Pilmer & Ors v Duke Group (In Liquidation) & Ors A22/1999 [1999] HCATrans 600 (30 November 1999)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A22 of 1999

B e t w e e n -

ANGUS CLAYMORE PILMER

ALAN ROBERT CRAWFORD

DOMENIC VINCENT MARTINO

PETER JOHN MESSER

PETER LAWSON MUNACHEN

PAMELA ANNE ROBINSON and JOHN RICHARD LANGFORD as executors of the estate of GEOFFREY JAMES STOKES deceased

ROBERT JOHN GRAY

Applicants

and

THE DUKE GROUP LIMITED (IN LIQUIDATION)

First Respondent

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Second Respondents

HAROLD ABBOTT

Third Respondent

KEVIN CLARENCE SOMES and SIR ERNEST LEE-STEERE

Fourth Respondents

RONALD WILLIAM EDWARD ARNOLD and OTHERS (as per attached schedule)

Fifth Respondents

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Sixth Respondents

HAROLD ABBOTT, KEVIN CLARENCE SOMES and SIR ERNEST LEE-STEERE

Seventh Respondents

Office of the Registry

Adelaide No A24 of 1999

B e t w e e n -

THE DUKE GROUP LIMITED (IN LIQUIDATION)

Applicant

and

ANGUS CLAYMORE PILMER

ALAN ROBERT CRAWFORD

DOMENIC VINCENT MARTINO

PETER JOHN MESSER

PETER LAWSON MUNACHEN

PAMELA ANNE ROBINSON and JOHN RICHARD LANGFORD as executors of the estate of GEOFFREY JAMES STOKES deceased

ROBERT JOHN GRAY

First Respondents

RONALD WILLIAM EDWARD ARNOLD and OTHERS (as per attached schedule)

Second Respondents

Office of the Registry

Adelaide No A27 of 1999

B e t w e e n -

KEVIN CLARENCE SOMES

Applicant

and

THE DUKE GROUP LIMITED (IN LIQUIDATION)

First Respondent

ANGUS CLAYMORE PILMER

ALAN ROBERT CRAWFORD

DOMENIC VINCENT MARTINO

PETER JOHN MESSER

PETER LAWSON MUNACHEN

PAMELA ANNE ROBINSON and JOHN RICHARD LANGFORD as executors of the estate of GEOFFREY JAMES STOKES deceased

ROBERT JOHN GRAY

Second Respondents

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Third Respondents

HAROLD ABBOTT

Fourth Respondent

SIR ERNEST LEE-STEERE

Fifth Respondent

RONALD WILLIAM EDWARD ARNOLD and OTHERS (as per attached schedule)

Sixth Respondents

FRANCIS ANTHONY QUILTY and KEITH DANIEL SINGLETON

Seventh Respondents

HAROLD ABBOTT and SIR ERNEST LEE-STEERE

Eighth Respondents

Applications for special leave to appeal

GLEESON CJ

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 30 NOVEMBER 1999, AT 9.30 AM

Copyright in the High Court of Australia

_______________________

MR A.J. MYERS, QC: May it please the Court, I appear with MR P. ZAPPIA in the first of those matters on behalf of the applicants. In the second, on behalf of the first respondent and the second respondents other than Messrs Lavis Gay and Taylor, and in the third of those matters, on behalf of the second and the sixth respondents. (instructed by Phillips Fox)

MR T.A. GRAY, QC: May it please the Court, I appear with my learned friends, MR R.J. WHITINGTON, QC, MR S.J. LIPMAN and MR S.J. DOYLE, for the Duke Group Limited (In Liquidation) in each matter. (instructed by Fisher Jeffries)

MR D.F. JACKSON, QC: If the Court pleases, I appear in the second matter with my learned friend, MR S.J. WHITE, for the respondents, Lavis, Gay and Taylor. (instructed by Thomson Playford)

MR M.E. HOILE: If the Court pleases, I appear for the party, Kevin Clarence Somes. We are the seventh respondent in the first of the applications and we are the applicant for special leave in the third. (instructed by Hume Taylor & Co)

GLEESON CJ: I have a certificate from the Senior Registrar. She says:

No appearance has been filed on behalf of Harold Abbott. I have been informed by Mr Alden Halse, the trustee of the bankrupt estate of Harold Abbott, that he will not be represented at the hearing of these applications and will submit to the orders of the Court, save as to costs.

No appearance has been filed on behalf of Sir Ernest Lee-Steere. I have been informed by Messrs Hume Taylor & Co that they no longer act for Sir Ernest Lee-Steere.

No appearance has been filed on behalf of Francis Anthony Quilty and Keith Daniel Singleton. I have been informed by Messrs Johnson Winter and Slattery that Mr Quilty and Mr Singleton do not intend to appear or make submissions on the hearing of these applications.

Before the matter proceeds, I should mention that there came into my chambers yesterday afternoon an affidavit that has been filed in connection with an application for a stay of proceedings that would arise for later consideration in certain eventualities. When I looked at that affidavit, I found out, for the first time, that the insurers of the accountants include a company called HIH. That is a company in which I hold some shares. I mention that fact in case any party wants to object to me sitting. I should say in that connection that if any party did object, there is another Judge who would be available to take my place without inconvenience. Yes, Mr Myers.

MR MYERS: May I inquire of the Court whether it is desired to deal with all three of the applications together? I infer it is so. To some extent, therefore, when I am dealing with the second of the applications, I will be knocking down Aunt Sallies, as it were, because I will not have heard what my friends have to say.

First of all, the first application. There are two remarkable features of the decision of the Full Court in this matter. The plaintiff company, at the date at which damages were assessed, had net assets of $56 million. After the award of damages, it had net assets of $112 million. That is because, in substance, what had happened was that the number of shares had been doubled and the judges below divided the number of shares existing at the date at which damages were assessed and got a value per share and multiplied that by the number of shares that existed at that date after the issue of the additional shares. The second thing is that - - -

GLEESON CJ: Sorry, what was the date on which you said it had assets of - - -

MR MYERS: 31 December. That was the date at which damages were assessed, your Honour. So, $56 million, that is the evidence of Mr Easton, which was accepted by the Full Court for the purposes of its calculations, and after the award it had net assets of $112 million.

