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Pilmer & Ors v Duke Group Ltd (In Liq) & Ors A46/1999 [2000] HCATrans 157 (7 April 2000)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A46 of 1999

B e t w e e n -

ANGUS CLAYMORE PILMER

First Appellant

ALAN ROBERT CRAWFORD

Second Appellant

DOMENIC VINCENT MARTINO

Third Appellant

PETER JOHN MESSER

Fourth Appellant

PETER LAWSON MUNACHEN

Fifth Appellant

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

Sixth Respondents

ROBERT JOHN GRAY

Seventh Appellant

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

McHUGH J

GUMMOW J

KIRBY J

HAYNE J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 7 APRIL 2000, AT 10.21 AM

Copyright in the High Court of Australia

________________

MR A.J. MYERS, QC: May it please the Court, I appear with MR P. ZAPPIA on behalf of the appellants. (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 respondent. (instructed by Fisher Jeffries)

McHUGH J: Before you commence, Mr Myers, in this matter I hold a certificate from the Senior Registrar of the High Court which indicates that she has been informed by Messrs Johnson Winter & Slattery that Francis Anthony Quilty, the firstnamed second respondent, does not intend to appear or make submissions on the hearing of this appeal. Messrs Johnson Winter & Slattery are no longer instructed by Keith Daniel Singleton, the secondnamed respondent. No appearance has been filed on behalf of Harold Abbott, the third respondent.

The Senior Registrar has 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 this appeal and will submit to the orders of the Court, save as to costs.

The Senior Registrar has been informed by Messrs Hume Taylor & Co that Kevin Clarence Somes and Sir Ernest Lee-Steere, the fourth respondents, will not be appearing at the hearing of this appeal.

The Senior Registrar has also been informed by Messrs Phillips Fox that there will be no appearance for the fifth respondents at the hearing of the appeal. However, Messrs Phillips Fox have been unable to obtain instructions from Gordon Maxwell Tremain, the thirty-seventh named fifth respondent.

Yes, Mr Myers.

MR MYERS: Thank you. Your Honours, the central facts in this appeal can be stated very succinctly. There are just a few figures which the Court might have in

mind. Before the takeover, which is the subject of the appeal, Kia Ora had assets of $56 million - I am using approximate figures, but they are true within one million - and had 68 million shares on issue. In the takeover it paid out $26 million in cash and it issued 68 million new shares. So the number of shares doubled, within a few hundred thousand, and it got assets which the Court below found were worth $6 million. Before the takeover, Kia Ora was a cash box; its assets were cash for all practical purposes.

McHUGH J: Having regard to its share price, it was quite an investment as a cash box company as at that point of time.

MR MYERS: Well, as at that point of time, your Honour, cash box companies were a bit of a drug on the market. What had happened was that shortlyMR MYERS: We respectfully agree with your Honour's remarks and one of the things that I was going to go on and point out is that where the Full Court speaks of consideration, and my learned friends adopt the same terminology in their outline, consideration is not the same thing as loss. Consideration can be a benefit conferred as well as a detriment suffered. It is so plain that it hardly bears repeating, yet there is a constant emphasis on the value of the consideration, as it were. If I could just - - -

McHUGH J: Just on this point perhaps you can help me. The Full Court placed emphasis on the fact that upon - and they used the term "the issue" of the shares - but is "issue" the relevant term as opposed to "allotment" and is there any distinction? I mean, do the shares have any value before they are actually allotted and at that stage is the value that of the allot owned by the allottee?

MR MYERS: In my respectful submission, no. One can get into rather scholastic arguments about the difference between issue and allotment and one knows that the terms are not always consistently used and so on, but until there is a shareholder, that is someone registered, there is no person who has the right which the share constitutes. It is sometimes said that the shares exist as soon as the authorised capital is created and in a sense they do, but not in the sense that one is talking about them, as I apprehend your Honour is now, in the sense of describing a bundle of rights, a fasciculus of rights that exist between shareholders and between the company as a separate legal entity and shareholders.

Can I go back just to the loss of opportunity and, your Honour Justice Callinan, I accept that a word or a tag like "loss of opportunity" can sometimes be a blunt instrument to describe a particular set of facts, but in the instance that your Honour is putting to me, in my respectful submission, it near enough does the job for common discourse because what one is saying is that by issuing these shares one could not go out and issue some more shares to take over a valuable company.

CALLINAN J: Well, not only that. The company itself is a much less valuable commodity and would lose attraction to the extent of what it has paid out to another company that might want to take it over.

MR MYERS: Well, in a sense the company may be a much less valuable commodity but the company's assets have not been reduced. The company's assets have increased. What the company has is more share capital, issued share capital.

CALLINAN J: Does not that make it a less attractive takeover target?

MR MYERS: Well, that would be a matter for the market to determine and really this is what Justice Hayne is referring to.

HAYNE J: And for the market to determine in relation to the position of the shareholder. A shareholder may have something of greater or less value according to the transaction.

MR MYERS: Yes.

McHUGH J: We have got to be very careful here not to treat this as if it was a partnership which was selling an interest.

MR MYERS: Quite so. You either recognise the existence of the company or you do not. Once you recognise the existence of the company, some consequences follow and one also cannot get too enmeshed in the conceptions of nominal capital either. I accept that for the purposes of my argument. May I just refer your Honours to pages 14 and 15 of the outline where the loss of opportunity is dealt with.

before the share crash, a great number of companies had been capitalised with cash to exploit the boom - one may say it has even happened again recently - and then with the crash, you could not do anything with them. Many of them were simply wound up and the cash distributed and others, of course, the cash was dissipated.

The decision of the Full Court below awarded $20 million plus $56 million for the shares. The $20 million is easy to understand: it is the difference between the $26 million that is paid out in cash and the $6 million that remains. But, in addition, there was an element of the award of damages for the shares. Thus, before the transaction, the company had about $56 million in assets and 68 million shares. After the transaction, its assets were doubled and its shares were doubled. The transaction reduced the net assets of the company by about $20 million, yet the company got $76 million, this is before interest, by way of compensatory damages. The takeover transaction, by doubling the number of shares on issue, maybe one can say, approximately, would have halved the value of each existing share before the transaction, so that each existing shareholder suffered a loss equal to one half of the value of each existing share.

One assumes that the effect of the decision below is that none of those shareholders would be entitled to sue for that loss. It is almost inconceivable that they would be so entitled otherwise, on any view of things, there would be double compensation. The next thing that one can point out is that the persons who benefit from the award of damages so far as it relates to the issue of shares include the persons who benefited when they got too much for their Western United shares in the original transaction.

We know that they to some extent, probably a very large extent, but I can say to some extent are not only people who benefited twice or potentially benefited twice but they are the very wrongdoers, that is the directors who were incompetent or dishonest, who took the company into this transaction.

McHUGH J: Well, these are your points of prejudice, but do they really advance the legal analysis any more than Mr Gray's argument that if you had issued these shares for cash and then purchased the shares in Western Mining you would have no complaint?

MR MYERS: Your Honour, this is one of those cases in which I want to say that the result is so startling and it brings about such an injustice that it must be wrong and that is the purpose of saying that. The case that was pleaded below is worth looking at at this point. It is at page 348 of volume 2 of the appeal book. The pleadings occupy two volumes of the appeal book and they are somewhat discursive, but at page 348 in paragraph 98 one sees this pleading:

In consequence of the breach of contract and negligence of Nelson Wheeler particularised above Kia Ora paid consideration in implementation of the takeover.

The consideration comprised cash of $25,696,129 and 67,951,751 shares in Kia Ora valued at $1.10 per share being the price assessed by Nelson Wheeler as the price of Kia Ora's shares at the date of preparing their report.

In consequence of the matters referred to in paragraph 98 above, Kia Ora has suffered the following loss and damage which was within the contemplation of Nelson Wheeler at all material times:

the amount of $85,443,058 being the difference between the amount of $100,443,058 paid by Kia Ora for all of the issued capital.....and the value of Western United at the date of the takeover......$15,000,000.

Well, in fact, the value was ultimately assessed to be $6 million and the $100 million is made up of the cash plus the 68 million shares multiplied by $1.10 each. That is how it was pleaded. The trial judge, Mr Justice Mulligan, awarded, in respect of the issue of shares, $30 million being 45 cents per share. It is explained in our outline of argument how his Honour calculated this. In fact, 45 cents per share, on the evidence, was the price of the shares on the stock market on 31 December, being the date at which his Honour assessed the loss. The Full Court - - -

McHUGH J: The full transaction was not completed until after that date, was it?

MR MYERS: No, it was not, but that was the date as at which his Honour assessed the damages.

McHUGH J: Yes.

MR MYERS: The full transaction was not completed until towards the end of January.

McHUGH J: I do not think it matters, but was there any material difference in the share price at the time of the compulsory acquisitions? There was a compulsory acquisition for the remaining couple of per cent.

MR MYERS: Yes, there was.

McHUGH J: I do not think it makes much difference.

MR MYERS: I will have a look, your Honour. I do know that in the judgment the 45 cents is referred to and I thought I had written down the reference and my learned junior might find it in a moment. Yes. This is in Justice Mulligan's reasons for decision. At page 399 at line 48 at 31 December 1987 the "share market price is 45 cents." And then his Honour goes on to calculate a price in a manner that is set out at the bottom of 399 and the top of 400 which arrives, one might say, coincidentally, I am not sure, at the same value.

The Full Court took a different approach. The Full Court divided the cash or the assets of Kia Ora as determined by Mr Easton, an accountant, by the number of shares before the takeover transaction occurred and that resulted in a value of 82 cents per share. That is arithmetic that one can easily do in an approximate way by dividing 56 million by 68 million.

In our submission, the Full Court's decision was wrong. The question for the court was whether the company, by the issue of shares, suffered a loss. One asks: what is the loss? Not its monetary amount, but how does the loss arise? How does one describe it? What is its identity? It could be a loss of the assets of the company, meaning the net assets of the company. That is one candidate. It could be a loss of opportunity that the company had. It could be a loss of expectation. It could conceivably be something else, but they are the three candidates that have been examined thus far.

McHUGH J: One thought that occurred to me - and perhaps it assists you more than your opponent - is that the real loss here is a loss of shareholders' funds when one works out the total transaction. Let me give you an illustration. Supposing you have a company with $100,000 worth of assets and issued capital, shareholders' funds on the other side of the balance sheet of $100,000, You then have an issue of 100,000 shares in return for assets of 100,000, so nominally shareholders' funds are 200,000, and on the assets side you would have $200,000 worth of assets. But let us assume that the assets that were obtained for that extra issue are only worth 10,000, so realistically you have $110,000 worth of assets after making the appropriate write-down and shareholders' funds necessarily also come down by the equivalent 90,000. So the net result is that the shareholders' funds are now 110,000 and the assets are 110,000, but I think you would say that the change in the shareholders' funds or the writing down has nothing to do with the company as such. It is the shareholders' interests in those funds which are affected, not the company's assets.

MR MYERS: The writing down does not have any effect, yes, I would say that. We are not contending in this case that if a company has suffered a loss the company should not be able to recover that loss. What we are saying is that merely by the issue of shares the company does not suffer a loss. What we are saying is that where, as here, the shareholders' capital has been doubled and there has been no compensating asset acquired, just looking at it from the point of view of a loss, the company has not suffered a loss. The company's assets have not changed but the value of each of the shareholders' assets has halved.

We go further, and I will go back to the question of justice. We say that justice requires that the shareholders should be able to sue. It is not the company that should sue because it is the shareholders who suffered a loss. They did not just suffer a derivative loss. It was not a loss that the shareholders suffered by virtue of the company suffering a loss. This is a loss that the shareholders suffered because the number of shares was doubled. Instead of having the whole of the interest in the company, instead of having the whole of the shareholders' funds, for example, as Mr Justice Dixon might have said in Archibald Howie, they have only half the shareholders' funds.

McHUGH J: Yes, their shareholding is diluted.

CALLINAN J: Mr Myers, say that there were another company other than Western, which was truly worth what Nelson Wheeler said Western was, in fact, worth, say there was such a company, then by doing the deal, as it were, that Kia Ora did, Kia Ora lost the capacity to do a deal which would have put it in the position that it would have been in had Western been of the value that Nelson Wheeler said it was. Is that not a loss to the company?

MR MYERS: That is a loss of an opportunity case. May I just say something - - -

CALLINAN J: It might be more than that, it might be a loss of value to the company. It may not be a loss of opportunity. It may be something you can value.

MR MYERS: The value of the company before the transaction is the value that one needs to look at, in my respectful submission, because the question is: what is the loss to the company by this transaction?

CALLINAN J: It is a loss of leverage, in a sense, is it not? The company loses that leverage that it had to do other remunerative deals.

MR MYERS: It has lost the capability, if you want to call it that, but it is capability in a commercial sense only, it is not capability in a legal sense; it can continue to issue shares as it wishes.

CALLINAN J: Well, why should not the law give value to that capability, or capacity?

MR MYERS: Maybe the law does give value to that capability, but there are some things in this case that mean that it does not arise. First of all it was not pleaded. I have read the pleading. It was not a case that was run. There is no basis for it in the evidence. I will just take you to one passage of evidence. But we dealt with it in our outline at paragraphs 69 and following - - -

CALLINAN J: But that depends upon my accepting - you say you deal with it in your outline - it depends upon your characterisation of this as a loss of opportunity being correct. I am not sure that that is correct at the moment. I am not saying it is wrong, but I am not satisfied that it is simply a lost opportunity.

HAYNE J: And it also invites attention, if you are to embark on the loss of opportunity analysis, to identify the loss. What is the hypothesis for the loss? Is the hypothesis for the loss no recompense for the cash paid out? What are the hypothesis against which you are assessing whether some opportunity has been lost?

MR MYERS: Precisely, your Honour. These matters simply were not examined.

McHUGH J: Also, Mr Myers, the fact that something may constitute consideration does not mean that there is a loss in a reliance sense. For example, you may say to me, "I will pay you $10,000 if you will consent to your daughter marrying me".

MR MYERS: I have two daughters, your Honour, which - - -

McHUGH J: And you do not go ahead with the transaction. Now I have suffered no loss except in an expectation sense, but I am no worse off immediately after your repudiation of the agreement in terms of what I was before. What I have lost is the expectation that you would be paying me $10,000, but I have suffered no loss in a reliance sense.

MR MYERS: We respectfully agree with your Honour's remarks and one of the things that I was going to go on and point out is that where the Full Court speaks of consideration, and my learned friends adopt the same terminology in their outline, consideration is not the same thing as loss. Consideration can be a benefit conferred as well as a detriment suffered. It is so plain that it hardly bears repeating, yet there is a constant emphasis on the value of the consideration, as it were. If I could just - - -

McHUGH J: Just on this point perhaps you can help me. The Full Court placed emphasis on the fact that upon - and they used the term "the issue" of the shares - but is "issue" the relevant term as opposed to "allotment" and is there any distinction? I mean, do the shares have any value before they are actually allotted and at that stage is the value that of the allot owned by the allottee?

MR MYERS: In my respectful submission, no. One can get into rather scholastic arguments about the difference between issue and allotment and one knows that the terms are not always consistently used and so on, but until there is a shareholder, that is someone registered, there is no person who has the right which the share constitutes. It is sometimes said that the shares exist as soon as the authorised capital is created and in a sense they do, but not in the sense that one is talking about them, as I apprehend your Honour is now, in the sense of describing a bundle of rights, a fasciculus of rights that exist between shareholders and between the company as a separate legal entity and shareholders.

Can I go back just to the loss of opportunity and, your Honour Justice Callinan, I accept that a word or a tag like "loss of opportunity" can sometimes be a blunt instrument to describe a particular set of facts, but in the instance that your Honour is putting to me, in my respectful submission, it near enough does the job for common discourse because what one is saying is that by issuing these shares one could not go out and issue some more shares to take over a valuable company.

CALLINAN J: Well, not only that. The company itself is a much less valuable commodity and would lose attraction to the extent of what it has paid out to another company that might want to take it over.

MR MYERS: Well, in a sense the company may be a much less valuable commodity but the company's assets have not been reduced. The company's assets have increased. What the company has is more share capital, issued share capital.

CALLINAN J: Does not that make it a less attractive takeover target?

MR MYERS: Well, that would be a matter for the market to determine and really this is what Justice Hayne is referring to.

HAYNE J: And for the market to determine in relation to the position of the shareholder. A shareholder may have something of greater or less value according to the transaction.

MR MYERS: Yes.

McHUGH J: We have got to be very careful here not to treat this as if it was a partnership which was selling an interest.

MR MYERS: Quite so. You either recognise the existence of the company or you do not. Once you recognise the existence of the company, some consequences follow and one also cannot get too enmeshed in the conceptions of nominal capital either. I accept that for the purposes of my argument. May I just refer your Honours to pages 14 and 15 of the outline where the loss of opportunity is dealt with.

I would just like to draw your Honours' attention to just a few of those paragraphs. We say in 69 a claim for loss of opportunity was not pleaded, nor conducted, nor proved. The following reasoning of the Full Court demonstrates its error in deciding the question on the basis of Kia Ora having suffered a loss of opportunity.

Another way of expressing the same point is to say that in the events that happened Kia Ora lost the opportunity to exploit or to receive the value of the shares that it allotted in itself. That was certainly an opportunity that it had. The ability to exploit or receive that value from the shareholder in Western United has now been irretrievably lost.

All that means is that you cannot issue the same shares again. So?

A loss of opportunity case was neither pleaded nor conducted by Kia Ora. Moreover, a claim based on loss of opportunity was not established on the evidence. The findings of the trial judge and the Full Court were unequivocal in this respect. The trial judge found:

There is no evidence to suggest that Kia Ora would, or even might have issued the shares otherwise than for the takeover of Western United. It is very unlikely that it would have done so.

CALLINAN J: Well, just stop there for a moment. Why would you need evidence of that. You have a company that is a cash box. It is either a very attractive target or it has leverage because it has got cash to do this sort of transaction. It does not have to be a transaction with Western United. I am not saying that what I am putting you is an answer necessarily to your argument against this being a lost opportunity, but I am just challenging the proposition that you need evidence that the company would have entered into some other transaction.

MR MYERS: No. If you were going to run a case like this, you would want a lot of evidence about the history and prospects of this company: the nature of the stock market, the whole commercial milieu in which the transaction occurred.

CALLINAN J: No, not necessarily. You can just look at the transaction in question and premise, instead of a fraudulent transaction of that kind, a legitimate transaction of that kind, and compare what happened with what would have happened had the transaction not been fraudulent, but had been legitimate. Why would that not be evidence?

MR MYERS: If the transaction had been legitimate in the sense that this report had not been written, and this is the case, there would have been no transaction. The whole argument - - -

CALLINAN J: Well, it would not have been a transaction at that time of this kind, but there might have been a transaction of exactly this kind a day later or a month later.

MR MYERS: But there was no evidence that there was any ability or inclination to do that.

CALLINAN J: But that there was an inclination is to be found in the fact of the transaction which was a fraudulent transaction.

MR MYERS: What the Full Court found, your Honour, in a sense, deals with this, I think. The Full Court found:

a claim based on a lost opportunity would require a finding that had this transaction not proceeded, Kia Ora would have raised capital in some other way. No such finding was made.....As we have mentioned, no such finding was made, and it has not been established that such a finding should have been made.

