforcement action to seek an injunction restraining further fundraising from occurring.
258 By a letter dated 26 February 2004 (evidently written on instructions), Mr Shearwood responded to ASIC, both for the development companies in the Westpoint Group and, with Mr Lurie’s consent, the mezzanine companies in the Westpoint Group. This letter affirmed:
3 Transition to regulated products
(a) For sometime … Westpoint has been pursuing a key element of its 10 year strategic plan, which is to raise mezzanine finance through regulated products. One example, is the appointment of trustees pursuant to chapter 2L of the Corporations Act and the issue or proposed issue of prospectuses to raise mezzanine notes (or debentures) (Mezzanine Notes) for the Market Street and Emu Brewery developments.
(b) Since the Market Street Prospectus was issued, the Westpoint Income Fund … has also been registered as a managed investment scheme as a means of providing funding to developments to be carried out by various companies, including those within the Westpoint Group.
(c) The strategy of Westpoint was to, from the time the Emu Brewery prospectus (EBM Prospectus) was registered, stop issuing promissory notes to raise new money for its development projects except for commitments made before that registration date (Pre-Commitments). As you know this was intended to have happened by 31 January 2004. There have, regrettably, been delays in finalising the terms of the Prospectus, for the most part, due to issues raised at a late stage by the trustee, Sandhurst Trustees Limited.
(d) I understand, though, that it is anticipated the EBM Prospectus will now be lodged with ASIC within the next week.
4 Ann Street
The Westpoint Companies undertake to ASIC that no promissory notes will be issued after the date of this letter (Effective Date) in relation to the Ann Street, Brisbane, Project except in relation to applications received in relation to commitments given prior to the date of this letter. …
5 Bayview Heritage
The Westpoint Companies undertake to ASIC that no promissory notes will be issued after the Effective Date in relation to the Bayview Heritage, Melbourne Project except in relation to applications received in relation to commitments given prior to the date of this letter. …
6 Cinema City
The Westpoint Companies undertake to ASIC that no promissory notes will be issued after the date of this letter in relation to the Cinema City, Perth Project.
7 Emu Brewery
(a) The Westpoint Companies warrant and undertake to ASIC that, except in relation to Pre-Commitments (which, based on information known to the Westpoint Companies as at the date of this letter were, as at the Effective Date, a total of $1, 250,000) no promissory notes:
(1) have been issued since the Effective Date; and
(2) will be issued after the date of this letter,
in relation to the Emu Brewery Project (whether by way of subscription or “roll-over” from another project [sic]. For the avoidance of doubt, the Westpoint Companies confirm they will not, after the date of this letter, accept any applications for promissory notes in relation to the Emu Brewery Project pursuant to Pre-Commitments in excess of the amount specified in this paragraph 7(a).
…
(c) The Westpoint Companies will, as soon as reasonably practicable after the EBM Prospectus has been registered, send investors in Emu Brewery promissory notes a copy of the EBM Prospectus and indicate that the holder of the promissory note will have the right to call for the early repayment of their promissory note on the condition that a Mezzanine Note of the same face value is issued in its place.
…
259 ASIC replied by letter dated 4 March 2004 noting that:
(1) information memoranda for the Ann Street, Bayview Heritage, Cinema City and Emu Brewery Projects were still available on a Westpoint Group website;
(2) a proposal to keep Freehills’ letter of 26 February 2004 confidential was not acceptable to ASIC; and
(3) ASIC would take the contents of the letter into account in determining whether it was appropriate to take enforcement action.
260 By letter dated 13 April 2004, ASIC wrote again to Mr Shearwood, stating that “[a] number of matters have now arisen which have caused ASIC to form the view that the response by the Westpoint Companies … set out in your letter of 26 February 2004 is now no longer acceptable”. The letter gave the following reasons.
(1) The promissory note issues for the Emu Brewery and the Bayview Heritage Projects were still being promoted on a Westpoint Group fundraising entity’s website.
(2) The audited accounts for Emu Brewery Mezzanine Ltd (‘Emu Brewery Mezzanine’) and Market Street Mezzanine referred to rollover agreements dated 18 December 2003, which appeared to be effected by Kebbel Victoria Pty Ltd or Perth Realty Pty Ltd (both of which were involved in Westpoint Group fundraising) without proper authority. ASIC’s letter noted that
[T]he way in which the rollovers were said to have taken place … or are to take place … is of concern. The transaction has the objective hallmarks of a refinancing activity by the Westpoint Companies as opposed to a series of individual decisions by investors to “roll” their investments from an “advanced” project into a “new” project … This means of refinancing is inconsistent with the way ASIC was lead [sic] to believe that these rollovers would occur in previous correspondence.
(3) There was insufficient evidence of the pre-existing commitments by which Ann Street Mezzanine, Bayview Heritage Mezzanine and Emu Brewery Mezzanine intended to continue fundraising and their documents evidencing commitments had not been produced.
(4) Since 20 June 2003 Market Street Mezzanine No 2 (formerly 297 Murray Street Pty Ltd) had raised $15 million on promissory notes and this had not previously been disclosed to ASIC.
(5) The letter concluded that:
In this context, it is now no longer appropriate for ASIC to accept commitments from the Westpoint Companies that are not enforceable. Moreover, the concerns set out above, have led ASIC to the view that Westpoint should cease all promissory note fundraising, including rollovers and the issue of notes to investors who have given commitments.
Accordingly, unless the Westpoint Companies offer to formerly undertake to ASIC by the close of business on Tuesday, 20 April 2004 that they will cease fundraising either by “rollover” or “new” promissory notes issues, by extension or otherwise including by “commitment” as described in your letter of 26 February 2004, ASIC will take immediate enforcement action. …
261 On 19 April 2004, Mr Shearwood, along with Messrs Carey, Beck, Rundle, Grant Dodd, Dixon and Lurie, met with ASIC representatives. Subsequently Mr Shearwood wrote a letter dated 22 April 2004 to ASIC, in which he stated that he was instructed that:
The Westpoint Companies will negotiate the form of an enforceable undertaking with the objective of such an undertaking on terms acceptable to those companies being entered into by close of business on Wednesday 28 April 2004.
Each of the Westpoint Companies undertake not to make, issue, extend or rollover any promissory note up until the close of business on 28 April 2004. If an enforceable undertaking is not signed by close of business on 28 April 2004 the Westpoint Companies will consider giving an extension of this undertaking to a later date.
262 Mr Shearwood informed ASIC that:
The reason for needing until close of business on Tuesday 27 April 2004 before providing you with the form of the enforceable undertaking that the Westpoint Companies are willing to enter into is because the independent directors of the Mezzanine Companies need to approve of its terms. …
It is noted that submissions will be made to you when the form of the enforceable undertaking is provided to you that there be no restriction on the companies involved with advanced projects issuing promissory notes so that the repayment obligations in relation to promissory notes issued by each Mezzanine Company matches the end date of the projects carried out by each relevant development company. To prevent the ability to do this through the use of promissory notes (and indeed the commencement of legal proceedings by ASIC) runs a very grave risk of putting all projects in jeopardy, for reasons which will be explained.
We also note that the first suggestion in our course of dealing in relation to promissory notes over the last 9 months or so that you wanted to stop the issue of promissory notes for advanced projects today was in your letter of 13 April 2004. Until then the relevant companies had proceeded on the assumption that the advanced projects would be “grandfathered” and allowed to continue to issue promissory notes. …The cash flows of the projects involved have proceeded on this assumption.
Further, you have not informed us to date of any issues arising out of the production of documents or audited accounts which suggest that investors’ funds are at risk. …
263 The reference to the absence of “restriction on the companies involved with advanced projects issuing promissory notes” can be explained in part by reference to Mr Carey’s evidence in cross-examination. In cross-examination, Mr Carey was asked about his concerns in April 2004 with respect to the negotiation of an agreed undertaking with ASIC. Amongst other things, Mr Carey stated that “my primary concern was that we simply couldn’t agree to anything that would not allow the projects to finish, because that would be self-defeating and if the projects didn’t finish there was no point to the agreement”. When Mr Riordan asked him whether he could he recall “why agreement was unable to be reached”, Mr Carey answered:
Well, it was because ASIC would not allow us - or wouldn’t agree with us to simply manage the promissory note product to the conclusion of the projects. They wanted set times where there would be no further issuing of promissory notes in terms of the maintenance of the projects. So that would definitely not allow the projects to finish. It would trigger defaults in the subordination agreements and bring the primary facility into default and the whole thing would collapse. So we just couldn’t persuade ASIC of - well, I felt that ASIC didn’t understand - or perhaps didn’t want to understand that - didn’t understand what we were saying.
264 As the evidence of Craig Colvin SC, which is referred to below, indicates, however, the problem, as ASIC’s legal advisors perceived it, was not so much that funds were being raised by means of promissory notes but rather the way in which the promissory notes were being rolled over, in effect without paying out the promissory note holders and without the effective supply of additional funds.
265 The Carey parties responded in final submissions that:
Rollovers were necessitated by the use of promissory notes with a fixed maturity date for large-scale property projects liable to cost and time overruns. Once the promissory notes were in use in a project there was no reasonably feasible way for Westpoint to change its funding mechanism and repay the notes, at least until individual titles were available at practical completion, when end financing could be used to pay out note holders pending completion of sales and realisation of project proceeds.
266 For the reasons that appear hereafter, it is unnecessary to make any determination with respect to these submissions.
267 Mr Shearwood deposed that he did not receive any further instructions to do any work for companies in the Westpoint Group in relation to promissory notes from the second half of 2004. By this point, Paul Evans from Freehills, who was a litigation partner, had become involved in the matter. In a letter dated 23 April 2004 to WPM and, in particular, Mr Carey and Mr Rundle, Mr Evans noted, first, that there was “plainly an issue joined between the Mezzanine companies, as promissory note issuers, and ASIC as the regulator, in relation to the interpretation of the Corporations Act and its application to these instruments”. Mr Evans added that it was apparent “that regulatory action has been threatened by ASIC and is imminent” and described the relevant court procedure. Mr Evans concluded:
[T]here is merit in considering originating summons proceedings, to be commenced to resolve this issue within a short timeframe, subject to realising that the response of ASIC to this may well involve a crystallisation of civil and criminal counteraction, the fundamental propriety of which will, in any circumstance, resolve around an adverse (to the mezzanine issuers) determination of the question – what is the proper characterisation of the promissory notes, in the circumstances in which they were issued?
(Emphasis added)
In view of the Carey parties’ position as stated immediately above, Mr Evans’ assessment was unexceptional.
Proceedings in the Western Australian Supreme Court
268 On 10 May 2004, Bayshore Mezzanine commenced a proceeding in the Supreme Court against ASIC seeking various declarations in relation to the status of promissory notes. On 12 May 2004, ASIC commenced a proceeding, also in the Supreme Court, against Emu Brewery Mezzanine seeking various declarations and injunctions, including an injunction preventing the issue of further promissory notes.
269 On 1 June 2004, the Supreme Court ordered that questions of law be stated for the opinion of the Court in a consolidated proceeding. The case stated was heard on 2 and 3 September 2004. On 19 November 2004 the Supreme Court delivered judgment. The Court held:
(a) the information memoranda issued by the mezzanine companies did not offer “securities” within the meaning of s 761A of the Corporations Act;
(b) the information memoranda were offering interests in a MIS, although the Court was unable to determine whether the schemes were required to be registered; and
(c) there were no false statements in or misleading or deceptive conduct represented by the publication of the information memorandum for the Emu Brewery Project.
Emu Brewery Mezzanine and Bayshore Mezzanine appealed and ASIC instituted a cross-appeal: see [32] above.
Further regulatory action by ASIC
270 At least by April 2005, ASIC was concerned about the solvency of the Westpoint Group companies. In an ASIC Investigation Plan made on 18 April 2005, ASIC recorded that “[t]he primary outcome of enforcement has been to prevent Westpoint from engaging in future promissory note fundraising”. The Investigation Plan continued:
The Westpoint group is not structured in a way that makes the overall financial position of the group readily transparent. The group consists of a number of operating companies, whose shares are held by an interlocking arrangement of companies and trusts. The structure put in place by the Westpoint Group in dealing with the funds raised show [sic] that the funds are effectively “pooled” and then applied at the discretion of Westpoint Corporation Pty Ltd. …
On the information currently to hand, it is not possible to determine whether or not Westpoint is solvent. That is probably exactly what the promoters intended in setting up such a complex structure.
The information within ASIC’s possession suggests that the group does not have much in the way of cash, and is very reliant on existing promissory note investors reinvesting once their promissory note expires, or being able to replace those investors with new retail money if they do not want to reinvest on the expiry of their note.
The Investigation Plan further noted that, during the course of the investigation into the validity of promissory notes, concerns had been raised regarding the solvency of the Westpoint Group.
271 The Investigation Plan recorded that:
Based on information to date it appears that the Westpoint Group has managed to deal with promissory notes that expired in January 2005 ($27.7M for Market Street Mezzanine) and March 2005 ($10.57M for York Street Mezzanine). It is suspected that some of the notes were rolled over and others repaid, probably from the proceeds of other note raisings. ASIC has received very few complaints in relation to these notes. The next big tranche of $27.7M in relation to Ann Street is not due to expire till December 2005.
It is apparent that funds raised from promissory notes by the mezzanine companies were paid directly to Westpoint Corporation. These funds were then applied by Westpoint Corporation to meet various expenses of the Westpoint Group including interest payments on promissory notes issued by other mezzanine companies.
272 After setting out a proposed course of action to consider solvency issues further, the Investigation Plan identified that the focus of such a forthcoming investigation would be: (a) the solvency of the Westpoint Group; (b) directors’ duties; (c) misleading or deceptive conduct by the directors of the mezzanine companies; (d) the use of money raised by the mezzanine companies; (e) obtaining money by deception; and (f) possible offences associated with each of these matters. The Investigation Plan recognised, amongst other things, that “[a] potentially large number of investors could be adversely affected should ASIC be successful in shutting down the Group’s activities”; and that the solvency review would be “highly complex”.
273 Prior to 6 September 2005, when ASIC received advice from Deloitte about the solvency of the Westpoint Group, there was at least one meeting between Westpoint Group representatives and ASIC’s representatives (including Rachel Waldren, Associate Director of Enforcement) at which ASIC’s concerns about the solvency of the Group were ventilated. On 11 August 2005, there was, according to Mr Carey, a meeting that he attended (with Mr Rundle, Mr Evans and another Freehills solicitor) since he “wanted to get an understanding of ASIC’s specific concerns about solvency of the Westpoint Group and the mezzanine companies”. (Mr Carey also claimed, and ASIC denied, that, shortly after this meeting, Ms Waldren made a statement to him concerning ASIC’s intentions with respect to the Westpoint Group. Whilst this evidentiary issue was relevant in the principal proceeding, it does not bear on the resolution of the cross-claim.)
274 On 6 September 2005, ASIC received advice from Deloitte as to the solvency of the Westpoint Group. There was some evidence that ASIC was told by Deloitte that each individual entity in the Westpoint Group was solvent at that time; and could not be regarded as insolvent “for as long as Westpoint [was] able to roll over or extend promissory notes”. There was also some evidence that ASIC was told by Deloitte that the Westpoint Group “would continue to be sovent for the next 6 months”. No representative of Deloitte was, however, called to give evidence and, as hearsay evidence, the Deloitte’s advice of 6 September 2005 was, as Freehills maintained, inadmissible as to the truth of its contents. In any event, for reasons that appear below, I have not found it necessary to determine the solvency issue.
275 In a Progress Report dated 21 September 2005, ASIC recorded that Gary Doran, from Deloitte, had stated that, if there was full disclosure to investors about Westpoint Group’s financial structures and actions, “a prudent investor [would] not invest in the products offered by the Westpoint Group (promissory notes, debentures, units in MIS) and would in fact wish to redeem their investment if given the opportunity to do so”; and that “[t]his would in turn trigger the insolvency of the Group when funds from retail investors and senior lenders dry up”. This evidence too was, however, inadmissible as to the truth of Mr Doran’s statements.
276 The Progress Report further recorded that:
The team proposes to adopt a two-step approach in proceedings against Westpoint – firstly, an application for court orders to injunct Westpoint from engaging in further fundraisings and to require Westpoint to make full disclosure to investors and to offer current investors an opportunity to be repaid, and secondly, an application for a court-appointed receiver or liquidator when it becomes clear that the group has become insolvent.
277 On 22 November 2005, ASIC commenced proceedings in the Federal Court seeking an order for the winding up of York Street Mezzanine on the grounds of insolvency and, alternatively, on the ground that it would be just and equitable for the company to be wound up. At the same time, ASIC filed an interlocutory application for the appointment of a provisional liquidator to York Street Mezzanine.
278 An immediate concern of ASIC in taking this action was the maturity date for the York Street Mezzanine promissory notes on 30 November 2005. Mr Colvin, Senior Counsel for ASIC in the proceeding to appoint a provisional liquidator, made an affidavit in this proceeding and was cross-examined. In cross-examining, Mr Martindale SC said:
I want to put a proposition to you, Mr Colvin, to see whether you agree or disagree, and it’s this: that ASIC’s application for the winding up of York Street Mezzanine was based on conduct of the Westpoint companies unrelated to their use of promissory notes as a method of fundraising. Do you agree with that?
Mr Colvin replied, “No, I don’t.” Mr Martindale continued, “In what respect would you not agree with that?” Mr Colvin responded:
I just find it hard to divorce from what was happening, the fact that the promissory notes were what was being used to raise the funds, and you say it was unrelated.
279 In further cross-examination, Mr Colvin went on to explain that “[t]he mere fact that promissory notes were the method of fundraising was not the reason why the advice was given and the application was made” (emphasis added). He said, and I accept, that the perceived problem was more complex than this and related to the way in which the promissory notes were being rolled over. Thus, when Mr Martindale put to Mr Colvin that “[r]olling over of promissory notes was a reason, wasn’t it, and the way in which they were being rolled over?”, Mr Colvin answered “[y]es”.
280 It must be borne in mind too that by the time ASIC applied to the Court, over-subscription was significant. As Mr Nairn (General Manager – Special Projects from 7 April 2004 until July 2005, when he became General Manager – Financial Accounting) agreed in cross-examination, “by way of example, York Street and Ann Street, in particular, were far in excess of what was on the information memoranda”.
281 On 23 November 2005, the directors of York Street Mezzanine placed the company in voluntary administration. On 24 November 2005, the application to appoint a provisional liquidator to York Street Mezzanine was adjourned to 7 December 2005.
282 On 5 December 2005, ASIC filed an application seeking a winding up order against Ann Street Mezzanine on the ground of insolvency and, alternatively, on the ground that it would be just and equitable to make such an order. ASIC also sought, by way of interlocutory application, an order for the appointment of a provisional liquidator to Ann Street Mezzanine. On 6 or 7 December 2005, the directors of Ann Street Mezzanine and other mezzanine companies placed their companies into voluntary administration. The other mezzanine companies included Bayshore Mezzanine, Market Street Mezzanine, Market Street Mezzanine No 2 Pty Ltd (‘Market Street No 2 Mezzanine’) and Mount Street Mezzanine.
283 On 7 December 2005, the applications against York Street Mezzanine and Ann Street Mezzanine were set down for hearing by the Court on 20 December 2005.