The second thing is that the persons who gave the advice that was the subject of the litigation, Nelson Wheeler Perth, gave advice that was not relied upon by anyone. It was not relied upon by the directors of the company, which is the plaintiff, nor was it relied upon by the unassociated shareholders for whom the report was provided. In that connection, one can also draw attention to the fact that the Full Court held that Nelson Wheeler would not have liable if they had told the directors that the report was not reliable; the very directors who did not rely upon it.

Can I take your Honours to some parts of the reasons. First of all, paragraphs [179] to [180].

GLEESON CJ: The reasons in the Full Court?

MR MYERS: Yes, Full Court.

GLEESON CJ: It is most convenient for us, I think, in the - - -

MR MYERS: ACSR.

GLEESON CJ: Yes. What paragraph was that?

MR MYERS: Paragraphs [179] and [180] first of all, your Honour. I am going to be referring to this and also to the judgment of the judge at first instance.

NWP were not under a duty to protect Kia Ora against decisions made by self-interested directors. Nor could they. Their duty was to provide a competent opinion on the fairness of the proposed price, and to do no more than that. But NWP undertook that duty in relation to a proposal conceived by directors who had a substantial interest in its execution. Their report was meant to provide independent and competent advice on that proposal. A failure to provide such advice might result in the shareholders approving the proposal. If they did so, the directors might implement the proposal.

In our opinion it was foreseeable that if the shareholders approved the proposal, it might then be carried through and result in loss to Kia Ora. It would be surprising if the directors, having put the proposal to the shareholders in general meeting, then determined not to proceed. This does not mean that NWP had to anticipate fraudulent conduct by the directors. The directors might simply be mistaken. But commonsense suggests that if the directors put the proposal to the shareholders, they are likely to proceed with it if the shareholders approve.

And then at paragraph [208], their Honours said:

While the present case is not a case of reliance in the sense that that term was used in Esanda, we see no reason not to take a similar approach to the use of the report, as distinct from reliance upon it in the sense of putting faith in it.

So, what the court below was saying is that there was not reliance upon the report in the sense of relying upon the truth and accuracy of it. Rather, what happened was that the errant directors used the report in the sense of providing it to the shareholders at the meeting of unassociated shareholders whose approval was required under the listing rules of the stock exchange. In that way, it can be said that the report led to the loss; that it was not reliance upon the sense in which it has hitherto been understood in these sorts of cases.

At paragraph [220], if I could ask your Honours just to scan it to line 18:

In our opinion the present case, while raising different issues, is not greatly dissimilar from the situation just considered.

Now, the "situation just considered" was to enable the directors to decide upon a proper price for the proposed acquisition, but it is greatly dissimilar from that situation because the directors of the company are not using the report to make any decision which leads the company to loss. All they are doing is using the report as an instrument to put to the unassociated shareholders.

Paragraph [222], their Honours say:

In summary, to impose a duty of care in the present case is to extend the existing law, in the sense that there appears to be no authority covering the present situation.

Well, we say it is an enormous extension of the law. What is happening here is that persons are being held responsible for economic loss as a result of a negligent misstatement where no one has relied upon that misstatement but someone has used the misstatement in an ancillary way.

GLEESON CJ: Used for what purpose?

MR MYERS: Used it for the purpose of giving it to unassociated shareholders at a meeting of unassociated shareholders. Listing rule 3J3 required - - -

GLEESON CJ: That is for the purpose of having the corporation committed to a certain course of action?

MR MYERS: Well, only in the sense of ultimately committed. The unassociated shareholders did not commit the corporation. They were not even a general meeting because it was not a meeting at which all shareholders were entitled to vote. In some senses, it has been referred to as a general meeting.

GLEESON CJ: But their approval was necessary before the corporation could be committed by the directors.

MR MYERS: Yes, certainly, your Honour. Their approval was necessary in this sense, that the listing rules required it. It was necessary, as a practical matter, not as a legal matter, the directors of the corporation, if they had wished to under the articles and perhaps the Corporations Law, could have gone ahead without it but they would have been de-listed. So, it was necessary, we concede, at least in that sense.

So, the directors did not use the report except in that sense. But what is the evidence of the shareholders relying upon the report in the usual sense? The shareholders did no more than pass a resolution authorising the directors, if they saw fit, to enter into a transaction which was described in general terms to the shareholders and to which the report related.

Now, in this case no shareholder was called by the plaintiff. In the end, there was no evidence as to who attended the meeting or who voted. At least, that is the finding of the trial judge, and it is set out at paragraph [316] of the Full Court's reasons. Perhaps it is easier to go to the trial judge at page 99, at line 38:

The proxy forms were not produced at the trial. The identity of the shareholders voting in favour of the motion is not known. During the course of the trial it was suggested by the Nelson Wheeler defendants that proxies had been obtained by Harold Abbott from Schneider-Paas on behalf of other companies in which he had an interest which could have been improperly voted...... The evidence does disclose that Harold Abbott did seek proxies from Schneider-Paas but it is not known whether they were for the extraordinary general meeting at which the same of the second half of the Marvel Loch mine was approved or for the meeting which authorised the takeover. It was not established that proxies were improperly used - - -

GLEESON CJ: This is the argument that you put that is referred to at paragraph [321] of the Full Court's judgment?

MR MYERS: Yes, it is. What I am doing is making good the proposition that I started with, that no one relied upon it. At least, there is no evidence that a single unassociated shareholder relied upon the report. None was called by the plaintiff. It is not clear who attended and who voted; in particular, who gave proxies. There were 121/2 million votes, approximately, cast in favour of the resolution. There was a company called Autocure which cast about 2.9 million votes in favour of the resolution. Evidence was called by the defendants that Autocure had objected to the takeover proposal and Mr Abbott, one of the errant directors, had approached Autocure, purchased his shares secretly and had Autocure attend the meeting and vote in favour of the resolution.

GLEESON CJ: The reason against you on this is expressed at line 10 in paragraph [324]. What is your response to that?

MR MYERS: "In our opinion it is inherently likely", is that what your Honour is referring to?

GLEESON CJ: Yes.

MR MYERS: Yes. In fact, that is not so. In the first place, that obscures the question of burden of proof. But, in the second place, Autocure, which cast 2.9 million votes, did so, regardless of the contents of the report. They were opposed to the scheme that voted in favour of it because of an agreement with Harold Abbott. Secondly, Mr Quilty, one of the so-called independent directors sent a letter to each of the shareholders explaining the virtues of the scheme in a rather salesman-like way. So, there was another matter that was before the shareholders.