They go on:

The only basis, in our opinion, for an award under this head would be a finding that if the takeover of Western United had not proceeded, Kia Ora would have allotted shares for cash, and thus raised funds that would have been invested profitably, presumably by placing them on deposit with Western United or by acquiring some other profitable asset.....The judge found that Kia Ora would not have made such an allotment. We agree. In the prevailing climate, we consider it unlikely that Kia Ora could or would have made an allotment of shares for cash.

Mr Easton, some of whose evidence is reproduced in the - - -

CALLINAN J: Let me immediately accept that for present purposes, Mr Myers, but what about its attractions as a target?

MR MYERS: Well, the thing is that the case was not conducted this way. There was not an examination in the evidence about that, not to any degree. There was a little bit of evidence. In the appeal book at pages 537 to 538, there is one particular passage, that is volume 3.

I think I can say to your Honours that the passage of cross-examination of Mr Easton by Mr Mansfield begins at page 537. If one reads from "Question Allowed", but I will cut immediately to the chase and get to where the real answer is made. On page 538 at line 22:

Q. What I'm putting to you -

and we can ignore the words in parentheses-

is that as a fact, on the evidence you have given as to the impact of the stock market crash, it is in the highest degree unlikely that Kia Ora, between October and December 1987, would have been able to place into the market, by issuing for cash, 57.95 million shares and receive cash of 75 cents for them.

A. Yes, put that way, I agree with that.

So, so far as the evidence exists, it does support the holding of the Full Court that I have read, that it is unlikely that Kia Ora could have made an allotment of shares for cash even at 75 cents, let alone 82 cents. One might think of any amount because cash boxes were a drug on the market. Unless you had a business, all you could do was wind up your company and return the cash to the shareholders.

The other way in which it might be put is that some expectation that Kia Ora had was defeated in the transaction and this has a value of 56 million dollars for which compensatory damages should be given. No such case was put below and it has not been advanced on the appeal. In fact, it is disavowed in paragraph 16.6 of the outline. That leaves one with the question, what is this loss? It is not a loss of opportunity. It is not an expectation loss. What is it? It certainly is not a loss of net assets. The answer, in our respectful submission, is to be found in the reasoning of the Full Court and if I could take your Honours to paragraph 202, which is at page 262 of the reasons, this is what underlies everything that followed hereafter:

There is no perfect solution here. But, in our opinion, requiring individual shareholders to sue is an unattractive means of remedying the injustice, if one acknowledges that there is one.

So this is a surrogate for having individual shareholders sued.

GUMMOW J: I am sorry, what paragraph was that?

MR MYERS: Paragraph 202 on page 262.

GUMMOW J: Yes, I see.

MR MYERS: I have the Australian Corporations and Securities Reports which I understood the Court was going to look at.

GUMMOW J: Yes, we have it here. We do have it.

MR MYERS: But I will refer to paragraph numbers as well. Now, with respect to the learned judges below - - -

GUMMOW J: That is not what the legal system is about really. It is all about giving effect to rights, not inventing them.

MR MYERS: In our respectful submission, so. But I say this with the utmost respect to the judges of the Full Court below. It is very difficult to grasp exactly what it is that the loss is said to be. I have counted up the conceptions of value that are referred to, sometimes in the same sentence or paragraph. Transaction value is referred to - I will not give your Honours references to it, it does not matter - market value; monetary value; net asset backing; expected value; value according to each Western United Ltd shareholder and simply value at various points.

The main paragraphs in which the reasoning is elucidated appear to us to be paragraph 433 - I hesitate to say main paragraphs but these seem to state the conclusions - and that is on page 299, your Honours. In our opinion the argument advanced there, and this is an argument advanced in a learned article in the Law Quarterly Review by Mr Oditah and which the judges rightly say had some considerable similarity to the argument advanced by the appellants here.

In our opinion the argument there advanced fails to pay sufficient attention to the fact that, upon allotment of shares, a consideration moved from Kia Ora that was equal to the transaction value of the shares, and that this consideration was irretrievably lost.

There is a confusion of consideration and loss. Again, with respect, it is difficult to conceive what is meant by the "consideration was irretrievably lost". Certainly, the company gave consideration but it did not thereby lose anything. If you are talking about value, in the sense of economic value, the persons who lost something were the shareholders, not the company. The court below is confusing an economic concept with a legal concept. They are just different. That is all.

McHUGH J: That is part of the problem with that paragraph 202, that although justice may be done in the sense that the wrongdoers are required to disgorge, that nevertheless the fact is that it does not necessarily mean that the true sufferers of the loss are compensated because the shareholders will not be the same, or will not necessarily be the same at a later stage.

MR MYERS: There is no evidence upon which one could found the proposition that a single shareholder who suffered loss is compensated as a result of this. One does not know how many shares were held by the directors, that is to say how many of the Western United shares were held by the Kia Ora directors or their associates.

McHUGH J: I thought there was a figure, somewhere around 75 per cent.

MR MYERS: There are a lot of figures but they range from 15 per cent to 85 per cent.

McHUGH J: Yes.

MR MYERS: Things were a bit murky in these companies, and there was a Mr Schneider-Paas who passed away before the action came to trial, a German gentleman who did not reside in Australia who had a very big interest in these companies as well as the directors, and he was an associate of the directors. I think the evidence establishes that he really put the directors up.

But, in any event, one does not know how many of the shares belong to the wrongdoers or their associates. One does not know how many shareholders in Kia Ora decided to hang on to their shares and not sell them. If one is a shareholder of Kia Ora and one gets the 3J(3) report, what you do is decide you go with the transaction on the basis of the 3J(3) report, or if you do not like it, then you sell your shares.

Now, it is only the persons who - I am putting it colloquially - decide to hang on to their shares in Kia Ora on the basis of the report, who should be able to recover. It is not the wrongdoers.

GUMMOW J: Now, what was the basis on which these damages were being awarded and assessed? What was the wrong, on the part of your clients?

MR MYERS: The wrong was writing an incompetent - - -

GUMMOW J: Was it in tort?

MR MYERS: Tort and contract. Contract is relied upon now. There was also breach of fiduciary duty. I understand that what is relied upon here now is contract because of Austrust v Astley.

GUMMOW J: See, I mean, take the Regal (Hastings) problem, for example, where the directors have to hand over the profits. It has always been said to be curious that the people who got the advantage out of that were the new batch of shareholders.

MR MYERS: Yes. That is because there was a wrong done to the company.

GUMMOW J: Yes.

MR MYERS: Here, I am contending there is really wrong done to the - - -

GUMMOW J: By the making of the profit?

MR MYERS: Yes, by the making of profit, yes, your Honour.

McHUGH J: It was the company's profit.

MR MYERS: Yes, it was the company's profit. What I am really saying here is that the loss that is suffered is not the loss that the company suffers. A loss is an economic conception we are talking about here. It is not the company's loss. It is the shareholder's loss, whose shares have been diluted, and those who should be able to recover are those shareholders whose shares were diluted and who decided to stay on in the company on the basis of the 3J(3) report.

Yet there is no evidence that there is a single one of them, not a single one. But what happened is that undoubtedly there were shares owned by the wrongdoing directors. They got too much for their Western United shares by a very large margin and then when the company is compensated, they get a second lick. So it is not a just result. Those who suffer the loss are precluded from suing, those who caused the loss get a double benefit and the persons who have to compensate for the loss pay a sum of money which is far and away too large, or it might be far and away too large; we do not know.

Could I just take your Honours to another passage. It is in paragraphs [475] to [476] on page 306. This again seems to be the summation of some reasoning. Paragraph [475] starts on page 305. Perhaps it is best to read it, although it is the end of the paragraph that is most important:

It has to be remembered that the purpose of the award of damages is to put Kia Ora in the position in which it would have been had the wrong not occurred.

It certainly does not do that. It puts it in the position where it has $56 million more worth of assets than it had before.

This requires the court to assess the difference between the price paid and the value of what was received.

So price paid is a consideration concept again.

For present purposes the price paid has two components. They are the cash component of $26,178,135.81, and the shares allotted to the vendors of shares in Western United. A monetary value has to be attributed to those shares.

One asks rhetorically why?

The judge has found that the value of a share in Kia Ora, prior to the allotment of further shares, was 82c.

HAYNE J: Value to whom?

MR MYERS: Quite so, your Honour, and that is the consideration point again.

It seems to us that Kia Ora entered into the transaction on the basis that in return for the shares allotted, it would receive a consideration at least equivalent to the value of the existing shares in Kia Ora.

That is an expectation loss.

Harking back to what Lord Green MR said in Osborne v Steel Barrel Co Ltd, what Kia Ora gave up was the right to call on the allottees of shares for payment of an amount equal to the then value of a share in Kia Ora.

It is not clear whether their Honours are using "right" in the sense of a legal right or an opportunity. By entering into the transaction, certainly Kia Ora accepted that it would get, instead of cash for the shares, some shares in Western United. To say that it gave up that right is, in one sense we say, not strictly correct. One has to take the transaction as a whole. One has to look at what was on offer. What was on offer, and it was the only thing that was ever on offer, was a takeover on certain terms. Then their Honours go on in [476]:

Arriving at the value of the shares allotted is complicated by the fact that the value of those shares, after the transaction is completed, is affected by and reflects the value of the assets acquired by Kia Ora. But, in our opinion, for the purposes of assessing damages it is proper to take the approach that we have taken.

Which is to say shares are worth 82 cents.

Indeed, unless such an approach is taken, the paradoxical result is reached that the consideration provided by Kia Ora diminishes with the value of the assets acquired.

Again, ideas of consideration are not relevant. One is trying to determine what is the loss to the company. As your Honour, Justice Hayne, has just remarked, it is loss to whom? One has to identify what is the company's loss. The question is not: "What could the company have got?" It is not even: "What did it give up?", because of the way the case was run.

CALLINAN J: Mr Myers, do you say, then, the correct result would have been that there should have been an assessment of damages for the actual cash paid, the money? I think you accept that, do you not?

MR MYERS: Yes.

CALLINAN J: And then cancellation, perhaps, of the shares that have been allotted to Western and a return of the Western shares to Western. That would restore the parties to the position they were in.

MR MYERS: If the Court were in a position to do perfect justice, that is what it would have done. But that was not the matter that came before the court, and one does not - - -

HAYNE J: Could it have been done in any event?

MR MYERS: It could have been done, your Honour, yes. In my respectful submission, it could have been done, and it was not done.

GUMMOW J: The courts have that sort of rescission with the shares coming back and then being cancelled?

HAYNE J: And cancelled, could you?

GUMMOW J: Without a reduction?

HAYNE J: Do you not encounter a number of corporate problems at that point?

MR MYERS: If the shares have been issued as a result of fraud, in my respectful submission, they could be cancelled. This was a case where one could have possibly mounted a case of fraud.

GUMMOW J: Who would be the plaintiff?

MR MYERS: The company would have to be.

HAYNE J: Absent fraud, and there is no finding of fraud, is there - - -?

MR MYERS: No, there is not and it was not pleaded in this case.

HAYNE J: So absent fraud, could you have unpicked the transaction in the way we have just been discussing?

MR MYERS: No, I do not submit that you could have, your Honour.

HAYNE J: It would seem to me that you could not.

MR MYERS: I am sorry, I am not as well armed. There are authorities that deal with these things, but my recollection of them is that they amount to fraud. It is only, if there is fraud, that you can rescind, yes. But, in any event, it is purely hypothetical because it did not happen and the course that was taken was that which you see. It was a decision simply to sue by the company. Another thing that could have happened is that if there were any shareholders who suffered any loss by reason of this, they could have sued. They did not. Maybe they did not want to exercise their rights or there were not any. We do not even know whether there was a single shareholder who suffered a loss. In any event, though it is a difficult passage, that does seem to be another crucial passage in the court's reasoning. In our respectful submission, it is again based on this notion of consideration. The court is not asking the question, "Did the company suffer a loss?" They are asking, "What is the value of the consideration the company gave?" And it is simply the wrong question.

Your Honours, I started by saying that the result is unjust. I do not wish to repeat myself. The result of the decision, however, is that it seems to have the effect of depriving existing shareholders who might have suffered a loss of an action. It benefits those who - - -

HAYNE J: I do not understand how or why that would be so.

McHUGH J: Yes. Neither do I.

MR MYERS: Well, it does seem a corollary of the - if you say that the company has suffered the loss, then the shareholders' loss must simply be derivative.

HAYNE J: That is not self-evident to me. I am afraid you will need to explain it.

MR MYERS: I am arguing against that. I am arguing against that proposition. That certainly is not derivative, but if you accept that the company suffered the loss, how is that the shareholders could then sue, in effect, for the same economic loss? You would have a position where the company gets $56 million and all the shareholders, who perhaps sold their shares after the transaction had occurred, come and sue again.

HAYNE J: Sue whom?

MR MYERS: Sue Nelson Wheeler. In any event, we say that the existing shareholders are the ones that suffered the loss and I do not want to set up an Aunt Sally and they should be able to sue. It benefits those who did wrong and it imposes an unfair burden on the professional advisers. This really is a case of disproportionate liability and it, in effect, gives or imposes upon them the consequences that would follow if they warranted to the company the value of the shares purchased. If your Honours please, they are the submissions that I wish to make.

McHUGH J: Yes, thank you. Yes, Mr Gray.

MR GRAY: May it please the Court, could I just start with talking a little about the facts of the transaction. This was a case where Nelson Wheeler had a contract in regard to giving professional advice in regard to a proposed initially valuation and then takeover. That gave rise to a relationship in contract between Nelson Wheeler and Kia Ora. In addition, the courts below, the intermediate court, found there were duties in tort and fiduciary duties that were breached.

In the result, the judgment that has come forward is in contract because that led to the larger sum of money, the court below taking the view that contribution was available in tort and breach of fiduciary duty, but not contract. So the matter before this Court relates to the contractual measure of damages and then that is limited purely to the question of whether a loss was sustained. The issue of how one might evaluate that loss or what it is worth is was a matter on which there has been no grant of special leave. The issue of special leave was confined purely to the question of whether a loss was suffered or not. Now - - -

HAYNE J: Where do I find that, Mr Gray?

MR GRAY: That is in book 3 at page 686. There is the appeal following leave and the grant of leave is at 659 to 661 and the limited grant of leave in particular at page 660. That, with respect, is a very important consideration because the Court simply does not have before it all of the materials that relate to the wider issues of loss. For example, the Court does not have before it the evidence of Mr Easton in which he deposed to the fact that cash boxes were very attractive targets at the time or, for that matter, that although he agreed with Mr Mansfield that Kia Ora was unlikely to place its shares cash, it was well advantaged to place its shares for assets because, in particular post-crash, there was a great liquidity problem. None of that evidence is before this Court because the issue of how one evaluates the loss, if one is sustained, is not a matter of leave. So the question is purely one of, was a loss sustained by the company in respect of the shares that were issued?

McHUGH J: In respect of the issue and allotment of shares, is it?

MR GRAY: Yes. Could I come to that dichotomy of terms a little later, just to put some submissions on that. We deal with that in the authorities - in footnote 14 we trace the authorities, if your Honour pleases, that deal with the cases that discuss those varying terms.

Now, if the Court pleases, what my client had in regard to the professional contract with Nelson Wheeler was an expectation that Nelson Wheeler would perform its professional obligations in contract properly, but it failed to do so.

GUMMOW J: Well, you had a term.

MR GRAY: Had a term, and it had an expectation that that term would be complied with and it was not. But the consequence of that was that the takeover proceeded and had the proper advice been given, the takeover could not and would not have proceeded. So, in that sense, the takeover contract is a consequential event, and it is a question of, in that sense, to pick on the wording of the Chief Justice Mason and Justice Dawson, Amann Aviation, the question of, was there some wasted expenditure, and if so, how it is to be evaluated. That leads to the subsidiary question, "Was there a loss to the company through the issue and allotment of shares?"

Now, the takeover involved offers to the shareholders of Western, not to the company itself and, as the Court has noted, ultimately, that ended in a compulsory acquisition of the final shares. But for practical purposes, 31 December 1987 was taken as the date on which to assess loss. Now, if the Court pleases, there has been considerable discussion in the cases, in particular in the United Kingdom, that deal with the detailed analysis of exactly what happens when a company issues and allot shares and either either pays for them or does not get adequate consideration.

The reasoning of the intermediate court entirely accords with that line of authority. I do want to go to that in a little detail because some of the passages of those cases do put the point very succinctly. Before doing that could I just take the Court in the judgment of the intermediate court? It is page 295, paragraph [418]. There, in a sense, the court poses the issue as it saw it. It is in the second sentence:

But if the shares allotted by Kia Ora have a monetary value, and are properly to be regarded as constituting consideration paid -

that is expenditure incurred -

represented by that value, principle requires that that value be taken into account in determining the price paid.

McHUGH J: That is the question, is it not, as to whether or not that is the issue?

MR GRAY: Yes, that is the issue.

HAYNE J: There are about three terms that you have used, each of which, at least for my part, would require some careful identification about the manner of their use.

MR GRAY: Indeed. That is the way the question has been posed. It is answered in at least the following five paragraphs or, essentially, the following five paragraphs - [425] to [427] both inclusive, and then [433] and [436]. If one goes to [425], the court said this:

However, the bundle of rights represented by a share, once it is issued, has a monetary value that the allotting company can realise.

And in the event of this case, attempted to realise by the takeover contract. It has been executed and, with respect, cannot be undone and could not have been undone. It has all happened and the question is, can it be said that in the process of issuing or allotting shares, has Kia Ora suffered a loss? And here it is, on this reasoning, it actually has expended that capacity to realise consideration, and that has occurred.

McHUGH J: Yes, but that is a loss of opportunity, is it not, or a loss of expectation? It is not an actual loss itself. The shares have no value at any point of time to the company except as a bargaining chip for which they can get some other asset or property in consideration of the issue.

MR GRAY: At a point of time the company has the ability through issue allotment to use those shares, those precise shares, as a medium of exchange.

McHUGH J: Yes, but that does not mean that they suffer a loss when what they get back is not equivalent to the nominal value or the issued value of the shares.

MR GRAY: Well, we would say that what they have lost is they have lost the receipt of, not the expectation of the contract or the expectation damages, but of the value of what passed. Expectation - - -

HAYNE J: Value to whom? Value of what passed, value to whom?

MR GRAY: Value of the consideration passing by Kia Ora to Kia Ora because my friend conceded Kia Ora passed consideration.

McHUGH J: There is no doubt about that.

MR GRAY: And the question was, did it have an entitlement to receive something in return, and the answer is it did, by the terms of the takeover, by terms of the Nelson Wheeler contract.

McHUGH J: My difficulty at the moment, Mr Gray, is that in answer to your question, "Was it entitled to something in return?", the answer is yes. But what it was entitled to was an expectation that it would receive value and if it did not get that value then it suffered expectation damages.

MR GRAY: We would say that that, with respect, is not the correct analysis, that what it was entitled to was the consideration.

McHUGH J: Well, it does not make any difference.

MR GRAY: It had an expectation it could get what Nelson Wheeler had said it was worth, but it lost the value which was a lesser figure.

HAYNE J: It had an expectation to get a bit of paper, some shares, and it thought that bit of paper gave it some rights, some rights which others might be prepared to pay some money for.

MR GRAY: We would say, more correctly, that it was entitled to receive consideration to the value of $96 million for its consideration, because that was the difference - - -

HAYNE J: Again, you have slid between two transactions, have you not?

MR GRAY: Indeed.