284 In the afternoon of 19 December 2005, ASIC served a winding up application on WPC.
285 On 20 December 2005, this Court, constituted by French J, ordered that provisional liquidators be appointed to York Street Mezzanine and Ann Street Mezzanine on the basis that the companies were insolvent: see Re York Street Mezzanine Pty Ltd (admins apptd); Australian Securities and Investments Commission v York Street Mezzanine Pty Ltd; Re Ann Street Mezzanine Pty Ltd (admins apptd); Australian Securities and Investments Commission v Ann Street Mezzanine Pty Ltd (2005) 56 ACSR 340 at [15], [25], [43].
286 Mr Carey’s evidence was (and it was not disputed) that, on 23 December 2005, Perpetual Nominees appointed a receiver over Westpoint Management Limited ATF for the 60 Market Street Trust and Bridgecorp Elders appointed a receiver over Bayshore Development Pty Ltd. On 24 January 2006, ING appointed receivers over WPC and seven other entities. On that same day, receivers terminated the employment of all of WPC’s staff. Progressively, receivers or liquidators were appointed over the companies within and associated with the Westpoint Group. On 10 February 2006, liquidators were appointed to WPC.
MISLEADING AND DECEPTIVE CONDUCT CLAIM
287 By their amended cross-claim, the Carey parties alleged a breach of s 52 of the Trade Practices Act 1974 (Cth) (‘TPA’) (as it then was) and s 10 of the Fair Trading Act 1987 (WA) (‘FTA’).
288 Hereafter, these reasons refer simply to s 52 of the TPA on the basis that whatever is said in relation to this provision will apply equally to s 10 of the FTA. In so doing, I do not overlook the differences between these provisions, which might have proved important had I reached a different conclusion about the Carey parties’ case. For example, with respect to s 52, the Carey parties were obliged to rely on ss 6(2)(a) and (h) and 6(3) of the TPA for the proposition that s 52 of the TPA applied to Freehills’ conduct. No such difficulty attended the Carey parties’ reliance on s 10 of the FTA.
289 The TPA was amended and partially renumbered by the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) (‘the Amending Act’) with effect from 1 January 2011. The Amending Act renamed the TPA as the Consumer and Competition Act 2010 (Cth). The TPA as in force immediately before 1 January 2011 continued to apply in this proceeding, however, because the proceeding was commenced before 1 January 2011: see Sch 7, item 7(1) of the amending Act.
290 The operation of s 52 is well known and the principles governing its application are well settled. Section 52 requires the court to determine whether conduct is misleading or deceptive, having regard to all the contextual circumstances within which something was said or done: see Peter Bodum A/S & Ors v DKSH Australia Pty Ltd (2011) 280 ALR 639 (‘Bodum’) at 678-679 [200]-[203]. The application of s 52 is not restricted to conduct that is intended to mislead or deceive: see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 (‘Puxu’) at 197 (Gibbs CJ); and Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228 (Stephen J).
291 Freehills admits that, if the representations were made, they were made in trade and commerce within the meaning of s 52 of the TPA. In order, however, to make out their case under s 52 of the TPA, the Carey parties needed to establish that: (1) the conduct of which they complained occurred; (2) viewed objectively, the conduct was misleading or deceptive; and (3) they relied on Freehills’ conduct in the relevant sense. In order to be compensated for any loss and damage under s 82(1) of the TPA, they also needed to establish a causal connection between this conduct and the loss for which they seek compensation: see, e.g., Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525-526 (Mason CJ, Dawson, Gaudron and McHugh JJ) and Henville v Walker (2001) 206 CLR 459 at 469-470 (Gleeson CJ), 480-481 (Gaudron J), 489-490 (McHugh J) and 509-510 (Hayne J). The Carey parties also relied on s 51A of the TPA, to the extent that the impugned representations were made with respect to future matters.
292 The Carey parties argued that, by reason of Freehills’ false representations, Freehills engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive. The alleged misrepresentations were set out in paragraph 30 of the cross-claim, as amended. These alleged misrepresentations were that, by the Promissory Note Advice, Freehills represented that:
(a) promissory notes issued in accordance with the Promissory Note Advice were not interests in a managed investment scheme;
(b) it was not necessary to issue a prospectus in respect of these promissory notes;
(c) the raising and deploying of mezzanine finance in accordance with the Promissory Note Advice:
(i) was in the best interests of Mr Carey and the Westpoint Group;
(ii) would serve the objective of developing a profitable funds management business consistent with the BCG Strategy; and
(iii) was to be preferred over other ways of raising mezzanine finance;
(d) the issue of promissory notes in accordance with the Promissory Note Advice was “totally legal”;
(e) there were no material inherent risks involved in raising and deploying mezzanine finance in accordance with the Promissory Note Advice;
(f) they had and were continuing to exercise due care, skill and diligence in carrying out their obligations under their retainer;
(g) they had conducted a proper and diligent review of the legislation and case law relating to managed investment schemes as they applied to the proposed issue of promissory notes; and
(h) they had reasonable grounds for making the representations in (a) to (e) above.
293 These alleged representations are referred to in the amended cross-claim as the “Representations”; and were said to be contained in the Promissory Note Advice constituted by the 17 January 2000 letter, the 9 February 2000 letter, the 2 June 2000 letter, the 5 February 2003 letter and the 2 September 2003 “advice”. Although oral advice provided by Freehills to Mr Bell in early 2000 is pleaded in paragraph 19 of the amended cross-claim, such advice is not alleged to constitute part of the Promissory Note Advice (as defined in paragraph 26 of the amended cross-claim) or as a basis of any of the representations pleaded in paragraph 30 of the amended cross-claim.
294 The making of a statement of legal opinion by a solicitor may constitute misleading or deceptive conduct under s 52 of the TPA: see Heydon v NRMA Ltd (2000) 51 NSWLR 1 (‘Heydon v NRMA Ltd’) at 108 [329]; and generally Rafferty v Madgwicks (2012]) 203 FCR 1. It has been said that a critical factor is the effect, or likely effect, of the making of the statement on the person to whom the statement is made: Heydon v NRMA Ltd at 108 [329] citing Yorke v Lucas (1985) 158 CLR 661 at 666. At the same time, a misstatement may not be misleading or likely to mislead “merely because it misinforms or is likely to do so” although “the situation may differ if the evidence shows that the opinion was not held or that it lacked any, or any adequate, foundation”: Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193 at 242 (Gummow J), citing Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88 where Bowen CJ, Lockhart and Fitzgerald JJ said:
A statement which involves the state of mind of the maker ordinarily conveys the meaning (expressly or by implication) that the maker of the statement had a particular state of mind when the statement was made and, commonly at least, that there was basis for that state of mind. If the meaning contained in or conveyed by the statement is false in that or in any other respect, the making of the statement will have contravened s 52(1) of the Act. …
… [T]he incorrectness of an opinion (assuming that can be established) does not of itself establish that the opinion was not held by the person who expressed it or that it lacked any, or any adequate, foundation.
The applicants argued that, nevertheless, the statement of an incorrect opinion is misleading or deceptive or likely to mislead or deceive merely because it misinforms or is likely to misinform. An expression of opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps that there is basis for the opinion. At least if those conditions are met, an expression of opinion, however erroneous, misrepresents nothing.
295 In Inn Leisure Industries Pty Ltd (Prov liq app) v D F McCloy Pty Ltd (No 1) (1991) 28 FCR 151 (‘Inn Leisure’) at 167, French J said:
A representation of law may be made in different ways which send different messages to the recipient. It may do no more than convey what is, on the face of it, the untutored opinion of the representor. As such it would be unlikely, if wrong, to constitute misleading or deceptive conduct. If the represented opinion were not in fact held by the representor, then that would be a misrepresentation of fact and able to be characterised as misleading or deceptive conduct. It is on that basis also that a fraudulent misstatement of law may be actionable. Expert advice as to the law may convey the representation that it is based upon an underlying body of knowledge, experience or expertise possessed by the person proffering it or to which that person has access. The situations in which advice, expert or otherwise, as to the law may be misleading or deceptive for the purposes of s 52 will depend upon the context and circumstances in which it is proffered and the representations implied or expressed that accompany it.
A misstatement in an opinion about the law may not be misleading or likely to mislead where it is a statement of an opinion that is not proffered as necessarily being correct: Heydon v NRMA Ltd at 108 [329], citing Inn Leisure at 164-167.
296 Whether or not a statement about the law will be misleading or likely to mislead will very much depend on the circumstances.
297 By reference to the alleged misrepresentations, the Carey parties made the argument that the Promissory Note Advice was negligent “and therefore misleading and deceptive”: see also, for example, amended cross-claim at paragraph 51 and (closing) submissions of the Carey parties at [141].
298 Freehills contended that, in all the circumstances of the case, the letters constituting the Promissory Note Advice were statements of opinion that did not convey an implied representation to the Carey parties that they were opinions that Freehills necessarily held and that were based on reasonable grounds. This was because each of the letters was created for the purpose of being provided to financial planners, bankers, and ASIC; and not for the purpose of advising a Westpoint Group company about the law. Further, Freehills argued that, to the extent that Mr Carey’s claim relied upon the implied representation having been made to Mr Carey, no such representation was made to him.
299 Broadly speaking, as explained below, I accept Freehills’ submissions concerning the Promissory Note Advice. As I have found, Mr Bell at WPM asked for, and Mr Shearwood created, the 17 January 2000 letter for the purpose of explaining promissory notes to the financial planners. Mr Bell at WPM also asked for, and Mr Shearwood provided, the 9 February 2000 letter for the purpose of being provided to financial planners. Mr Shearwood provided the 2 June 2000 letter to ASIC as a defensive response to ASIC’s letter of 29 May 2000; and he provided the 5 February 2003 letter to Mr Carey, at WPM, for the purpose of being shown, if needed, to banks or financial planners. As to the last item in the alleged Promissory Note Advice, I have found that there was no such advice given by Mr Shearwood to any Westpoint Group entity (or any of the Carey parties) at the meeting with ASIC on 2 September 2003.
300 None of the letters of 17 January, 9 February and 2 June 2000 and 5 February 2003 was an advice in the received sense because none set out a lawyer’s opinion to his client about the law that included an implied representation to the client that the opinion that the lawyer stated was an unqualified expression of his genuine opinion and based on reasonable grounds. The implied representation that accompanies a lawyer’s advice to his client is made to that client and is not usually made to other persons who may happen to read and rely on the lawyer’s advice. As set out below, none of the Carey parties, including Mr Carey, was a client of Freehills. In this circumstance, even if there was an implied representation of the relevant kind made to a Westpoint Group client entity, no such representation was made to Mr Carey or any of the Carey parties. The letters of 17 January, 9 February and 2 June 2000 and 5 February 2003 were, moreover, in the nature of explanations or submissions prepared by a lawyer, on instructions from his client, to best expain his client’s position or to make out his client’s case as best the lawyer could (and so far as the law permits) to third parties. In each case, Mr Shearwood created and provided the letters, at his client’s request, for provision to financial planners or banks, or to ASIC. Mr Shearwood’s letters were in the nature of explanations or “best case” statements of his client’s position and they were known by his client to have this character. In these circumstances, the letters did not incorporate an implied representation to any Westpoint Group client entity that the opinions stated in them were a complete and an unqualified expression of Mr Shearwood’s actual opinion based on his legal knowledge and expertise.
301 As explained hereafter, I would reject the cross-claimant’s misleading and deceptive conduct case. I find that the Promissory Note Advice was neither negligent nor misleading and deceptive: compare Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575 at 602 [104] and Heydon v NRMA Ltd at 108 [330].
302 In order to make out their claim against Mr Shearwood for damages for negligent advice, the Carey parties were required to establish: (1) a duty of care owed by Mr Shearwood to the Carey parties or one or other of them; (2) breach of that duty; and (3) consequential economic loss. Freehills denied that any element of the tort was established.
303 At the relevant time, Mr Carey held shares in companies in the Westpoint Group and held directorships of companies within the Group. Quartz and Heca Nominees Pty Ltd (‘Heca’) also held shares in companies in the Westpoint Group. As already noted, the Group comprised numerous companies and had a complex structure. The other cross-claimants were companies in the Westpoint Group in November 2005.
Construction of the duty by the Carey parties
304 In the present case, the Carey parties alleged that Freehills owed them a duty of care. The derivation of the duty relationship between the Carey parties and Freehills was said very largely to hinge on the existence of an entity known as ‘the Westpoint Group’ and on the idea that “[a]t all material times the interests of each cross-claimant and each Mezzanine Company were co-incident with the interests of Carey, the wider Westpoint Group and Mezzanine Companies”: see amended cross-claim at paragraph 46. Strictly speaking, as already noted, no ‘Group’ (within the meaning of a single hierarchical corporate arrangement) existed. Instead, Mr Martindale SC submitted in opening that what knitted together the majority of the Westpoint Group member companies was their ultimate control by Mr Carey.
305 It is important at the outset to attempt to articulate in what particular capacity and by what particular path the different cross-claimants submitted that a duty of care arose between each of them and Freehills. In their amended cross claim and submissions, three ‘categories’ of cross-claimants appeared, although some of these categories were abandoned or reorientated during the course of the trial, as explained below.
306 The first category was Mr Carey himself, who sued in his capacity as the ‘owner-entrepreneur’ and ‘ultimate stakeholder’, so to speak, of the Westpoint Group and as a director of companies in the Group: see, for example, the amended cross-claim at paragraph 41. In closing submissions, Mr Martindale SC put the position of Mr Carey in the following way:
The first issue … discussed…this morning was the question of duty of care and negligence. We’ve concentrated … on the position of Mr Carey as the entrepreneur that was the decision-maker and the owner of the equity that was floated if the plans to float went ahead. There’s no indeterminacy issue that would arise in such a case from extending the duty from beyond the solicitor’s client to the sole and effective controller of the client in question.
In their closing written submissions, the Carey parties also advanced the proposition that “coincident with any formal retainers between Freehills and certain entities within the Westpoint Group, there was an overarching relationship of solicitor and client between Mr Shearwood and Mr Carey”.
307 The second category was what the amended cross-claim defined as “the shareholding cross-claimants”. This category included Mr Carey again, but also the second and third cross-claimants, Heca and Quartz respectively: see, for example, the amended cross-claim at paragraph 42. Originally, the Carey parties’ case was that the members of this category sued in their capacity as shareholders of the Westpoint Group companies. By the end of the trial, however, this path had been abandoned. In closing submissions, Mr Martindale SC agreed that the Carey parties no longer pressed the “duty of care to shareholders per se” and that the live issue was whether or not Freehills owed a duty of care to Mr Carey. In this context, Mr Martindale said:
There may have been circumstances, but we can put that to one side, in which a duty of care is called into existence with respect to shareholders. We don’t press it as being this case. It’s the duty of care called into question by the foreseeable economic loss that would fall squarely on Mr Carey if something goes wrong.
This was different from what was originally pleaded: see the amended cross claim at paragraph 42.
308 The third category included the remainder of the companies who were parties to the cross-claim. These companies were simply those that were, as Mr Martindale SC explained, “the remnants of the Westpoint Group that remain[ed] under [Mr Carey’s] control”. To the extent that these parties sue as shareholders, their claim too must be taken to have been abandoned. It was not pressed at all in closing submissions. Further, as Ms McMillan SC said towards the end of the trial and before the proceedings involving ASIC settled, eight of these companies had apparently been deregistered.
309 It should also be noted that, at trial, Mr Martindale SC sought to define the legal claims of the ninth cross-claimant (Earlmist Pty Ltd) and the twenty-third cross-claimant (Vannin Pty Ltd) in terms of a duty owed by Freehills to them as “guarantor companies”, rather than as shareholder companies per se. This formulation was not, however, specifically pleaded in the amended cross-claim; and an application to amend the pleading further in order to articulate their claim was refused at trial. This was, so Mr Martindale SC explained, “the only cause of action that Earlmist and Vannin ha[d]”. Accordingly, the cross-claim so far as these two cross-claimants are concerned, requires no further consideration.
Some relevant legal principles
310 Generally speaking, solicitors do not owe a duty of care to persons who are not their clients: see, for example, Hill v van Erp (1997) 188 CLR 159 (‘Hill v van Erp’) at 167 (Brennan CJ). A solicitor owes a duty of care to a client who has retained that solicitor. Freehills owed a duty of care to WPC and WPM, who had retained Mr Shearwood; but neither company is a cross-claimant. In Hill v van Erp at 167, Brennan CJ said:
Generally speaking, … a solicitor’s duty is owed solely to the client subject to the rules and standards of the profession. That is because the solicitor’s duty is to exercise professional knowledge and skill in the lawful protection and advancement of the client’s interests in the transaction in which the solicitor is retained and that duty cannot be tempered by the existence of a duty to any third person whose interests in the transactions are not coincident with the interests of the client.
311 Where a solicitor’s conduct demonstrates an assumption of responsibility, with known reliance by the plaintiff, a duty of care may arise by reason of an implied professional retainer agreement: see, for example, IGA Distribution Pty Ltd v King and Taylor Pty Ltd [2002] VSC 440 at [231] (Nettle J); Pegrum v Fatharly (1996) 14 WAR 92 (‘Pegrum v Fatharly’) at 95 (Ipp J), 101-102 (Anderson J, Kennedy J agreeing); and Meerkin & Apel v Rossett Pty Ltd [1998] 4 VR 54 at 62 (Charles JA, Callaway and Batt JJA agreeing).
312 There are, however, circumstances in which a duty of care on the part of a solicitor may arise independently of a retainer. Thus, a duty of care has been said to arise in the context of negligent misstatement causing loss: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241, at 252 (Brennan CJ). A duty of care has also been recognised as being owed by a solicitor to a beneficiary of a client’s will, in the absence of reliance by the third party beneficiaries: see Hill v van Erp at 166-168 (Brennan CJ), 172-173 (Dawson J), 234 (Gummow J). Significantly, however, there the High Court emphasised the coincidence of interest between the client and the beneficiaries. In Blackwell v Barroille Pty Ltd (1994) 51 FCR 347 (‘Blackwell v Barroille’) a Full Court of this Court held that a solicitor owed a duty of care to the client’s trustee in bankruptcy as a result of the reliance by the trustee on the solicitor. See further, Beach Petroleum NL v Kennedy and Others (1999) 48 NSWLR 1 at 45-48 [188]-[205] and Hawkins v Clayton (1988) 164 CLR 539 at 578 (although Deane J’s analysis there depended on treating proximity as a determinative factor, an approach that has since been rejected: see below).
313 Where a duty of care is claimed to have a risen in a new circumstance or with respect to a new category of relationships, Australian law now requires a multi-factorial approach in assessing whether a duty of care has indeed arisen. As the New South Wales Court of Appeal noted in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649 (‘Caltex v Stavar’) 675 [101], the High Court has rejected the doctrine of proximity as a determinative factor in deciding whether a duty of care existed, as well as “the two stage approach in Anns v Merton London Borough Council [1978] AC 728 based on reasonabl[e] foreseeability, the expanded three stage approach in Caparo Industries Plc v Dickman [1990] 2 AC 605 [(‘Caparo v Dickman’)] and any reformulation of the latter two”. See, for example, Hill v van Erp at 210 (McHugh J), 237-239 (Gummow J), Perre v Apand Pty Ltd (1999) 198 CLR 180 at 193-194 [9]-[10] (Gleeson CJ), 197-198 [25]-[27] (Gaudron J), 208-213 [70]-[83], 216 [93] (McHugh J), 268 [245]-[247], 273 [255], 285 [280]-[287] (Kirby J), 303 [330]-[335] (Hayne J), 319 [389], 324 [398]-[400], 326 [406] (Callinan J); Sullivan v Moody (2001) 207 CLR 562 at 577-580 [43]-[53] (Gleeson CJ, Gaudron, McHugh, Hayne and Callinan JJ); Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 at 583 [99] (McHugh J), 625 [234]-[236] (Kirby J); and Stuart v Kirkland-Veenstra (2009) 237 CLR 215 at 260 [132] (Crennan and Kiefel JJ).