Thirdly, and this may be of the greatest importance, on 19 October, seven days before the meeting, there was a stock market crash and the report of Nelson Wheeler Perth was expressly conditioned upon the circumstances that obtained at the date of the report which was early October before the stock market crash and the notoriety of the stock market crash was such that any ordinary person would have conceived that it would affect a transaction like that. So, far from it being inherently likely that a majority of those voting in favour of the resolution relied upon the report, it is inherently unlikely but, in any event, we did not have the burden of proof of proving reliance. It was on the plaintiff and there was no real attempt to do that. There was no attempt to do it.

So, the proposition that I trust I have made good is that this is an extraordinary case because there is liability on the basis that no one - not withstanding that no one relied upon the report, neither the directors - - -

McHUGH J: Is that accurate? I mean, rightly or wrongly, the trial judge and the Full Court have upheld the view that it was open to draw an inference that the shareholders did rely on it. Is it not just a question of fact?

MR MYERS: No, it is not just a question of fact because what happened is that no evidence was called by the plaintiff from a single shareholder.

GLEESON CJ: Is it not a question of concurrent findings of fact?

MR MYERS: With respect, we say no. The defendant did - really, it is a reversal of the onus of proof. Certainly, in one sense, it can be characterised as a finding of fact but it is a finding that - it is a mere assertion:

it is inherently likely that a majority of those voting in favour of the resolution relied upon the report.

Why? In the circumstances, we assert to the contrary. It is inherently unlikely and advance three powerful reasons: Autocure, Quilty's letter and the stock market crash. There was not any attempt at all to establish reliance.

If I can just go back? Now, there is an issue in this matter as to the nature of the case that is conducted. We notice in the outlines that have been put forward there is a suggestion of collusion between Nelson Wheeler and the errant directors and so forth. The case that was put was one of negligent misstatement based upon tort and contract and afterwards there was a case of fiduciary duty put but there was no case of dishonesty put against my clients.

We say that the case misstates, misapplies the law concerning negligent misstatements because it makes persons responsible for the consequences of negligent misstatements regardless of reliance. In the end, it is a completely new concept which is being employed. It is use of the report rather than reliance upon it. So far, no one, anywhere, apart from this Court, has made any person responsible for economic loss resulting from a negligent misstatement where the statement has not been relied upon.

The case, so far as the application that was first mentioned concerns, does not involve any disputed issues of fact unless one characterises this issue that I have just been addressing your Honours about concerning the meeting of unassociated shareholders as a disputed issue of fact. The matters concerning the scope of responsibility for negligent misstatement are certainly of general importance. It would provide an opportunity for the Court to consider several issues of principle in relation to liability for negligent misstatements concerning - causing economic loss. It would resolve a conflict which now exists between the Full Court in South Australia and the Full Court of the Supreme Court of Western Australia in the Strategic Minerals Case and it is, we say, seriously wrong because the court has, in another respect, made a fundamental error; that is, to treat the issue of shares as a loss to the company. In fact, what that does is make the persons who are held responsible pay twice as much where the number of shares is doubled than the real loss that they caused to the shareholders.

There are issues of principle involved there that have never been addressed by this Court and, indeed, have never been addressed by any court except a single judge in the Supreme Court of South Australia, Mr Justice Olsson in the Health and Life Case where he reached an opposite conclusion to the conclusion reached by the Full Court in this case.

The results of the assessment of damages in relation to the issue of shares are really simply absurd because they compensate someone who has not suffered a loss by a measure of damages that does not bear any relationship to anyone's loss and leaves the plaintiff still exposed to an action for damages by the unassociated shareholders to whom the report was directed and who may well have relied upon it to retain their shares, for example, rather than sell them or go into the scheme.

Now, the question of fiduciary duty: again, there are general issues of principle involved here.

GLEESON CJ: That does not seem to have played an integral part in their decision making.

MR MYERS: No, it does not, your Honour, but, nonetheless, we would need to succeed on tort, contract and fiduciary duty if we were to overturn the decision below. The trial judge did not decide there was a fiduciary duty but, nonetheless, the Full Court bolstered a decision which is really only dealing with advisers' liability for negligence by reference to this extension of the concept of fiduciary duty. In any event, there was no breach of any fiduciary duty because the undisputed fact is that Kia Ora knew, through its directors, of the conflict of interest. That is the very basis of the case.

If I can just briefly deal with Mr Gray's - - -

GLEESON CJ: I notice your time is up, Mr Myers. I would like to ask you a couple of questions that I deliberately refrained from asking you while your time was running because they are questions that really are aimed at clarifying my thinking rather than testing your argument. The first one is this: is this a case in which it is possible to isolate any of the issues that you have just addressed from the others? Let me be specific. Is it possible to isolate the issue that you raised as to whether or not damages could be calculated by reference to the shares that were allotted?

MR MYERS: Certainly. That issue is quite discrete. There are no factual difficulties which would be encountered if that were done. There is no doubt about that, in my submission, your Honour, that is plainly discrete.

GLEESON CJ: If that issue were isolated, how long would the appeal take?

MR MYERS: One day.

GLEESON CJ: The second question is this: I am not entirely clear in my own mind what the outcome of all of this was in relation to that issue concerning what I might call the Australia-wide partnership, that is the relationship between Nelson Wheeler Perth and others.

MR MYERS: Well now, what was said by the plaintiff below was that there was a national partnership comprising the partners in Perth and persons in other States and Territories who used the name Nelson Wheeler. There were no issues of law involved in that; just a tremendously complicated question of fact which occupied more time probably than any other issue in this three-and-a-quarter year trial. I did not participate for most of the trial but, looking at the transcript, I can say that.

Before the Full Court, it was a matter which took about a week to argue and it concerns issues of fact. What constitutes a partnership is hardly a contentious matter and there were no issues of law involved there. We say in the first place it is not suitable, obviously, because it is just an issue of fact and, secondly, the decision that was made is not attended with any doubt. The unchallenged fact was that each of the State partnerships carried on business separately and they were not interdependent and so, in any event, the decision was correct.