HAYNE J: You have slid between a transaction between acquiring company and selling shareholder and a transaction that has occurred between the acquiring company and its adviser.

MR GRAY: We do, in fact, say there is a great danger in sliding between the two and one is asking the question: as a result of the Nelson Wheeler breach of contract, did Kia Ora suffer an expenditure loss, to pick up the Amann Aviation description? The answer is yes, it did. What did it do? It expended cash and it expended an ability to use those shares as a medium of exchange.

McHUGH J: That does not mean it suffered loss.

MR GRAY: That then comes down to the question - - -

McHUGH J: I mean, if an estate agent enters into a contract under which a person - the estate agent says, "I will secure a purchaser for you if you agree to pay me X dollars", and the vendor repudiates the agreement, I have not suffered any reliance damage. I have suffered expectation loss, which is to say that consideration and loss are not the same thing. That is to say, reliance loss and expectation loss are two quite different concepts.

MR GRAY: With respect, in a simple contract case where there is a failure of consideration, the normal measure of damages is the difference between consideration paid and consideration received, and that would be trite. In this case we are, as it were, one step removed because the relevant contract is with Nelson Wheeler and the issue to be asked is in regard to the consequential event, that is this contract was entered into as a consequence of Nelson Wheeler's breach of contract.

McHUGH J: Yes, I know, Mr Gray, but what we must be very careful of is not to treat this case as if it was a partnership case. If five partners in a law firm agree to sell an interest to another person and they get a consideration which is less than what they bargained for, each of them has suffered a loss. They have transferred an interest they have to the purchaser and got something less in return, but in a limited liability situation you have to draw a careful line between the shareholders and the company, and the shareholders' funds are not an asset of the company.

MR GRAY: If the Court pleases, we do not wish to quarrel with that. We put the point differently. There is no question of the shareholders suing on this contract. They were not parties to the contract. There was no contractual duty owed to them. The question is, with respect, what loss followed on this contract to Kia Ora? We take your Honour's point that we have to identify a loss to Kia Ora. What we say, and we say this is well supported by authority, is that when it is analysed, what Kia Ora has is the right and the power to issue - allot shares. That is not a conventional asset one finds in a balance sheet but, notwithstanding that, it remains as an asset. A right and a power is an ability to be used.

So there is the asset in the most widest terms, not a balance sheet asset but plainly a right and powers - Ngurli v McCann establishes that. What does it do, as a result of Nelson Wheeler's conduct, is that it exercises that right and it proceeds to allot and issue those shares, so it has expended that capacity, it has gone, it has occurred. Those shares are out; they cannot be in this transaction returned. That is what happened and the question is: how do you value that right and capacity expended, used, utilised in regard to these particular scrip?

HAYNE J: With its boundless capacity to create more capital.

GUMMOW J: Yes, that is right.

HAYNE J: It is magic pudding, is it not? They can keep issuing shares, upping their capital.

MR GRAY: With respect, no. In theory they can but they have to have somebody to be prepared to take those shares, and that will depend on the financial profile of the company. But they certainly cannot issue these shares again. These particular mediums of exchange have gone.

McHUGH J: But test the position with an issue to the existing shareholders. The company does not lose anything. The value of the shareholders' shares are diluted. If there is a two to one issue, then the value of each share is 50 per cent. The company may have expended - in one sense it has lost the power to issue that issue of shares but it has not lost anything in any relevant sense.

MR GRAY: That is in the case of a bonus issue, because the company there is not expecting to receive anything by way of consideration.

McHUGH J: Exactly.

MR GRAY: That is a very different case. That is very much like the Lowry decision where there was the issue of shares to employees at par where they were worth more than par and the balance was held to be in the nature of simply a gratuity or a gift to the employees. It was never intended to be received as consideration. So those cases are an entirely different situation to a circumstance where the company is electing to use that right with a mind to receiving consideration for it. Can I put the matter this way, if the Court pleases - - -

McHUGH J: But your argument must be that the issuing by the company deprives it of a power to issue those shares for their face value in cash.

MR GRAY: Well, in fact, they were worth less and so the fact that they struck a bargain where they were going out at par would have an expectation element in it from the bargain and that is why the plaintiff below did not seek the difference between real value and par.

KIRBY J: Are you going to take us to the English cases that have looked at this?

MR GRAY: Yes, if the Court pleases. Could I just before doing that just indicate this to the Court, that if one looks at it from an accounting point of view this rather odd result arises because on this transaction - well, take a transaction, for example, where Nelson Wheeler have said, "Well, it is all worth $100 million." But, in fact, 50 million of value is received.

McHUGH J: Yes, but that is because in an accounting sense the share capital is treated on the liability side as an actual liability of the company. For legal purposes it really is not.

MR GRAY: Yes, but from the point of view of it, in that situation the net assets of the company would have increased by $50 million because on their argument you have got 50 million of value as consideration and in a share swap case, for example, to put the matter at its highest, it has cost you nothing and so your net assets have increased by 50 million, although viewed objectively you have paid 50 million too much. So that is the danger. When one reverses my learned friend's position and one takes that situation, the net assets would change dramatically to improve the company's position.

HAYNE J: And in the share swap case you have just identified you used the expression "you have paid out too much" may lead to the key to this, that what you have paid out, it is not the company's money, you have paid out the value of the shareholder. The shareholder value has been diminished and that has been paid away.

MR GRAY: In that example, if the Court pleases, I was wishing to take up the suggestion about the net asset position has not changed because one takes this reasoning and one says that the issue of the shares cost the company nothing in a transaction where, leave aside the accounts, one would look at it and say, "Nelson Wheeler got this transaction completely wrong." They said it is worth 100 million, pay 100 million, pas t consideration of 100 million and you get 50 back. According to the books, the company - according to my friend's argument, it has been a wonderful result. The net assets have increased by $50 million.

McHUGH J: Yes, but that is because your argument does not distinguish between the company and the shareholders. When the two steps are taken that Mr Easton deposed to and the loss is written off, then it has a consequential effect on the shareholders' funds and the value of their shares. It is the shareholders who have lost, not the company. The company in terms of its own assets in this particular case increased - well, no, it has not because the cash went out but - - -

MR GRAY: Well, critically, that is not, with respect, the complete picture because the company's balance sheet would show now retained losses of the company and Mr Easton's evidence is that, in fact, from an accounting perspective a loss to the company is taken on this transaction and does reflect right through to the balance sheet and does affect the financial health and wealth of the company.

McHUGH J: Yes, but that is because the object of the accounting exercise is to determine what the value of the company is to the shareholders, what are the shareholders' funds. It is not concerned with the determining what are the assets of the company in a legal sense.

MR GRAY: But to make the balance sheet balance, it has to include an entry dealing with retained losses of the company, not of the shareholders, of the company. One works through the Companies Code approved accounting standards. To have all this to be accounted for, it does actually take a loss in the company and reflects right through the balance sheet, not only in an increase in shareholders' capital, but in the company reflecting retained losses arising from this transaction in the company.

HAYNE J: Accounted for and accounts prepared for reporting to shareholders.

MR GRAY: Indeed, but relatively for this purpose, identifying the loss in the company, not in the shareholder, recognising, with respect, the reality of it, that the company did take a loss in the transaction because it did not get consideration for its consideration.

McHUGH J: Yes, but to some extent the problem is clouded over by historical accounting, by the fact that one does not look at true values of assets - although that is not the case at the present time, there have been changes, of course.

HAYNE J: At least not in some companies.

MR GRAY: We accept those difficulties, but at the level of principle, if one is looking at leaving aside those variations, the level of principle, what Mr Easton does when he takes one through the accounting standards and then puts them into the adjusted accounts is to identify, as a matter of principle, a loss in the company from this transaction and he then takes that through and reflects that ultimately in the balance sheet as a loss to the company. At the same time, he reflects the increased capital of the shareholder. But without having the balancing item of reflecting the loss taken by the company, it would not balance.

McHUGH J: I know, but if it was a partnership, the accounts would be set out in the same way, except instead of having shareholders' funds, you would have partners' funds.

MR GRAY: Indeed.

McHUGH J: And there is a world of difference between the two entities.

MR GRAY: With respect, in both circumstances, partnership or company, the retained losses are in the company or partnership, not in the individuals. We say, with respect, that the point about the retained losses, the balance sheet is the way in which one can see from the accounting standards point of view, the way in which they deal with the transaction.

Could I just show that to the Court in the exhibit? It is at page 561 to 563 of the appeal book, No 3. There are some very detailed footnotes and notes that explain each of the steps being taken. But at page 561 one is looking at the impact in the profit and loss account of this acquisition. Critically, it is the line "Extraordinary items" where the two writedowns occur. There are two writedowns because the first thing from an accounting perspective one does is to recognise that the Kia Ora shares that were being passed as consideration were not worth $1. In this particular example, they are worth 66 cents, finally it is 82 cents. The second aspect is then to write down the investment, that is the value for consideration received, and that is to recognise that there is a writedown in this particular example of 66 million. Ultimately, it is 75 million, because the ultimate value is - - -

GUMMOW J: What is the providence of this document?

MR GRAY: This document, your Honour, was proved in evidence as being a working through of the accounting standards as required by the Companies Code. Mr Easton then gave evidence and this part of his evidence was not challenged in regard to this working through of this process. There is the profit and loss account and there it is taking the writedown. The footnotes explain exactly why that is so and reference to the Code and the standards are set out. On page 563 one has - - -

McHUGH J: But it really demonstrates, does it not, an expectation loss. It demonstrates that the company did not get what it expected to get.

MR GRAY: With respect, no. We would say that this is recognising the loss taken on the transaction.

McHUGH J: I notice in your submissions you use the term "loss on the transaction", but that is not the issue.

MR GRAY: The expectation element, we say, is taken out when one assesses, not what the transaction called for $1 per Kia Ora share issued at par, but the real value of the Kia Ora share, which is less than that.

McHUGH J: But the reason this exercise has to be done is because the company expected to receive Western shares of a particular value. They were not of that value and because what they got was not what they expected to get, they have to deal with it in the accounts. It does not make it a reliance loss.

MR GRAY: With respect, one can use expectation in that sense in regard to every contract where there is a failure to receive the promised consideration. One has agreed to receive the consideration, and one does not receive it; one expected to receive it, but that is not expectation loss. That is simply a loss incurred on the transaction. The word "expectation" is capable of, with respect, much vagary in meaning. It is a bit like saying, when one has a broken leg, one suffered pain, one could say, one could have damage with the expectation one would be pain free.

McHUGH J: Yes.

MR GRAY: So it is, with respect, a term that needs a great deal of care. As we say, in the case of an ordinary contract and a failure of consideration, one can always say of the party suing, "Well, you expected to get more". But that is not expectation loss. The answer is, "You took the loss on the transaction because you did not get the consideration that was bargained". In that sense, it is not expectation loss at all. It is simply a historical fact, and that is why we put the submission based on Amann Aviation. Perhaps I might take the Court to that. It is - - -

CALLINAN J: Mr Gray, before you do, say that shares were issued - you acquire land that had been valued wrongly by a valuer and the land was worth much less when the company got it, would that be any different?

MR GRAY: No, no different at all, and one would simply say the company suffered a loss, and the property which was coming in exchange for the shares would have been coming into the company as an asset of the company and it would be coming in at a value less than it should have.

McHUGH J: Yes, but the question is, in terms of losses, in this area of discourse we are talking about what you lose and what you do not receive, and it seems to me that your problem is that you did not receive what you expected to receive. The problem that you have to overcome is to show that you lost something other than what you expected to receive.

MR GRAY: We would say, your Honour, we would vary that, by saying that what we lost was the receiving proper consideration in regard to the shares issued and allotted, and it was something that we were to receive and did not receive, and it is not expectation, in a sense of expectation loss at all. We are talking about, in effect, wasted expenditure. Could I take the Court to the way in which it is put in Amann by the majority.

McHUGH J: Yes.

MR GRAY: It is page 81, 174 CLR, at about point 9 on the page, the last paragraph:

A further example of the application of Robinson v Harman which will result in a plaintiff being entitled to claim damages for wasted expenditure is in a contract for services such as that between a solicitor and a client. Where a solicitor has breached his or her contractual duty of care, the measure of damages to which a client will be entitled will be such an amount as would put the client in the position he or she would have been in had the contract of retainer been performed without negligence. In cases where, had non-negligent advice been given, the client would not have entered into a subsequent transaction, for example, a purchase of real property, then, in conformity with Robinson v Harman, the client will be entitled to recover as damages expenditure wasted on account of the negligent advice, less anything subsequently recovered and given reasonable acts of mitigation.

Now, the question then becomes, in those terms, what expenditure was wasted by the company, Kia Ora?

McHUGH J: I would have thought it was plainly the administrative expense of issuing the shares and holding the meeting, 3J(3) meeting, and matters of that sort, together with the fact that you paid out the 20-odd million, but it is another question at the moment, to me, as to whether you lost anything in that sense when you issued those shares.

MR GRAY: Undoubtedly, with respect, the company exercised its right and power to issue and allot those shares. It undoubtedly did that in circumstances where it was using those issued and allotted shares as a medium of exchange and that has occurred and cannot occur again.

McHUGH J: That only means it cannot issue shares, 67 million to 135 million or whatever the relevant numbers were. That is all it means, does it not?

MR GRAY: And he cannot exchange those for consideration, and consideration would then have received - - -

McHUGH J: But it can then issue 136 million to 246 million. It might not get as much for them, but that is because, as Justice Hayne said earlier, the value of shares in the company has been diluted. That is not the company's loss. It is the shareholders' loss.

MR GRAY: What the company has not received, which it was entitled to receive, was the fair value of the medium of exchange and that that would have brought in, as an asset of it in the case of real property, for example, real property for Nelson Wheeler, of the value and it has not got that and that would have been property in which it expended this capacity and that it has not received. That represents loss. We would say there is nothing unconventional about that at all.

GUMMOW J: There is really, because there is an ambiguity in this phrase, "medium of exchange".

MR GRAY: I am happy to develop that, if the Court pleases, because the English cases do touch on that. Could I, perhaps, move to those? I would like to start first with a decision of the House of Lords in Stanton which I think is available to your Honours.

GUMMOW J: Before we read these passages I think we have to know precisely what the issue was that their Lordships were addressing.

MR GRAY: Indeed, yes. The issue in Stanton, if the Court pleases, was were their corporation tax chargeable said to be gains on a transaction, so it was a taxing case. The taxpayer company, Drayton, had entered into a contract by which it was allotting shares for consideration and the contract specified the consideration to be 160p per share. Because of a delay in the contract being settled, the market price of the shares when it was settled was, I think, 125p and the issue was whether the company should bring into account a cost of 160p or 125p. So the issue was one as to which was the proper measure of value with implications for tax being on how you assessed - - -

GUMMOW J: Where do we find the section on which all this turned?

MR GRAY: The section is at page - - -

HAYNE J: It is in the headnote in the last four lines, the relevant question being:

the "amount or value of the consideration, in money or money's worth" given by the company -

So it is an assessment of consideration.

MR GRAY: Yes. Now, against that background at page 504 counsel arguing put this at line 3:

Osborne establishes that it is nonsense to suggest that when a company issue shares in return for stock, the cost to the company of acquiring the stock is nothing -

At page 509F in the speech of Lord Fraser:

The first stage is to ascertain exactly what was the consideration given by Drayton.

The argument was, was the consideration the share or was it the agreement to allot the share. Over the page at point 2:

In my opinion, the consideration was the Drayton shares. That is.....how any businessman would have seen the transaction, and it is the commercial reality.

Then down a line:

From the lawyer's point of view, it seems plain beyond argument that what Eagle Star received as consideration for its portfolio was the Drayton shares.

Then dropping down to paragraph C to D:

The view contended for by Drayton, and substantially accepted by the Court of Appeal, was based mainly on two decisions -

Osborne and Craddock, and then:

In Osborne's case a new company had acquired stock in trade for a consideration consisting partly of cash and partly of shares which they issued as fully paid. The Crown's contention was that the shares had cost the company nothing and that the stock should be entered in their books simply at the amount of cash paid for it.

Which is my friend's position here -

It is perhaps not surprising that that contention failed. In the Court of Appeal Lord Greene M.R. said that "on the facts of [that] case" the issue of the fully paid shares represented a payment in cash equal to the par value of the shares, mainly because the only alternative would have been that the shares had been issued at a discount which would have been illegal -

Then there is the quote from Lord Greene:

"A company cannot issue [sterling]1,000 nominal worth of shares for stock of the market value of [sterling]500, since shares cannot be issued at a discount. Accordingly, when fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired."

So, if that analysis is correct, Kia Ora, in this transaction, passed over consideration equal to the value of the shares, par value, or in this case, real value.

McHUGH J: I know, but they do not spell out precisely what the consideration is. When it is really written out, the consideration that has passed is the value of the shareholder's funds or part of the value of the shareholders' funds, because that is what underlies the shares.

MR GRAY: But the consideration agreed to be - - -

McHUGH J: Before the transaction the shareholders' funds were worth X amount of dollars. When this was issued there are further shares, so the value of their shares may or may not be diluted depending on what they get back, but it is the shareholders' value that is being transferred. It just does not exist up in the air.

MR GRAY: No, but from the company's perspective, and one must look at the right of the company, what has happened is that it has disposed of a consideration. This is the exchange value. It had the ability to exchange value in this way to this value and hence it had the ability to receive proper consideration for it. The Western United shares come on to the Kia Ora books as an asset of Kia Ora's, it is just that they come on at - instead of 96 million, they come on at 6 million. So, in that sense, the balance sheet is materially changed. In actual fact, because of the way in which net assets are defined and the way the write-offs occur, that comes to be represented in the balance sheet as a retained loss of the company and all of that is directly as a result of the consideration moving to Kia Ora - - -

McHUGH J: But retained loss is an accounting concept, it is not a legal concept. You cannot enforce a retained loss. You cannot sue on a retained loss. You cannot - well, you can sell a retained loss in some circumstances, but - - -

MR GRAY: But as a rule it represents a detriment.

McHUGH J: Yes, but it represents - just as shareholders' funds is an accounting concept.

MR GRAY: And, indeed, that produces - another detriment to the company is that it has taken on 67 million further sets of obligations to the new shareholders and the corollary of their rights - - -

McHUGH J: Well, I am not sure that that is correct. Is there any case that says the 67 million shares constitute obligations on the part of the company? They confer rights on the part of the shareholders, rights to participate in the profits, rights to participate in the winding-up, but is it true to say in any relevant sense they are obligations?

MR GRAY: Indeed, because they are rights that can be enforced by action by the shareholder against the company.

McHUGH J: Those rights, yes.

MR GRAY: And if they can be enforced by cause of action against the company, there must be an obligation on the company to respect those rights.

HAYNE J: The obligation to send them notices of meeting.

MR GRAY: For example.

HAYNE J: Beyond that?

MR GRAY: Yes.

HAYNE J: Once you have declared a dividend there might be an enforceable right.

McHUGH J: That is right, you see.

HAYNE J: Once you are wound up there might be, but in the course of running, I think you are entitled to a few bits of paper and an annual report.