314 Caltex v Stavar has become an exemplar of the multi-factorial approach, partly because Allsop P helpfully set out, in a non-exhaustive list (at 676 [103]), the “salient features” in the evaluative task of imputing a duty of care in novel circumstances, including its scope and content. In Caltex v Stavar Allsop P said (at 675 [100]) that the current approach:
… recognises what has been said to be the use of foreseeability at a higher level of generality and the involvement of normative considerations of judgment and policy. This approach requires not only an assessment of foreseeability, but also attention to such considerations as control, vulnerability, assumption of responsibility and nearness or proximity.
His Honour continued (at 676 [102]):
This rejection of any particular formula or methodology or test the application of which will yield an answer to the question whether there exists in any given circumstance a duty of care, and if so, its scope or content, has been accompanied by the identification of an approach to be used to assist in drawing the conclusion whether in novel circumstances the law imputes a duty and, if so, in identifying its scope or content. If the circumstances fall within an accepted category of duty, little or no difficulty arises. If, however, the posited duty is a novel one, the proper approach is to undertake a close analysis of the facts bearing on the relationship between the plaintiff and the putative tortfeasor by references to the “salient features” or factors affecting the appropriateness of imputing a legal duty to take reasonable care to avoid harm or injury.
315 In connection with the “foreseeability” factor, Allsop P specifically said (at 677 [106]) that:
In a novel area, reasonable foreseeability of harm is inadequate alone to found a conclusion of duty. Close analysis of the facts and a consideration of these kinds of factors will assist in a reasoned evaluative decision whether to impute a duty. Whilst simple formulae such as “proximity” or “fairness” do not encapsulate the task, they fall within it as part of the evaluative judgment of the appropriateness of legal imputation of responsibility.
316 The list of “salient factors”, which Allsop P identified, was not intended to be exhaustive: Caltex v Stavar at 676 [104]. See also Makawe Pty Ltd v Randwick City Council [2009] NSWCA 412 at [17], [92]-[94]; Hoffmann v Boland [2013] NSWCA 158 (‘Hoffmann v Boland’) at [31] (Basten JA), [127]-[130] (Sackville AJA, Barrett JA agreeing). It is unnecessary to make findings about all the factors in the list. This point was reiterated in Hoffmann v Boland at [31], where Basten JA said that Allsop P’s “salient features”:
… provide a valuable checklist of the kinds of factors which can be of assistance. They do not constitute mandatory considerations, failure to address which will constitute error of law; nor do they lead to a formula which will provide a result in a particular case. Each involves considerations of varying weight; some will be entirely irrelevant. What is necessary is to focus upon the considerations which are relevant in the circumstances of the particular case.
317 By reference to the factors mentioned in Caltex v Stavar and other relevant factors in this case, the Court must assess the circumstances in order to determine whether or not the law will impute a duty of care and, if so, its scope and content. I interpolate that, generally speaking, where the alleged duty of care owed by a solicitor to a non-client conflicts with a duty of care towards the client, a duty of care to the non-client is unlikely to be established. See, for example, Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448 at [338].
318 The alleged duty of care said to be owed by Freehills to Mr Carey (and, on one formulation, Quartz and Heca) was formulated in three different, albeit overlapping ways). I deal with each in turn and cumulatively, below.
Solicitor – Client relationship
319 As already noted, the Carey parties contended that there was an (implied) overarching relationship of solicitor and client between Mr Shearwood and Mr Carey. An implied retainer will arise only where, on an objective consideration of the circumstances, an intention to enter into such a contractual relationship ought fairly and properly to be imputed to the parties: see Dean v Allin and Watts (a firm) [2001] 2 Lloyd’s Rep 249 at 256 [22] (Lightman J, Robert Walker and Sedley LJJ agreeing); and Hancock Family Memorial Foundation Ltd v Fieldhouse [No 5] [2013] WASC 121 (‘Hancock v Fieldhouse’). For the reasons stated below, I reject the Carey parties’ submission on the basis that the facts as found do not, objectively speaking, support the Carey parties’ contention.
320 Relevantly, so far as this issue is concerned, the facts, as I find them, were as follows:
(a) Freehills, via Mr Shearwood, was retained by either WPC or WPM with respect to the the matters in which Mr Shearwood acted relevant to this proceeding. In the relevant period, Mr Shearwood was not expressly retained by Mr Carey, Quartz, Heca, or any other cross-claimant.
(b) Whilst Freehills did not always generate a retainer letter for advice in relation to “incidental matters”, this circumstance did not justify a finding that there was an implied relationship of solicitor and client between Mr Shearwood and Mr Carey or any other cross-claimant. There was nothing in the circumstances of any of the letters or the alleged advice said to constitute the Promissory Note Advice that would support this proposition.
(c) As already stated, I have found that there was no meeting in April 1998, at which Mr Carey, in the presence Mr Bell and Mr Rundle, made a presentation to Mr Shearwood detailing matters pertaining to the Westpoint Group and Freehill’s instructions (amongst other things). For the reasons stated earlier, to the extent that the Carey parties relied on the alleged presentation at this meeting as evidence that Mr Carey himself retained Freehills’ services, I have rejected this evidence.
(d) With the exception of the 5 February 2003 letter, none of the relevant letters or the alleged 2 September 2003 advice (all said to constitute the Promissory Note Advice) was addressed to Mr Carey or any other cross-claimant. The evidence established that, with the exception of the 5 February 2003 letter, none of the Promissory Note Advice letters and supposed advice was intended to be communicated (in the relevant sense) to Mr Carey or another cross-claimant, whether in the capacity of shareholder or director or otherwise.
(e) Further, none of the letters and the supposed advice said to constitute the Promissory Note Advice was communicated for the purpose of leading Mr Carey or any other cross-claimant to enter into any transaction. So far as Mr Shearwood was concerned, Mr Bell at WPM requested the letters of 17 January 2000 and 9 February 2000 for financial planners, whilst Mr Thomas requested the creation of the 2 June letter to ASIC, which was reviewed by him, Mr Beck and Mr Rundle before being sent, as a defensive response to ASIC. The letter of 5 February 2003 was requested by Mr Rundle after the meeting between him, Mr Carey and Mr Shearwood, for the purpose of being shown, if needed, to banks or financial planners. As stated earlier, there was no relevant advice given on 2 September 2003 by Mr Shearwood to Mr Carey. There was nothing in the circumstances in which these letters were created to make it likely that they would lead Mr Carey or any cross-claimant into any transaction. (As explained below, they did not so lead them.)
(f) Mr Carey claimed the requests for advice (said to be the letters and supposed advice constituting the Promissory Note Advice) emanated from him. As stated above, I did not find Mr Carey an honest or reliable witness; and I would not accept his evidence unless corroborated by other reliable evidence. In any event, even if the requests to Mr Shearwood that led him to create the letters in question arose out of internal discussions with Mr Carey and others within the Westpoint Group, save for the 5 February 2003 letter, this was not a matter that Mr Shearwood knew or that concerned him. Mr Shearwood had no reason to, and did not, enquire about Mr Carey’s involvement; and, save with respect to the 5 February 2003 letter and the 16 December 1997 and 21 July 2000 meetings (respectively regarding the Tea Tree Plus Project and Paragon Commercial MIS) Mr Shearwood had no reason to believe that Mr Carey had any specific involvement in Mr Shearwood’s work.
(g) Mr Shearwood provided the 17 January 2000 letter to Mr Bell, at WPM, which Mr Bell had requested for the purpose of being provided to financial planning groups. This letter was recorded on a Freehill’s file for WPC (“MIA-General”).
(h) Mr Shearwood provided the 9 February 2000 letter to Mr Bell, at WPM, which Mr Bell had also requested for the purpose of being provided to financial advisers. This letter was also recorded on a Freehill’s file for WPC (“MIA-General”).
(i) Mr Shearwood drafted the letter dated 2 June 2000 to ASIC, at the request of Mr Thomas, at WPM, and provided it to ASIC after it had been reviewed by Mr Thomas, Mr Beck and Mr Rundle, as a defensive response to ASIC’s letter of 29 May 2000. A copy of the 2 June letter was kept by Freehills on a WPM file and, as noted, it was the subject of communications with WPM personnel.
(j) Mr Shearwood provided the letter dated 5 February 2003 to Mr Carey, at WPC, for the purpose of being shown if needed to banks or financial planners. A copy of the letter was kept by Freehills on a WPM file.
(k) Whilst Mr Shearwood was told by Mr Rundle that he was seeking the ‘one pager’ that became the letter of 5 February 2003 at Mr Carey’s request, this letter was unusual in that it followed a meeting that Mr Carey had himself attended (along with Mr Rundle and Mr Beck) and, although addressed to him at WPC, was sought and prepared for banks and financial planners as part of the Group’s overall strategy. When considered in light of other relevant citrcumstances, the circumstances that attended the preparation by Mr Shearwood of this letter do not justify a finding that the relevant retainers were not only with WPC and/or WPM but also with Mr Carey.
(l) Mr Shearwood attended the 2 September 2003 meeting with, amongst others, Mr Beck and Mr Rundle, both from WPM, at which a presentation was made to ASIC. Mr Shearwood did not prepare the presentation, although, on instructions, he said that “the Westpoint Group was in the process of converting to regulated products and had debentures for the Market Street Project and had commenced the Westpoint Income Fund”.
(m) The fact that WPC was said to operate as a “general treasury” for the Westpoint Group did not provide a basis for implying a retainer with Mr Carey or companies within the Group other than WPM and WPC.
(n) At the time the Promissory Note Advice was allegedly given, Mr Shearwood did not know and did not enquire about the nature of Mr Carey’s interest in the Westpoint Group. In cross-examination, Mr Shearwood said (and I accept) that, as at the beginning of 2000, he had some limited knowledge of Mr Carey’s interest in the Westpoint Group. Mr Shearwood’s evidence was:
I think by that stage I had the impression that Mr Carey didn’t have any assets, but he was a potential beneficiary of the trust that may have had some controlling interest in the group.
In closing submissions, Mr Martindale SC made much of the topics referred to in the minutes for the float team meetings, particularly for 29 October 1998, attended by Mr Shearwood. These minutes merely confirmed, however, that, as Mr Shearwood said in cross-examination, Mr Carey apparently had a controlling interest in the Group via some unparticularised arrangement: see [341 (5)] below.
(o) The Westpoint Group was a large and complex group of companies, which consisted of four smaller groups: (1) the property group; (2) the funds management group; (3) the financial services group; and (4) the technical services group. The Group operated as a distinct organisation and was said by Mr Carey to have had more than 350 employees.
(p) For the purposes of raising mezzanine finance through promissory notes, separate mezzanine companies were established with (save for Bayview Mezzanine) independent boards of directors.
(q) WPC or WPM paid Mr Shearwood’s fees in relation to work relevant to these proceedings. (This factor is not determinative and its weight depends on the circumstances of the case: compare Pegrum v Fatharly at 105 (Anderson J).
321 Mr Carey did not himself retain Mr Shearwood and, to the extent that Mr Carey relied on the alleged presentation in April 1998, I have rejected Mr Carey’s evidence. The facts as found do not support a finding that there was an implied retainer between Mr Shearwood and Mr Carey. On an objective consideration, an intention to enter into contractual relations cannot fairly and properly be imputed to Mr Shearwood and Mr Carey. Mr Shearwood’s conduct did not demonstrate an assumption of responsibility to Mr Carey, whom he formally met only three times in the period 5 December 1997 to 2 September 2003, including on 30 January 2003 prior to Mr Shearwood’s preparation of the 5 February 2003 letter and strategy paper. Over this nearly six year period, Mr Shearwood almost invariably received his instructions from representatives of WPM or WPC and not from Mr Carey. His meeting with Mr Carey on 16 December 1997 and 30 January 2003 must be understood in this context; and thus understood, these meetings were manifestations of Mr Shearwood’s retainers with WPM and WPC. Further, whilst Mr Shearwood acted for and advised WPM and WPC, through their representatives, the circumstances set forth above would not support a finding that Mr Carey made known his personal reliance on an assumption by Mr Sheawood of responsibility to him.
Duty to Mr Carey as the effective/ultimate stakeholder of the westpoint companies (Apart from Any Retainer)
322 The Carey parties also submitted that, apart from any retainer, Freehills owed Mr Carey a duty of care in giving the Promissory Note Advice. Apart from the argument relating to the duty owed to Mr Carey ‘purely’ as a shareholder cross-claimant, this argument relied on Mr Carey’s position as the “sole and effective controller of the client in question”, which in some way created a relationship between Mr Carey and the giver of the Promissory Note Advice such as to give rise to a duty of care. On its own, however, being a sole and effective controller of a client company does not give rise to the putative duty said to be owed by Freehills (as I detail below).
323 As a general proposition, the law of negligence resists any extension of a solicitor’s duty of care beyond a client company to its shareholders or other related entities purely because they have derivative interests in the company’s performance. It is not the case, however, that the duty of a solicitor may, irrespective of the circumstances, never extend beyond the individual or corporate client company, to perhaps a trustee or shareholder.
324 As stated above, in Blackwell v Barroille, for example, a Full Court of this Court (Davies, Einfeld and Lee JJ) unanimously held that a firm of solicitors owed a duty of care to the trustee of a client’s bankrupt estate. No retainer existed between the trustee and the solicitor. As the reasons of Davies and Lee JJ make clear (at 358), what was important in that case was that the trustee:
… stood in the shoes of [the client] and had assumed the rights and obligation of [the client]. … The property of [the client] vested in [the trustee]. This included the entire shareholding [of the relevant company], notwithstanding that [the client] may not have been the registered shareholder”.
In addition, their Honours noted the relationship between the trustee and the solicitors involved the trustee’s reliance on the solicitors, observing (at 358-359) that the solicitors would reasonably have known that:
… the information supplied to the trustee will be relied upon by the trustee. The relationship of solicitor and clients and the reliance of the client’s trustee upon the solicitor will establish a relationship of proximity between the trustee and the solicitor, and the solicitor will have a duty of care to the trustee to ensure that the trustee is properly informed by the solicitor’s response to the trustee’s request for information about the client’s affairs.
As noted already, current Australian law has rejected the proposition that “proximity” is enough to establish a duty of care, but, this aside, their Honours’ analysis indicates that they would have reached the same conclusion on the preferred multi-factorial approach, in which “proximity” is one of the various factors to be considered.
325 The Court was not referred to any case that contemplated that a solicitor acting for a company owed a separate duty of care to its shareholders, even a majority shareholder or a ‘sole and effective controller’. In this context, the Court was referred to Irvine v Shaw [1992] ANZ Conv R 83 (‘Irvine v Shaw’), which was perhaps the nearest a court has come to imposing such a duty. This was a very different case from the present. In Irvine v Shaw the High Court of New Zealand held that solicitors acting for a company owed a duty to a shareholder/director to recommend that the shareholder/director take independent advice, in circumstances where the director had given a personal covenant in the nature of a guarantee that the company would observe its lease obligations. The duty related to the director taking action in respect of his own interests as opposed to those of the company. Importantly, the solicitor’s action regarding the guarantee took place against a pre-existing arrangement between the shareholder/director and the defendant solicitors that “anything relating to the client company affecting [Mr] Shaw personally would be referred to his personal lawyer”. No referral was made. The Court observed that the possibility of there being a conflict of interest such that the shareholder/director “should have been expressly alerted to the need for separate legal advice” was obvious. The case does not support the imposition of a duty of care with respect to a shareholder/director where the advice in question was restricted to the conduct of the client company, especially in the absence of any pre-exisiting arrangement. I interpolate here that there was no pre-existing arrangement between Mr Carey and Freehills.
326 Further, in a later case of Brownie Wills v Shrimpton [1998] 2 NZLR 320, the New Zealand Court of Appeal rejected the possibility that solicitors owed a duty of care to a company director where the plaintiff director had, in the defendant solicitors’ office, signed a guarantee for the indebtedness of the company to its bank. The plaintiff director, via a company he controlled, was a 10% shareholder in the client company. In dismissing the claim for the solicitors’ negligence, Gault and Blanchard JJ stated (at 326) that:
In the present case the solicitors’ clients had no purpose of benefiting, or even protecting, the guarantors. The bank wanted enforceable securities. The company wanted to give securities in order to obtain the bank’s money. And the plaintiff was not totally dependent on [the company’s solicitor]. He could easily have taken advice elsewhere or asked [that solicitor] to act for him. If such a request revealed a conflict of interest he would no doubt have been referred to his own solicitor.
…
We conclude that a duty of care should not in these circumstances be imposed upon the solicitors in the circumstances in which the signature was taken. ...
327 A third member of the Court, Tipping J, agreed, saying (at 329):
If there is a solicitor involved in a transaction, it is not uncommon for the participants to blame the solicitor is something goes wrong. In such circumstance, if the party seeking redress from the solicitor is not that solicitor’s client, and the complaint lies in a failure to act or advise, it is necessary to find some clear or principled basis for saying that there was sufficient proximity between the solicitor and non-client to raise a duty of care.
Assumption of responsibility is the conventional touchstone upon which the proximity issue is determined in circumstances such as the present. Without an assumption of responsibility to act on the part of the solicitor, it is hard to see any rationale for funding proximity and thus liability in tort for not acting.
328 In Australian law, as already noted, “proximity” is not the determining factor; rather, the approach here is said to be multi-factorial. Nonetheless, the fact that a solicitor did not assume responsibility may remain a relevant factor, especially when the plaintiff did not, by his conduct, make any reliance known.
329 Johnson v Gore Wood & Co [1999] PNLR 426 (‘Johnson v Gore Wood’), a decision of the English Court of Appeal, falls perhaps closer still to the argument advanced by the Carey parties. Mr Johnson was a principal shareholder entrepreneur, who sued for damages for breach of contract and negligence, including for consequential diminution in the value of his shareholding in his company, Westway Homes Ltd. The company was, as in the present case, a property development company. The Court described Mr Johnson as being
… [l]ike so many … conduct[ing] his business affairs through companies which were wholly or substantially owned by him. In the case of Westway Homes Ltd … he held 998 out of 1000 issues shared, he was its managing director and guarantor of its liabilities and thus it had never been in dispute that this company was his alter ego.