That issue, I would concede, is not factually intertwined with the issues of negligence but it is an enormous factual issue. The other way in which it was put below was that even if there was not a partnership in fact, a national partnership in fact, there was a holding out of a partnership which was relied upon by someone, the company or the shareholders, in giving faith to the Nelson Wheeler report.

GLEESON CJ: Now, who is it that wants to carry that?

MR MYERS: Mr Gray does. Mr Jackson is representing Lavis, Gay and Taylor who were three of the national partners. I am, with Mr Zappia, representing the rest. But, again, that is a question of fact which involved examination of what the holding out constituted and - - -

GLEESON CJ: I just wanted to understand the relationship between those issues. We can hear what Mr Gray and Mr Jackson - - -

MR MYERS: It is factually separate but huge.

GLEESON CJ: Yes, thank you. Yes, Mr Gray.

MR GRAY: May it please the Court, the judgment below in this matter was in contract because that led, in the circumstances, to the greater award of damages. As a result, the suggested special leave issues in regard to a duty of care in tort, fiduciary obligations, contribution, matters of amendment become moot unless special leave be granted on the issue of contractual duty of care or other matters.

If the Court pleases, in regard to the question of contract, the special leave grounds that are agitated are quite narrow. It was conceded below that there was a contract. It was conceded below there were terms of a contract. It was conceded, at the end of the submissions at trial, there was a breach. The tension that appears to have arisen is because we would say there is some confusion about principles and not attribution. In contract, the case is very straightforward.

It is suggested that because directors, who on behalf of a company, enter into a contract with professional advisers to obtain a report, have an intention to misuse the product of that contract, that therefore there is no contract. We say that is an unsustainable proposition on ordinary principles.

The intermediate court made it plain that it put to one side completely the issues of none attribution of knowledge, that is, that fraudulent directors' knowledge is not imputed to the company. The intermediate court found that unnecessary to consider in reaching their conclusion there was a binding contract and liability under contract. In fact, the intermediate court found against the plaintiff below because it found that there could be an attribution of knowledge in regard to contribution in tort. So that the special leave point built out of that issue is a false one.

It then follows, with respect, that if special leave is refused in contract, most of the other points fall aside. That does leave, if the Court pleases, certain discrete arguments. Special leave is sought in regard to issues touching novus actus and causation. If one analysis carefully the intermediate court judgment, it is clear that the court had regard, as they expressly state, to all the recent authorities of this Court in regard to those issues, and I mention March v Stamare, Medlin, Bennett, Chapple v Hart and your Honour Justice McHugh's decision in Alexander. There is absolutely no issue of principle arises. In fact, it becomes a question of application of these principles to those peculiar facts in this case.

GLEESON CJ: What do you say about the issue concerning damages and the allotment of shares?

MR GRAY: If the Court pleases, if I might come directly to that. We say that it is not as discrete, as my learned friend would suggest, that true it is one can isolate that issue but if that were to be opened up it would open up a number of other issues in regard to damages. It would open up questions of, if there were to be an alteration in damages, consequential matters of statutory interest, loss of use damages and - - -

GLEESON CJ: What do you say about the merits of the point?

MR GRAY: On the merits of the point, if the Court pleases, we say that the matter is clear from the reasons below. My learned friend's argument is mounted on the fact that when a company allots shares it does not actually use its own property. It has paid nothing for the shares but for the reasoning below operates at a different point of time. The reasoning below is that the company has the power to allot shares and then, this is critical, use those shares for valuable consideration in a transaction and if it fails to get value it has suffered loss. Now, if the Court pleases, the court below relies on the reasoning of - - -

GLEESON CJ: The company can only allot shares for money or money's worth.

MR GRAY: Yes.

GLEESON CJ: Is the proposition for which you contend that if a company, as a consequence of a tort or a breach of contract, allots shares on the understanding that it is getting money's worth and it is not getting money's worth, it has suffered a loss measurable by the difference between what it thought it was getting and what it did get.

MR GRAY: By what it had bargained to get and what it received. It was put in the Osborne Case by the Master of the Rolls when the company allots shares for cash, there is a primary obligation on the allottee to pay cash to the company and when the cash is paid the company receives the cash as its cash for its use and the Master of the Rolls makes the point that when there is consideration other than cash, the company has, as it were, bargained away its primary obligation to receive money for other consideration.

GLEESON CJ: Well suppose the negligence in a particular case took the form of a negligent valuation of land and the company, on the faith of that valuation, allotted 100,000 shares of $1.00 each on the assumption that the land which it received in consideration was worth $100,000 and the land was, in truth, worth only $20,000. Leave aside those issues that arise as to how you measure damages in negligent valuation cases that can raise other complications, the company is then allotted 100,000 $1.00 shares and it has received land worth $20,000. You say it has suffered a loss of $80,000.

MR GRAY: Yes. It has failed to receive the consideration it bargained for and it had the power to allot shares and then to receive consideration in a different form than money and when it did that bargain it was to receive an extra $80,000 in the value of real estate. It did not receive it. It suffered a loss.

There was evidence below from two experts, Mr Easton of Coopers & Lybrand and Mr Hall of Grant Samuels, both who said from a business point of view and from an accounting point of view, Duke had to accept the loss on the transaction and bring it to account in its books. So at the business level, the commercial level, the accounting standards level, there has to be a recognition of the loss taken on the transaction. Otherwise, one winds up with the company, in effect, issuing shares at a discount and if one traces back through this area in case law, it is suggested, of course, that that would be inappropriate.

The Osborne Case that is referred to and relied on by way of analogy by the intermediate court has had approval in both the House of Lords and the High Court, most recently in the House of Lords in 1983 but early 1940s, and in this Court in a judgment in the 40s and more recently one in the 70s and, in fact, in support of my friend's proposition, there is an article in the Law Quarterly Review which acknowledges it is against authority that was picked up and applied by Justice Olsson in the Health and Life Care decision and has been specifically disapproved of by the intermediate court and by Justice Mullighan.

In our respectful submission, when one analyses this what, in fact, is happening is that the applicant for leave on this ground is focusing on the wrong issue. He is saying is there an expense to the company in allotting shares. That is not the question. The question is when the company exercises its powers to allot and use the allotted shares in a transaction for consideration and it does not receive the consideration bargained for, it suffers a loss.