MR GRAY: Well, Justice Dixon in the Archibald Case put it the right to see that the assets of the company are properly dealt with. So it is much more than just a bit of paper. Justice Dixon in the Archibald Case describes it as the right to see, in effect, the proper management - - -

McHUGH J: But so has a residual beneficiary got a right in one sense to see that the assets of the estate are properly administered but - - -

MR GRAY: But to answer your Honour directly, the right in the shareholder is a contractual right against the company and that right can be described partly as an immediate existing obligation and partly as a conditional one and the company has an obligation to, to use a neutral term, respect that right but it is more than that: it is a legal obligation because the shareholder can sue the company, not only for declaration, but for specific performance.

GUMMOW J: Of what?

MR GRAY: Of, for example, the right to receive a notice of meeting; if a dividend is declared, a right to receive the dividend.

HAYNE J: And those rights can undoubtedly be turned to account by the shareholder. Other people will pay that shareholder money for acquiring those rights but at least for the moment I do not understand how you take the step from that hypothetical transaction, shareholder selling to the third party, back into some statement about the position of the company and it is at that point at the moment I am stumbling.

MR GRAY: Well, the issue is whether the company suffered a detriment through this transaction, if I can use the term "detriment". One way of approaching it is to say, yes, it did, because it has now taken on, to 67 million new shareholders, a series of obligations. Are they obligations known to the law? Yes, they are. They happen to be the corollary of the rights of the shareholders against the company and rights, depending on the circumstances, that the shareholder can enforce by suit, therefore, the company is exposed to an obligation in the nature of a chose of action, the other side of the chose of action. Now, that is a detriment to the company and that must represent - - -

GUMMOW J: Why is it a detriment?

MR GRAY: Well, because the company now has an obligation to meet and with that connotes an expensive meet-out, and that is ongoing and all of that would sound in damages. If one was to say, "What is that worth?", it is difficult to say it is the direct corollary of the shareholders' rights,.....rights because the shareholder has obtained some rights against other shareholders. So there are some rights shareholders inter se as well as contractual rights to the company.

But if somebody said, "Do you want to buy out those obligations?", then the ready answer would be, "You pay the share price". The pragmatic answer to "Do you want to buy out those obligations?", "You pay the share price". There would be another way to do it but in fact we do acknowledge that as you bought out those obligations, you would also be dealing with some shareholder obligations as well. But there plainly is a detriment, there plainly is an obligation, it plainly has a value. The question then becomes: how do you value that? That is not the issue this Court is dealing with, with respect.

That is a different issue. We would say, as we said in the intermediate court, that the value of meeting these obligations is in fact the value of the share, because it is the only way of getting rid of them. So my learned friend's analysis does not address the detriment identified in that way and the cases, we say, are bound to establish that they are obligations that the company has. I will develop that a little later.

CALLINAN J: Do you say that unissued shares are part of the assets of the company?

MR GRAY: It has been put they are potential assets, because unissued they do not exist. It is a capacity or a power.

GUMMOW J: You could get a security over them in a sense, I suppose.

MR GRAY: Yes, and I think Lord Wright in Lowry's Case described them as a potential capital, so in that sense they are a right. But could the Court just look at the matter as it develops at a micro speed just in stages because, before the shares actually reach the new shareholder, a piece of paper has to be produced. That piece of paper is produced. It is an asset. It is a piece of property. At that stage it is in the company's hands and it is yet to be passed over to the new shareholder. At that stage the company has moved from an unissued share to a piece of paper, still yet to be put into the hands of the third party.

GUMMOW J: The piece of paper is evidentiary.

MR GRAY: Yes, but it is a piece of property at that point, we would say.

McHUGH J: No, it is a piece of paper, nothing else.

MR GRAY: Nothing else, but it does exist and at that point it has the capacity then to be endowed with a series of covenants, because when the share in fact goes to the - - -

GUMMOW J: We live in a world now of scripless dealings.

MR GRAY: We would put it that at the moment this paper then goes to the ultimate shareholder, what it does is it is the passing over of the covenants. At the moment, if one was to look at it in terms of a deed, at the moment that it is, as it were, printed out but yet to be passed over, it will consist of a series of proposed covenants. When it is handed over to the shareholder in exchange for consideration, those covenants are given by the company. They are promises by the company and then the document then provides evidence of that and the security of it. But the real consideration passing from the company in that sense is a series of promises.

GUMMOW J: There are cases that say that by some means there are promises inter se between shareholders, are there not? That is a baited question how that happens.

MR GRAY: But undoubtedly the cases speak of the share being a congery of rights and they represent choses in action and they effectively are promises by the company to the shareholder.

McHUGH J: Yes, and therefore they constitute consideration but you must still come back to the question whether there has been a loss.

MR GRAY: If the Court pleases, when this takeover occurs, Kia Ora has committed itself to a number of covenants. It has created a number of choses in action against it. The corollary of that is it incurs the obligation to meet those covenants.

McHUGH J: But promises are not losses.

MR GRAY: No, but the ongoing obligation does represent a detriment and without it - - -

McHUGH J: Of course it does. That is what makes it a consideration, but the fact that it is an obligation does not make it a loss.

MR GRAY: No, but what it does do when one does not receive a covenant in return is it represents a detriment incurred by the company for no consideration received.

McHUGH J: It still retains its character as an obligation, but the company has not received what it expected to receive.

MR GRAY: Or what it bargained to receive.

McHUGH J: What it bargained to receive. But that is an expectation loss.

MR GRAY: With respect, could I just stop short of the final step and look at with the Nelson Wheeler point of view. By reason of their breach of contract, Kia Ora has now undertaken a series of obligations that it would not have undertaken. Those series of obligations represent a detriment to Kia Ora. A detriment to Kia Ora sounds in damages. Conventionally a detriment. We have referred to the cases in the outline. Detriment represents loss.

CALLINAN J: Mr Gray, would somebody, perhaps an existing shareholder, I do not know, but would somebody pay money for a negative covenant to be given by the company to that person not to issue further shares?

MR GRAY: It may.

CALLINAN J: It may have a value in that sense, the unissued share capital.

MR GRAY: Yes. But, with respect, when a person gives a covenant that is binding and it represents a consideration passing, the corollary must be that it suffered an obligation and a detriment.

McHUGH J: It does not mean it suffered a loss.

MR GRAY: The question of how you value - we would say, yes, it does, there is a loss taken because it has received nothing for that. How you value that loss is another matter. With respect, the valuation of that loss is not an issue before the Court.

McHUGH J: No, but the obligation remains constant. What has changed is the expectation of what you receive in terms of giving that, or entering into that obligation.

MR GRAY: When one says, "What is the value to Kia Ora?", the answer is, by making these covenants - and it has lost the ability to exchange those covenants for fair value. That is what it has lost. And it has done that, it has expended that. It is as though you passed over another piece of property and got nothing for it. It has expended that property and got nothing in exchange. It is just we deal with a chose in action rather than a piece of hard property. Either way, Kia Ora has suffered a detriment and a loss because it can no longer use those promises that could otherwise for consideration.

McHUGH J: But they did not exist apart from the context of this particular transaction.

MR GRAY: Precisely.

McHUGH J: To make other promises to other people.

MR GRAY: They were tailor made for this transaction and they have been used and spent and expended in regard to this transaction. That is why we say they are wasted expenditure. It happens that what has been expended is the giving of covenants. Put in that way, we say there is no difficulty at all in conventional legal principle in saying Kia Ora suffered a loss. When one then says, "How do you value that loss?", we accept that that matter might require some debate. We would say that it happens to be the value of the share because that is the only way you can bridge yourself of that obligation. If Kia Ora said, "I want to be rid of these obligations to these 67 million shareholders. How could I do it?". The answer is that you have to pay, there is no other way to do it. You have to pay an amount of money. What do you have to pay? You have to pay the value of the share. So put in that way, at a pragmatic level - - -

GUMMOW J: I am not sure I understand that last step.

MR GRAY: If Kia Ora wanted to be free of these obligations to the 67 million new shareholders, how could it do it? The answer is it would have to acquire those shares. The only way you can get rid of the obligations is to acquire the shares.

HAYNE J: What, of self-dealing?

McHUGH J: Go back and buy back.

MR GRAY: A buyback, select a buyback. It would have to then pay the value, and the value would be the value of the share. Having said that, we do accept that the congery of rights does include, not only rights between shareholder and company, but also rights between shareholders inter se. Hence, one might say there is some value in that as well that has been brought out. But that is why these covenants - with respect, it is not expectation of damage at all - - -

McHUGH J: Take the buyback situation, let us follow that through. I mean, what the buyback does is increase the value of the existing shareholders' shares. Does it affect the company?

MR GRAY: Yes, because it removes the obligations the company has to those shareholders. Of course, it has a derivative effect through to other shareholders.

HAYNE J: Is this a buyback of a limited group of share, not rateably?

MR GRAY: A selected buyback.

HAYNE J: At the then prevailing market price.

MR GRAY: Yes, and if it required some form of court order, no doubt - - -

HAYNE J: What is the relevance of this? What do you say the relevance of this hypothetical case is?

MR GRAY: It is to value the obligations that Kia Ora has undertaken. The question is, how does one value the obligations, these covenants, that Kia Ora has given? One way is to say, what does it cost to get rid of them? What is the cost, what is the cost of actually getting rid of all these covenants?

HAYNE J: Is the relevant time of analysis the time of breach, Nelson Wheeler breach?

MR GRAY: Yes, one has to - - -

HAYNE J: That might invite attention to when buybacks came in, Mr Gray.

MR GRAY: I was only wishing to use it to illustrate that these covenants have a value and what we would say is a pragmatic way of valuing that. We are not suggesting, your Honour, that - it is simply done to answer the question, have these covenants a value, and one way to answer the question is yes.

Another way to put it, and perhaps a simpler way, is to say, "If somebody wanted the benefit of those covenants, what would they pay for them?". The answer is, they would buy the share, because all that the purchase of a share does is take over the benefit of those covenants. There is nothing else.

HAYNE J: But that is to slide from an inquiry about the position of A into an inquiry about the position that would obtain in a transaction between B, the shareholder in A, and C, the third party. How can you relate the position of A to a transaction that occurs between two other parties?

MR GRAY: It is simply a question of trying to assess what the value of these covenants are. When one takes the step that all the share is is a congery of rights, a series of covenants, that is all it is, the question becomes, "What is the value of those covenants?". The answer is, "What would the market pay for them?", and it is not sliding into a transaction between B and C, it is simply saying what does the market value those covenants at. Another way of putting the same proposition is what would it cost the company to, as it were, get rid of those covenants by buying them back. The answer always is, the value of the share.

Now, my learned friend's analysis just does not address the obligations the company takes on through these covenants. Now, that is not something the shareholders do, the shareholders are not party to those company's covenants. They come from the company and bind the company.

McHUGH J: But this case was never run on the basis of value of covenants. Nobody was called to value covenants. The case was run, judgments were given, special leave was granted on a particular basis, and that is that you stood or fell on the basis that you were entitled to recover the market price of these shares when they were - - -

MR GRAY: Your Honour, the position we put before the trial judge in the intermediate court at length was that the nature of the shares was a bundle of covenants. This very argument I am now putting has been put at both stages below. This is one of the rationales we put. We put the matter two ways. We put that the company had a medium of exchange through the issue and allotment of shares. In the events that happened, it did not get the consideration bargained for. That is not expectation loss, that is loss taken on the transaction. We did not seek the Nelson Wheeler value, we sought real value to get rid of any expectation or bargain aspect of it.

Our alternative case, as always put, was that the other way of looking at it is that you have this bundle of rights. They had covenants, covenants in the company and that this argument I am putting now, that one way of buying that out, one way of assessing that value is the cost of buying it and the issue that has come to this Court - - -

McHUGH J: But buying it out when? I mean, one would have to look at it in terms of the date of breach. Was there any evidence called as to what the value of these covenants given by your client?

MR GRAY: No, the covenant argument is simply a matter of analysing what really a share is. It is just simply saying that all a share is is a congery of rights, a series of covenants.

GUMMOW J: You value it on an earnings basis or a winding-up basis, I suppose. There are endless death duty cases about all this. It seems a world away from this case.

MR GRAY: But it does need to be analysed as to exactly what a share is because the Court is putting to me this is a just a matter of shareholder's loss. We say no, that when you analyse this transaction and bear it back to its basic legal essentials, it is the company giving covenants for which it - it is a whole idea about capital to which it is getting exchange. It then receives in the capital. That becomes an asset of the company for use by the company. What has happened here is it did not get in, effectively, the capital. It did not get in the money's worth that had been bargained.

McHUGH J: But it would still have the obligations if it had got what it wanted.

MR GRAY: Indeed.

McHUGH J: So it is not the incurring of the obligations that constitutes the loss. It is the failure to get in what you expected to get in.

MR GRAY: It is in a sense both because, if one gets fair consideration for covenants, there is not a loss. If one does not get fair consideration then one has covenants given, nothing in return.

McHUGH J: But that comes back to the point I put to you nearly an hour ago, that one has to distinguish between the failure to receive what you expected to get and what you lose.

MR GRAY: This analysis, with respect, is a little different because this analysis is saying has there been a wasted expenditure by the company. What has the company done and the answer is the company has expended. What has it expended? It has expended - it is given a series of covenants and that has been wasted.

McHUGH J: It has not been wasted. It has something in return for it. It did not get back what it expected to get back.

GUMMOW J: You see, the value of these covenants is really expressed through the relationship inter se of the shareholders, that is to say who is going to get the dividends, who is going to get a distribution on a winding up or a reduction of capital. It is an aspect of the inter se relationship that is created, it seems to me.

MR GRAY: It has that effect but that is only one aspect of it.

GUMMOW J: This idea that there is value in a right to get a notice of a medium, it is a bit ethereal, I think.

MR GRAY: Again, we are wishing to approach it through the question, "Has this company wasted expenditure?" and the answer is it has because it has given out covenants and it has wasted those.

KIRBY J: What is your answer to the point that was put at the forefront of Mr Myers' submission that the shareholders who have suffered no loss will receive a windfall and shareholders who have suffered a loss may not benefit.

MR GRAY: But that always follows in the case of a company when the loss is taken in the company. It is because shareholders' fortunes follow the company, necessarily follows in every case as the Full Court said.

KIRBY J: But that means that the net outcome and it may be what follows as a matter of law is that the guilty directors who were guilty of fraud take advantage on the payment to the company because they are still shareholders.

MR GRAY: If they are still shareholders, their fortune will follow the company's but their assets are then available to other parties who might have a claim against them, but that is a necessary concept of - necessary corollary of - - -

McHUGH J: I mean, they may have - let it be assumed they owned 80 per cent of the shares in Kia Ora. What are they to get, 80 per cent of the 70 million? I mean, it really makes the law look ridiculous if that is the situation.

KIRBY J: And it emphasises the importance of distinguishing between the position of the company and of the shareholders.

MR GRAY: Well, the passage at paragraph [202] that my friend referred to is a passage dealing with, "Was there a separate duty owed to shareholders in tort?" That is part of the judgment dealing with, "Was there a duty in tort to shareholders?" And the court found there was not and it sets out all the reasons for that and all those policy reasons following from Esanda and from Hercules and the other cases. When we get here, it is obvious that once the loss is taken into the company and there is a recovery it will benefit the shareholders of the company and that is so in any case.

KIRBY J: It will not benefit those who sold their shares and it will benefit those who are the miscreants.

MR GRAY: But that is so in any case where the loss is taken into the company and the wrongdoers are shareholders. So, for example, in a misfeasance case the recovery is to the company and shareholders will benefit.

KIRBY J: Is your argument that the law excludes the shareholders from recovery and though it is true that this will lead or may lead to some shareholders who have sold their shares not recovering, and to some shareholders recovering who were the source of the fraud, nonetheless at least some shareholders may expect to benefit from the company's accretion of - - -

MR GRAY: Yes, and we said in our outline towards the end all the policy reasons that support that course, and the Court must understand in any case of a shareholder doing a wrong to the company and a recovery, if that person stays a shareholder, on at least the initial level they will benefit with that recovery and - - -

CALLINAN J: Well, those who have sold their shares in theory should have sold them taking into account the likely fruits of these proceedings.

MR GRAY: Precisely.

CALLINAN J: Whatever they might be.

MR GRAY: This happens with every company where shares are bought and sold. There is nothing unique about this at all and it arises in every case where a shareholder has been brought to account by the company in regard to damages and if they remain a shareholder the money comes back into the company and they will then have their proportionate share. If they have then a responsibility to others, that will be one of their assets available to that recovery.

McHUGH J: Well, that happens all the time in misfeasance cases.

MR GRAY: Yes.

McHUGH J: But the fact that you do get this almost perverse result is a reason for insisting on adherence to a proper legal analysis of the transaction.

MR GRAY: Well, there is no quarrel with that and we come saying that this is a contract with the company, shareholders have no rights in regard to this contract, they cannot sue on this contract, and the question is, "What does the company suffer?" If one is looking at other shareholder rights against Nelson Wheeler, it is very difficult to create a right against Nelson Wheeler in a shareholder.

McHUGH J: I must say I am far from convinced that the shareholders at the 3J meeting could not have sued.

MR GRAY: Well, your Honour, that goes then to a - - -

McHUGH J: They were a small group. They were in a very different category to the Esanda-type situation where you are just dealing with an indeterminate class of creditors and potential creditors. This is a specified group.

MR GRAY: Well, your Honour, that is, as it were, a different debate.

McHUGH J: Yes.

MR GRAY: We have set out all those policy reasons from, not in Esanda.....and the other cases would act against that or the problems it creates. The other problem is what you do with, as far as the shareholders concerned, at what point do you give them their rights in regard, in particular, say, later acquiring shareholders. For example, when does the floor become uncovered? When is the damage suffered? There are tremendous problems then selecting a time at which to choose what shareholders can recover. If you choose the shareholders at the time of the transaction, you might not learn about the problems until years later, and all sorts of other issues have taken over.

There are enormous policy problems and practical problems in trying to give a right to shareholders. But the theory here is quite fair because the company recovers. If a miscreant has a shareholding and they get a benefit from that recovery, then that will swell their assets. If they were exposed because of their misconduct, they will be assets available to whoever has a claim against them. But, necessarily, it follows that when you have a company - all misfeasance cases necessarily follows. If the director who is the miscreant is also a shareholder, he is going to, as it were, get the benefit back as a shareholder.

McHUGH J: I suppose you can rely on what Lord Simonds said in Plato v Speidel that it does not follow that because the plaintiff receives more than he is entitled to that the defendant has paid more than it should have had to pay.

MR GRAY: Yes, it is a question of analysing, as your Honour the presiding judge has said, exactly what are the legal rights here that are being impaired and what are the consequences? The issue with this Court is whether Kia Ora suffered a loss, not how one values that loss.

KIRBY J: Presumably the shareholders would be out of time now to sue - - -

MR GRAY: Yes. Now, if the Court pleases, that is why, in strict legal theory, one way of approaching this is through Amann Aviation and looking at expenditure wasted. That takes one into the covenants the company gave that it would not have given. Those covenants have been wasted by the company. They did not get the value that they should have got.

McHUGH J: You are just going over old ground, but anyway you have made the point.

MR GRAY: Yes. If the Court pleases, could I just continue a little further in Stanton?

HAYNE J: Now, Stanton was a taxation case, it was a deduction case.

MR GRAY: Yes.

HAYNE J: The deduction being limited to the amount or value of consideration given for the acquisition.

MR GRAY: Yes, and in that context the matter is put very starkly to the proposition that the shares that were issued had cost the company nothing and that argument was rejected. That is the very argument that is being put by Mr Myers in this case, that the shares cost this company nothing. This point is dealing with the nature of the transaction and is not, with respect, impaired because it is a tax case because it is analysing the nature of the transaction.