330 Importantly, in Johnson v Gore Wood, the Court of Appeal (Nourse, Ward and Mantell LJJ) agreed with the primary judge that that it was arguable that a duty of care, separate to a retainer of any kind, arose between Mr Johnson and his solicitor, Mr Wood, even though Mr Wood was retained formally by Westaway Homes Ltd. In this connection, the Court of Appeal referred (at 440) to Caparo Industries Plc v Dickman [1990] 2 AC 605 (‘Caparo Industries v Dickman’) and White v Jones [1995] 2 AC 207 before reiterating the primary judge’s statement that:
… if the facts alleged in the statement of claim are proved, it may well appear at the end of the day that Mr Johnson’s personal affairs and his business dealings were so intimately intertwined that it is quite possible that any professional man advising on all these matters on which the defendents are alleged to have advised … would not distinguish between Mr Johnson and his company. The solicitor would know the advice which he was giving would be relied on for the guidance of the whole since the parts could not sensibly be separated.
As the Court of Appeal hastened to add, however, “the development [would be] limited to special circumstances of this description”: see Johnson v Gore Wood at 440. Critically, the special circumstances (assumed to be the facts for the purpose of the proceeding) were that Mr Wood of the defendant solicitors’ firm had allegedly acted for Mr Johnson in relation to his other businesses; was familiar with Mr Johnson’s personal financial position; and had knowledge “both of Mr Johnson’s financial position and of the use to which he was putting [the advice] in the regulation of his own affairs”: see Johnson v Gore Wood at 438.
331 This is not such a case. While Mr Carey’s position shares some similiarities with the entrepreneur in Johnson v Gore Wood, it does not share the critical features highlighted by the Court of Appeal in that case. Mr Carey had no pre-existing client relationship with Freehills in his personal capacity and Mr Shearwood did not have any intimate, detailed and long-running knowledge of Mr Carey’s financial affairs comparable to Mr Wood’s knowledge of Mr Johnson’s affairs in Johnson v Gore Wood. Mr Shearwood rarely dealt directly with Mr Carey; rather, he ordinarily dealt with Mr Thomas and Mr Bell, as the known representatives of WPC and WPM. Furthermore, because of the nature of the proceeding, the Court of Appeal held only that a duty of care was, in the circumstances, arguable.
332 In Johnson v Gore Wood & Co [2002] 2 AC 1, the House of Lords determined a subsequent appeal and cross-appeal on the assumption that the Court of Appeal had correctly held that there was, arguably, a duty of care in the circumstances as outlined, but, contrary to the Court of Appeal held, amongst other things, that Mr Johnson could not recover damages for the diminution in value of his shareholding because this loss was merely a reflection of the company’s loss. I mention this here because the point is relevant to the recoverability of damages issue, touched on below. After referring to numerous authorities. Lord Bingham (with whom Lord Goff and Lord Millett agreed on the point) said (at 35-36):
These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. … (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. … (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of the duty owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.
333 Within Australian jurisdictions, the Western Australian Supreme Court, in Hancock v Fieldhouse, recently considered the impact of advice to the ultimate controller of a corporate structure on the nature of a solicitor’s duty of care. At issue in Hancock v Fieldhouse was whether advice given to the late Langley Hancock gave rise to either an implied retainer and/or a duty of care to the Hancock Foundation because (among other things) Mr Fieldhouse knew that:
(a) Mr Hancock was the controlling mind of the Hancock Foundation;
(b) the Hancock Foundation would act in accordance with Mr Hancock’s direction if satisfied that what they were doing was legal;
(c) the Hancock Foundation did not have any legal (or valuation) advice other than that which was being provided to Mr Hancock;
(d) the transaction (the subject of the dispute) was to be between the Hancock Foundation and its controlling mind; and
(e) Mr Fieldhouse told the Hancock Foundation through its controlling mind that the transaction was “sound”. See Hancock v Fieldhouse at [83].
334 The primary judge, Le Miere J, held that there was neither a duty of care nor an implied retainer between Mr Fieldhouse and the Hancock Foundation, despite Mr Hancock’s status as ‘the controlling mind’ of Hancock Foundation; the fact that certain people representing Mr Hancock also had roles in the Hancock Foundation (see [92]); and Mr Fieldhouse’s knowledge that the Hancock Foundation had not received any independent advice regarding the transaction: see Hancock v Fieldhouse at [85], [97], [108] (no implied retainer); and [111].
335 Le Miere J drew attention, like the Court of Appeal in Johnson v Gore Wood, in particular, to the origins of the transaction, the nature of the advice, the payment of the fees, and the delivery of the advice. In Hancock v Fieldhouse these circumstances evidenced that the advice in question was advice for Mr Hancock in his personal capacity. Further, his Honour noted that Mr Hancock’s position vis-À-vis the Hancock Foundation was not analogous to the relation between a client and the beneficiary of the client’s will (as in Hill v Van Erp), in part because of the potential for the solicitor’s duty to Mr Hancock to have conflicted with a putative duty to the Hancock Foundation: see further, Hancock v Fieldhouse at [100] and following.
336 What is clear again here is that the coexistence of a ‘controlling mind’ in one person and the incorporated entities that person has created does not give rise to anything in the nature of a presumption of duty of care on the part of a solicitor advising one element of the corporate structure to all companies and/or the controlling mind. Rather, whether or not a duty arises will depend on the totality of the circumstances in which the advice was sought and provided. I address this multifactorial enquiry shortly. At this stage, however, I note that, while Mr Carey described the interests of all the companies of the Westpoint Group as entirely “co-incident” with his own (see above), each company and he himself held diverse interests in respect of which there was an evident potential for a conflict of interest.
337 In this case, for the reasons stated, I reject the Carey parties’ submissions in so far as they asserted that a duty of care arose between Freehills and Mr Carey by virtue of him having some special status as the ultimate stakeholder or the sole and effective controller of the Westpoint Group (or of WPC or WPM).
Duty to Mr Carey (and Quartz and Heca to the extent they held their interests for Mr Carey) as shareholder
338 As noted, originally the Carey parties argued that Freehills owed a duty of care to Mr Carey, Quartz and Heca as the shareholders of the companies within the Westpoint Group. As already stated, however, Mr Martindale SC abandoned this part of the Carey parties’ case, saying that, whilst there may be circumstances in which “a duty of care is called into existence with respect to shareholders”, the Carey parties were not pressing it “as being this case”. Mr Martindale SC made clear that what they were relying on was “the duty of care called into question by the foreseeable economic loss that would fall squarely on Mr Carey if something [went] wrong”. This submission is rejected, for the reasons stated above.
339 In any event, as already indicated, I was not referred to any case that contemplated that a solicitor acting for a company automatically owed a separate duty of care to its shareholders. In Caparo Industries v Dickman (to which Freehills referred me) the House of Lords rejected a shareholders’ claim against the company’s auditor for the negligent preparation of the company’s annual accounts. The shareholder claimed that it had purchased shares in reliance on the auditor’s report, suffering a loss by acquiring them at a price greater than their true value; and that the shareholder would not have done so had the true facts been known. The House of Lords unanimously dismissed the shareholder’s claim against the company’s auditor, on the basis that, in the circumstances, the auditor owed no relevant duty of care to a shareholder. This was because the purpose of the statutory requirement for an audit of public companies (to facilitate the shareholders’ collective interest in the company’s proper management) did not extend to the provision of information to assist shareholders to make decisions about future investment in the company: see Caparo Industries v Dickman at 626-627 (Lord Bridge); 628-629, 631-632 649-650, 654 (Lord Oliver); 658, 661-662 (Lord Jauncey). Any loss suffered by a shareholder as a result of the auditor’s negligence could be recouped by a claim against the auditor in the company’s name: see Caparo Industries v Dickman at 626 (Lord Bridge).
applying the multifactorial approach does not support the existence of a duty
340 Having been referred to no authority that would establish the existence of the duty of care for which the Carey parties argued, I undertake a consideration of the kind discussed in Caltex v Stavar. That is, I turn to the various factors in this case that impinge on whether or not such a duty should be found to exist. They are as follows.
341 In addition to the various matters mentioned above (in respect of both the implied retainer and duty of care issues), there are a number of other factors that militate against the imputation of a duty of care owed by Mr Shearwood to Mr Carey or any other shareholder cross-claimant in this case.
(1) None of the letters constituting the Promissory Note Advice was sought and provided for the purpose of a company in the Westpoint Group taking any action. On the contrary, the letters were created either solely for the purpose of submission to financial planning groups or financial advisers (as in the case of the letters of 17 January 2000 and 9 February 2000) or for the purpose of being shown if needed to banks or financial planners (as in the case of the 5 February 2003 letter) or to ASIC (as in the case of the 2 June 2000 letter). The alleged advice of 2 September 2003, if given, would also have fallen into this last-mentioned category.
(2) As appears above, none of the letters or the alleged 2 September 2003 advice said to constitute the Promissory Note Advice was sought or provided for the purpose of Mr Carey or any other shareholder cross-claimant taking any action. Instead, each was provided solely for the purpose of provision to financial advisers or planners, banks, or ASIC. Although the letter of 5 February 2003 was addressed to Mr Carey, it was addressed to him at WPC and, as already stated, the evidence established that it was sought and provided for the purpose of being shown, if needed, to banks and financial planners, after ASIC had publicised its concerns about the kind of fundraising in which the Westpoint Group was involved and had made further enquiries concerning the fundraising activities of the Westpoint Group companies.
(3) During the two-year period from mid 1998 to mid 2000, Mr Shearwood had very little personal contact with Mr Carey. His only recorded attendances with Mr Carey were on 16 December 1997 and 21 July 2000. Whilst there may have been, as Mr Carey maintained, other conversations between the two men during this time, none of them were of sufficient significance to justify an entry in Mr Shearwood’s comprehensive records. The meeting on 30 January 2003, when Mr Shearwood and Mr Carey met again, this time to discuss a strategy to deal with ASIC’s renewed publicized concerns, marks the beginning of a fresh chapter in Mr Shearwood’s dealings with the Westpoint Group interests, in the sense that, from this point, Mr Shearwood was being instructed, on the basis of what the companies had in fact done, to negotiate a compromise with ASIC to avoid ASIC acting against Westpoint Group interests by intervening further in the Group’s affairs or from instituting court proceedings.
(4) As already noted, the Westpoint Group was a substantial group of companies in a complex structure, with various operating arms, and in excess of 350 employees. The Westpoint Group operated as a distinct organisation, as underlined by the proposed float. Mr Carey’s position with respect to the Group was entirely different from the position of a sole trader who operates a small business through a company: see, for example, RP Howard Ltd & Witchell v Woodman & Co (a firm) [1983] BCLC 117 (disagreed with by Chesterman J in Scottsdale Homes Pty Ltd v Gemkip Pty Ltd & Ors [2008] QSC 326 on another issue), where Mr Witchell and his wife owned all the shares in a company and Mr Witchell sought legal advice, both as a representative of the company and in his personal capacity. The latter circumstance may more readily justify an extension of the duty of care to a shareholder in his personal capacity who “was the company”, although much will depend on the facts.
(5) Although the evidence showed that Mr Shearwood believed that Mr Carey might have an ultimate beneficial interest, the nature of that interest was not explained to him. This sets Mr Carey very much apart from the plaintiffs in cases like Irvine v Shaw, Johnson v Gore Wood and Christensen v Scott [1995] 1 NZLR 273. As already noted, I reject Mr Carey’s evidence about the April 1998 presentation, including that, on that occasion, Mr Carey told Mr Shearwood about his lack of experience in funds management and that he was the ultimate client. Mr Riordan accepted in closing submissions that Mr Shearwood knew that Mr Carey was the Group’s managing director. Mr Shearwood did not know, however, and did not ask about the means through which Mr Carey’s ultimate beneficial interest might flow through to him. In cross-examination, Mr Shearwood was asked whether he understood from his attendances at the float team meetings that Mr Carey was the owner of the business being carried on by the entities in the Westpoint Group. Mr Shearwood’s response was that, “by that stage [he] had the impression that Mr Carey didn’t have any assets, but he was a potential beneficiary of the trust that may have had some controlling interest in the Group”. The exchange continued:
That’s a matter of structure, isn’t it, Mr Shearwood? You were dealing with Mr Carey as the principal of the client group? -- Yes, in a manner of speaking.
Yes. And if the business was going to be floated it was going to be Mr Carey’s equity that was going to be offered to the public? Well, subject to my qualification before, well, I will accept what you say, yes.
It was just structuring in the end, wasn’t it? In economic terms, it was Mr Carey’s interest that was going to be floated?---Well, quite a significant difference, but I accept that he was the person that spoke for that equity.
I would not read this as an unequivocal acknowledgment, or evidence to that effect, that Mr Shearwood knew much beyond the very general about the nature of Mr Carey’s interest in the Wespoint Group. Mr Shearwood’s evidence must be understood subject to his expressed qualification that it was his impression that Mr Carey did not have any assets, but was a potential beneficiary of the trust that may have had some controlling interest in the Westpoint Group. So too must his statement that Mr Carey “spoke for that equity”.
(6) The fact was that Freehills owed a duty of care to its client companies, principally WPC and WPM, and would have been liable to those companies for damage arising from negligent advice. If WPC had incurred loss and damage in rectifying its funding operation, which had erroneously been undertaken on the basis of negligent advice, WPC would have been entitled to claim against Freehills for such loss and damage. This factor strongly tells against the existence of a separate duty of care to the shareholder cross-claimants (including Mr Carey) in respect of the same damage and the loss of opportunity to float: see further below.
It has been accepted in other common law jurisdictions that no separate or independent duty of care arises where there is an identity of interest between the company and the shareholders, such that any loss to the shareholders may be recouped by an action by the company: see Christensen v Scott [1995] 1 NZLR 273 at 279 [20]; and Caparo Industries v Dickman at 626. It was a consideration of this kind that led Lord Bridge in Caparo Industries v Dickman to hold that, whilst the company’s auditor owed a duty of care to the company, the auditor did not owe a separate duty to the company’s shareholders: see Caparo Industries v Dickman at 626. In this case, any diminution in the value of Mr Carey’s shareholding arising from any negligence or breach of retainer by Mr Shearwood was apparently capable of being recouped by the client companies by their own action.
The importance of this kind of consideration has been emphasised by the learned authors of Jackson & Powell on Professional Liability, who, after referring to Caparo Industries v Dickman, stated (at [17-039]):
We suggest that it is wrong to permit the shareholders as a class to sue independently of the company, both because it conflicts with the general rule that duties are owed only to the client company and because it gives rise to the problems of duplication of remedies. Although the company as a going concern is often identified with its shareholders, this is no longer the case when a company becomes insolvent; at that point the interests of creditors become paramount. In such a case we suggest that there are strong policy grounds why the claim of the liquidator (effectively acting for the creditors) should prevail over the claim of the shareholders. (Footnotes omitted)
(7) The claim made by Mr Carey (and, to the extent pressed, the shareholder cross-claimants) is for damage suffered as a shareholder arising from the loss of opportunity to float the companies in the Westpoint Group and, in the alternative, for the lost value of this shareholding in the companies comprising the Westpoint Group: see amended cross-claim at paragraph 56(a) & (b). This means that the Carey parties must establish that Freehills was under a duty to avoid causing Mr Carey (and so far as pressed the other shareholder cross-claimants) damage of this particular kind – the loss of opportunity to float and/or the lost value of their shareholding. This analysis is well-accepted. Thus, in Sutherland Shire Council v Heyman (1995) 157 CLR 424 at 487, Brennan J said “a postulated duty of care must be stated in reference to the kind of damage that a plaintiff has suffered and in reference to the plaintiff or a class of which the plaintiff is a member”. His Honour went on to say (also at 487):
It is impermissible to postulate a duty of care to avoid one kind of damage – say, personal injury – and, finding the defendant guilty of failing to discharge that duty, to hold him liability for the damage actually suffered that is of another and independent kind – say, economic loss. … The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it.
The letters and supposed advice constituting the Promissory Note Advice were not requested for the immediate purpose of furthering the progress of companies in the Westpoint Group towards an initial public offering (‘IPO’). Neither were they provided for that purpose in the way that the Carey parties’ case would have it. I need only reiterate that I reject Mr Carey’s evidence about the April 1998 presentation. Indeed, to some extent, Mr Carey’s own evidence was to the contrary in so far as he said in cross-examination that the decision to raise funds by issuing promissory notes was actually made by the directors of the mezzanine companies, which were said to be independent of him. For these and the other reasons already stated, I reject the Carey parties’ submission that Mr Shearwood “knew or ought to have known that Mr Carey was the person who ultimately made the decision in relation to what fundraising was to be adopted by the Westpoint Group”. For much the same reasons, I reject the Carey parties’ submissions that Mr Shearwood “knew or ought to have known that Mr Carey would order his affairs and cause companies within the Westpoint Group to enter into transactions to give effect to the advice provided by Mr Shearwood in relation to promissory notes …”. (See amended cross-claim at paragraph 41(f).)
(8) The losses claimed by the Carey parties were not reasonably foreseeable. Mr Shearwood joined the float team in September 1998, but there is little evidence of any serious concrete consideration of a public float of the Westpoint Group after the float team’s last meeting in December 1999. Furthermore, the relevant series of events were not reasonably foreseeable. When the letters of 17 January 2000, 9 February 2000 and 2 June 2000 were created (all being said to constitute the Promissory Note Advice), it was not reasonably foreseeable that:
a. the Westpoint Group would use promissory notes to raise hundreds of millions of dollars;
b. the Westpoint Group would raise the funds in the manner that ASIC believed was misleading and deceptive;
c. ASIC would focus on the question whether the Westpoint Group was insolvent; and
d. ASIC would bring proceedings to wind up mezzanine companies on the grounds of insolvency; alternatively that it would be just and equitable for the company to be wound up.
When Mr Shearwood created the letters of 17 January 2000 and 9 February 2000, he knew that a company or companies in the Westpoint Group was proposing to raise mezzanine finance via promissory notes to be ‘sold’ through financial planners, but he did not have any details about the proposal or the Project to which it might relate. He did not, moreover, have the information that would have enabled him to assess whether or not the proposed transactions might involve interests in a MIS. Mr Shearwood did not acquire knowledge of the precise Projects involved until June 2000. By 2 June 2000, Mr Shearwood knew that Bayview Mezzanine had used promissory notes to raise funds and, by 12 June 2000, he was aware that York Street Mezzanine had embarked on the same fundraising route. Prior to 2 June 2000, however, Mr Shearwood had not seen the information memorandum for Bayview Mezzanine and had therefore no reason to suppose that a Westpoint Group company would embark on fundraising through the issue of promissory notes in the manner and on the scale in fact undertaken.
Further, even when the letter of 5 February 2003 was created (it also being said to constitute the Promissory Note Advice), it was not reasonably foreseeable that:
a. the manner of fundraising undertaken by the Westpoint Group would be believed by ASIC to be misleading and deceptive;
b. ASIC would focus on the question whether the Westpoint Group was insolvent;
c. ASIC would bring proceedings to wind up mezzanine companies on the grounds of insolvency; alternatively that it would be just and equitable for the company to be wound up; and
d. the Westpoint Group would continue to use promissory notes to raise significant amounts of money until the winding-up applications in 2005 (as opposed to taking steps to issue debentures to replace the existing promissory notes and/or take other steps to transition out of fundraising through promissory notes.)