When one focuses on the second matter, the second matter in point of time, we say that there is no issue. So on the point of principle that is the answer I provide your Honour the Chief Justice and that is, as we say, backed up by quite a number of cases. The early cases of Banco de Portugal which the intermediate court referred to again, by analogy, the reason there, in particular Lord Atkin, expressly supports what I have put to the Court when dealing with, in that case, banknotes being issued.

If the Court pleases, one of the difficulties that arises if this issue is opened up is that it leads into the area of loss of opportunity. It leads into an analysis of the facts at trial by both these experts which would involve the Court in having to embark on that inquiry. It will then have flow on issues in regard to other aspects of damages, in particular, in regard to, if this Court was to reopen the question of damages, we would be wishing to agitate the other consequences that follow in regard to issues on statutory interest and so on.

McHUGH J: It may be, if the Court granted leave and was against you on this point, that those matters could be dealt with by the Full Court. The proper order would be to send the matter back to reassess the damages.

MR GRAY: Yes, it may be but in the sense one of the problems with damages is that there is a great advantage in the one court dealing with the entire issue so that one can address restitution in its entirety but I do not know that I can advance the matter beyond that, if the Court pleases. The Court has our argument on principle and we say it is not a clean vehicle and suffers from a number of problems that, in fact, arise because of the mass of material in this case. I mean, both experts gave evidence for quite some time, one for some months, one for, I think, the order of a week and there are charts and documents and calculations. For example, there are various quite complicated exhibits about the way in which the company's books needed to be rewritten to bring to account these losses so there is quite a mass of material in that respect that needs to be gone into.

If the Court pleases, in regard to the other issues raised by my learned friend in the application for leave, he raised points as to date of assessment, referral of experts below by the court, issues of remoteness on damage and we would say nothing arises on those points.

My learned friend did open by two points which he suggested were dramatic points. The first was he did the before and after analysis in dollar terms of the company. What he left out of his equation was, in addition to the cash the company had, it had the, in the Ngurli v McCann terms, the power to allot shares and then the power to use those allotted shares as valuable consideration and he just leaves that out of the equation as though that is not an asset of value and that power, in the Ngurli v McCann sense is treated as a power of the company and hence an asset of the company and one has to be, with respect, a little more sophisticated than simply a cash comparison to deal with that fairly. The other aspect he referred to was reliance. The intermediate court and the trial judge - - -

GLEESON CJ: You have concurrent findings of fact in your favour on that issue.

MR GRAY: We do, if the Court pleases, and we obviously would suggest that this Court would not review this area because it is essentially a factual question.

GLEESON CJ: What do you say about the issue concerning the width of the partnership, if I can use that expression?

MR GRAY: If I could come to that, if the Court pleases, that forms one of the primary points of my client's application. We take two points. The first is that this Court has not looked at either the partnership in fact or partnership by holding out for something like 50 years.

GLEESON CJ: Why does it matter to your client?

MR GRAY: It matters to my client, if the Court pleases, because it would lead to a recovery against a wider band of people and hence, ultimately, prospects of greater recovery in regard to the damages.

GLEESON CJ: But did not the decision on that aspect of the case turn on the application of well-settled principles to the facts?

MR GRAY: No, with respect. If I might take the holding out aspect of the matter. The intermediate court identified that its view on the meaning of section 14 in the Partnership Act was at odds with both Fletcher & Higgins and Lindley. The critical words in the Partnership Act that need to be construed are what is meant by the "giving of credit" and the intermediate court took a very narrow view of that and a very restrictive view of that in a timing sense. The trial judge had taken a very, we would say, modern view about that that accorded with both the learned authors of Lindley and Fletcher & Higgins.

GLEESON CJ: The trial judge roped in all the national partners.

MR GRAY: Yes, he did. The trial judge found that on the facts there was, when properly understood, a carrying on of business in common with a view to profit. The intermediate court took a very narrow view of profit. Our case is that in this area of national, international professional firms, the conducting of business is done in a very different way than yesteryear. The profit is taken - - -

GLEESON CJ: It is done in a different way between different firms. It depends on the facts and circumstances of the particular firms.

MR GRAY: Indeed. So, ultimately, one is going to have to look to these principles on the facts. That is obviously self-evident but generally, business has changed in this regard and one has, for marketing purposes, professional firms holding themselves out as national organisations. In this case, for two decades, Nelson Wheeler deliberately set out to have the public believe they were a national partnership because it would bring to them national clients who wanted to deal with a national firm. That was their positive intent, explicitly found by the intermediate court to be so.

In this particular report it was an area which they focused for publicity because it was a public company work going to 18,000-odd shareholders or whatever the number was, and in the report itself, explicitly they say, "We are a national firm." Offices are identified throughout the country and elsewhere and Mr Pilmer, the author, is identified as being the managing partner of Perth.

Now, Justice Mullighan had no difficulty in finding that the ordinary reader would go to the bottom line and see who wrote the report and what he said and under qualifications, this expression was there, "a member of the national firm" with all this expertise so the reader would be comforted and supported by understanding that he was dealing with the sort of firm with experience and depth and not, for example, just a suburban firm who might not have that experience and depth. That was in there for a reason. It was in there to induce people to rely and on the principles that your Honour the Chief Justice identified in paragraph [324] on inferred reliance, they apply equally in that area.

This is a case where the primary facts are not in issue. We would argue the case out of the judgments. We would accept the primary findings. On the critical documents this Court would be in an equal position with the courts below to draw the inferences. In that sense it is quite a manageable matter. We would not be taking the Court through masses of evidence. That simply would not arise.

So the two points are, what does taking a profit mean, the partnership, in fact, in the 1990s, and on the holding out side, the estoppel side, what is the proper interpretation of section 14 of the Partnership Act? The intermediate court interprets it in terms of last century and does not bring into account modern notions. Then the question of reliance and we say there is an inconsistency between the reasoning of the court at page 280 paragraph [324] and what they do later. If they are right at [324] then there would have been further reliance later. They are the points we take in regard to what we call the national partnership issue.

That also leads into the issue of common law estoppel because that was also raised and we lost there because of the different inference the intermediate court drew from Justice Mullighan in regard to the particular representation and then on the question of reliance.