GUMMOW J: Where do we find an identification of what it was supposed to have cost the company?

MR GRAY: Well, this particular line of authority is picked up in - - -

GUMMOW J: No, in this decision.

MR GRAY: As to costs?

CALLINAN J: It is 511, is it?

GUMMOW J: Where does Lord Roskill deal with it?

MR GRAY: Well, it is dealt with in the adoption of Lord Greene's remarks at the foot of 510 as the value of the consideration passing, and then it is dealt with at the foot of 511. There is reference to Craddock's Case where the same principle is being identified and then at the foot of page 511:

From these judgments I extract the following propositions relevant to the present appeal. A company can issue their own shares "as consideration for the acquisition of property" - as Lord Greene M.R. said. The value of consideration given in the form of the fully paid shares allotted by a company is not the value of the shares allotted but, in the case of an honest and straightforward transaction, is the price.....agreed.

In the case at Bar we have sought, not the price agreed, but the value of the shares allotted because this is not a straightforward case. Now, if that be correct, my learned friend's contentions fail. The second aspect of Lord Fraser's speech is to deal with the question then of the issue of value. Does one take the contract value or the real value?

Lord Roskill is to the same effect. He at 515 first of all quotes from the Ooregum Case. I just wanted to mention four or five lines from that:

"A company is free to contract with an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential.

We would say that that is a very good illustration. Here, if Kia Ora had as a related transaction raised the money, issued shares to AMP, a third party, raised the money, then used that money on this transaction, there would be a loss.

HAYNE J: If things were different, things would be different. That is all that that proposition amounts to, Mr Gray, is it not?

MR GRAY: Except in the Ooregum Case it is making the point that simply going through the longer process, the circuitous route, is not necessary. That, with respect, is the answer. It is not just if things were different. There must be something substantial that follows from the difference. If that had happened - - -

HAYNE J: The company's bankers might have thought there was something substantially different.

MR GRAY: On the hypothesis that happened, my learned friends would be conceding the loss and all these other problems he spoke about about shareholders would remain. So by that simple change in the way the transaction was done, we move from complete recovery to no recovery. Tested that way, it does not make his point of prejudice, his point of principle, with respect, sound to be much strength. If it was a round robin of cheques, for example, if before Kia Ora did anything it received a cheque from Western United shareholder and endorsed that cheque back to the shareholder as part of the consideration, on that basis there would be full recovery. That type of technique of changing the transaction does not in substance change it. That is the point the Full Court made. This is a matter of substance. It can be a matter of form, not substance.

Lord Roskill at page 516 refers to Osborne v Steel Barrel and Craddock at paragraph C:

Both those cases involved the determination of the cost to the taxpayer of "stock".....In both cases the taxpayer contended that the cost was what the taxpayer has paid. In both cases the Revenue sought to go behind the agreement pursuant to which those shares were so issued, and to contend that the issue of the shares credited as fully paid had cost the taxpayer either nothing, or at any rate, less.....They failed for substantially the same reason, namely, that their contention ignored the true nature of the issue of shares credited as fully paid for a consideration other than cash.

Then picking up exactly again of the passage in Lord Greene. That is not an analysis being driven by any tax law. That is an analysis strictly of the transaction. What it does is it recognises that the true nature of the issue of shares is that - if I might read a little further from Lord Greene:

"The argument really rests on a misconception as to what happens when a company issues shares credited as fully paid for a consideration other than cash. The primary liability of an allottee of shares is to pay for them in cash; but, when shares are allotted credited as fully paid, this primary liability is satisfied by a consideration other than cash passing from the allottee. A company, therefore, when, in pursuance of such a transaction, it agrees to credit the shares as fully paid, is giving up what it would otherwise have had - namely, the right to call on the allottee for payment of the par value in cash.

So here - - -

GUMMOW J: But the taxpayers who are being talked about here, the taxpayers are in the position of these shareholders in Western Union, are they?

MR GRAY: No, this is speaking about the acquirer, this is the exact position of Kia Ora.

HAYNE J: Such that on this analysis, the consideration given by Kia Ora if it were a British taxpayer subject to this, would be $1.10, or would it be the dollar, the par value? They were credited as fully paid.

MR GRAY: It would be the par value unless the transaction was other than an honest and straightforward one. See, the final notes, based on.....by the directors that they be the assets acquired. In the hypothesis, one has an honest transaction, the cases say that it is to be accepted. But when the transaction is not an honest one, then one goes to - - -

CALLINAN J: On page 517G:

unless the agreement can for some reason be "impeached," - - -

MR GRAY: Yes. So here, being impeached, one goes to actual value. The point about this, if the Court pleases, is that one of the wasted expenditures was that Kia Ora gave up the right to call for the allottee to pay, in this case, par value.

McHUGH J: That is not a wasted expenditure; that is a misuse of terms to talk about a wasted expenditure.

MR GRAY: Can I put it another way, then: it is a loss of an asset. It is a right to receive par value and it has been lost.

McHUGH J: But that is the expectation. Tell me, what I do not understand about this case is why your claim against Nelson Wheeler was not along these lines, that Nelson Wheeler promised that if Kia Ora issued a certain number of shares in consideration of receiving so many shares in Western Union, Kia Ora would receive shares to the value of $X. That would have been a simple case of expectation loss.

MR GRAY: Based on the contract of Nelson Wheeler.

McHUGH J: Yes. That claim was never made.

MR GRAY: The claim has advanced in the way that the Court has found, but it was also put - - -

HAYNE J: But Nelson Wheeler never made that promise, did it? Nelson Wheeler promised that it would undertake some work carefully and it did not.

MR GRAY: There was no warranty by Nelson Wheeler.

HAYNE J: But there is the point, is it not?

McHUGH J: That is the point, that you have either to spell out of its report and what it did promise along the lines I have indicated, or you are stuck with the promise that they did no more than promise to take reasonable care and that put you back on reliance damages.

MR GRAY: There was no suggestion this was a warranty case. That was not spelt out of the arrangement and that was never put. But, if the Court pleases, it was put that there was reliance. The effect of the reliance was entry into a transaction that would not otherwise have gone ahead. The question then becomes - I am going over old ground - what is the consequence of that? One type of language that has been used that is not entirely apposite, is "waste expenditure". But one can equally say, "What has Kia Ora wasted?", leaving aside expenditure, because it must be wide in expenditure. One thing that is wasted is this right to allot for consideration. That has been wasted. In the events that occurred, that has gone to waste. To put it another way, and perhaps more correctly, that it gave up. What did it give up? What did it lose? It lost the right to call for par value.

Now, if the Court pleases, there is one point in my learned friend's submission where there is an important factual error and it is on this very topic. It is paragraph 86. We have identified a number of errors but this one was not identified.

HAYNE J: What page, Mr Gray?

MR GRAY: It is page 19, paragraph 86 of the outline.

HAYNE J: Yes.

MR GRAY: And it says:

A contractual right to recover the par value for an issued share cannot be assumed -

this is on the very point I am putting -

A no liability company can issue shares at a discount -

and then the following words are the incorrect ones -

as Kia Ora did in this case -

Now, that is directly contrary to the finding of the trial judge at page 115 of the ACSR report, directly contrary to it, and this was not challenged in the intermediate court.

McHUGH J: What is the paragraph in the trial judge's - - -

MR GRAY: It is paragraph 86 of the outline - - -

McHUGH J: Yes, I know.

MR GRAY: - - - and the judgment it is page 115 lines 30 to 35:

In my view, the opinion of Hayward was correct -

says the trial judge -

and for the reasons which he expressed. Kia Ora was not able to create retrospectively a situation which did not exist. Kia Ora issued the new shares at par, not at a discount, which is not to be confused with their true value at the time.

Now, that has been transposed to the exact opposite in this outline and it is incorrect and was not challenged in the intermediate court.

GUMMOW J: But does it matter?

McHUGH J: Yes.

MR GRAY: It does matter when one comes to look at the analysis being put in Stanton because one way in which the, as it were, loss is identified or there has been a waste of something of value to Kia Ora is that it has given up in this transaction damage it otherwise would have had, the right to call in the....payment of the par value in cash.

McHUGH J: But you keep using "waste", a term that you borrow from Amann's Case. There is no waste here. They have incurred obligations. They still get something for it. They just do not get what they expected to get for it. It is not as if the money has just been wasted in the sense it is of no value whatever.

MR GRAY: In expectation terms one would say they expected to get 112 million - 106 million for it - 112 and they got 6. In reliance terms they actually spent something worth 96 and got something worth 6. They actually spent something worth 96 and got 6 back, so - - -

HAYNE J: The difficulty lies in the expression "worth 96", worth to whom? And we are back on the central debate which we have, perhaps, exposed.

MR GRAY: Yes. Could I put it another way then? We would say that the company has suffered a loss because it had this right it no longer has. It is a different question as to how you value that loss.

HAYNE J: You have said repeatedly, Mr Gray, that the grant of leave being limited, the question of valuing the loss does not arise on this appeal.

MR GRAY: Yes.

HAYNE J: I am not quite sure that I understand the significance of that submission that you make.

MR GRAY: Well, for example, if the Court took the view that there is a loss to Kia Ora but it is not to be identified simply as value of consideration passing, valuation of consideration received, but it is to be assessed in some other way, then we simply do not have the materials before the Court to assess it another way and there was a lot of material.

HAYNE J: But are you saying then that much, if not most, of your outline of argument is addressed to issues which do not arise?

MR GRAY: Some of it is.

HAYNE J: I find that startling.

MR GRAY: The difficulty is the argument put against us was that the issue of the shares cost Kia Ora nothing and to answer that submission involved our having to go into some of the material.

HAYNE J: But I had read your submissions as seeking to support the Full Court in all its aspects of this issue of the case, but am I wrong?

MR GRAY: Yes. We have not addressed what might be - if the Full Court's manner of assessment of loss is incorrect, what would be the correct assessment of loss, because that is not an issue before the Court.

McHUGH J: Well, let me make it plain. When special leave was granted in this case, at least so far as I am concerned, it was not granted on the basis that if you could show that you suffered a loss of $20,000 the appeal failed. We were dealing with the real questions of substance here.

MR GRAY: Yes. Your Honour, we are not speaking about the cost of printing up some paper or the cost of the Nelson Wheeler report. But what we are saying are these various matters that we do, do lead to a matter of substance. Now, take, for example, the loss of opportunity. The claim for loss of opportunity was put at trial and rejected, and there was evidence led in regard to opportunity. But that has all been rejected and, from our point of view, because we have succeeded on our primary claim, in that sense, it becomes irrelevant. If we lose on our primary claim, we do rely on evidence led at trial by Mr Easton that there was not a question of being able to issue these shares for cash, but it was, and there is very clear evidence, this was a prime time to be able to issue shares for - acquire assets.

GUMMOW J: Is this some sort of notice of contention that you did not raise in the Full Court, that you somehow want to keep in the cupboard for here?

McHUGH J: I was just going to say that.

MR GRAY: No.

HAYNE J: Well, what is the order you would seek to have us make if you persuaded us that some damage had been suffered?

MR GRAY: Some substantial damage, other than just the cost of scrip or something like that. No, but the order the appeal be dismissed.

HAYNE J: So, without passing upon the correctness of the assessment, you should hold the verdict you obtained in the Full Court?

MR GRAY: The issue on leave was limited to the point of principle. Also - - -

HAYNE J: No, no, answer my question, Mr Gray: is the answer yes?

MR GRAY: Yes, the answer is yes. No, the answer is yes, the point of appeal - - -

HAYNE J: For my part, I find that an unusual position in which we are to be put.

McHUGH J: Mr Gray, I think you should proceed on the basis that, if necessary, we would formally extend the grant of special leave if there is any argument about it, is that if you can make out a case other than in terms of what the Full Court held in your favour, but failed to justify what they have found for you, or their reasoning process, then we would send the matter back to the Full Court to be dealt with.

MR GRAY: If the Court pleases, can we say that, for example, there are other matters of damages, for example, interest that interweave with these sorts of matters where my client was unsuccessful, sought special leave. So it is a case where, if damage is to be viewed at large, one must work right through all the areas of it.

McHUGH J: Yes, but I think you should proceed on the basis that, certainly speaking for my own part at the time, the special leave was intended to deal with a real matter of substance as to whether or not you were entitled to obtain damages along the lines that the Full Court gave you and if you make out a case that you are entitled to damages but not along the lines that the Full Court has found for you, then we would send it back and the grant of special leave should be understood in there.

GUMMOW J: And it would be for the Full Court to decide whether it was still open to you in the way you had run the case in the Full Court to have another go.

MR GRAY: Yes.

CALLINAN J: Mr Gray, do you rely upon Kenny & Good at all?

MR GRAY: Yes, we do. We say - I do not have it right to hand, but if the Court pleases, we say that we come within the principles there.

CALLINAN J: Do you say that the liability of the appellants has to be considered or assessed in the light of the task they are asked to perform and you do not need a warranty in order to get the sorts of damages that you say you are entitled to?

MR GRAY: Yes, indeed.

CALLINAN J: Relying particularly perhaps on the passage at paragraph 80 in Justice Gummow and possibly 116 in the judgment of Justice Kirby and myself.

MR GRAY: Yes. I do not have that judgment in front of me at the moment, if the Court pleases, but I do recall those passages and we do say here that the very task of Nelson Wheeler was to protect Kia Ora in regard to this very transaction.

CALLINAN J: And that is not saying that it is a warranty case and you do not need to say that.

MR GRAY: No, and that was certainly at the forefront of our submissions, both at trial and the intermediate court. This was the very purpose of the contract. In fact, that will be in other parts of the judgments. Just dealing with Stanton for the moment, at page 518D dealing with the question about - - -

GUMMOW J: We have got to read that case but understanding what the revenue he was trying to get away with.

MR GRAY: Yes, of course, but the point we are making, if the Court pleases, is that we accept all of that - - -

GUMMOW J: There was no deduction at all.

MR GRAY: Indeed, and the answer was to critically analyse the precise nature of the legal relationships involved what was happening.

HAYNE J: Well, that is the revenue. It was saying there had been no consideration for this transaction, a rather startling proposition.

MR GRAY: That it had cost through the issue of shares - - -

HAYNE J: No, no, there had been no consideration. The relevant statutory requirement was to find the consideration.

MR GRAY: And the subsidiary argument was being put that it cost the company nothing to issue shares so that the direct point involving this case being addressed there and rejected, as Lord Roskill says:

But in the passages in the judgments of Lord Greene MR to which I have referred, he was explaining the nature of an agreement to issue shares credited as fully paid and otherwise than for cash, in order to lay the foundation for the rejection of the Revenue's argument that the "stock" in question had cost the taxpayer nothing. I do not think that Lord Greene MR was intending to lay down a rule -

et cetera, and then at page 519 he reserves in paragraph E "for future consideration" the question about adducing evidence as to value, for example, when the integrity of the transaction was being impeached. Now, there is a case referred to of Shearer which I would like to pass to the Court.

This again was a tax case and the particular tax section involved is referred in the headnote as section 290(4) but the other section being considered was the obligation to create a share premium account, section 56, and its comparator in the Companies Code at the relevant time in Australia was section 119.

The transaction involved the taxpayer taking shares in circumstances where he received for each share that was allotted and creating a share premium account. There were then some dividends paid by the two acquired companies and the taxpayer wrote down the share premium of account and the issue was whether in the English Tax Act circumstances that was taxable or not, but it did require an exploring of the underlying transaction, not in the artificial way but as to what, in reality, was happening.

Justice Walton at page 301 sets out section 56 of the English Companies Law and the Court can see it is materially the same as section 119 of the then Companies Code.

At page 305 the seven submissions of the Crown are identified at paragraphs d to f, and it is in the course of discussing those submissions that the relevant remarks take place. At page 306, paragraph f:

So far as the Steel Barrell case -

that is Osborne's Case being approved of in Stanton -

is concerned, that is chiefly notable for another remarkable contention on the part of the Crown, namely that since the issue of shares in a company cost that company nothing (beyond, doubtless, the cost of providing the relevant share certificates) stock acquired in exchange for shares should be treated as having been acquired for nothing.

Which is my friend's position -

In refuting that contention, Lord Greene MR said -

and then there is the quote from Lord Greene -

When counsel for the Crown first read me that passage I assumed that the words `consideration moving from the company' must be meant to read `consideration moving to the company', but on rereading and reflection I now see that this is erroneous. What Lord Greene MR is saying in that passage is that, because shares cannot be issued at a discount, if the company issues shares in exchange for stock, the minimum value which the directors must have placed on that stock, fairly and honestly, is the nominal value of the shares.

GUMMOW J: Yes, well that is it. That was the robust common sense answer to this rather greedy revenue claim.

MR GRAY: And then continuing on:

So long as the value of the assets acquired for the shares is equal to the par value of the shares, there will be no breach.....But it is implicit -

et cetera. Then over the page, at paragraph d to e:

The power raising capital, or acquiring assets, by the issue of shares is, like all the other powers conferred on directors, a fiduciary power to be exercised in the best interest of the company. Accordingly, if what is sought to be implied by this submission is that the company can do what it likes as regards the issue, this very far indeed from being the case.

As the evidence of the expert accountant for the court was, issuing shares is a matter of real interest to the company. It needs to get in a value for the shares otherwise it would be quite indifferent whether issuing shares or not. That, of course, picks up on Ngurli v McCann, that passage. Then, over the page again there is the - on this occasion the quote from Lord Wright in Lowry's Case at the top of 308.

"It is true that unissued shares are not an asset, in any sense, of the company. What value they have only comes when, and by the fact that, they are issued, just as a deed has no value, and, indeed, no existence, until it is signed, sealed and delivered, or a negotiable instrument until it is issued. Unissued share capital was described by Lord Davey.....as potential capital. The power to issue further capital is only a potentiality, but the fact of the issue makes it actual capital, and creates the fasciculus of rights and liabilities between the company and the shareholder which flow from the share when issued. If the share stands at a premium, the directors prima facie owe a duty to the company to obtain for it the full value which they are able to get.

Now, again, we say that is all directly apposite to the case and it is identifying that this right is a matter of real value to the company because it receives in an asset that it can use, and it does then reflect, of course, through to shareholders.

McHUGH J: Mr Gray, how are we going for time?

MR GRAY: I thought perhaps half an hour to three-quarters of an hour.

McHUGH J: So we will finish well within the afternoon.

MR GRAY: Yes, we would expect to finish.

McHUGH J: We will adjourn until 2.15 pm.

AT 12.46 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.19 PM:

McHUGH J: Yes, Mr Gray?

MR GRAY: In the intermediate court judgment at paragraph [125] of page 250, the finding about the terms of the retainer are set out. I wanted just to go to that and the Full Court's findings before going to discuss Kenny & Good. There was no written record of the retainer, the letter of instruction apparently having been lost. But the trial judge at line 4:

I am satisfied that the scope of the retainer was that Nelson Wheeler Perth was to undertake a valuation of Western United for Kia Ora in the context of a proposed takeover and then, if required, to prepare a report pursuant to Listing Rule 3J(3), which is what in fact occurred.

So it was a particular contract, a particular retainer in regard to that particular proposed transaction. First in regard to the valuation, then in regard to the direct proposed transaction.