I reject the Carey parties’ submissions to the effect that Mr Shearwood had assumed responsibility for the manner and the extent to which the Westpoint Group companies issued promissory notes on 2 June 2000 (and thereafter) when he became somewhat aware of the promissory note fundraising activities. (It must be recalled that Mr Shearwood was not aware, for example, of the oversubscribing of the promissory notes until much later). This submission is inconsistent with the fact that, after this date, Mr Shearwood repeatedly warned against the use of promissory notes in this manner and on such a scale – as evidenced in his subsequent communications of 24 August 2000, 28 September 2000, 3 October 2000, 22 December 2000, 17 August 2001, 23 November 2001 and 28 May 2002. As already stated, I find it more likely than not that Mr Shearwood reiterated his concerns at the meeting on 30 January 2003; and I reject Mr Carey’s evidence that Mr Shearwood gave unqualified advice in favour of the continued use of promissory notes, particularly in view of ASIC’s published concerns on that date. As stated above, the “one page” letter of 5 February 2003 was evidently sought by Mr Rundle (and, notwithstanding his evidence, Mr Carey) and prepared by Mr Shearwood as part of the Westpoint Group’s defensive strategy and intended to be given if needed to financial planners and banks.
(9) In some circumstances, a solicitor’s advice to a company (given, for example, to obtain a benefit in the short term at some risk) may well conflict with some or all of the shareholders’ long-term interests or plans with respect to the company. This potential inconsistency militates against the imposition of a separate duty of care to the shareholders with respect to advice given to a company concerning its own conduct of affairs. There was every likelihood that Freehills’ advice to one or other of the Westpoint Group companies would conflict with Mr Carey’s personal interests, particularly bearing in mind, for example, the contemplated float. Indeed, the potential for conflicted interests even within the Group was apparently recognised with respect to the mezzanine companies, which ultimately retained their own solicitor.
(10) If it were said that a solicitor in Mr Shearwood’s position not only owed a duty of care to a client company but also to the company’s shareholders by reason of the reduction in the value of their shareholding as a consequence of negligent advice, serious questions of indeterminacy of liability would arise. For example, questions would arise as to whether such a duty should be limited to immediate shareholders, ultimate shareholders or the ultimate beneficiary. This is not a case, as I have already stated, where the putative duty is readily confined to a special class of person. It is not analogous to the position of a disappointed beneficiary of a will as, for example, in Ross v Caunters (1980) 1 Ch 297, to which the Carey parties referred me. Further questions would arise as to whether a shareholder would have an available claim at the time of the breach of duty, the occurrence of the damage, or the time of judgment; and whether a shareholder’s claim should preclude the claim by the company for the losses suffered by it.
342 Bearing in mind the above considerations, and for all these reasons, I reject the Carey parties’ submission that Freehills owed a duty of care to Mr Carey and the other shareholder cross-claimants, who were said in some way to be holding their interests for him.
FREEHILLS DID NOT BREACH ITS DUTY OF CARE AND DID NOT MAKE ANY MISREPRESENTATIONS
343 The Carey parties rely on the misrepresentations as pleaded to make out their claims of negligent misstatement and misleading and deceptive conduct. As noted above, these misrepresentations were said to be contained in the Promissory Note Advice. The consideration of these representations is material to both claims. What follows is a discussion of each of the pleaded misrepresentations. As will be apparent from the foregoing, this was not the only way the Carey parties put their negligence case but it was a key way they made their claim.
344 For the reasons set out below, I conclude that the representations, as pleaded, either did not arise from the Promissory Note Advice, as alleged; or, if they did, there was no relevant representation to Mr Carey and the other cross-claimants. Further, there was no relevant reliance by Mr Carey and the other cross-claimants on any part of the Promissory Note Advice: see further, “Causation Issues”.
Promissory Notes issued in accordance with the Promissory Note Advice were not interests in a Managed Investment Scheme (amended cross-claim, par 30(a))
345 In paragraph 30(a) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills represented that promissory notes issued in accordance with the Promissory Note Advice were not interests in a MIS. The representation was said to be express and contained in the letters of 17 January 2000 and 5 February 2003, and in the 2 September 2003 advice.
346 The letter of 17 January 2000 made no representation to the effect alleged. On the contrary, the letter expressly indicated that no opinion was being expressed about the existence of a MIS since the letter in fact stated:
So long as the Promissory Notes are not part of any arrangement that would fall within the definition of Managed Investment Scheme, then there are no other prospectus implications.
(Emphasis added)
The letter did not make any subsequent mention of the existence or non-existence of a MIS. That is, this letter did not make any analysis or state any opinion about whether the promissory notes fell within the definition of a MIS and did not purport to state whether the notes were part of any arrangement that might have that effect.
347 The letter of 5 February 2003 did, however, set out a view about this issue (although, as indicated below, it was based on reasoning that was open at that time). The 5 February 2003 letter stated:
As the repayment of loans to the holders of the promissory notes are not dependent upon the success of the project by virtue of the Westpoint guarantee and the nature of the transaction as a financing transaction, the promissory notes do not fall within the managed scheme provisions of the Corporations Act.
This observation was said that to be based on the author’s “understanding”, set out in the previous paragraph, which included that:
Because of [the Westpoint] guarantee, promissory note holders are not dependent on the success of the business activities of the company which owns the development for the repayment of their loan and interest thereon.
348 This latter statement was not baseless. Around this time, ASIC’s published statements also referred to “dependence” as a possible marker of a MIS. Thus, in IR 03/16 of 14 July 2003, ASIC stated that:
Generally, where an offer involves just a promissory note with a face value of at least $50,000 and no other special features, it will not be regulated under the Corporations Act.
However, ASIC notes that some issuers are seeking to rely on the promissory note exemptions under the Act by offering complex investment arrangements involving promissory notes to retail investors. In some cases although an offer involves the issue of a promissory note, the rate of return and the financial risk to retail investors varies or is dependent on the performance of certain investments.
ASIC believes that these arrangements are likely to be financial products and therefore regulated under the Corporations Act, requiring licensing and disclosure.
(Emphasis added)
349 It may be accepted that, ultimately, the statement that the Westpoint guarantee precluded ‘dependence’ was seen to be ill-founded, as reference to the reasons for judgment of Simmonds J in ASIC v Emu Brewery, delivered on 15 June 2006, indicates: see ASIC v Emu Brewery (2004) 52 ACSR 168 at [92]-[94], [99]. It does not follow from this, however, that the Carey parties have established that the representation, as pleaded, was made.
350 Whether in fact they have done so depends on the circumstances in which the 5 February 2003 letter came into existence. When these circumstances are recalled, it is plain enough that, in providing this letter, Mr Shearwood did not represent to his client, let alone Mr Carey or the other Carey parties, that the letter set out the author’s own unqualified opinion. As already stated, I have found that the “one page” letter of 5 February 2003 was sought by Mr Rundle (at Mr Carey’s instance) and prepared by Mr Shearwood as part of the Westpoint Group’s defensive strategy and intended to be given, if needed, to financial planners and banks. Mr Shearwood’s evidence in cross-examination (some of which is set out earlier) needs to be considered in its entirety and in context. I have found that, considered in this way, in providing the letter to Mr Rundle, he did not give “unqualified” advice in favour of the continued use of promissory notes (including on the basis that there was no MIS involved). As previously noted, this would have been entirely inconsistent with Mr Shearwood’s repeated warnings about the use of promissory notes by Westpoint Group companies (see below).
351 As outlined earlier, Mr Rundle had sought the one page letter of 5 February 2003 following the meeting on 30 January 2003 between him, Mr Carey and Mr Shearwood to discuss ASIC’s publicised concerns about property-related investment schemes and the use of promissory notes as a means of raising mezzanine finance. The letter was provided at the same time as a draft strategy plan, which recommended that Freehills be instructed to review “all the current documentation relating to promissory note fundraising by companies in the Westpoint group”. Mr Shearwood was informed that the 5 February 2003 letter was sought for the purpose of being shown if needed to banks or financial planners: it was requested by Mr Rundle on that basis and provided by Mr Shearwood on this basis. Indeed, Mr Rundle himself stated that the request for confirmation was better described as part of the strategy paper – but separated out so that it could be distributed in the way already described.
352 At the time the draft strategy plan and the letter were created, Mr Shearwood had already given a number of warnings to various Westpoint personnel about the use of promissory notes and had expressly stated that uncertainty attended the legal position with respect to this use (and, in particular, with respect to the MIS issue). Reference here should be made to Mr Shearwood’s conversation with Mr Bell in April 2000, Mr Shearwood’s email to Mr Thomas on 2 June 2000, Mr Shearwood’s faxed letter to Mr Rundle and Mr Thomas on 24 August 2000, Mr Shearwood’s emails to Ms Pham on 27 and 28 September 2000 and 3 October 2000, Mr Shearwood’s email to Mr Thomas on 22 December 2000, Mr Shearwood’s conversation with Mr Beck on 15 August 2001, Mr Shearwood’s letter to Mr Beck on 17 August 2001 (also specifically asking that the mezzanine company directors be advised of the risks by being shown the letter), Mr Shearwood’s email to Mr Millmore on 23 November 2001; and Mr Shearwood’s email to Mr Bell on 28 May 2002. It is plain enough that Mr Shearwood did not endorse the mechanism of a guarantee as a failsafe way to avoid a MIS characterisation; and he gave no unqualified advice to this effect. Whilst it may not matter, it is clear enough too that, as Mr Boyatzis’ email of 28 September 2000 indicates, Mr Carey was aware that Mr Shearwood had warned about the use of promissory notes.
353 Significantly, as we have seen, the 5 February 2003 letter was not sought or provided for the purpose of providing a legal opinion to Mr Shearwood’s client, let alone to Mr Carey and the other Carey parties, on the application of the law as it stood at the time. As stated earlier, in the circumstances as they then stood, Mr Carey and Mr Rundle would have understood at the time that the “one page letter” was a short statement of the best case that could be made to justify the promissory notes issues by Bayview Mezzanine and York Street Mezzanine, in the context of ASIC’s public statements of concern about such matters. There was no representation to Mr Shearwood’s client, let alone to Mr Carey or the other Carey parties, that the letter set out the author’s unqualified legal opinion; and, given Mr Shearwood’s previous and concurrent warnings, could not have been understood in that way by them.
354 Furthermore, as Freehills noted, the letter was emailed on 5 February 2003 after the promissory notes had been issued. In this circumstance, it cannot be said to have been intended to affect or to have affected what the Westpoint Group companies had already done. What is more, in all the circumstances, including the clear context for the letter, there is also no basis for the proposition that the letter somehow kept the companies on this course. In all the circumstances, there is no basis for finding any reliance on the letter by Mr Carey or the other Carey parties.
355 For the reasons stated earlier (see above [234] and following), it cannot be said that any supposed advice of 2 September 2003 included the pleaded representation. There was no evidence at all that any such representation was made. The only evidence of what was said at the meeting with ASIC on 2 September 2003 was that given by Mr Shearwood and Mr Rundle and what may be inferred from the slides presented at the time. Neither witness made any reference to the alleged representation. There was no evidence that Mr Shearwood said anything at that meeting other than as a representative of Westpoint Group interests and, in this context, there was no basis for saying that he gave anything by way of professional advice to Mr Carey (who was not present) or the other Carey parties.
356 There is, moreover, no evidence that Mr Shearwood said anything at the 2 September 2003 meeting with ASIC that was relied on by Mr Carey or any of the Carey parties in making any subsequent decision or taking any subsequent action:
357 For the above reasons, the supposed advice of 2 September 2003 is incapable of forming the basis of the alleged representation.
358 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(a) of the amended cross-claim was made to Mr Carey or any of them.
It was not necessary to issue a prospectus in respect of the promissory notes (amended cross-claim, par 30(b))
359 In paragraph 30(b) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills represented that it was not necessary to issue a prospectus in respect of the promissory notes. The representation was said to be contained in the letters of 17 January 2000 and 9 February 2000.
Letter of 17 January 2000
360 Again, the letter of 17 January 2000 made no representation to the effect alleged. On the contrary, as the passage set out at [346] above shows, the letter did not state whether or not a need to issue a prospectus arose in this particular case. This was because the letter made it clear that the requirement was dependent on there being a MIS, about which the letter expressed no opinion and made no analysis.
361 The 9 February 2000 letter stated:
Providing the nature of the instruments being offered is a promissory note as defined, it falls outside the definition of debenture and therefore the definition of securities. This means that no prospectus is needed.
This statement was correct. The evidence was (and I have accepted) that this letter was requested by Mr Bell for financial planners, and that Mr Shearwood understood this when he prepared the letter. This understanding is reflected in the statement in the letter that:
An investment advisor’s dealer’s licence is only required in order to deal in securities and is unlikely to impose any restrictions on that adviser advising on or dealing in promissory notes. The adviser should, however act as if promissory notes were security.
362 The pleaded representation may proceed on a misapprehension. It has to be borne in mind that the requirement for a prospectus did not arise because of the use of promissory notes. Rather, as the 17 January 2000 letter recognised, the requirement arose because a funding scheme could constitute a MIS regulated by the Corporations Act irrespective of whether the funds were being raised by promissory notes or in some other way. The 9 February 2000 letter said nothing about whether a particular funding scheme would constitute a MIS, but made it clear that it was to be read in conjunction with the letter of 17 January 2000, which, according to the 9 February 2000 letter, “outlined the basis upon which a prospectus was not needed when offering a promissory note”. Importantly, the 9 February 2000 letter on its face recommended that the 17 January 2000 letter accompany the 9 February 2000 letter if the latter were provided to an investment adviser, by stating:
If a copy of this letter is provided to any investment adviser, we suggest that it be accompanied by a copy of our letter to you of 17 January 2000, which explains the precise legal nature of a promissory note.
363 It is plain enough from the foregoing that, whilst the 9 February 2000 letter contained a statement to the effect pleaded, the statement within the letter was not erroneous; and furthermore that this letter was to be read in conjunction with the 17 January 2000 letter, which adverted to the need for a prospectus in the case of a MIS. There was therefore no false representation.
364 At the same time, the evidence established that the 9 February 2000 letter was not sought or provided for the purpose of providing an opinion on the law as it stood at the time to companies in the Westpoint Group (let alone Mr Carey or the other Carey parties). As stated earlier, in the circumstances as they stood at the time, Mr Bell and Mr Shearwood understood then that the letter was intended to be provided to financial planners as part of their compliance regime. The letter did not represent to companies in the Westpoint Group (let alone Mr Carey or the other Carey parties) that it set out Mr Shearwood’s unqualified advice to them; and, in the context in which it was sought and given, could not have been understood in that way by them.
365 I, moreover, accept Mr Bell’s evidence that the use of the letters of 17 January 2000 and 9 February 2000 was limited to provision to financial planners. As already stated, I accept Mr Bell’s evidence that he did not rely on these letters in making any decision regarding promissory notes and I reject Mr Carey’s evidence that he did.
366 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(b) of the amended cross-claim was made to Mr Carey or any of them.
The raising and deploying of mezzanine finance in accordance with Promissory Note Advice: (i) was in the best interest of Carey and the Westpoint Group; (ii) would serve the objective of developing a profitable funds management business consistent with the BCG Strategy; and (iii) was to be preferred over other ways of raising mezzanine finance (amended cross-claim, par 30(c))
367 In paragraph 30(c) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills impliedly represented that the raising and deploying of mezzanine finance in accordance with Promissory Note Advice: (i) was in the best interest of Mr Carey and the Westpoint Group; (ii) would serve the objective of developing a profitable funds management business consistent with the BCG strategy; and (iii) was to be preferred over other ways of raising mezzanine finance. The representation was alleged to be implied from the following:
(a) the Promissory Note Advice; and
(b) paragraph 14 of the amended cross-claim, relating to the alleged “funding structure retainer”, which was allegedly:
(i) partly written, consisting of the 17 January 2000 letter and the 9 February 2000 letter;
(ii) partly oral, consisting of the alleged April 1998 Powerpoint presentation and various unspecified conversations between Mr Shearwood and Mr Carey, Mr Rundle and Mr Bell between 1998 and 2000;
(iii) partly implied by the performance by Freehills of certain unspecified tasks, business efficacy and the implication of law;
(c) paragraph 17, which alleges that Freehills held itself out to have expertise in the field of funds management and financial services; and
(d) the terms of each of the retainers with Freehills, which are set out in unparticularised paragraph 18 of the amended cross-claim.
368 As stated earlier, I accept that, on 6 September 1999, Mr Shearwood had a relatively brief conversation with Mr Bell about different methods of obtaining mezzanine finance, as his file note of that date indicated, on a temporary basis pending syndication, without the need for a prospectus. The conversation was very general and promissory notes were mentioned. On 17 January 2000, Mr Shearwood again discussed promissory notes with Mr Bell and the absence of a requirement for a prospectus when issuing a promissory note with a face value of more than $50,000. In the course of that conversation, Mr Bell asked Mr Shearwood to provide, very speedily, some general written statement about promissory notes, which was to be given to financial planners. This resulted in the letter of 17 January 2000. Mr Shearwood had a further conversation with Mr Bell about promissory notes and restrictions on advisers on 7 February 2000, in which Mr Bell requested a simplified form of the 17 January 2000 letter to provide to a wider group of financial planners. This led to the letter of 9 February 2000.
369 In neither the letter of 17 January 2000 nor the letter of 9 February 2000 did Mr Shearwood express any opinion as to whether the use of promissory notes for raising mezzanine finance was in the best interests of companies in the Westpoint Group or, indeed, Mr Carey (or other Carey parties). Nor did he express any view that promissory notes should be preferred over other methods of financing and/or were consistent with the BCG strategy. In any event, given the context in which the letters were written, it was most unlikely that Mr Shearwood would have stated, expressly or otherwise, any such thing. Indeed, the recommendation against advertising, which is in both letters, can be read as to some extent discouraging the use of promissory notes, or at least problematising their use.
370 There is no evidence that the letters of 17 January 2000 and 9 February 2000 were written by Mr Shearwood in response to a request about what form of mezzanine fundraising was in the best interests of the Westpoint Group or Mr Carey. There is no evidence that these letters were prompted by a request for advice about developing a profitable funds management business consistent with the BCG strategy or the preferred way of raising mezzanine finance. Furthermore, none of these matters were put to Mr Shearwood in cross-examination. Rather, the evidence was, as already noted, that the letters were provided for the financial planners.
371 For the reasons already stated, I have accepted Mr Shearwood’s evidence that there was no meeting in April 1998 at which Mr Carey made a presentation of the kind Mr Carey purported to describe. I would not infer from the evidence of conversations between Mr Shearwood, Mr Bell, Mr Rundle or, indeed, Mr Carey between 1998 and 2000 that Mr Shearwood made any representation to the effect the Carey parties allege. Mr Shearwood met Mr Carey on two recorded occasions around this time, in December 1997 in the context of the Tea Tree Plus Project, and on 21 July 2000, to discuss with KPMG personnel a prospectus to be issued with respect to the Paragon Commercial MIS and a revised report prepared by KPMG concerning the Westpoint Group. There is no evidence that promissory notes were discussed on either occasion. As already indicated, the first conversation about promissory notes was that with Mr Bell on 6 September 1999, but there is nothing in that or any subsequent conversation that would justify the inference that the Carey parties would have me draw. In April 2000, Mr Shearwood made the first of numerous warnings about about the use of promissory notes in fundraising: see [146] above. These warnings grew even stronger after ASIC made the first of its enquiries in May 2000 and Mr Shearwood reviewed a copy of the Bayview Mezzanine information memorandum in early June 2000.