Might I just mention Queensland very briefly, Mr Jackson's clients. They were dealt with separately on the basis that they had retired from the firm. It was uncontested that there had been a notice of termination given in April, operating and active in December. The relevant events occurred in September. The letter of resignation spoke of "in December, unless earlier and otherwise agreed". The trial judge made a finding of an earlier agreement at a date. It was a date that at nowhere did the Queenslanders contend for. They contended for a whole variety of dates. It was not the date the judge chose. There was no evidence to support the date the judge chose.

What has happened, in fact, is that at the end of a month's appeal hearing, the intermediate court having heard our very full argument, the argument against Queensland for over a day, there are over 100 pages of written submissions analysing the material, the intermediate court has said, "We reject that. We find no fault on the trial judge's part." There is, essentially, no reasoning on that aspect of the case. It had become moot because they had found no national partnership for other reasons and, essentially, we say that in the administration of justice we were entitled to have those issues adjudicated on. All we have had is that they were rejected. As is put in Mr Jackson's submissions, the matters were thoroughly argued. They certainly were. There were, we would submit, very detailed arguments put that simply have not found any expression in the reasons at all so my client, as it were, has lost on that substantive issue.

GLEESON CJ: That is a sort of sub-issue of the national partnership issue.

MR GRAY: Yes, it is. We would need to have leave on national partnership and we would say that if we got leave on national partnership, this Court should carry with it the Queensland issue because the intermediate court simply did not deal with our major points. I mean, they have dealt with it, simply saying it is dismissed, but they have given, essentially, no reasons. Now, if the Court pleases, as events have transpired, I am having my answer to Mr Myers and my application for leave rolled into one. I do have one other major matter on damages I wish to address.

GLEESON CJ: Yes.

MR GRAY: If the Court pleases, it relates to the question of damages for interest or loss of use. What has happened in this matter is the trial judge gave statutory interest to my clients in respect of the entire period from the events until judgment and he did so in applying section 30c of the South Australian Supreme Court Act. Section 30c has its direct comparators in four other Australian States and the other States have different wording but have been essentially interpreted in the same way, so the point is of wide import throughout Australia. The intermediate court found that my client was not to be criticised for any time that passed before the issue of proceedings. Some three years passed before proceedings were issued.

GLEESON CJ: Go ahead and finish this point.

MR GRAY: Yes. There was no criticism in regard to that time. The finding is that the plaintiff is not to be criticised yet we lost, essentially, something that approaches to $40 million.

GLEESON CJ: On the basis of an exercise of discretion.

MR GRAY: On the basis of an exercise of discretion. The trial judge had allowed it to us. The intermediate court has disallowed it and it is something approaching between $30 and $40 million and it is in circumstances where there is a positive finding that my client is not to be criticised and what my client did was understandable.

Now, our short point is this, if the Court pleases. This Court has made it plain in a series of cases that statutory interest is compensatory in nature and is designed to effect restitution. In circumstances where my client cannot be criticised or blamed, how could we fall short on restitution by $40 million or by about between 20 to 25 per cent in those circumstances. Something has gone very wrong.

Now, if the Court pleases, we would say that this offer - this is a very discrete, narrow point, an isolated point. It would take, perhaps, half a day to argue and it would allow this Court to explore fully the juristic nature of statutory interest compared to damages. This Court has not done that yet. There have been a series of decisions but none have really grappled with this issue about whether the principles that guide the award of statutory interest should be the same as or differ from damages interests.

When it is understood, if the Court pleases, that both statutory interest and damages.....the same point, compensation and restitution, why, in principle, should there be a difference and we say if we are in the area of damages and the court found, "You, the plaintiff, can't be criticised; you, the plaintiff, acted in an understandable way." there could be no reduction on damages.

Now, if the Court pleases, the second point about it is, as I articulated in the special leave grounds, that there was an affidavit by the principal solicitor involved explaining that awareness of critical matters in regard to the Duke Case did not become known until several years into the investigations and that affidavit which was tendered at trial appears to have been overlooked by the intermediate court. That is the second factual point.

The primary point is one of principle and we would say this case offers a very good vehicle for this Court to explore fully this juristic nature of statutory damages, statutory interest and is it, in principle, any different than damages, should different principles guide it. On this point, on the exercise of discretion, we have suffered a loss of $40 million when the intermediate court has - - -

GLEESON CJ: You have mentioned that.

MR GRAY: Yes, if the Court pleases.

GLEESON CJ: Mr Jackson, you are caught up in the national partnership point, as I understand it. If we were not minded to grant leave in relation to the national partnership point generally, it would follow that we would not grant leave against your clients.

MR JACKSON: Indeed, your Honour. We do not wish to address any separate submissions on the national partnership issue.

GLEESON CJ: All right, we do not need to hear you. Now, Mr Hoile.

MR HOILE: We wish to make a brief submission in support of two aspects of our application only. The first is - - -

GLEESON CJ: Just remind us where you fit into the picture.

MR HOILE: Yes. We are an errant director. It may assist the Court to remind the Court that the findings against the directors essentially broke the directions into three groups.

McHUGH J: You are for the fourth respondent?

MR HOILE: I am for the applicant, Kevin Somes, and we are the seventh respondent on the notice of appeal. Group one was Harold Abbott, the architect, the driver, the generator, if one likes, of the takeover and all of its sequeli. There was a separate group, the independent directors, and we take our place as a third group. We were not the architect and not the driver of the scheme, but the findings are against us that we were involved and that we had knowledge when the scheme was first put to us that we should have followed that the scheme was not in the best interests of our shareholders. Those findings have been fairly reproduced in the answer to our application for leave and we do not quibble with those.

The two issues that we say merit consideration of special leave are, first of all, the question of the damages flowing to the plaintiff by reason of the issue of shares. We do not seek to put any further arguments than have been put by my learned, Mr Myers, QC. We would say this, that the facts of the case are a convenient vehicle for consideration of the issue. We would say that for these reasons: first of all, on any aspect of what one might call market value of the shares, either Kio Ora or the target, Western United, there are detailed findings, in effect, day-by-day findings, throughout the whole period as to what the value on market was and perhaps one could comment that that reflects also the events of what have been called the share crash. So, there is a convenient record throughout the whole year, 1987, of just what the market value of these two stocks were.

McHUGH J: But do not these cases always turn on their own facts? Supposing the shares are issued for worthless oil leases, is there no claim for damages on the part of the company which has issued the shares in return for the worthless oil leases?