The intermediate court then, at page 285, paragraphs [344] and [345] spoke of the nature of the duty. Paragraph [344]:

Nelson Wheeler Perth were under a duty of care to guard against the risk of the directors proposing to the shareholders a purchase at a price that was not fair, because of self-interest. Putting it a little differently, it was the foreseeability of the risk of the directors acting in the manner in which they did, which contributes to the conclusion that NWP owed a duty of care in that respect to Kia Ora. That duty was not performed and the relevant risk eventuated.

So that the very matter that occurred was the very point of the retainer protected against and was specifically the subject of the retainer and, in that sense, we would say the matter does attract the description given in paragraphs 80 and 116 in Kenny & Good.

Against that background it is interesting just to reflect for a moment on Kenny & Good because that was a claim in tort and breach of statutory duty. Because of the negligent valuation a subsequent contract of lending was entered into and a loss was taken on that contract. The lender paid more for the security than he should have. In that sense, overpaid consideration. The Court allowed that as reliance damages. There was no problem with any suggestion of expectation damages.

Now, if we change the circumstances slightly and contemplate a contract where a valuation in regard to a car is taken: the car is valued at $500; the purchaser pays the $500; the car turns out to be worth $250. The purchaser could sue the valuer and would recover $250. That would be a straightforward application of Kenny & Good. It would be a claim assuming in tort. There would be no question that these were reliance damages, no question of expectation loss.

If we change the circumstances a little and now, instead of paying cash for the car, it is a car swap. One car is given to the other on the basis that the car being obtained has been valued at $500. It is worth $250. On the face of it the prima facie claim would be for the difference between the value of my car, which I put at $500, and the $250 received. It turns out that the car being traded is not worth $500. In fact, it is worth $450. The loss is $200. In each instance that circumstance against the valuer, the claim is for reliance damages.

McHUGH J: I would have thought not. I would have thought it was for reliance damages.

MR GRAY: We would say in Kenny & Good, the very basis of the award of damages there was for reliance damages.

McHUGH J: No point was taken about whether it was reliance or other sort of damage. It was all about whether or not the House of Lords was to be followed in Australia and when it reached this Court that was what the argument was about.

MR GRAY: Well, we would say that Kenny & Good on its direct application allows for recovery of damages in tort in this circumstance and we would say, with respect, correctly so and the difference - then if we come to this case. In this case the basis my friends advance the argument is the difference is between consideration paid, the cash, and consideration received. Their proposed assessment of damages and award is based on a difference in consideration and nobody is suggesting that that is an expectation loss, that that is reliance damages.

So the real issue becomes what if, instead of passing with cash, Duke in this case did property, something moneys worth, property, would that be any different than cash? One would say no. What then is the difference the fact that it is a share? The answer it must be something in the nature of the issue of a share.

McHUGH J: Well, it is.

MR GRAY: But, with respect, it is not expectation. It is a question of reliance damages, not expectation damages.

McHUGH J: But you have got nothing to lose. The shares are not yours. You have got a right to issue them, but that is all. They have no value to the company as such.

MR GRAY: Well, with respect, what I was wishing to do with those examples was to say this is not a matter about expectation of reliance damages. It is about analysing the true nature of what is said to be moneys worth in this case. That is the true question.

McHUGH J: If the company has lost anything here, it is things to do with its credit rating and it is to the amounts of money perhaps that it could borrow, either on the market, from shareholders in the future, but that may or may not be a case that you have run at some stage but - - -

KIRBY J: Did you run that sort of case?

MR GRAY: It was said that the company had suffered financial detriment through the issue of shares. It was put in a variety of ways. For example, one of the cases the court was - - -

HAYNE J: Was one of those ways an increased cost of capital, debt or equity?

MR GRAY: I cannot recall it being put in those precise terms, but what was put was that the company had suffered a financial detriment and that could be viewed in many ways. I just cannot recall whether that specific example was used. I mean, the case went for a long time, and I just cannot bring to mind whether that particular example was used.

HAYNE J: Put it this way: there was not a parade of bankers and others telling you what the cost of capital for the company was or should have been?

MR GRAY: No, no.

McHUGH J: Or would be after this transaction.

MR GRAY: No, no, the evidence was not led of that. But, for example, what was relied on was the passage in Ord - - -

KIRBY J: Would you need evidence to give the detail of that, or could common sense tell you that that - I mean, in a sense, it is self-evident that that would be the case.

MR GRAY: It is self-evident.

KIRBY J: Its detailed and the actual quantification might be difficult, but that there is a loss is clear.

MR GRAY: Indeed. Yes, the lack of evidence might go against the plaintiff when one comes to assess the loss, and it is a lack of evidence that might limit the loss the court could award, but it does not deal with the point as to whether in principle there is a loss. For example, in Ord Forrest - - -

GUMMOW J: You would have to quantify it then, would you not?

MR GRAY: I am sorry, your Honour?

GUMMOW J: You would have to quantify it.

MR GRAY: Yes.

GUMMOW J: Yes.

MR GRAY: But again, with greatest respect, the issue of principle.....this Court was, in substance, had the company suffered a loss, something more than simply - - -

GUMMOW J: Yes, I am just wondering what, as against a situation where you could not hang on to this award you have here, as to what is really left as an alternative foundation for some other quantum of recovery which you say is still behind in the Full Court and which you want to preserve for yourself.

MR GRAY: If the Court pleases, perhaps if I could just use this example. In Ord Forrest, 130 CLR 135, Justice Stephen, at first instance, who was approved of 2:2 in that case and then further approved in St Helens' Case - - -

McHUGH J: Did it survive eventually?

MR GRAY: Yes, this view ultimately survived and he, in fact, restated it in St Helens. But at 135, in the last paragraph:

The second misconception is involved in the proposition that a company which allots at par shares having a value greater than par does not thereby suffer any financial detriment.

He goes on then to discuss Hilder v Dexter and explains how Lord Davey had been misunderstood. For example, Justice Gibbs, in the same case, at pages 148 and 149, at page 148 there is a picking up of the re V.G.M. Holdings Case, a misfeasance case, and just before about point 3 of the page:

Moreover, the share does not pass from the company ; before allotment the share does not exist as a piece of property ; it is only when it is allotted and issued that the rights which it confers are created -

Then over to 149, having decided because of the extended definition of the Gift Duty Act there was a "disposition of property", he then comes to consider value, and at line 4:

It must further follow that any allotment of shares in a company which is made without fully adequate consideration passing from the allottee to the company is a gift. The value of the gift will be the extent of the inadequacy of the consideration -McHUGH J: What do you say about the passage on the top of page 148:

An allotment of shares cannot be described as a disposition of property in the ordinary meaning of that expression. When a share is allotted, nothing is transferred or conveyed from the company to the shareholder.

MR GRAY: That can be accepted but that rather begs the question because, when one goes to the next stage and what actually happens in the transaction, because it did not exist before and does not exist until the moment it is in the shareholders' hands as a covenant, it is no different than a deed.

GUMMOW J: These Gorton cases turned on paragraph (a), allotment of shares, as being a disposition. What Sir Harry Gibbs is saying in the middle of 148 is that:

However, the definition of "disposition of property" extends to transactions which are not dispositions in the ordinary sense.

It was that distortion of ordinary concepts through the statute that runs through all these Gorton cases, how to grapple with it.

MR GRAY: We accept there is that special definition but, when one then comes to look at the underlying reasoning, we say at that level.....in the transaction, it is apposite. If one goes to pages 150 and 151, at the foot of 150 there is the passage from Justice Dixon I referred to earlier that I would like to read because it does characterise the nature of the obligations the company comes under:

"The allotment of the share and the payment up of the liability thereon conferred upon the holder for the time being of the share a right to have the assets of the company used and applied in the various ways in which the articles expressly or impliedly require or authorize and this is one of them. It is an effectuation or realization of the rights obtained by the acquisition of the share in the same way as is the distribution of a dividend. The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment."

That is in language of an immediate existing right in regard to - that a shareholder is against the company, so that is something that the company has given in this transaction.

It comes about - and Justice Aickin rather describes it, we would say, very fully in St Helens' Case. This is in fact the taking on of an obligation that amounts to the passing of consideration. Justice Aickin in particular in St Helens equates it to a deed.

GUMMOW J: Where did Justice Aickin end up in all of this?

MR GRAY: He ends up in the minority.

GUMMOW J: On the Barwick side, does he not?

MR GRAY: But this particular passage, we would say, is not a matter where there would be contention. It is page 443 in St Helens at the top of the page:

It was also submitted that an executory contract was not included in any part of the definition of disposition of property. Executory contracts, generally speaking, and perhaps always, create property in the sense that they create choses in action. When a complete allotment is made in discharge of an obligation there is necessarily full consideration because it is in satisfaction and discharge of the existing obligation and is the counterpart of the right of the subscriber to compel the company to make the complete allotment. Conversely there is the right of the company to compel the subscriber to pay. Such consideration could properly be regarded as passing from company to allottee and vice versa.

So, one is talking about a right in the company to have the consideration. If one goes back to the car analogy, it is no different than, we would say, the right of the purchaser of the car to have what had been bargained for. The same in Kenny & Good, the right of the lender to have had adequate security.

McHUGH J: But the right of somebody for damages for what he bargained for is a classic case of expectation damages.

MR GRAY: Indeed, and that is why in this particular case we would move away from what was bargained for. Take the case, for example, of the car: where there is a car swap and one says, "Well, my car is worth $500 and I am swapping it for a car the valuer said was $500, the valuer was wrong, it was worth $250, I am wrong, my car is worth $450". In tort, the damages are not $250, they are $200 - $250 the expectation, $200 would be reliance. The extra $50 is expectation, the bargain.

McHUGH J: But to begin with in the illustration, even if it is apt, the person who owns the property, the person who is transferring something out, just as in the case, the company transferred out $20,000 of its own money - cash.

MR GRAY: Indeed. We say that the true question is whether the shares issued are, for relevant purposes, the equivalent of monies worth or not.

McHUGH J: Exactly.

MR GRAY: That is the question. It is not dealt with by expectation arguments, it is dealt with by an analysis of what happens on the issue and allotment of a share. The expectation analysis is, with the greatest respect, we would say, wrong. We rely on Kenny & Good to support that, where nobody suggested under a heading of "reliance damage" there could not be recovery. So the real question is, are my learned friends right when they say these shares were issued at no cost to the company? There one comes up hard against Osborne, Stanton in the House of Lords, and a whole lot of English cases saying that that is a nonsense, it does cost the company something. The question then becomes how to analyse that cost. The next step in the analysis where we recognise that this was not a pre-existing asset, it is something the company creates, it exercises its power, it creates the asset - - -

McHUGH J: Yes, but your argument does seem to me to equate the incurring of an obligation with a loss. That cannot be right because if the company gets what it bargained for, you can hardly say in those circumstances that the obligation was a loss.

MR GRAY: The company, with respect, did not get what it bargained for because it was bargaining for receiving $112 million; it received $6 million.

McHUGH J: Yes. That is its "loss"; it did not receive what it expected to receive.

MR GRAY: We say that is no different than the lender who overpaid consideration in Kenny & Good. He got less for security than he expected to get. But all that sounded in reliance damages. In Kenny & Good the lender got security less than he expected.

McHUGH J: Just test it with a simple illustration: you have a company with $100,000 in assets and a paid up capital of $100,000, and issues another $100,000 worth of shares to get something which is totally worthless. Now, if you ask yourself what has it lost? It has lost nothing; it still has its $100,000 worth of assets. What it has lost is the right to obtain something which is worth an equivalent $100,000.

MR GRAY: Take the example, if the allocation was for cash and was not paid, the company would have an undoubted right to call for the par value and could sue for it. No question. If it was for something other than cash, then one would have to look at the company's position and its position has changed. It has suffered financial - in the terms of Justice Stephen, it has suffered financial disadvantage in the following ways. First of all, it has failed to receive the consideration on the contract and we would suggest that it has taken a loss. That loss would be taken on its profit and loss account. It would have be taken on its profit and loss account and that - - -

McHUGH J: But that has to be taken into account on its profit and loss account because in its debtor's ledger it would have an entry in there for the asset which it purported to receive worth X dollars when it was worth X minus Y, so the Y has got to be written in and it will be charged against X through the profit and loss account and eventually it will find its way as a deduction from the shareholders funds.

MR GRAY: Well, just pausing though, it should make no difference whether the allotment is for money or money's worth in terms of the company. The fact that it is not receiving cash but receiving money's worth should make no difference from the company's perspective because there is absolutely no reason to view it differently.

McHUGH J: But supposing it did issue these shares for cash and -supposing a company issued shares for cash and no cash is paid, there is a default. The company has then got a right to recover the fee, but it is a right. It has not suffered any loss.

MR GRAY: But if it cannot recover it, it does and that is the difficulty.

McHUGH J: No, but it does not get a loss from the issuing of the shares.

MR GRAY: No, it is the issue of the share coupled with the failure to receive in the cash that leaves it with a loss and that loss would be reflected in its profit and loss account first and it would then be taken through its profit and loss account to its balance sheet and, as it does in this particular case, it eliminates carried forward profits.

McHUGH J: Yes, I know but I think we are just going over the same ground. It seems to me it is just the same argument that is put against you that what it has lost is its inability to receive the $100,000 which it expected to receive.

MR GRAY: But to give an example of how this company suffers financially, before this transaction it had carried forward profits of $20-odd million. They are eliminated and it is left with carried forward losses of $67 million. So it has lost the advantage - - -

McHUGH J: But that is an accounting effect. It is not a property effect. In fact, they are better off in one - well, if they had not paid out the $20,000 they would be better off.

MR GRAY: Well, this is the oddity. From an accounting point of view of my friend's analysis this company is $6 million better off.

McHUGH J: Yes, but that is because we are dealing with a limited liability company and one has to draw a distinction between the shareholders and the company as opposed to a partnership. Your argument would be unanswerable if this was a partnership. If a partnership sells its interest, the sale is made by those who have something just as in this case the company has got 20 million which it hands out, but the argument against you is that the shares are worth nothing to the company at all.

MR GRAY: Well, if the Court pleases, if I could just finish with the balance sheet very quickly and then leave it?

McHUGH J: Yes.

MR GRAY: The difficulty that your Honour's proposition contains is that the company does suffer a real financial disadvantage by not having retained profits because dividends can be paid over obtained profits in a year when the company makes a loss. So the company loses the ability to pay a dividend, in this particular transaction destroyed the company's ability to pay a dividend.

HAYNE J: The company has lost?

MR GRAY: Yes.

HAYNE J: How has the company lost?

MR GRAY: The ability to pay a dividend can be a real advantage, commercially, to a company and what this has done is it has completely eroded the retained earnings out of which a dividend could have been paid.

McHUGH J: But the inability to pay the dividends is the shareholders' loss.

MR GRAY: Yes.

McHUGH J: The company's property remains exactly the same.

MR GRAY: One of the rights that a company has, one of its abilities is, at appropriate times, to pay dividends. Now, that could be a very important right to a company. The beneficiary of the exercise of the right is the shareholder, in one sense, but it has commercial benefits to the company.

GUMMOW J: Right is the right word, is it?

MR GRAY: I am sorry, your Honour.

GUMMOW J: I am sure "right to pay a dividend" is the correct way - - -

MR GRAY: Or an ability to pay a dividend. I would be happy - - -

CALLINAN J: Mr Gray, I was just going to ask you, the directors are bound to form a fair view of the value of the assets at the end of each accounting period, are they not?

MR GRAY: Yes.

CALLINAN J: And they would be bound to form a view about the value of the Western shares that they got and the view that they would form would inevitably be that they were virtually worthless or whatever it was.

MR GRAY: Yes.

CALLINAN J: Did it then follow that the assets of the company would have to be written down to the extent - - -

MR GRAY: Yes.

CALLINAN J: Is that the loss that you contend for, then?

MR GRAY: Yes, it is, and that is demonstrated explicitly in exhibit P1170, pages 561 to 563 of book 3.

McHUGH J: Yes, I know. But the point I put to you earlier, and I will repeat it, but the reason that loss is there and it is written down is because it was an expectation. The company brought the asset into its books at $100,000 when it should have brought it in at $60,000 or $40,000 or whatever the case may be, so it then has to write it down. But it is an expectation loss. At least, it seems to me at the moment. When I fully consider these arguments - your arguments may have persuaded me to the other view - but at the moment I really have difficulty with this.

MR GRAY: If the Court pleases, I do not want to go to the expectation argument again.

McHUGH J: No.

MR GRAY: But we do say Kenny & Good, on its application, I think all members of the Court agree there were reliance damages. The point of difference here related to whether the market fall would form part of that or not.

McHUGH J: Your real argument at the moment seems to be, and perhaps it is not a case that was ever run, namely that as a result of this transaction, you have suffered a loss in the sense that it is now much more difficult for you to raise capital, either from creditors, bankers or even from the market, you would have to issue your shares at a discount, but that is not the way the Full Court approached the case.

MR GRAY: No, they accepted our primary argument.

McHUGH J: Yes.

MR GRAY: They rejected the lost opportunity and said the evidence did not make it out. Justice Mulligan rejected it. We put contentions to the contrary. But that was not the only basis on which the case was run, if the Court pleases. The case was run on the basis that - - -

KIRBY J: Could I just ask on that, did you have a notice of contention in the Full Court? Do you have a notice of contention in this Court?

MR GRAY: No, because the only issue coming to this Court is the issue did the companies have a loss, not the manner of assessing it, and before the intermediate court we cross-appealed on damages.

McHUGH J: And succeeded.

MR GRAY: And succeeded, and in the course of that, put the arguments that had been put to the trial judge. Our primary position was, this is not a lost opportunity case, this is a different case. But if we are wrong in that, we specifically refer to the evidence left to Mr Easton, for example, that this was an absolute perfect time for a cash box to be acquiring assets through the issue of shares.

CALLINAN J: That is transcript we do not have, I think you told us.

MR GRAY: Your Honours do not have that transcript. What your Honours have is one snip in which Mr Easton says to Mr Mansfield in cross-examination, "I agree it would be difficult to allot Kia Ora shares for cash", or post pressure certainly was. But Mr Easton was saying there were lots of bargains out there if you had cash and you wanted assets.

CALLINAN J: Cash is always handy, most people would think.

MR GRAY: Well, common sense would indicate after the crash exactly what the position would be. But, if the Court pleases, the other basis on which the case was run below was by the appellants here saying that positively there was no duty owed to Kia Ora shareholders. If the Court goes to page 41 in book 1 of the appeal books, the position taken - it is paragraph 19 of the statement of claim. It is the last three lines that my client was asserting that:

Nelson Wheeler was under a duty of care.....to Kia Ora and its shareholders to -

do certain things. The defence to that was to admit the duty of care to Kia Ora but to deny the duty of care to shareholders. Now, that position did not change until the statute of limitations had run and during final addresses or shortly before, there was an application to withdraw the - or to change that position, and that application was refused. The argument was put in the Full Court and the Full Court refused but the trial was run on the basis of there being no duty to shareholders and, therefore, no right of shareholders to claim. The statute of limitations, I think, ran out in about 1994.

KIRBY J: Would there have been a Companies Code remedy available to shareholders?

MR GRAY: Not against Nelson Wheeler.

CALLINAN J: It would be only against the directors, would it not?

MR GRAY: Yes.

McHUGH J: But why - sorry, a companies remedy?

MR GRAY: Not against Nelson Wheeler.

McHUGH J: Yes.