372 Although Freehills, through Mr Shearwood, held itself out to have expertise in the field of funds management and financial services, this fact alone cannot assist the Carey parties’ case. There is no other basis that I can discern that would lend support to the proposition that Freehills made a representation in the terms pleaded in paragraph 30(c) of the cross-claim.
373 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(c) of the amended cross-claim was made to Mr Carey or any of them.
The issue of promissory notes in accordance with Promissory Note Advice was “totally legal” (amended cross-claim, par 30(d))
374 In paragraph 30(d) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills represented that the issue of promissory notes in accordance with the Promissory Note Advice was “totally legal”. The representation was said to be express and contained in the 2 September 2003 advice.
375 For the reasons stated earlier, it cannot be said that any supposed advice of 2 September 2003 included the pleaded representation. In closing, Mr Martindale properly accepted that no-one said at that meeting that the use, relevantly, of the promissory notes was “totally legal”. There was no evidence at all that any such representation was made. As stated above, the only evidence of what was said at the meeting with ASIC on 2 September 2003 was that given by Mr Shearwood and Mr Rundle. Neither made any reference to the alleged representation. There was no evidence that Mr Shearwood said anything at that meeting other than as a representative of companies in the Westpoint Group and, in this context, there was no basis for saying that Mr Shearwood gave anything by way of professional advice to his client, let alone to Mr Carey (who was not present) or the other Carey parties.
376 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(d) of the amended cross-claim was made to Mr Carey or any of them.
There were no material inherent risks involved in raising and deploying mezzanine finance in accordance with the Promissory Note Advice (amended cross-claim, par 30(e))
377 In paragraph 30(e) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills impliedly represented that there were no material inherent risks involved in raising and deploying mezzanine finance in accordance with the Promissory Note Advice. The representation was said to be implied by Freehills’ silence and the fact that none of letters of 17 January 2000, 9 February 2000 and 5 February 2003 contained any, or adequate, warning that the promissory notes could well be an interest in a MIS.
378 I would not infer any representation of the kind alleged from Freehills’ supposed silence in circumstances where Mr Shearwood was not informed about the arrangements pursuant to which promissory notes were, or were to be, issued.
379 When Mr Bell first raised the matter of promissory notes on 6 September 1999 and later in early 2000, Mr Shearwood was not asked to advise on their use as a means of raising mezzanine finance with respect to any particular project. He was not given instructions about the arrangements under which the promissory notes were issued and not asked for advice as to the appropriateness of proceeding to raise funds via promissory notes in accordance with those arrangements.
380 As stated earlier, I accepted Mr Shearwood’s account of the 6 September 1999 telephone conversation and that the discussion that day was general and abstract. Whilst Mr Shearwood was asked for advice by Ms Pham on 16 February 2000, with respect to the application of the Managed Investments Act to the Bayview Project, his instructions did not indicate that promissory notes would be used for mezzanine fundraising. As already stated, his instructions were that the funds would be raised by an issue of shares as was done with the Chocolate Factory Project. Subsequently, in April 2000, Mr Shearwood specifically warned Mr Bell about the use of promissory notes in fundraising for the Bayview Project.
381 Whilst Mr Shearwood gave advice as to whether the Murray Street Project was a MIS in March and December 2000, his instructions did not disclose an arrangement to raise mezzanine finance by promissory notes. Even so, his advice noted that there was only “limited scope to argue that the scheme is not a managed investment scheme”.
382 As noted already, Mr Shearwood did not review a copy of the information memorandum for the Bayview Project until 1 June 2000 following instructions to draft a response to ASIC’s letter of 29 May 2000, to persuade ASIC that no MIS was involved. At no point prior to drafting this 2 June 2000 letter, as instructed, did Mr Shearwood have an opportunity to warn in a considered advice given on proper instructions about the risks involved in a particular use of promissory notes. This was because he was not instructed as to the arrangements under which the promissory notes were being issued and his advice as to the appropriateness of raising mezzanine finance via promissory notes was not sought. In this context, it must be borne in mind that, notwithstanding this, Mr Shearwood gave two telephone warnings about the use of promissory notes to personnel of a Westpoint Group company in March and April 2000.
383 Further, I would not infer any representation of the kind alleged from Freehills’ supposed silence once Mr Shearwood was informed, albeit in a limited way, about a Westpoint Group company’s use of promissory notes. This is because any silence occurred in circumstances where Mr Shearwood then repeatedly warned Westpoint Group personnel about the use of promissory notes and expressly stated that uncertainty attended the legal position with respect to this use and, in particular, that there was a risk that the promissory notes would be considered an interest in a MIS. As noted already, such warnings were given in Mr Shearwood’s conversation with Mr Bell in April 2000, Mr Shearwood’s email to Mr Thomas on 2 June 2000, Mr Shearwood’s faxed letter to Mr Rundle and Mr Thomas on 24 August 2000, Mr Shearwood’s emails to Ms Pham on 27 and 28 September 2000 and 3 October 2000, Mr Shearwood’s letter of 1 December 2000 to Mr Rundle, Mr Shearwood’s email to Mr Thomas on 22 December 2000, Mr Shearwood’s conversation with Mr Beck on 15 August 2001, Mr Shearwood’s letter to Mr Beck on 17 August 2001 (also specifically asking that the mezzanine company directors be advised of the risks), Mr Shearwood’s email to Mr Millmore on 23 November 2001; and Mr Shearwood’s email to Mr Bell on 28 May 2002.
384 It is plain enough too that Mr Shearwood did not endorse the mechanism of a guarantee as an assured way to avoid a MIS characterisation; and that he gave no unqualified advice to this effect. On 3 October 2000, for example, as noted above, Mr Shearwood wrote to Ms Pham that:
The existence of a guarantee from “Westpoint” was relied on to argue that [the issue of promissory notes] was a purely financing arrangement, rather than participation in a development. ASIC appears to have accepted that this means there is no interest in a managed investment scheme involved in the case of Port Melbourne and logic would suggest that ASIC should accept this here too. … I can give you no assurance that ASIC would not take a different view if it were to consider this matter again. (Emphasis added)
385 Further, as already noted, Mr Boyatzis (working in the funds management area on new fund raisings) specifically drew Mr Carey’s attention to Mr Shearwood’s warnings about the use of promissory notes (in the email of 28 September 2000 referred to above), noting that “[t]his supports the theory that he is a bit nervous on this whole issue” (emphasis added).
386 Furthermore, the evidence established that Mr Sheawrood’s instructions about the arrangements under which Westpoint Group companies continued to issue promissory notes remained sparse even after 1 June 2000. In his letter of 24 August 2000 to Mr Rundle and Mr Thomas, Mr Shearwood not only advised them of ASIC’s ‘no action’ decision but also warned them about the continued use of promissory notes and recommended that:
Before you use promissory notes for any other project, I recommend that you seek advice from us on whether the facts of that case are sufficient to justify not registering a management investment scheme and issuing a prospectus.
Notwithstanding Ms Pham’s 29 September 2000 fax (upon which the Carey parties relied) it seems to me plain enough that this advice went largely unheeded.
387 In the draft strategy paper of 5 February 2003, Mr Shearwood recommended that Freehills:
… review … all the current documentation relating to promissory note fundraising by companies in the Westpoint group. This will identify which projects are of high risk of being targeted by ASIC and will enable Westpoint to establish a further strategy for dealing with any possible issues of concern.
No instructions to undertake a review were given.
388 As noted above, the Carey parties relied on the letters of 17 January 2000 and 9 February 2000, both, as discussed above, prepared for financial planners and premised on the assumption that the arrangements under which the promissory notes were issued did not make the promissory notes interests in a MIS. Neither letter gave advice about that assumption because it was not within the remit of the letters to do so. It cannot, therefore, be possible that their silence as to any material risks of raising and deploying mezzanine finance by way of promissory notes or the supposed “Promissory Note Advice” generated the implication in this circumstance that there were none.
389 As discussed above, the letter of 5 February 2003 was not sought or provided for the purpose of providing an opinion to Mr Shearwoood’s client, let alone to Mr Carey and the other Carey parties, on the law as it stood at the time. As stated earlier, in the circumstances as they stood at the time, Mr Carey and Mr Rundle would have understood that the “one page letter” was a short statement of the best case that could be made to justify the promissory notes issue by Bayview Mezzanine and York Street Mezzanine, in the context of ASIC’s public statements of concern about such matters. This letter was therefore premised on the assumption that the arrangements under which the promissory notes issued did not constitute them interests in a MIS. The circumstances in which the letter was written make it clear that the letter could not reasonably have been understood as representing to Mr Shearwood’s client, let alone to Mr Carey or the other Carey parties, the author’s considered, unqualified legal opinion; and, given Mr Shearwood’s previous and concurrent warnings, could not have been understood in that way by them. The context of his instructions gave him no opportunity to warn in this letter of “inherent risks involved in raising and deploying mezzanine finance”. Instead, Mr Shearwood’s serious concerns were conveyed in the various warnings of which mention has already been made and in conversation with Mr Carey some days earlier, on 30 January 2003. The terms of the draft strategy paper, which was provided to Mr Rundle at the same time as the 5 February 2003 letter, underlines that these concerns were clearly communicated to those instructing Mr Shearwood.
390 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(e) of the amended cross-claim was made to Mr Carey or any of them.
They had and were continuing to exercise due care, skill and diligence in carrying out their obligations under their retainer (amended cross-claim, par 30(f))
They had conducted a proper and diligent review of the legislation and case law relating to managed investment schemes as they apply to the proposed issue of Promissory Notes (amended cross-claim, par 30(g))
391 In paragraphs 30(f) and (g) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills represented that they had and were continuing to exercise due care, skill and diligence in carrying out their obligations under their retainer and that they had conducted a proper and diligent review of the legislation and case law relating to Managed Investment Schemes as they apply to the proposed issue of Promissory Notes. The representations were said to be implied from the terms of the alleged representations discussed above, the terms of the retainers as pleaded in paragraph 18 of the amended cross-claim and the Carey parties’ reasonable expectation of the standard expected of Freehills.
392 For the reasons already stated, I have rejected the Carey parties’ allegations with respect to the representations pleaded in paragraph 30 (a) – (e) of the amended cross-claim. The terms of the retainers, as pleaded in paragraph 18, relevantly included that Freehills would:
…
(c) warn of any material inherent risks present in relation to the matters upon which they advised.
(d) protect the interests of the Westpoint Group, the Mezzanine Companies and their directors (as the case may be).
(e) give such advice to the Westpoint Group, the Mezzanine Companies and their directors as they appeared to need in the circumstances known to Freehills, regardless of whether or not such advice had been specifically requested.
(f) if circumstances arose giving rise to a real and foreseeable risk of economic loss by Westpoint Group, the Mezzanine Companies and their directors (as the case may be), to perform tasks outside of their instructions so as to prevent such loss.
This pleading was, as already indicated, unparticularised.
393 As stated above, I have accepted Mr Shearwood’s evidence that there was no meeting in April 1998 at which Mr Carey made a presentation of the kind Mr Carey purported to describe. The facts as to Freehills’ retainer are discussed earlier. In particular, the retainers were limited to WPC and WPM. In summary, there was no evidence that Freehills’ retainers included all the above pleaded terms. The engagement letters to which I have referred concerned particular projects, or incidental matters, in relation to which WPC or WPM were identified as the client; they were not at large with respect to the Westpoint Group companies or their directors.
394 Further, for the reasons already stated, assuming there was a duty to warn as pleaded in paragraph 18(c), Mr Shearwood discharged any such duty in the context of the instructions he was given: see particularly [352] and [379]-[387] above.
395 I note that the Carey parties pleaded two other terms of the alleged retainers to which I have not referred. These terms (as expressed in paragraphs 18(a) and (b) of the amended cross-claim) were that Freehills would:
(a) exercise reasonable care in the performance of the said tasks.
(b) exercise care and skill to the standard to be expected from an expert in the field of funds management and financial services.
I deal with these terms here out of an abundance of caution because it does not appear to me that, by their pleading in paragraph 30(f) of the amended cross-claim, the Carey parties intended that these two terms would be included in the “obligation” alleged in that paragraph. It seemed to me that an obligation to “exercise reasonable care and skill” or “care and skill” would be a duplication of the expressly pleaded obligation in paragraph 30(f) to exercise “due care, skill and diligence” in carrying out the pleaded obligations.
396 The Carey parties have not established that Mr Shearwood failed to “exercise reasonable care” (as alleged in paragraph 18(a)) or “care and skill to the standard to be expected from an expert in the field of funds management and financial services” (as alleged in paragraph 18(b)) for the same reasons that they have not shown that Mr Shearwood failed to exercise “due skill and diligence” (as discussed above). Further, I note that, for the reasons already stated, Mr Shearwood was not instructed to perform the “tasks” that the Carey parties alleged. Rather, he was retained to perform more limited work of the kind already described.
397 In so far as the representation pleaded in paragraph 30(f) of the cross-claim assumes the existence of a retainer in the terms as pleaded in the cross-claim, it has not been made out. Further, in so far as the representation pleaded in paragraph 30(g) of the cross-claim assumes the existence of the representations pleaded in paragraphs 30(a)-(e), it too is not made out.
They had reasonable grounds for making representations in paragraphs 30 (a) to (e) above of the cross-claim (amended cross-claim, par 30(h)).
398 In paragraphs 30(h) of the amended cross-claim, the Carey parties pleaded that, by the Promissory Note Advice, Freehills represented that they had reasonable grounds for making representations in paragraphs 30(a) to (e) above of the amended cross-claim. The representations were said to be implied from the terms of the alleged representations discussed above, the terms of the retainers as pleaded in paragraph 18 of the amended cross-claim and the Carey parties’ reasonable expectation of the standard expected of Freehills.
399 The representations in paragraphs (a), (b) and (d) were not representations of fact; rather they constitute alleged representations about the law. The representations alleged in paragraphs (c), (e), (f) and (g) were possibly mixed representations about the law and fact. As we have seen, the alleged representations were said to be contained in the Promissory Note Advice.
400 In this context, I commence by noting the following two matters. First, in relation to representations as to the law, it is useful to bear in mind the distinction between a lawyer’s advice to a client as to the law (including its application to the circumstances disclosed in the lawyer’s instructions) and a submission prepared by a lawyer, again on instructions from a client, to make out the client’s case as best the lawyer can (and so far as the law and the lawyer’s professional obligations permit). In the former case, the lawyer’s advice includes an implied representation to the client that the opinion stated in it is honestly held and based on reasonable grounds: see, for example, Heydon v NRMA Ltd at 108 [329]- [330]; Inn Leisure at 167. In the latter case, the lawyer’s submission does not incorporate an implied representation to the client or, to adopt French J in Inn Leisure, a “message”, that the opinion stated in it is the author’s own unqualified opinion and a complete expression of his legal knowledge and expertise. This is because the client knows that the lawyer is the client’s representative (or mouthpiece) who is acting on the client’s instructions to present the client’s own case in the best possible light in order to advocate for the position as the client would have it: see Inn Leisure at 167. A misstatement in a submission prepared for the client is not likely to mislead the client because it is not proferred to the client as necessarily being correct: see Heydon v NRMA Ltd at 108 [329] and Inn Leisure at 164-167.
401 Secondly, for the reasons already outlined, in the circumstances in which they were sought and prepared, none of the letters constituting the Promissory Note Advice was “advice” to or “advised” a Westpoint Group company on the application of the law to its particular situation; and all the more then were not sought and prepared to advise Mr Carey or any of the Carey parties. The letter of 2 June 2000, which is defined as part of the Promissory Note Advice (though not referred to in the particulars to paragraph 30 of the cross-claim as a source of the representations) was a submission to ASIC, made on instructions. (At one stage in closing submissions, Mr Martindale SC said that he did not press the 2 June 2000 letter. I am not clear what he intended by this, because earlier in closing submissions he had done just this.) The letters of 17 January 2000 and 9 February 2000 were both sought and prepared for financial planners, in the circumstances already outlined. The 5 February 2003 letter was sought and prepared for the purpose of being shown if needed to banks or financial planners, in the circumstances discussed. In consequence, none of these letters conveyed a message to the client that the author was expressing an unqualified opinion which he regarded as correct nor that he had reasonable grounds for that opinion based on his complete legal knowledge and expertise. Any misstatement in these letters was unlikely to mislead the client because it was not proffered to the client as necessarily being correct.
402 There is, however, a more fundamental difficulty with the representation pleaded in paragraph 30(h) of the amended cross-claim. As explained above, the Carey parties have not established that any of the representations pleaded in paragraph 30(a)-30(e) of the amended cross-claim were in fact made. The representation pleaded in paragraph 30(h) hinges on a finding that one or other of them was made out. Without such a finding, the Carey parties cannot make out the representation pleaded in paragraph 30(h).
403 If, however, any of these representations as to law were established, the Carey parties would still fail to establish the “reasonable grounds” representation in paragraph 30(h) because, for the reasons just stated, these representations did not convey the relevant message to the client about Mr Shearwood’s legal opinion. That is, as discussed, the context in which the letters were sought and provided precluded such an implication. The other point to note about any representations about the law allegedly in the letters said to constitute the Promissory Note Advice is that, if the representations were made as pleaded, they were not made to Mr Carey or to any of the Carey parties. If there were any representation as to facts made of the kind implicit in paragraphs 30(f) and (g) of the amended cross-claim, the Carey parties have not established that they were untrue; or made without reasonable grounds, as pleaded.
404 Finally, although not strictly necessary, I would add that the Carey parties failed to establish that, to the extent that Mr Shearwood expressed an opinion as to whether the issue of promissory notes might constitute a MIS, he did not have reasonable grounds for that opinion. Indeed, there were circumstances that indicated that, at the relevant time, a lawyer may well have formed the view, based on reasonable grounds, that the issue of promissory notes in the circumstances set out in Mr Shearwood’s letter to ASIC of 2 June 2000 and 16 October 2002 may very well not constitute interests in a MIS. These grounds were set out in Freehills’ memorandum in the firm’s brief to Mr Bannon SC on 23 June 2003. That they were reasonable in the relevant sense appears not only from the memorandum itself but from the fact that senior counsel substantially agreed with the reasoning and the conclusions in the memorandum. The fact that, ultimately, the opinion did not prevail or was found to be inaccurate in some respects does not, in the circumstances as they existed at the time, of itself demonstrate a lack of reasonable grounds: see also [178] above. This is because the legal issues were not straightforward and, at the relevant time, lawyers could reasonably differ about the law and its correct application. As Simmonds J was to say in ASIC v Emu Brewery at [2]:
The questions for me on the Cases Stated go to whether certain conditions that determine, or help to determine, the application of certain provisions regulating financing arrangements and contained in the Corporations Act 2001 (Cth) are met on the facts and documents I am confined to. Those questions raise a number of issues of some considerable difficulty, and, in one case, involve some controversy about authorities none of which bind me. (Emphasis added)
405 For the reasons stated, the Carey parties have not established that the representation pleaded in paragraph 30(h) of the amended cross-claim was made to Mr Carey or any of them.
Conclusion on misleading and deceptive conduct and negligence
406 The Carey parties failed to make out any of the alleged misrepresentations. The Carey parties therefore failed to establish that Mr Shearwood’s conduct was misleading and deceptive and that, in so far as they relied on s 52 of the TPA, their case must fail.