MR HOILE: Well, we support the arguments generally that have been advanced by Mr Myers. We see the differences being the question of where the loss falls. Clearly, as has been argued, there is a clear case for losses to those who hold the shares. But when one comes to consider the question of the company suing itself for the loss said to be constituted by the allotment of its own shares, we say the question is more difficult and we do pick up on the point mentioned by Mr Myers, again, that the fundamental basis of valuation appears to have been, or, at least clearly was, a finding by the court that prior to the allotment of shares this company, Kio Ora, had about 70 million on issue. Its net assets were worth about 60 million, therefore, the net asset value of its shares was about 80 cents. Then that finding was adopted as being, as it were, the value of the allotted share. It is reminiscent of an expectation loss to say that it would be expected that a share would issue at a price roughly equivalent to the assets that one would expect would be obtained by it.

We do suggest and support that the arguments that have been mentioned are not free from doubt. We do concede that both the trial judge at first instance and the Full Court gave detailed consideration to the factual issues, so, in that sense, I would be bound to make the concession that the matter was looked at closely on its facts but we say the point of principle remains and is an appropriate one for consideration.

The other point we wish to make is that leaving aside the question of the market value of the shares, their value on other grounds is also very clearly and, without any argument before the court, through the vehicle of the report of Mr Easton whom the trial judge accepted and, again, on whom the Full Court relied. So, the Court would not lack findings as to market value and/or net asset backing of the shares of both companies throughout the whole period of the events concerned, if it were otherwise thought proper to grant special leave on the issue. We do not propose to say anything more in support of that appeal.

The other specific and narrow point which we wish to agitate is comprised by our question No 3: should compound interest be awarded as part of equitable damages in circumstances where there has been a clear finding that the money lost would not have been employed in a profitable business? Now, we must preface our submission here with a few concessions. First of all, we are an errant fiduciary. We concede that it is proper that damages be assessed us on the basis of the usual principles of equitable damages. We accept that that gives a large amount of discretion to a trial judge and then, again, a Full Court in doing so.

Our point that we would wish to agitate is simply this, that if, as we say, there was a finding by the trial judge that the history of this company showed that it was a speculative investor, a mining company, and the trial judge clearly put out of his mind the question of any further or other fraud, and he made the finding as a finding of fact that there could be no presumption that funds would be employed in the usual profitable way - in fact, the whole history of the operations of this company showed the reverse - well, we would suggest that, again, this is an appropriate vehicle for the Court to consider that question.

My friend, Mr Gray, QC, has argued that he seeks to agitate questions relating to the award of statutory interest. Ours is more limited than that, it is only the question of the compounding of the interest. As I say, I think it would not be right to advance that submission without the concession that we make that we are the errant fiduciary, we cannot appeal that finding.

So, whatever may be said, perhaps, on behalf of the client of Mr Myers, QC, who is an errant fiduciary but of a much lower order, well, we would accept that, in effect, we have been found to have been party to a fraud and that may weigh in the Court's consideration as to whether leave should be sought on such a narrow point. If the Court pleases, I cannot assist any further.

GLEESON CJ: Yes, thank you, Mr Hoile. Yes, Mr Myers.

MR MYERS: On the question of the issue of shares, it was dealt with as a discrete matter by the court. There was no loss of opportunity case put. The court says that twice at paragraphs 421 and 484. There is no issue of fact involved in this question of principle, none at all.

McHUGH J: But do you assert as an absolute rule that damages can never be recovered in the issue of shares?

MR MYERS: No, not as an absolute rule, your Honour. A loss of opportunity case might be different.

McHUGH J: Take the illustration I gave. Supposing the company doubles it share capital by issuing shares for worthless shares. In the books of the company, the liability side, capital has increased double; you have worthless assets there on the assets side. They have to be written off. So, the company suffers a loss in that sense, surely.

MR MYERS: In my respectful submission, it does not, your Honour. The shareholders suffer a loss. The company has the same assets before or after but the shareholders' share - if we just say the number of shares have been doubled - for no consideration, have been halved and the shareholders could sue. It is the shareholders who suffer the loss. It is they who should be compensated.

McHUGH J: What, on a contract to which they are not parties?

MR MYERS: Well, that may be a different case.

McHUGH J: That is part of the problem, is it not?

MR MYERS: Well, this is a case of negligent advice which was directed to the shareholders who suffered the loss.

McHUGH J: You are relying on your tort claim but you have your contract claim to get over here, have you not?

MR MYERS: In the end, the company did not suffer a loss. The shareholders did. The shareholders in this case - - -

McHUGH J: So, those who suffered the loss cannot sue because they are not a party to the contract and those who might technically have a right of action cannot sue because they have suffered no damage?

MR MYERS: Well, the bare hypothetical case that your Honour puts is very bare, but if the directors did that then there may well be a case against the directors. There may well be a case against the directors. It is true that this issue of principle arises in a particular context of facts but the particular context here is really clear and there is no dispute as to facts. That is the proposition that I am advancing. One is hesitant to say never but, as a matter of principle, it is the shareholders who suffered this loss, not the company and the absurd results that follow and the unjust results that follow by reason of the company making the claim really do require the Court to look at this. In this case, my clients are responsible for an extra $56 million in damages.

McHUGH J: Yes, I know, but it is a liability of a company. When it doubles its capital, say, and in the books of the company the issue of the share capital is a liability, it is a liability because it is liable to its shareholders for that sum.

MR MYERS: In my respectful submission, it is not, and that is the error of the nominal value of shares and what your Honour has said, in my respectful submission, is not so.

Now, the question of causation, I just want to say one thing. The court decided there was no duty to protect against the acts of the directors. The directors deliberately and dishonestly went ahead and did something and, yet, it is said that the chain of causation is not broken, there is no novus actus. That, we say, is plainly wrong and there is an issue of principle involved there.

The question of damages for interest. My learned friend, Mr Gray, dealt with that. It is purely a discretionary matter. The judge below at first instance made a mistake. He said that in calculating statutory interest against Nelson Wheeler, one took - - -

GLEESON CJ: We do not need to hear you on this, Mr Myers.

MR MYERS: Thank you. If the Court pleases, I have no further submissions.

GLEESON CJ: We will adjourn for a short time to consider the course that we will take in this matter.

AT 10.32 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.35 AM:

GLEESON CJ: Mr Myers, which is the ground of appeal in your draft notice of appeal that raises the issue of damages arising from the allotment of shares?