MR GRAY: If I might just - to the point your Honour - - -

HAYNE J: But the Nelson Wheeler report went to the 3J(3) meeting and those who relied on it at the 3J(3) meeting were shareholders conveniently tabulated in the register of members.

MR GRAY: Yes - - -

HAYNE J: A defined and closed class.

MR GRAY: The report went to all shareholders as an organ of the company. Now, your Honour Justice McHugh mentioned Esanda's Case. Of course, Esanda was the question of whether the duty owed to the financier, but in Esanda the Court approved the Caparo analysis which in turn has been approved in Hercules saying that the auditors when they did their audit report, did not owe a duty to shareholders individually, they owed a duty to the company and the shareholders only received the report as a body collective, as an organ of the company.

McHUGH J: Yes, but the big distinction is that this report was going to these shareholders to give their approval at a meeting called for that very approval.

MR GRAY: At an EGM of the company.

McHUGH J: Yes.

CALLINAN J: But that is the whole purpose of 3J, as Justice McHugh is putting to you. A bit different from the situation you are talking about.

MR GRAY: Yes, but the whole purpose in 3J was to allow the company to make that decision in regard to the transaction free of those with an interest in it. It is predicated on directors not voting - - -

McHUGH J: Yes, I know, but not merely directors not voting, but - sorry, is it merely directors, or - I think it is the shareholders?

MR GRAY: No.

CALLINAN J: To persuade the non-interested shareholders to approve the transaction. It is aimed much more specifically, I would have thought, at the shareholders than it is at the company.

MR GRAY: But they then vote, the unassociated shareholders then vote as an organ of the company at an EGM of the company. So we say it is the same class of people who get the report, it is the shareholders of the company, so they can perform a function as the company at its EGM and, hence, the duty is owed to the company.

CALLINAN J: But surely the - well, I do not know about that - why can the shareholders not sue those at whom the report is specifically aimed in order to persuade them to all vote in favour of the transaction? Why can they not sue?

MR GRAY: It would be the same position as in Esanda and Caparo and Hercules, that they receive it in the capacity as an entity to exercise the company's decision-making process. That is the whole rationale, with respect, behind Esanda and Caparo that - - -

CALLINAN J: I am not too sure whether it is - - -

MR GRAY: It is not for their own purposes, it is for the purposes of making a decision for and on behalf of the company. In Esanda, for example, or Caparo, the shareholders are receiving the report of the auditors so they can vote as the company at an EGM to approve the accounts, the directors having an interest in the preparation of the accounts they put forward. At paragraph [202], the paragraph my friend goes to, is amongst about 15 pages of quite precise reasoning by the intermediate court based on Esanda, an analysis of Esanda compared to the circumstance here. But, so the case below was run on - - -

McHUGH J: Take a company like Autocure which had nearly 3 per cent of the shares, supposing it had gone along to the meeting and acted on Nelson Wheeler's report, I must say I find it very difficult to believe that it would not have had a cause of action against Nelson Wheeler.

MR GRAY: Well, if the Court pleases - - -

McHUGH J: They voted their 3 per cent in favour of the resolution, based on the Nelson Wheeler report.

MR GRAY: And if they had a separate identifiable loss, as distinct from a loss through the company and they had a cause of action, they could recover. But if the Court pleases, we repeat, as the Court will see in the pleading, this case was fought on the basis that there was no duty to shareholders and that only changed very late in the piece after the statute of limitations had expired.

HAYNE J: And were shareholders in any way a party to this suit.

MR GRAY: No, the directors were sued in their capacity as directors, and some of those directors - - -

HAYNE J: So, whatever was said about shareholders was not something that bound them, or indeed, on one view, was something that was not even relevant.

MR GRAY: It did not bind them, but it certainly was relevant the way the case was argued. The way the case came to be argued it had to be dealt with and was dealt with by applications to amend being refused.

Now, if the Court pleases, that position in regard to there being no....to Kia Ora shareholders was the subject of correspondence in which it was specifically confirmed that it was not the defendant's case, and would not be, that there was any duty to individual shareholders. We can put that correspondence before the Court. But now to confront an argument for the complete change of position we say is very unfair.

Now, if the Court pleases, there was one short reference I wish to go to in Shearer's Case that I just had not reached before the adjournment, and it just picks upon the misfeasance position, and it is page 308, [1983] All ER, page 308, and it is paragraph f:

Counsel's next submission for the Crown, that the number of shares to be issued was a matter of discretion for the company, not governed by the value of the consideration received, I totally reject. Any director who was a party to the company deliberately paying over the necessary odds for anything would be committing the plainest possible misfeasance towards that company.

In our outline, I do not propose to go to it, but at paragraphs 89 to 91 we deal with one of the many examples there are of directors' misfeasance cases. It is the case of Hirsche which is, we would say, an example of that principle. It is being put as a misfeasance towards the company and that is in regard to damages suffered by the company through the issue of shares for inappropriate consideration. We say if that line of authority is correct, then equally there must be recognised a loss to the company.

If the Court pleases, there is one other English case that might be of assistance and it is the Banco de Portugal Case [1932] UKHL 1; (1932) AC 452. I am pleased to say it is not a tax case. It involved a claim in respect to damages in regard to the issue of banknotes, promissory notes. What had happened was that the person who produced the banknotes had.....produced one batch and then mistakenly produced a second batch which got into the wrong hands and the bank had to take back all the banknotes and it claimed the losses. We would say there are some differences but there are some very close analogies to the case at Bar. The court divided 3:2 in favour of my client's position.

McHUGH J: Sir Norman Birkett in a biography of him, or it might have been his autobiography, said he really knew what legal advocacy was when he heard Mr Gavin Simonds lead him in this appeal in the House of Lords. Some might say the future Lord Simonds went very close to leading the majority down the garden path.

CALLINAN J: He said it in his BBC lectures.

HAYNE J: Talking about funny money.

MR GRAY: We would say that it was careful analysis, with respect, that it is sound. Could I just deal with the analogy to this case. The bank had the ability to print more promissory notes and before it did so, they did not exist. So in that sense it is on all fours with the ability of the company to issue shares. Once the promissory note was, as it were, printed on a piece of paper - I think the example used in one of their Lordships' speeches in the seller but not issued, it only had value as a piece of paper. It only obtained its value to the bank when it was handed to a person as a medium of exchange. With respect, that is on all fours with the case at Bar. The difference with the case at Bar relates to the nature of the covenants. The covenant by the bank was because it was a banknote was to honour it with its value immediately. That was the covenant. The covenants in the case at Bar, as we have discussed, are of a more disparate nature but do involve immediate rights.

Justice Macmillan, if I might just start there, who formed part of the majority, deals with the issue at page 509, if I can start there. At about point 8 in the middle of the last paragraph:

Whether its notes are convertible or not a bank of issue in issuing them incurs only the cost of paper and printing; the difference consists in the purchasing power which they represent according as they are the equivalent of so much gold, ie, of a universally acceptable medium of exchange, or only of so much of the bank's credit, a particular medium of exchange whose value may vary between being as good as gold or as worthless as dross.

Over the page:

Much stress was laid by Messrs Waterlow on the fact that in the Bank's own hands its notes were mere chattels possessing only the value of the paper and printing, and that if by a fire in its premises its whole stock of notes were burnt it would lose no more than their chattel value, whereas if the Bank's notes were destroyed by fire while in the possession of a member of the public a loss represented by their face value would be incurred. That is true, but the argument disregards again the value of the note-issuing power of the Bank -

and we interpolate there the share-issuing power of the company -

which enables it to confer on the paper which it issues the quality of legal tender, the quality of possessing purchasing power to the amount indicated on its face.

Now, one can say exactly the same as the share. It becomes a medium of exchange, a form of security and the covenants are of a different character.

HAYNE J: Not being covenants to make any outlay of money.

MR GRAY: No, but being covenants to take on obligations.

HAYNE J: And there lies the distinction, does it not?

MR GRAY: Well, with respect, there is obviously a distinction in relation to the covenants but in terms of it suffering a financial disadvantage if it does not receive the quid pro quo for the covenant, it suffered a loss. The question becomes how to assess that:

The Bank only issues notes in exchange for value, and the value of its notes in turn reflects the value which it receives in exchange for them -

exactly the position in regard to shares in the ordinary course being issued for consideration -

Herein lies the answer to the point advanced on behalf of Messrs Waterlow that, inasmuch as the Bank issues the bulk of its notes on the call.....spurious notes -

and then over the page at 511 point 4:

On the whole matter accordingly I reach the conclusion that the Bank, being compelled to issue for nothing notes for which if it had issued them in ordinary course it would have received value corresponding to the purchasing power of the number of escudos which they represented, has suffered loss to the extent of the face value of these notes.

Now, this is in a claim of contract and the House of Lords had seen no difficulty in recovery. Now, that is Lord Macmillan. Lord Atkin at page 489 at about point 5 on the page:

I therefore find the position to be that the Bank by issuing its note like the trader issues its promise to pay a fixed sum; issues a bit of its credit to that amount; like the trader, it is bound to pay the face value in currency; like the trader, it is liable on default to judgment for the face value exigible out of its assets; and, like the trader, if it is compelled by the wrong of another to incur that liability, its damages are measured by the liability it has incurred.

Now, with respect, accepting the difference in the nature of the covenants but accepting the covenants put obligations on the company that a shareholder values and may wish to enforce, all of that reasoning is directly applicable. Then I think at the foot of the page starts the well-known passage:

If a person is wrongfully induced to part with a valuable thing, whether it be goods or choses in action -

here what the company parts with are choses in action. It creates them as it parts with them. It is no different than a deed with covenants that are made on execution -

his measure of damages is the value of the thing at the time he parted with it -

but the question is, "What was the value of these covenants to the company at the time they parted with them?" And the answer is to get par value or, if agreed, money's worth -

The cost of replacement does not enter into the measure of damages at all. If a man is fraudulently induced to part with 500 standards of timber he recovers the value at the time; it is quite immaterial that he could have replaced the timber - say, from the Russian market - at a small portion of the value. If he manufactures for 1d articles which can sell for 6d, the measure of damages against the wrongdoer is 6d, not 1d.

So, in other words, the cost is not the issue. The issue is market value, what it is worth as a meaning of exchange.

So if he was by fraud induced to promise the deliver 500 of the 6d. articles so that the contract could be enforced by an innocent holder of the contract, it appears to me that on well established authority the damages would be 12l. 10s., not 2l. 1s. 8d. This means that, whether he parts with goods or parts with an obligation, the measure of damages is the market value of what he parts with -

and we say, here, the company has parted with that obligation, it has happened. The measure of the damage is what is the worth of that obligation? We say the answer has to be market value. We say it is impossible, with respect, to distinguish this line of reasoning. The fact that the covenant changes is not the issue, and none of these remarks of Lord Atkin are in any way denying that the covenants that the company gives are not obligations with a market value. That is exactly why the shareholder pays a consideration for it, because he sees those obligations to him as being of value.

If he incurs an obligation to pay pounds sterling, you do not inquire at what cost he will acquire the pounds sterling necessary to fulfil the obligation; he may get them by getting some one to produce an article at much less cost which he can sell for the equivalent sterling; he may get them from a benevolent uncle or from some one who for a small premium has undertaken to make good his loss. Whatever the liability incurred, the measure of damages is market value, which in the case of an obligation to pay currency is face value.

In the case of a company's obligations it is what the intending shareholder will pass by way of consideration.

Some confusion has been introduced into the discussion by considering the question as though the Bank had "lost" the bank notes. If the notes had been "lost" before the Bank had made them the Bank's contractual obligation by delivery the proposition of the defendants would be correct.

So, if here these shares had been printed but then lost and had not gone, well then that is so. It is like the Adelaide Petroleum Case where it was intended to issue shares, the transaction fell over, they were never issued at all, there could be no claim for loss in regard to the shares.

In that case, that is before use as a medium of exchange before issue and allotment in shares, the notes were nothing "but a collection of bill stamps completed, but not delivered, to destroy them would but have the same result as burning a man's cheque book whether the cheques were filled up and signed or not."

Now, with respect, for the appellant to succeed here it has to say that reasoning is wrong because there is no basis on which to distinguish it, given the way in which Lord Atkin has identified obligations and he has plainly identifying obligations in a different nature to simply an obligation to pay the face value of cash in the very many examples he uses.

Now, Lord Justice Sankey, Lord Chancellor, Viscount Lord Chancellor Sankey was to a similar effect forming the majority. The issue arose about the ability of the Bank to keep issuing more banknotes so that if there was a call, it just issued some more notes. The minority took the view that because that could be done, as it were, indefinitely, there was no loss. That is the point on which the minority differ.

Now, that was rejected by the majority for two reasons or, with respect, for three. The first was it overlooked the fact that it was a means of exchange, it overlooked the ability that Lord Justice Macmillan has identified and which Justice Atkin identified. Secondly, there was a cap on how many banknotes it could issue under the regulations. I think it was 131 billion or million. But thirdly, it must be recognised at a point of time the banknote could be called on to be honoured with something.

CALLINAN J: What about first day covers that are issued by the PMG? They probably cost a few cents to produce but would be worth a great deal of money if, and there is no limit, theoretically, upon how many the PMG can issue.

MR GRAY: Yes. There are, with respect, an example we would adopt, there are many others that one can use to demonstrate that cost cannot be the measure in the ordinary case. For example, the artist who enters into a contract and he is going to paint some gum trees. He has nothing. There is no asset beforehand. He has got a capacity. He enters into the contract. He is told by a valuer, "Well, you get Western United stock for this worth $100 million", so he paints some gum trees. The only cost to him is the cost of some oil and a little bit of time to put together his gum trees and he will get this $100 million for it.

CALLINAN J: As Whistler said in the Ruskin case, he was charging for the skill and experience of a lifetime and not for the hour and a half that he dishonestly said he took to paint the painting which probably took about four months to paint, in fact.

MR GRAY: Another is the famous cricketer who can simply endorsed the back of the bat and have any amount of money delivered to charity. Again, he has the ability and the asset does not exist. He enters into the contract, he then creates the medium of exchange. The answer that one must look to the cost of the article in all these examples demonstrated, cannot be right.

CALLINAN J: You say that you cannot say that you have not lost something simply because you have a capacity to create a whole lot more of them for nothing or at a very small price.

MR GRAY: Indeed. So here, that is why it becomes very important to analyse exactly the nature of what has happened in this transaction and one can speak loosely of shares being issued, but in reality what is happening is that the company is saying, "We will accept these obligations", and it is that which the company passes over. It is no different than a deed of covenance.

McHUGH J: But it is not an obligation to pay 85 cents a share - - -

MR GRAY: No, but - - -

McHUGH J: That day or any other day. It is an obligation to give you notice of a meeting, furnish you with the reports and, on the declaration of a dividend, to pay a dividend in proportion that your shareholding has to the other shareholders.

MR GRAY: Or in Gambotto's Case, as your Honour the presiding judge recognised, something more than property because, in fact, in certain circumstances, as against the company the minority shareholder could demand more than fair value to avoid expulsion.

CALLINAN J: Well, it is a little bit more, with respect, than what Justice McHugh has put to you. It is also an obligation on the part of the company, perhaps enforceable against the directors, but the company has the obligation to preserve the assets and to increase them and to act in accordance with the articles and objects to enhance the value of the company.

MR GRAY: Indeed - - -

CALLINAN J: The value which, ultimately, the shareholders get.

MR GRAY: Yes.

HAYNE J: Is that right? May this not identify the kind of difficulty that is surrounding this whole area? That the identification of the company with its shareholders is something that can be readily understood particularly in a context where directors are charged with misconduct or failure to follow their duty, for their duty is directed toward shareholders. But in this context, to personify the company as the shareholders may lead into error, may it not?

MR GRAY: Well, if the relevant entities are confused, yes, of course. We accept that. But the point about it here is that the contract on which this judgment rests is a contract with the company. As a result of the contract with the adviser there has been a subsequent or a consequential transaction.

What has happened to the company is that it has been induced to part with something. It has been induced to part with some cash and it has been induced to part with some promises and it has parted with them. It has happened and in parting with them it has lost something. It has lost the ability to use that cash somewhere else and it has lost the ability to give those promises to someone else. If it had used the cash somewhere else, it could have obtained value for its cash. If it had given those promises somewhere else, it could have obtained value for those promises.

McHUGH J: That seems to me a loss of opportunity claim and, you see, one has to be very careful about saying what rights shareholders have got as a result of the shareholdings that they hold. It seems to be that although no doubt it is right that the directors have a duty to increase value, it does not follow that the company has otherwise any shareholder would have a right of action against the company as such for failing to increase value. Well, maybe such a cause of action exists but the ingenuity of lawyers do not seem to have fastened on to it yet.

MR GRAY: Well, if the company does not - in this particular case we say it is not an opportunity situation because, in fact, this transaction has occurred and the consequence in this transaction was that if what Nelson Wheeler had said had happened there would have been something of value coming in regard to the promises and that would have come in as an asset of the company, not of shareholders. It comes in as an asset of the company and it happens to be characterised in the company's books as capital but it comes in as property of the company to be used by the company as its property in regard to its everyday business.

HAYNE J: But the property came in. The complaint is about the value of it.

MR GRAY: Yes, because as against Nelson Wheeler, there was an expectation that it would come in at $112 million, in which case the loss would have been $106 million. In actual fact, because that would be expectation loss, one must go to value to see what the company has, in fact, passed over. The question in Lord Atkin's terms is: what were those promises worth? Lord Atkin would say, "It does not matter whether it is cash or obligation, it is a question of the market valuers obligations".

McHUGH J: We have to be very careful of distinguishing, as Justice Hayne said, between the shareholders and the company. The problem arises, of course, because the corporation, the English corporation, a limited liability company, is the product of the trust deed, the old joint stock company which was, in effect, just a large scale partnership through the mechanism of the trust. Then the limited liability acts came in and separated personal liability from this new entities liability, and some of the old ideas have carried across. This is part of the problem.

MR GRAY: There are always going to be problems once one has the legal picture of a company. One must, we agree, keep it steadfastly in mind, but to pick up, if I could, from Lord Atkin, that it is the case that as a consequence of Nelson Wheeler's breach of contract, the company undertook 67 million sets of obligations. It did that; it has happened. If that has happened at a cost to the company, that is recoverable damage.

HAYNE J: You focus, you say, on the worth of the obligation, is that right?

MR GRAY: In this argument, we do. In this strand of it.

HAYNE J: If that is so, how do you cope with this example: a company issues partly paid shares to a named allottee paid, say, to 20 cents, it matters not what, whom the company, on the advice of a bank, believes is worth sufficient to meet the call that will later be made for the unpaid capital. But, in fact, the bank is negligent in giving its bankers advice and the call is made and not met. What damage do you say the company has then suffered by reason of the negligence of the bank?

MR GRAY: The company suffered the loss of the ability to make the balance of - to make the call for the balance.

HAYNE J: Regardless, in that example do you say, of how the shares, whether it is the partly paids or the fully paids, may stand in the market, and yet, in this argument, we are invited to look at the value of the obligations that the company has undertaken and, yet, in the example I just gave you, you look at once at the 80 cents unpaid liability. I am lost.

MR GRAY: The difference, with respect, is in regard to the obligation to pay par where a share is allotted for cash, in your Honour's example, part paid. There remains a liability to pay some more cash to par value. That is the nature of the bargain struck and that is a matter of contract between the company and the allottee and the fact the shares might fall away in value later does not affect the contract unless it has been dealt with in the contract.