407 It follows too that, in so far as the Carey parties based their claims of negligent misstatement on these alleged misrepresentations, their claims must also fail. The Carey parties did not establish that, by reason of these alleged misrepresentations, Mr Shearwood’s work was per se negligent and/or that he gave negligent advice to his client, let alone the Carey parties.
408 As already noted, this was not the only way the Carey parties put their negligence case. The Carey parties also submitted that Mr Shearwood’s negligence lay in a failure to warn about the use of promissory notes for fundraising. I would reject this submission. I have already referred to (and rejected) their submissions that Mr Shearwood’s negligence was constituted by his failure to warn about the risks inherent in using prmosissory notes for fundraising: see, for example, [116]-[117], [127], [160] and [180] above. I have also repeatedly referred to the numerous and unmistakable warnings that Mr Shearwood in fact gave Westpoint Group personnel; and I shall not repeat them yet again. In so far as the Carey parties’ claim in negligence depended on Mr Shearwood’s failure to warn, this claim must also fail.
409 In so far as the Carey parties’ case in negligence relied on an asserted failure properly to advise, I have considered and rejected this allegation in the course of considering the alleged misrepresentations. Accordingly, in so far as the Carey parties asserted that Mr Shearwood gave negligent advice, this claim too must fail.
410 No causation issues would arise on the conclusions I have reached with respect to the Carey parties’ case. It may nonetheless be helpful to sketch the conclusions I would reach with respect to them.
411 Section 82 of the TPA requires consideration of whether the claimant has suffered loss or damage “by conduct of another person” done in the contravention of an identified provision of the TPA (in this case, s 52). In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (‘Wardley’) at 525, Mason CJ and Dawson, Gaudron and McHugh JJ said that the word “by” “clearly expresses the notion of causation” and that s 82(1) “should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506 (‘March v Stramare’), except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act”. In order, therefore, to be compensated for any loss and damage under s 82(1) of the TPA, the Carey parties needed to establish a causal connection between the alleged misrepresentations and the loss for which they seek compensation: see further Wardley at 525-526 and Henville v Walker (2001) 206 CLR 459 (‘Henville v Walker’) at 469-470 (Gleeson CJ), 480 (Gaudron J), 489 (McHugh J) and 508-509 (Hayne J).
412 In Wardley at 525, their Honours said that where the Court is “concerned with contraventions of s 52(1) in the form of misleading conduct constituted by misrepresentations … acts done by the representee in reliance upon the misrepresentation constitute a sufficient connexion to satisfy the concept of causation”. If a material representation has contributed to the loss or damage in some way, “despite other factors or conditions having played an even more significant role in producing the loss or damage”, it will be regarded as a cause of the loss or damage: see Henville v Walker at 493 [106] (McHugh J, with whom Gummow J agreed), 509 [163] (Hayne J, with whom Gummow J also agreed). A loss may be a loss of opportunity foregone: Henville v Walker 502-503 [133]. A material representation is calculated in the sense of being “objectively likely” to act as an inducement to act in some particular way: see Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1 at 166. As Lockhart, Gummow and French JJ observed in Ricochet Pty Ltd v Equity Trustees Executors & Agency Co Ltd (1993) 41 FCR 229 at 235:
Ultimately, the “causative threshold” beyond which liability attaches to a misrepresentation which is one of a number of factors inducing a decision that produces loss, will be a question of judgment. ... But the mere possibility that a misrepresentation might have induced a course of action by the representee can never of itself attach liability under s 82 to the making of it.
413 The insuperable difficulty for the Carey parties is that I am not satisfied on the balance of probabilities that the Promissory Note Advice (in which the alleged representations were said to be made) were material in the sense of playing some part in any decision within the Westpoint Group, whether by Mr Shearwood’s client or, in some relevant capacity, Mr Carey (or any of the other Carey parties) to issue promissory notes in accordance with the arrangements made within the Group.
414 The Carey parties have not established that, on the balance of probabilities, a company in the Westpoint Group or any of the Carey parties relied on the supposed Promissory Note Advice itself. The Carey parties argued that they did not need to show “who it was that relied on Freehills’ advice and how it was relied upon”. Rather, it was sufficient that “[t]he use of promissory notes by the Westpoint Group was embarked upon in accordance with the advice given by Freehills”, because “the inference arises that the persons and entities who decided to embark on the course of conduct did so because of Freehills’ advice”. As stated below, I would reject this submission. Even if there was any evidence for such an inference, the inference is not sustainable when the evidence as a whole is considered.
415 There was no direct evidence that anyone within the Westpoint Group had relied on the Promissory Note Advice in making a decision to issue promissory notes as companies in the Group did. The letters of 17 January 2000 and 9 February 2000 were both prepared to be provided to financial planners and were not used for any other purpose. In cross-examination, Mr Bell said that the letters were included in “a due diligence pack for all financial planners to use as part of their compliance regime” and that was the extent of their use. His evidence was that the letters did not lead to the decision to use promissory notes.
416 The letter of 2 June 2000 was provided to ASIC as a response to ASIC’s letter of 29 May 2000. In the circumstances as found, the Westpoint Group and the Carey parties understood that they were prepared as a defensive submission to dissuade ASIC from taking its enquiries further. Similarly, whilst the letter of 5 February 2003 was sent to Mr Carey, it was sought and prepared for the purpose of being shown, if needed, to banks or financial planners, in circumstances where Mr Shearwood’s concerns about the Westpoint Group’s use of promissory notes had been clearly conveyed to Westpoint Group personnel and to Mr Carey. As noted already, Mr Shearwood had warned about their use as early as April 2000, in a conversation with Mr Bell. Subsequently, he warned about the use of promissory notes in an email to Mr Thomas on 2 June 2000, a letter to Mr Rundle and Mr Thomas on 24 August 2000, emails to Ms Pham on 27 and 28 September 2000 and 3 October 2000, an email to Mr Thomas on 22 December 2000, a conversation with Mr Beck on 15 August 2001, a letter to Mr Beck on 17 August 2001, an email to Mr Millmore on 23 November 2001; and in an email to Mr Bell on 28 May 2002.
417 There is evidence and I accept that Mr Carey was made aware of Mr Shearwood’s concerns. For example, as appeared in the fax to Mr Carey of 28 September 2000, within the Westpoint Group it was known that Mr Shearwood was “a bit nervous on this issue”. Mr Bell agreed in cross-examination that he would have told Mr Carey about the concerns expressed by Mr Shearwood to him in March or April 2000. Furthermore, no-one within the Westpoint Group said at the time that he or she had acted on the basis that Mr Shearwood had given unqualified advice as to the use of the promissory notes and expressed dismay at a change of heart. One may infer from this that no-one within the Westpoint Group ever proceeded on the basis that Mr Shearwood had given any such unqualified advice.
418 There is a further difficulty so far as the Carey parties’ case on reliance is concerned. The following circumstances lead one to conclude that it is more probable than not that the decision to use promissory notes for mezzanine fundraising was made before the letter of 17 January 2000 and therefore the other letters (and the alleged 2 September 2003 advice: but see above). The evidence established that Mr Bell began to prepare an information memorandum for the Bayview Project in December 1999, Bayview Mezzanine being incorporated the following January. It would follow from this that a decision of some kind had already been made by December 1999 – by someone in the Westpoint Group – to proceed to raise mezzanine funding by way of promissory notes. Consistently with this, Mr Bell’s evidence was that it was not long after this that he began preparing information memoranda for the York Street and the Market Street Projects as well. It is also worth noting that York Street Mezzanine was in fact incorporated in November 1999, although Bayview Mezzanine was the first of the mezzanine companies to issue promissory notes.
419 The decision to issue promissory notes had clearly been made by February 2000. Promissory notes had been issued by 4 February 2000. The final versions of the information memoranda for the Bayview and York Street Projects were both published to financial planners in February 2000. Market Street Mezzanine was incorporated by late January 2000, although its information memorandum was not finally published until December 2000 based, however, on that for the York Street promissory note issue.
420 Further, by the time of the 5 February 2003 letter, there were yet further mezzanine companies with published information memoranda, including Bayshore Mezzanine (incorporated in August 2001, with an information memorandum in September 2001); Ann Street Mezzanine (incorporated in November 2002, with an information memorandum in December 2002).
421 It is also worth bearing in mind that, whilst Mr Carey and Mr Bell may not have had direct experience of funds management, Mr Rundle, to whom Mr Bell reported, did in fact have such experience. Mr Carey asserted on more than one occasion that he relied on Freehills’ expertise in funds management since he had insufficient knowledge and experience. Whether or not Mr Carey was more knowledgeable than he claimed, Mr Rundle, who commenced his role as Chief Financial Controller (‘CFC’) in 1997 clearly had relevant, translatable, experience. Prior to joining the Westpoint Group, Mr Rundle was employed by the Challenge Bank, where so he said:
From 1990 to 1996 I spent time as a senior manager within the commercial banking division where I became experienced in providing senior debt funding for property development projects.
422 According to Mr Rundle, “[t]his experience proved valuable in my later position at Westpoint where I was responsible for arranging and managing all senior debt funding for projects”. Mr Rundle as Mr Carey’s CFC was, in Mr Carey’s words “responsible for all aspects of the accounting/administration/finance of the Westpoint Group”.
423 Furthermore, even if Mr Bell lacked funds management experience in mid 1997 when he first entered into a contract with a Westpoint Group company, he certainly had experience in stocks and securities as well as in accounting.
424 Finally, as already stated, Mr Carey was not in my view an honest and reliable witness. I reject his evidence that he would not have proceeded if he had known that the use of promissory notes arguably contravened the Corporations Act. This evidence was inconsistent with the fact that Mr Shearwood had communicated to Westpoint Group personnel as early as April 2000 that the position with respect to promissory notes was “not without doubt” and at best arguable – a fact clearly communicated to Mr Carey at the end of September 2000, if not earlier.
425 The companies in the Westpoint Group took known risks. They continued to use promissory notes for fundraising even after Mr Shearwood had specifically warned that it was only “arguable” that the promissory notes did not constitute interests in a MIS. Mr Carey conceded that he had received Mr Shearwood’s 3 October 2000 email in which Mr Shearwood had said as much. Notwithstanding this, promissory notes continued to be issued. The Westpoint Group had also proceeded with the earlier Murray Street Project notwithstanding Mr Shearwood’s advice (in his 1 December 2000 letter) that there was only “limited” scope to argue that the scheme was not a MIS. Mr Carey acknowledged in cross-examination that he knew of Mr Shearwood’s advice and its qualification, but determined that the Project should proceed.
426 At one stage, Mr Carey agreed, in cross-examination, that 95% of the promissory notes were issued as a result of the decision of the independent directors of the mezzanine companies and that “to the extent that those decisions were influenced by Mr Shearwood’s advice … one would need to ask the independent directors”. As Freehills submitted, if this evidence were accepted, the Carey parties’ case might well fail for want of evidence from the relevant decision-makers as to their reliance on Mr Shearwood’s evidence. I would, however, reject Mr Carey’s evidence that the decision to issue promissory notes after 3 October 2000 was really that of the directors of the mezzanine companies. Mr Carey gave this untrue evidence in an attempt to explain the Group’s continued use of promissory notes after 3 October 2000, when he had to accept that he knew that Mr Shearwood’s advice was that the legality of fundraising by way of promissory notes was only “arguable”.
427 Having regard to the whole of the evidence, the Carey parties have failed to establish that, on the balance of probabilities, Mr Sharewood’s client, let alone Mr Carey or any of the Carey parties, relied on the Promissory Note Advice.
428 I note that, by their written submissions, the Carey parties raised the prospect that it was not necessary for them to prove their reliance on the misrepresentations, citing in this regard Janssen-Gilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 (‘Janssen-Gilag’) at 528-529. The situation, however, with respect to third parties in the context of passing off or comparative advertising cases is different from and ill suited to the present case and cannot support the Carey parties in their cross-claim. In such a case as this, reliance is critical to their claim under the TPA. I do not accept that Lockhart J’s statements in Janssen-Gilag at 528-529 are applicable here, for much the same reasons as Stone J gave in De Bertoli Wines Pty Ltd v HIH Insurance Ltd (in liq) and Ors (2011) 200 FCR 253 at [63] and [64] (affirmed on appeal in De Bertoli Wines Pty Ltd v HIH Insurance (in liq) [2012] FCAFC 28). As her Honour held (at 269 [63]):
To succeed in its claim in respect of each share purchase transaction DBW must show that it was induced to enter into the transaction by the impunged conduct of HIH. Insofar as it claims to have relied on analysts’ reports it must show that the misleading or deceptive in those reports emanated from HIH. This case must be distinguished from that in the example given by Lockhart J in Janssen. It is not a case where the innocent party’s act by its very nature causes the applicant’s loss. Here reliance is critical to the applicant’s claim; DBW must show that it relied on the misleading information and that that information emanated from HIH.
429 Having regard to the whole of the evidence, the Carey parties have failed to establish, on the balance of probabilities, that they sufferred loss and damage by the alleged contravening conduct of Mr Shearwood.
430 For much the same reasons, so far as the Carey parties’ negligence claim is concerned, I am not satisfied on the balance of probabilities that any representation was “a necessary condition of the occurrence of harm” within s 5C(1)(a) of the Civil Liability Act 2002 (WA) or that “factual causation” within s 5C(2) is otherwise established.
431 So far as the negligence claim is concerned, both parties proceeded on the assumption that the Civil Liability Act 2002 (WA) (‘Western Australian Civil Liability Act’) provided the primary legal framework for the purposes of the causation question, which meant that, on their analysis, the issue of causation was governed by s 5C of that Act.
432 The relevant division (Division 3) of the Western Australian Civil Liability Act came into operation on 1 December 2003. No party drew my attention, however, to s 5A(3) of that Act, which provides that Division 3 does “not apply unless the harm giving rise to the claim for damages arises out of an incident happening on or after 1 December 2003”. Since no argument was addressed to the point, I assume that the relevant incident for the purposes of s 5A(3) is the incident broadly described as the Westpoint Group collapse, and not the Promissory Note Advice.
433 At the same time, the application of the Wrongs Act 1958 (Vic) remained doubtful. I note that no party was able to articulate whether and, if so to what extent, the Victorian Wrongs Act 1958 applied. Mr Riordan SC stated that he “suspect[ed] that different parts of the [Promissory Note Advice] could be said to be given in Victoria; acted upon elsewhere”, but that there was “no material difference” between s 5C of the Western Australian Civil Liability Act and the equivalent provision – which was s 51 in the Victorian legislation. For present purposes, it may be accepted that there is no material difference between s 51 of the Victorian legislation and s 5C of the Western Australian Civil Liability Act. There was, as indicated, no argument to the contrary. As a result, I propose to deal with the question through the lens of s 5C, acknowledging that what I say in relation to causation on its terms would apply equally to the question of causation under the Victorian Act. This course is an appropriate one in the current circumstances, where I have already found that the Carey parties’ claims against Freehills have failed.
434 Section 5C of the Western Australian Civil Liability Act provides a statutory basis for determining the questions of causality between the negligent act and the harm suffered, and the scope of the defendant’s liability. Section 5C relevantly provides:
(1) A determination that the fault of a person (the tortfeasor) caused particular harm comprises the following elements -
(a) that the fault was a necessary condition of the occurrence of the harm (factual causation); and
(b) that it is appropriate for the scope of the tortfeasor’s liability to extend to the harm so caused (scope of liability).
(2) In determining in an appropriate case, in accordance with established principles, whether a fault that cannot be established as a necessary condition of the occurrence of harm should be taken to establish factual causation, the court is to consider (amongst other relevant things) –
(a) whether and why responsibility for the harm should, or should not, be imposed on the tortfeasor; and
(b) whether and why the harm should be left to lie where it fell.
Section 5D provides:
In determining liability for damages for harm caused by the fault of a person, the plaintiff always bears the onus of proving, on the balance of probabilities, any fact relevant to the issue of causation.
435 In considering the equivalent provision in the Civil Liability Act 2002 (NSW), the High Court noted in Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420 (‘Moubarak’) at 440 [42] that the provision “divides the determination of whether negligence caused particular harm into two elements: factual causation and scope of liability”. The Court continued (at 440-443 [43]-[44], [52]-[56]):
Dividing the issue of causation in this way expresses the relevant questions in a way that may differ from what was said by Mason CJ, in March v E and MH Stramare Pty Ltd [(1991) 171 CLR 506 at 515] to be the common law’s approach to causation. The references in March v Stramare to causation being “ultimately a matter of common sense” were evidently intended to disapprove the proposition “that value judgment has, or should have, no part to play in resolving causation as an issue of fact”. By contrast, s 5D(1) treats factual causation and scope of liability as separate and distinct issues.
It is not necessary to examine whether or to what extent the approach to causation described in March v Stramare might lead to a conclusion about factual causation different from the conclusion that should be reached by applying s 5D(1). It is sufficient to observe that, in cases where the Civil Liability Act or equivalent statutes are engaged, it is the applicable statutory provision that must be applied.
…
Counsel for the plaintiffs, in this court, relied upon passages in Chappel v Hart [(1998) 195 CLR 232]. But in that case the majority proceeded on the basis that but for the failure to warn the event would not have happened; the question then was whether certain additional factors, combined with the satisfaction of the “but for” test, were sufficient to establish causation.
In the present case, in contrast, the “but for” test of factual causation was not established. It was not shown to be more probable than not that, but for the absence of security personnel (whether at the door or even on the floor of the restaurant), the shootings would not have taken place. That is, the absence of security personnel at Adeels Palace on the night the plaintiffs were shot was not a necessary condition of their being shot. Because the absence of security personnel was not a necessary condition of the occurrence of the harm to either plaintiff, s 5D(1) was not satisfied. Did s 5D(2) apply?
Section 5D(2) makes provision for what it describes as “an exceptional case”. But the Act does not expressly give content to the phrase “an exceptional case”. All that is plain is that it is a case where negligence cannot be established as a necessary condition of the harm; the “but for” test of causation is not met. In such a case the court is commanded “to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party”. But beyond the statement that this is to be done “in accordance with established principles”, the provision offers no further guidance about how the task is to be performed. Whether, or when, s 5D(2) is engaged must depend, then, upon whether and to what extent “established principles” countenance departure from the “but for” test of causation.
At once it must be recognised that the legal concept of causation differs from philosophical and scientific notions of causation. It must also be recognised that before the Civil Liability Act and equivalent provisions were enacted, it had been recognised that the “but for” test was not always a sufficient test of causation. But as s 5D(1) shows, the “but for” test is now to be (and has hitherto been seen to be) a necessary test of causation in all but the undefined group of exceptional cases contemplated by s 5D(2).
Even if the presence of security personnel at the door of the restaurant might have deterred or prevented the person who shot the plaintiffs from returning to the restaurant, and even if security personnel on the floor of the restaurant might have been able to intervene in the incident that broke into fighting in time to prevent injury to anyone, neither is reason enough to conclude that this is an “exceptional case” where responsibility for the harm suffered by the plaintiffs should be imposed on Adeels Palace. To impose that responsibility would not accord with established principles.
(Emphasis in original)
I note that, instead of the expression “an exceptional case” in s 5D(2) of the NSW legislation, the equivalent provision in the Western Australian Civil Liability Act – s 5C(2) – uses the expression “an appropriate case”.