MR MYERS: Page 81, your Honour.

GLEESON CJ: Page 81?

MR MYERS: I hope I am right. Yes, 15 and, we would say 16 as well,

McHUGH J: Mr Myers, paragraph 16 of that notice of appeal would seem to get us into the evidence.

MR MYERS: No, with respect, your Honour. The evidence on this point is not in dispute. The figures are really clear. There is $55 million or $56 million of assets; 67 million shares; 67 million further shares issued and allotted. It does not get one into a controversy as to evidence.

GLEESON CJ: What do you say about that, Mr Gray?

MR GRAY: There is limited controversy on that but it is limited. As I understand it, that ground is aimed at seeking to restore the trial judge's assessment rather than the intermediate court. It is a different issue entirely that is being addressed. The point of principle is governed by 15. The other one does go into a different issue in the case entirely.

GLEESON CJ: Mr Hoile, have you a proposed ground of appeal in the same terms as 15?

MR HOILE: I have a proposed ground; perhaps not in the same terms. We would be prepared to settle for the one articulated ground.

McHUGH J: Where is your ground?

MR HOILE: And we would not be looking for any different expression of the point.

GLEESON CJ: Well then, we are minded to make a grant of special leave but limited to ground 15 in your proposed notice of appeal. I will give some brief reasons for the way we are disposing of the other aspects of the matter.

For the most part, and subject to one qualification to be mentioned later, the decision of the Full Court of the Supreme Court of South Australia turned upon the application of well-established principles of law to the particular facts and circumstances of the case which were, in a number of respects, unusual. To the relatively limited extent to which the case raised issues in respect of which the Full Court was not bound by existing authority, the resolution of those issues was closely affected by the special facts and circumstances of the case and turned upon findings of fact or the exercise of discretion. In relation to the issue of reliance, there are concurrent findings of facts against the applicants.

Subject to the qualification I mentioned earlier, the case does not raise questions suitable for a grant of special leave and the Court is not persuaded that the ultimate findings of the Full Court are attended by sufficient doubt to warrant the conclusion that the interests of justice require a grant of special leave.

The qualification concerns the issue raised in paragraph 15 of the draft notice of appeal in the application of Pilmer & Ors. There is a similar ground in the draft notice of appeal in the application of Somes. In both of those matters, leave to appeal is granted, limited to the issue set out in paragraph 15 of the draft notice of appeal in the application of Pilmer & Ors.

Now, what do people want to say in relation to the costs? We will say nothing about the costs of - - -

MR MYERS: Well, the second matter, A24, that was my friend Mr Gray's application, that was unsuccessful and we seek our costs.

MR JACKSON: We do, your Honours.

GLEESON CJ: Mr Myers, everybody else, except Mr Jackson, has had mixed success and failure. Does that not suggest that we should make an order that Mr Jackson's clients' costs should be paid by the Duke Group Limited but that subject to that, there should be no order as to the costs of any parties?

MR MYERS: I do not say anything against it.

GLEESON CJ: In relation to the matter of costs, the order that the Court will make is that the costs of the second respondents, Gay, Lavis and Taylor, in the application by the Duke Group Limited, should be paid by the Duke Group Limited. Subject to that, there should be no order as to costs in relation to any of the other parties in any of the other applications.

McHUGH J: Mr Gray, the matter of Swiss Partners v Jeffcott Holdings that came before the Court on Friday raises an almost identical point, does it not?

MR GRAY: It does, your Honour. It also raises a simple share swap compared to a share and another consideration case. It raises the same principal point and, in some ways, it throws up a difference that might be material.

McHUGH J: Yes. Well, perhaps it might be important to get the special leave application - and I know you are the respondent in that case, are you not?

MR GRAY: Yes.

McHUGH J: It might be important to get that special leave application on. It would be desirable that both matters be heard together if leave is granted in the Jeffcott matter.

MR GRAY: Yes. If the Court wished to hear that matter on 10 December in Sydney, we could be available to attend then, if that was convenient to the Court. I think Mr Karkar's junior indicated they will be seeking the earliest date practicable. So, if that was of assistance to the Court, we would be available.

GLEESON CJ: Justice McHugh is managing that matter.

In relation to the matter of the stay of proceedings or the continuation of the stay of proceedings, as I understand it - correct me if I am wrong - the consequence of the limited grant of special leave is that there will be a question as to the continuation of that stay. Is that right?

MR GRAY: It will be an issue, if the Court pleases. We say the judgment will remain; would need, in the circumstances, if there was any stay, a limited stay.

GLEESON CJ: Now, I think it was indicated to the parties by the Registrar that there will be a judge made available - I expect it will be Justice McHugh - in Canberra during the next week or so to deal with that by a video link application. I understand that the representation is different.

MR GRAY: Yes.

GLEESON CJ: Is there any problem about agreeing on a continuation of the stay in the meantime?

MR GRAY: I expect none at all, if the Court pleases. No, there is no difficulty, if the Court pleases.

GLEESON CJ: Well then, is it sufficient if I say that it is understood that there will be a contested application concerning a continuation of the stay of proceedings that was granted by the Full Court - - -?

MR GRAY: Yes. It was by Chief Justice Doyle.

GLEESON CJ: By the Chief Justice of South Australia and that contested application will be listed for hearing by video link in Canberra. It is expected that it will be listed during the current sittings in Canberra which will last for a fortnight. By consent, until the determination of that application, the stay granted by Chief Justice Doyle is continued.

MR GRAY: It is on the assumption that the undertakings that lay behind that stay continue, my clients - my instructions are to indicate our consent to that.

GLEESON CJ: Does somebody have instructions to continue those undertakings?

MR W.J.N. WELLS, QC: Yes, if the Court pleases. If the Court pleases, I appear for the Nelson Wheeler Perth Partners on the stay application. (instructed by Holding Redlich)

GLEESON CJ: All right. Well, you continue those undertakings?

MR WELLS: Yes, they are conditions, your Honour, of the present stay and a couple of those conditions are in the form of undertakings.

GLEESON CJ: Does the order that has just been made then solve your problem in the meantime?

MR WELLS: It certainly solves it for today, your Honour, yes.

GLEESON CJ: Very well.

AT 10.47 AM THE MATTER WAS CONCLUDED