HAYNE J: But I am inquiring about the action against the banker for negligent advice about commercial worth to the allottee.

MR GRAY: To the company? Well, if in fact the company could not recover on the contract, it would be able to sue the bank in regard to negligent advice and the loss taken. The difference is, when it comes to money's worth, the cases all say that if there is a transaction that could be impeached, one must look to what the real value was and not just the stipulated value in the contract. Otherwise, because the contract can be impeached, it could cause great injustice. In our case, we disavowed throughout any claim for the difference between the contract at the Nelson Wheeler advised price of 112 million and what we say was the consideration of the value of 96.

So we disavowed the expectation aspect of it and only sought the value according to the actual valuation of the Kia Ora worth and hence the need for the write down one sees in Mr Easton's analysis. We brought to account, as it were, the overvaluation of the consideration that Kia Ora passed. We brought that to account by reducing our claim for 112 million consideration passing to 96 and then credited the six. Might I say on that score, my learned friend did mistake the position in regard to what the intermediate court found in regard to the cash and the consideration received. The court did not reason cash 26, consideration received six, therefore, 20 loss on that head. The court did not approach it the way my friend put it all.

What the court did was to say, consideration paid cash 26, shares 56 - whatever the figure is, 50 - added those together and then offset the six against the total. There is no basis for saying one offsets the six received from Western United just against the cash component. That is how my friend put it. The finding by the intermediate court is at page 313, paragraph [530]. The Court will see that the approach to the court was to address the entire consideration passing, adding some interest and then put against the total the six million received. My friend, as he addressed the Court, rather suggested that this is a case where the six is directly to be set off against the cash and in that way, of course, he can argue that the net asset position does not change.

The moment you set off the consideration received against the total consideration passed, the net asset position of the company does change and it is only by changing what, in fact, the Full Court did and suggesting that six goes against the 26 that you can reach the result that there is no change to the net cash position of the company. But that is not the finding and where is the justification, we ask, for saying that you put the six against the cash? Because my friend concedes the company did pass consideration by the shares. He has conceded that. But when it comes to loss he says, "Well, I am not going to put any of the value received against the share issue at all. I am going to put it all against the cash component because that is the only technique I can use that allows me then to argue that the net asset position has not changed on the ballot sheet."

I also have to ignore, he says, the fact that the equity side of the balance sheet has changed and I also have to ignore the fact that the carrying of profits has gone and I am now carrying losses. So, from the company's perspective, we say that is an illegitimate approach of reasoning and it actually shows the flaw in this suggestion that the net asset position does not change.

Now, if the Court pleases, at page 14 of our outline of argument, paragraphs 72 through to 80, we deal with the issue of the accounting treatment - and we accept this is a matter, of course, for your Honours and not accountants - but at paragraph 73 we have identified he proposition the Court places significant weight on accounting treatment; and in Footnote 52 we have identified those authorities that have amply demonstrated that, and in particular, it all starts, of course, with Justice Dixon in the Executive Trustee Case.

The accounting standards we are here speaking of involve the Companies Code and accounting standards promulgated pursuant to the Code with the force of the Code, so we are speaking of accounting standards of that particular ilk. What happened below in regard to those standards was that Mr Easton and Mr Hall spoke to them, particularly Mr Easton, and in regard to his evidence about standards and their application to this case as an accounting standard pursuant to the obligations under the Code, there was no challenge. There were other challenges to them, but not on that issue.

McHUGH J: But you took us to this evidence this morning and summarised it, and we have it in writing.

MR GRAY: Yes, if the Court pleases. At paragraph 80 the court has quoted a small piece of the evidence of Mr Hall that is not within the appeal books. That particular passage is to be read with the matters in the appeal books.

He puts it, when it was being suggested to him that it does not cost the company anything to issue its own shares. He said:

Well, I don't agree with that. From the way I would look at it, the company has done two things by issuing shares. It has increased its assets by bringing some cash onto the balance sheet, or bringing some other asset onto the balance sheet. So it's increased its assets. It's increased the claims against the company, in this case taking the form of additional shareholders who have a claim against the company. It has cost the company the value of the shares issued, and it has benefited the company by the value of the cash or assets acquired. In net terms, the company is the same as long as the asset it acquired was worth the value of the shares issued. In the simplest case of cash, in net terms it's equalling off because the cash is equalled to the additional claims on the company that there are.

Now, he goes on to expand on that in his other evidence and we would say, with respect, from a commercial point of view, from an accounting point of view, from a common sense point of view, absolutely correct and we would say that the Court would be giving great weight in accordance with those authorities to that formidable body of evidence anchored, as it is, back to the Companies Code requirements and, again, we have set out - those references are in the appeal book in the evidence of Mr Easton. Mr Easton then takes up the exhibit I referred to earlier and uses that as a vehicle to demonstrate the application of the standards and there is a need for reconciliation from that document with the final judgment and it is primarily brought about by using majority value for the Kia Ora shares with the minority value.

Now, if the Court pleases, in terms of the tax cases, there are other cases that I do not propose to go to that are identified from paragraph 93 of our outline, but we do address the question of the shareholder loss and the proper plaintiff from paragraphs 103 forward and, with respect, if one looks at the whole body of law in this area now, and it is considerable, it seems to very much hinge on Newman's Case and come back to Newman's Case, whether it be Esanda, whether it be Caparo, whether it be Hercules, eventually the reasoning seems to anchor back to the remarks from Prudential Insurance v Newman and we have quoted in particular from some pertinent parts in that regard and it is identifying when the loss in law is within the company, if the company makes the claim and the shareholders are protected through the derivative claim. May it please the Court.

McHUGH J: Thank you, Mr Gray. Yes, Mr Myers.

MR MYERS: Thank you, your Honours. A few matters in reply in the order in which they arose. Your Honours asked me some questions this morning about the right to rescind and I was at first inclined to say, yes, there would have been a capacity to rescind the share issue in this case and then perhaps on further reflection said that that is only a right that arises if the shares were allotted as a result of fraud.

Fraud is too narrow a way to put it. If I can refer your Honours to what I was able to look at during the day. In Pennington's Company Law, 4th edition, at pages 152 and 153, it is neatly set out. One of the occasions on which a company is entitled to rescind a share issue is where the shares were made by the directors in breach of fiduciary duty, which is this case. In that event the company is entitled to give back whatever it got and the shareholder is then given the option of either paying cash for the shares or paying full value or having the shares rescinded.

GUMMOW J: A difficulty might arise if the shareholders have on-sold.

MR MYERS: Yes, it may do. There are some Australian authorities that are gathered together and there is a discussion of the provisions of the Corporations Law affecting the matter. They are conveniently gathered together in the CCH loose leaf thing, Australian Corporations and Securities Law Reporter, at paragraph 70-260 and following. Without going further and subject to the question that might arise if the shares have been passed on, this is a case on the authorities in which there could have a rescission.

The second matter concerns Mr Easton's evidence regarding these accounts to which my learned friend has referred to. That evidence is largely contained in volume 3 of the Court book. I refer your Honours, without reading it, in particular to pages 527 and 536 of the Court book where Mr Easton discusses the effect of the accounting treatment.

My learned friend, both before and after the luncheon adjournment, was inclined to suggest to your Honours that there may have been other bases upon which the matter was put to the Full Court which would justify, in the event that the appellant is successful, the matter being sent back to the Court for some sort of further determination. Perhaps my friend has forgotten the way the matter was put in the Full Court, but there is certainly no mistake about how it is written in paragraph 32 of his outline, the last sentence:

Kia Ora has only ever sought what it was awarded by the Full Court, namely the difference between the consideration paid and the value received in the takeover transaction.

That accords with my memory, if not my learned friend's memory, of what happened in the Full Court.

The next matter is this: my friend said in substance shortly before the luncheon adjournment, "The shareholders have rights against the company, therefore the company has suffered a loss equal to the value to the shareholders of those rights". It is the "therefore" that simply does not follow, and that is at the heart of this case.

On the matter of Ord Forrest and St Helens, we say that those cases are of no assistance in the resolution of the matter before your Honours, except that there are, with respect, correct statements of what a share is and how a share is issued and allotted, particularly in the judgments of Chief Justice Barwick - although he was in the minority in both cases - and in the judgment of Justice Aickin in the St Helens Case.

The majority in each case agreed with what Chief Justice Barwick said there about the nature of a share and the way it was allotted. My friend made a point about the way in which the case was put below and said it was unfair that the appellant should in this Court argue that the shareholders had a right to sue because that was never put below. He referred to some portion of the pleading.

Three things about that. The pleading itself is, to say the least, highly confusing. It is a pleading in a claim by the company that a duty was owed to the company and to its shareholders. If your Honours were to take the trouble, you would see that that formula is repeated again and again through the hundreds of pages of this statement of claim. What in fact happened was that there was at first an admission that a duty of care was owed to the company. There was an application to withdraw that admission after a change in counsel which occurred just before final addresses before Justice Mulligan. That was refused, but nonetheless the argument was put before Justice Mulligan and before the Full Court that the shareholders would in effect be denied a right of action and that was unjust if one said that the company was entitled to sue. I have put that in a little bit of an awkward way perhaps.

CALLINAN J: Mr Myers, would there not be some record of this in the record of the proceedings?

MR MYERS: Yes, there is and I was going to refer your Honours to it.

CALLINAN J: What I was going to suggest - I do not know what the other members of the Court think, but surely you and Mr Gray should be able to agree upon this, with references. We should not be troubled with arguments about what did or did not happen in the court below.

MR MYERS: Your Honour, all I wanted to do is say in Justice Mulligan's judgment at page 350 he recites the argument put and it is set out there. In the Full Court's reasons in paragraph 137 it is recited there. I simply invite your Honours to look at it. It is as plain as day. I certainly do not want to let your Honours be involved in some sort of contention about what was put. I simply rely upon what Justice Mulligan said was put and what the Full Court said was put.

GUMMOW J: What is the Full Court reference again?

MR MYERS: Paragraph 137. It is most clearly put in Justice Mulligan at page 350 in the middle of the page:

In essence, it is the submission of the first defendants that, given the law relating to the decision making of the company and the purpose of the listing rule, they did not owe a duty of care to Kia Ora but only to the unassociated shareholders of Kia Ora.

CALLINAN J: Mr Myers, could I ask you one other question. I am sorry, I am not familiar with the pleadings in South Australia. Is there a prayer for relief anywhere in a writ or in a statement of claim which summarises precisely what the plaintiff - - -

MR MYERS: Yes, there is a prayer for relief. I will ask my learned junior to see if it is in the Court book. Two other things that I want to say by way of reply, just two. The first is this. My learned friend referred to an extraordinary general meeting of the company. It was a meeting at which only associated shareholders could vote. It was not an extraordinary general meeting of the company. Regulation 58 of the articles, which is at page 595 of volume 3 of the Court book says:

every member shall be entitled to be present at every general meeting of the Company and to vote on any question put before any such meeting.

So it was not such a meeting. It was a meeting at which only the so-called unassociated shareholders could vote. So that the so-called EGM was not a meeting of the company; it did not constitute an organ of the company. In any event, all that that meeting purported to do was authorise the directors to enter into the transaction. It was the directors who had the power to enter into this transaction. They were the organ of the company that entered into the transaction and what happened is that to comply with the listing rule which is part of a contract between the company and the stock exchange, a meeting was held which was not a meeting of the company at which certain persons, for the purposes of the stock exchange rule, authorised the directors to proceed with the transaction if they thought fit. All that is set out in the judgments. The prayer for relief is at page 414 of volume 2 of the court book. It claims damages, compound interest, a declaration and costs.

KIRBY J: 414?

MR MYERS: I beg your pardon. I am sorry, your Honour, 454. I have looked at the wrong page - 414 of the pleadings. Anything you want to find is in these pleadings. It is page 454.

The last matter that I wish to address in reply is the Banco de Portugal Case. I see there that it took counsel about 11 days to persuade the House of Lords of the opinions that were expressed by the majority. There are a couple of things: my friend put a lot of emphasis on what Lord Atkin said at page 490. The thing about what Lord Atkin said at page 490 is this: regardless of whether one would agree with his Lordship or not, he equated the position of the banknotes to a widget that had been manufactured, some timber that had been bought to something that had been manufactured. So he was treating the banknotes as an existing thing having a value which was equal to their face value.

GUMMOW J: Like a cheque.

MR MYERS: Like a cheque. He was not dealing with something that is remotely like the present case where some rights are created by the issue and allotment.

KIRBY J: But is that not self evident that currency is of the same nature?

MR MYERS: Well, in my respectful submission, it is and that was the second matter that I was going to go to. On that point I respectfully adopt what the Full Court said below at paragraph [440]. They distinguished the Banco de Portugal Case on the sort of basis that your Honour has just mentioned and his Honour Justice Hayne mentioned in argument with my learned friend. If the Court pleases, they are the submissions on behalf of the appellants in reply.

GUMMOW J: What do you say about those English revenue cases?

MR MYERS: That is what they are, your Honour, English revenue cases. They are concerned with - no, I am not wishing to be facetious about that but they are concerned mainly with questions of the valuation of trading stock and it would be astonishing if anything other than some commercial value was given to trading stock for the purposes of computing a person's liability to tax of course and under our system, if you get trading stock by way of a gift or howsoever, as soon as it is trading stock it is given a particular value for the purposes of computing the amount upon which tax is exigible.

GUMMOW J: Yes. Now, could you just look a minute at paragraph 89 of Mr Gray's outline.

MR MYERS: Yes, your Honour, I will get it. Yes, Gemstone v Grasso.

GUMMOW J: Yes.

MR MYERS: Gemstone v Grasso was a case where a share was issued partly paid.

GUMMOW J: Yes.

MR MYERS: Well, it is a completely different case.

GUMMOW J: Why is that?

MR MYERS: Because, there the share has been issued partly paid and there is a right by contract to payment of the balance. What was lost in that case was the right to payment of the balance.

GUMMOW J: Well, the debt was not paid. It quotes a debt.

MR MYERS: But the debt was not paid, yes.

GUMMOW J: But what about the other one, the Privy Council one? That is a case of unauthorised issue at a discount, is it not?

MR MYERS: Yes, it is.

GUMMOW J: Is that quite in the same league as Gemstone?

MR MYERS: No, it is not quite the same as Gemstone v Grasso, but, on the other hand, it does not, in my respectful submission, really assist in determining what is a loss for these purposes that your Honours are considering.

GUMMOW J: Well, it says there was a loss to the company occasioned by the directors getting less than the par value, at least.

MR MYERS: Well, for the purposes of determining whether the directors - in a case where the question was whether the directors were in breach of their fiduciary duty.

GUMMOW J: Yes.

MR MYERS: Now, your Honour has raised at the very last minute an issue which may raise somewhat different considerations. If there is a case concerning breach of fiduciary duties by directors, there may be different considerations operating, assessing or determining the quantum of damages.

GUMMOW J: That is what I had been wondering, yes. Is that discussed anywhere in this mound of paper?

MR MYERS: No, it is not. It has never really been advanced and my friend did not advance it to your Honours today. It is mentioned in the written outline, but it is certainly not something - - -

McHUGH J: This case is nailed to the contract, anyway - the breach of contract.

MR MYERS: Yes it is, absolutely nailed to the contract.

McHUGH J: Thank you.

MR GRAY: Can I just mention three matters, if the Court pleases? My friend referred to Mr Pennington's work in regard to fiduciary. Could I just correct one thing: the court below found causes of action made out in tort, breach of fiduciary duty as Nelson Wheeler and contract. The reason why the matter proceeded in contract was because that led to a higher - - -

GUMMOW J: Yes, you said that this morning.

MR GRAY: But if the Court pleases, if the Court set aside the award in contract, it would not follow for a moment that there could not be a claim for fiduciary duty. That is one of the problems as we have seen it. The issue has been whether the company suffered a loss. If the Court says in fact that the court's approach in contract is incorrect, we would wish to fall back on the reasoning in regard to fiduciary, because that might then produce a large wad of damages. That would cause, with respect, a great injustice to my client. We are only in contract because we lost an argument at contribution in fiduciary. If the Court pleases, as my learned friend referred to Mr Pennington's work, and spoke about the rights that arise in that circumstance, and the sharer's obligation if it got back its consideration and the need to pay, then that would indicate a different approach in equity and there is a cause of action here made out in equity.

GUMMOW J: What order would you seek us to make if the appeal was allowed?

MR GRAY: If the appeal was allowed, if the Court pleases, on the basis that a loss in contract had not been shown on issue of shares, the Court should remit - - -

GUMMOW J: Just on the basis that this figure could not be supported.

MR GRAY: I am sorry, your Honour, that - - -

GUMMOW J: Simply on the basis that this award here could not be supported.

MR GRAY: Well, the matter should be remitted because it may well be it is supportable in regard to the breach of fiduciary duty against Nelson Wheeler. There were findings of breach of fiduciary duty here against Nelson Wheeler and against the directors.

GUMMOW J: There were findings of contributory negligence too.

MR GRAY: Yes, and contribution, but if the Court pleases, if there was a recovery in regard to issue of shares in equity and still contribution, it would leave the plaintiffs substantially better off in dollar terms. So it is a very material matter and, with respect, this problem has arisen because of the judgment in contract and leave was given, special leave, in regard to one, with respect, discrete aspect, and it did not go to all the other ways in which loss might be assessed. The second point about it, if your Honour pleases, is that in the order sought, paragraph 2 on page 686 we challenge. That would not be the correct order because that figure is only arrived at by putting the consideration received from Western United at 6.7 million dollars solely against the cash.

So that follows the argument I put before. If one follows it through order sought 2 is not appropriate. One would have to at the very least pro rata which would mean the bulk of the consideration received would go against the share issue. The other matter I wanted to - - -

GUMMOW J: What would be the right figure?

MR GRAY: I cannot give your Honour a precise figure but it would be approximately - - -

GUMMOW J: Well, someone will have to tell us.

MR GRAY: Yes. We would be happy to provide that to the Court. It would be effectively about two-thirds of the 6 million plus the interest that has to be added into that, so all told it might be about another $10 million, but I cannot be precise about it. Perhaps $6 to $10 million. The other matter was in regard to what your Honour Justice Callinan raised about the pleading and the pleading of damages. In South Australia there is a - and I stand corrected - it is either by the Act, the Supreme Court Act or by the Rules, a direction compelling the court to give such relief as is appropriate providing the other party has not been taken by surprise regardless of how the matter is pleaded.

CALLINAN J: Nobody should have been taken by surprise in a trial that lasted as long as this one did.

MR GRAY: No. So they are the matters I was seeking to raise.

McHUGH J: Yes. Mr Myers, is there anything you would like to say about the orders that should be made in the event that - - -

MR MYERS: No, there is not, your Honour. If my friend is going to put something in writing to the Court I would like to have an opportunity to look at that. That is all.

McHUGH J: Yes. Do you propose to put anything in writing, Mr Gray?

MR GRAY: If the Court pleases, we would put, if it assists the Court, the calculation of what the order should be - the order we say should be made if the Court is against us on the primary point.

McHUGH J: How long will it take you to do that, seven days?

MR GRAY: Seven days.

McHUGH J: Yes. You have seven days to reply.

MR MYERS: Yes, thank you.

McHUGH J: Yes. The Court is indebted to counsel for their arguments in this case and the Court will now adjourn.

AT 3.49 PM THE MATTER WAS ADJOURNED


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