436 In the present case, having regard to paragraphs [414]-[427] above, the Carey parties have not shown that, on the balance of probabilities, the “but for” test of factual causation was satisfied. It was not shown to be more probable than not that, but for the Promissory Note Advice, the Westpoint Group companies would not have proceeded to issue promissory notes under the arrangements in place at the relevant time. That is, the existence of the Promissory Note Advice was not shown to be a necessary condition of the promissory notes being issued.
437 In their causation argument, the Carey parties submitted that “[b]ecause [this] case is about advice it is essential to ask what would have occurred had Freehills given the advice without negligence”. They contended that this was “not stating a ‘but for’ test of causation”; rather, so they said, “it [was] asking whether the advice was still operating causally”. In this connection, the Carey parties relied on Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 414 and 420-421 in support of the proposition that the advice would only cease to operate as a cause “if it can be said that the events which have occurred would have occurred even if the correct advice and proper warnings had been given”. In the context of this case and the facts as found, I reject the Carey parties’ submission. This is because I have found that the Promissory Note Advice was not operating causally at any relevant time on the events: see above paragraphs [414] and following. Therefore, any consideration, hypothetical as it already is, of what would have occurred if the advice was different is wholly misplaced. This is also because there is simply no factual foundation for the Carey parties’ argument that it was some supposed failure to warn about the use of promissory notes that was a cause of their loss. I have already referred to Mr Shearwood’s repeated warnings to Westpoint Group personnel about the use of promissory notes, including his express statements that uncertainty attended the legal position with respect to this use and that there was a risk that the promissory notes would be considered an interest in a MIS: see above paragraphs, including [352] and [379]-[387] and [416]. This is, therefore, not a case in which it is appropriate to enquire what would have happened had a positive duty been performed because it has not been shown that such a duty was not performed.
438 Further, this is not a case in which, in accordance with established principles, causation should be taken to be established even though the ‘but for’ test is not satisfied. It is not an “appropriate case” with the meaning of s 5C(2) of the Western Australian Civil Liability Act. Rather, to impose that responsibility would be contrary to established principles. Section 5C(2) of that Act is therefore inapplicable.
439 That is, causation, considered according to established principles and as a question of fact, has not been established. Causation within the established principles is not “susceptible of reduction to any one philosophical or scientific formula such as the ‘but for’ test, but rather to be resolved as a matter of common sense and experience”: RP Balkin and JLR Davis, The Law of Torts (5th edition, Lexis Nexis Butterworths, 2013) (‘Balkin & Davis’) pp 318-319, citing March v Stramere at 509 and Chappel v Hart (1998) 195 CLR 232 (‘Chappel v Hart’) at 242-243 [23] (McHugh J) and [62] (Gummow J), even if, as the Carey parties urged, causality is not determined by reference to commonsense alone. Given my findings at paragraphs [414]-[427] above, it simply cannot be said here that the Carey parties have shown that, in any relevant sense in accordance with established principles, the supposed representations, assuming they were made, ‘resulted in’, ‘led to’, ‘operated as a cause of’ or was ‘a factor in bringing about’ the harm suffered; alternatively they were not a ‘substantial’, ‘material’ or ‘real’ cause of the injury: see Balkin & Davis at pp 317-318 citing Fitzgerald v Penn (1954) 91 CLR 268 at 274; and I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 at 128 [56]- [58] (Gaudron, Gummow and Hayne JJ).
440 Having regard to the whole of the evidence, the Carey parties have failed to establish, on the balance of probabilities, the factual causation required to succeed in their negligence claim.
441 In these circumstances it is unnecessary to consider the Carey parties’ submissions that:
Freehills’ advice exposed the Westpoint Group to the risk of investigation and enforcement action being taken by ASIC because of the use being made of promissory notes to exploit a loophole in the law to raise millions of dollars from retail investors without the protection of prospectus standard disclosure and without the protection of a registered managed investment scheme.
For the reasons set out already, the factual foundation for this argument was not established by the Carey parties.
442 In the same way, it is unnecessary to consider Freehills’ alternative submissions in support of the proposition that the Westpoint Group’s use of promissory notes was not the cause of the collapse of the Westpoint Group. In these submissions, Freehills contended that the Group collapsed because of: (1) the insolvency of the Group; (2) the orders made by French J winding up York Street Mezzanine and Ann Street Mezzanine in insolvency; (3) ASIC’s applications for the winding up of York Street and Ann Street Mezzanine, which were based on the insolvency and misleading conduct of the companies and unrelated to the use of promissory notes as the method of fundraising; and (4) ASIC’s issuing of an Initial Stop Order on the Westpoint Income Fund on 25 October 2005 and a Final Stop Order on 23 November 2005. These submissions would only have been necessary to explore on the causation issue if the Carey parties had established there was the relevant reliance on the Promissory Note Advice. Since it is unnecessary to explore the solvency issue raised by these submissions, it is also unnecessary to rule on the admissibility of what the parties referred to in submissions as the ‘Read report’.
443 From the outset, the Carey parties’ fundamental claim was that, by reason of the Promissory Note Advice, they lost the opportunity to publicly list their shareholding in, or ‘float’, the companies in the Westpoint Group; alternatively, that they lost the value of their shareholding in the companies in the Westpoint Group: see amended cross-claim, particulars to paragraph 56. Other kinds of loss were also originally pleaded by the Carey Parties in their amended cross-claim, specifically, damages under s 87 of the TPA (or s 77 of the FTA) for Mr Carey’s loss of remuneration as a result of the collapse of the Westpoint Group; depletion in the value of the other cross-claimants’ assets and their loss of income. As previously noted, in the course of the trial, an application to amend in respect of claims by Vannin Pty Ltd and Earlmist Pty Ltd as “guarantor companies” was refused; and the loss said to have been occasioned to the non-shareholder cross-claimants was abandoned. Taking these matters into account, had the Carey parties made out the other elements of their misleading and deceptive conduct and negligence claims, I would have been required to focus on the loss said to be suffered by Mr Carey (and potentially Heca and Quartz to the extent that they were said to hold Mr Carey’s interests for him), namely: the lost value of Mr Carey’s shareholding; his lost remuneration; and the lost opportunity to publicly list his shareholding in the companies comprising the Westpoint Group.
444 In closing submissions, however, the Carey parties’ claim for loss and damages was apparently further narrowed. In closing written submissions, the Carey parties stated that the relevant loss was “the lost opportunity to float the Westpoint Group” or “the loss of the chance to list” and claimed damages in respect of “the lost opportunity [that] arose from the planned public listing of the Westpoint Group”. Mr Martindale SC confirmed in closing that it was “Mr Carey’s loss, as the holder of the shares in the would-be float vehicle that we [are] focussing on”. The other forms of claimed loss were not pursued.
445 Depending on the circumstances, loss and damage may encompass “the loss of a commercial opportunity which had some value (not being a negligible value) the value being ascertained by reference to the degree of probabilities or possibilities”: see Sellars v Adelaide Petroleum; Poseidon Ltd v Adelaide Petroleum NL (1994) 179 CLR 332 at 355 (emphasis in original).
446 This final part of the Carey parties’ case was far from straightforward. Even if they had succeeded in establishing the other elements of their pleaded causes of action, the factual basis for their loss and damage claim was not strong. Furthermore, the Carey parties’ loss and damage claim necessitated consideration of the question whether they could claim in respect of the alleged loss at all. At this point, the Carey parties’ case faced both factual amd legal hurdles: it might fairly be argued that they could not recover because the loss, even if established, was merely a reflection of the loss of WPC (or some other company or companies or even that of the Westpoint Group companies as a whole, if such a whole could be said to exist). An issue of this kind was considered by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1, where it was held that it was not open to recover damage that had in fact been suffered by the company of which the plaintiff had been the principal shareholder and director where the loss suffered was that of the company: see Johnson v Gore Wood & Co [2002] 2 AC 1 at 35-37. See also Gould v Vaggelas (1985) 157 CLR 215 at 219-220; Harris v Milfull [2002] FCAFC 442; (2002) 43 ACSR 52 (‘Harris v Milfull’) [15]-[34]; and Willoughby v Clayton Utz [2005] WASC 47; (2005) 193 FLR 373 at [42]-[55].
447 Whilst the loss ultimately sought by the Carey parties was the “loss of the opportunity to publicly list Mr Carey’s shareholding in the companies comprising the Westpoint Group”, this too may be attended by the same difficulty encountered by a direct claim for the lost value of Mr Carey’s shareholding. In this connection, the statements of McPherson JA (Williams JA and White J concurring) in Thomas v D’Arcy [2005] 1 Qd R 666 at [17]-[18] are of some significance. After noting (at [17]) that:
… to the extent that the loss is the same, and is measured by the diminution in value of the plaintiff's shareholding in those companies, it reflects the loss suffered by the companies and so falls within the exclusionary principle recognised by Lord Millett in Johnson v Gore Wood & Co [2002] 2 AC 1, at 62. …
his Honour continued (at [18]):
In attempting to escape the reach of this rule, the plaintiff has sought to couch his claim in this action not as one against the Bank or Ebbage, but against the defendants for negligence or breach of their retainer. It was submitted that it was, legally speaking, a claim for the value of the chance or opportunity, which the plaintiff has lost through the defendants’ breach of retainer or negligence, of preventing mismanagement or sale of corporate assets at undervalue, and it was not to be confused with the value of the lost assets themselves. … But in any event and with due respect to Mr Savage SC, this is a form of legal legerdemain. The prima facie measure of the value of the lost chance is the value of the lost assets themselves discounted to the extent necessary to make allowance for the uncertainties and risks of the proceedings which the plaintiff claims the defendants should have advised him to bring against the Bank or Ebbage in order to protect those assets. In so far as they were or are corporate assets, the measure of the loss which the plaintiff seeks to recover from the defendants is the diminution in value of the shares that he holds in the companies or which they in turn hold in others. The damages he claims are merely a reflection of the loss sustained by the companies, although in this action he seeks to recover from the defendants rather than from the Bank or Ebbage.
It may be that a lost chance to protect an applicant from the sale of corporate assets at undervalue is not unlike the loss of a chance to publicly list corporate assets.
448 Alternatively, it may be that there is something truly distinct from the “mere” value of the shareholding which arose out of what the Carey parties described in closing written submissions as the “additional value … derived from the interrelatedness of the companies, synergies within the group, the structures and business processes which had developed within the group over the period of its existence together with its goodwill and earning capacity”. Indeed, the loss of opportunity to publicly list that additional value was argued by the Carey parties to be “not dissimilar” to the situation of the appellant in Giles v Rhind [2002] 4 All ER 977 where Waller LJ of the English Court of Appeal distinguished Johnson v Gore Wood & Co [2002] 2 AC 1 and stated (at [28]) that:
Obviously the value of [Mr Giles’] shares reflect to some extent the value of the assets of the company but in his case they also reflect what Lord Millett described as market sentiment, or what would have been considered their value because of the potential which the business had.
Chadwick and Keene LJJ agreed that Johnson v Gore Wood & Co [2002] AC 1 ought be distinguished and did not govern Mr Giles’ position.
449 I do not consider it appropriate, however, to consider the interesting question, whether in this case there was some additional value of the kind the Carey parties described that was in truth distinct from the value of the shareholding, or the many other questions that might arise at this juncture of the Carey parties’ case. Whatever I were to say about the recoverability issue would be entirely unnecessary for the decision in this case. Further, I am mindful of the cogency of the statement of the Full Court of this Court in Harris v Milfull at [40] that “the development of the law in this area will take place in a more orderly way if decisions are based upon actual findings of fact rather than upon mere allegations.” Given the findings already made, findings in respect of loss and damage would be entirely hypothetical and are not sensibly made. Any comment I would make here upon the recoverability question would not be made on the basis of “actual findings of fact”. Any supposed ‘findings’ would require me to assume an abundance of unproven suppositions and, in doing so, I could not be other than inexact. Such inexactness would not be of assistance in such a case as this, or in any future proceeding in which this recoverability question requires determination. In the circumstances, I do not consider it helpful to venture further. In this case, moreover, notwithstanding the parties’ voluminous submissions, relatively little attention was given to this particular point.
450 Similarly, it is inappropriate and unnecessary to delve too deeply into the question whether the companies in the Westpoint Group were solvent at 30 June 2005, or indeed at any relevant point. The insolvency question was also far from straightforward and raised many complex issues. It is possible that any factual finding of insolvency in this proceeding may have an as yet unknown impact in relation to other proceedings. In this context, it is unnecessary to determine whether the Carey parties’ failure to call Ms Lindsay (who had prepared a report on the insolvency issue that they did not ultimately tender) would justify what Mr Riordan SC referred to as “a Jones v Dunkel inference” on the issue: see [174] above.
451 If I had reached different conclusions on the various issues already discussed in this case, the question of solvency would have been significant for the question of loss and damage, and potentially to the question of causation as well. As already explained above, however, it was unnecessary to consider the solvency of the companies in the Westpoint Group to conclude that the Carey parties’ failed to make out requisite causation. This was because I rejected their case regarding the alleged misrepresentations made in the supposed Promissory Note Advice and that they could have operated causally on the events the subject of the claimed loss.
452 At its heart, the relevance of the solvency question to loss and damage amounted to the proposition that no damage could be claimed for a lost opportunity to float the Westpoint Group if the companies in the Group were insolvent. An insolvent company cannot be listed and, therefore, so Freehills submitted, no such loss of opportunity could possibly have been suffered by the Carey parties.
453 Given that the Carey parties have not made out the other elements of their negligence and TPA claims, it is unnecessary to consider further the solvency of the companies in the Westpoint Group at 30 June 2005 to determine the outcome of this proceeding. Whatever I were to say about the solvency question would be entirely unnecessary for the decision in the case. Bearing in mind this lack of utility and the comments at [449]-[450], I would not examine the solvency question further.
454 Since, for the reasons stated, I would not address the recoverability or solvency issues further, it is therefore quite unnecessary to consider the supposed ‘gaping hole’ and other deficiencies that Freehills claimed attended the report of Mr Leibowitz (dealing with the supposed lost opportunity to float); the Carey parties’ objections to the report of Mr Read (on the solvency question); or the significance of the evidence of Mr Smith’s report (challenging aspects of Mr Leibowitz’s report). As already noted, in the same vein, nothing further need be said about the decision made by the Carey parties not to call any expert evidence in relation to solvency and their stated reasons for not doing so: see [450] above. It is also unnecessary to discuss the evidence of other witnesses (as, for example, Mr Carey, Mr Bell, Mr Nairn or Ms Margaret Mote) to the extent that they bore on these issues of recoverability and solvency.
455 It suffices to say that I would dismiss the Carey parties’ cross-claim, principally because the Carey parties failed to establish on the balance of probabilities that:
(1) the Carey parties, or any of them, were persons to whom Mr Shearwood owed a duty of care;
(2) the representations as pleaded were made and/or if made, were untrue, not soundly based or negligently made;
(3) the Carey parties, or any of them, relied on the alleged representations or that the Promissory Note Advice had the requisite causal relationship with the events said to have resulted in the claimed loss and damage.
456 For the reasons stated, I would dismiss the cross-claim. In the ordinary course, costs would follow the event. I would, however, afford the parties an opportunity to make short submissions on costs if they wish, such submissions to be limited to 3 pages. If there are no submissions received within 10 days of the delivery of judgment, I would order that the Carey parties pay the first cross-respondent’s costs of and incidental to the cross-claim.
| I certify that the preceding four hundred and fifty-five (456) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. |
Associate:
SCHEDULE
| NORMAN PHILLIP CAREY | First Cross-Claimant |
| QUARTZ NOMINEES PTY LTD (ACN 008 859 103) ATF THE QUARTZ TRUST | Second Cross-claimant |
| HECA NOMINEES PTY LTD (ACN 053 581 874) | Third Cross-claimant |
| ACEBID PTY LTD (ACN 074 566 046) | Fourth Cross-claimant |
| ANDRIANNI PTY LTD (ACN 005 458 720) ATF THE ANDRIANNI TRUST | Fifth Cross-claimant |
| ANN STREET BRISBANE PTY LTD (ACN 101 943 711) ATF THE ANN STREET BRISBANE TRUST | Sixth Cross-claimant |
| BENNALONG HOLDINGS PTY LTD (ACN 008 741 008) | Seventh Cross-claimant |
| DOSIUS PTY LTD (ACN 009 449 450) | Eighth Cross-claimant |
| EARLMIST PTY LTD (RECEIVER & MANAGER APPOINTED) (CONTROLLER APPOINTED) (ACN 069 056 926) ATF THE EARLMIST UNIT TRUST | Ninth Cross-claimant |
| ETNAS PTY LTD (ACN 056 599 350) ATF THE ENTAS TRUST | Tenth Cross-claimant |
| HEALTHCARE PROPERTIES PTY LTD (ACN 074 501 955) ATF THE HEALTHCARE PROPERTIES TRUST | Eleventh Cross-claimant |
| HUNTINGDALE VILLAGE PTY LTD (RECEIVER & MANAGER APPOINTED) (ACN 085 048 531) ATF THE HUNTINGDALE VILLAGE UNIT TRUST | Twelfth Cross-claimant |
| JEVWOOD PTY LTD (ACN 074 525 321) | Thirteenth Cross-claimant |
| K.I.S. REALTY PTY LTD (ACN 100 871 314) | Fourteenth Cross-claimant |
| KEEP IT SIMPLE INVESTMENTS (GLOBAL) PTY LTD (ACN 100 871 270) | Fifteenth Cross-claimant |
| NORTH SYDNEY DEVELOPMENT PTY LTD (CONTROLLER APPOINTED) (ACN 107 037 838) ATF THE NORTH SYDNEY DEVELOPMENT TRUST | Sixteenth Cross-claimant |
| PAQUERO PTY LTD (ACN 003 540 556) | Seventeenth Cross-claimant |
| PARAGON APARTMENTS LTD (RECEIVER & MANAGER APPOINTED) (ACN 087 200 413) | Eighteenth Cross-claimant |
| RENAISSANCE MEZZANINE PTY LTD (ACN 110 978 491) | Nineteenth Cross-claimant |
| ROMPRIDE PTY LTD (ACN 074 524 824) ATF THE ERLEY UNIT TRUST | Twentieth Cross-claimant |
| SCOTS CHURCH DEVELOPMENT LTD (RECEIVER & MANAGER APPOINTED) (ACN 091 686 323) | Twenty-first Cross-claimant |
| SILKCHIME PTY LTD (RECEIVER & MANAGER APPOINTED) (ACN 066 849 429) ATF THE SILKCHIME UNIT TRUST | Twenty-second Cross-claimant |
| VANNIN PTY LTD (RECEIVER & MANAGER APPOINTED) (ACN 067 610 271) ATF THE HAY FAMILY TRUST | Twenty-third Cross-claimant |
| WARWICK ENTERTAINMENT CENTRE PTY LTD (RECEIVER & MANAGER APPOINTED) (ACN 054 246 918) ATF THE WARWICK ENTERTAINMENT CENTRE UNIT TRUST | Twenty-forth Cross-claimant |
| WESTPOINT FINANCIAL SERVICES PTY LTD (ACN 074 148 324) | Twenty-fifth Cross-claimant |
| WESTPOINT MANAGEMENT (CENTREWAYS) PTY LTD (ACN 082 349 068) ATF THE CENTREWAYS REFURBISHMENT SYNDICATION TRUST | Twenty-sixth Cross-claimant |
