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High Court of New Zealand Decisions |
Last Updated: 4 April 2022
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP No. 2455/89
BETWEEN EQUITICORP INDUSTRIES GROUP
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
First Plaintiff
AND EQUITICORP HOLDINGS LIMITED (In
Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
Second Plaintiff
AND ARARIMU INVESTMENTS FOUR
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland
Eighth Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Twelfth Defendant
AND EQUITICORP AUSTRALIA LIMITED
(In Liquidation) a duly incorporated company under the laws of New South Wales, Australia and having its registered office in Sydney
Fourteenth Defendant
Counsel: Plaintiffs: J A Farmer QC, S S Elias QC (until 18 August 1995),
S B W Grieve, W G Manning, H D Winkelmann,
A F Cook and L N D Way (from 23 February 1996)
12th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
14th Defendant: P F A Woodhouse, N Manousaridis, A C Challis and J L Hubble (from 13 November 1995)
CP No 111/94
BETWEEN GLENBROOK STEEL HOLDINGS
LIMITED a duly incorporated company having its registered office at Auckland, Holding Company
Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Eleventh Defendant
Counsel: Plaintiff: P F A Woodhouse, N Manousaridis, A C Challis and
J L Hubble (from 13 November 1995)
11th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
Consolidated Hearing: 198 days between 21 November 1994 and 21 December
1995, plus 7 additional days, 23 February, 22 March,
19 April, 1, 2 and 16 May and 21 June 1996
Judgment: 12 July 1996
JUDGMENT No 47 OF SMELLIE J
re Liability and Quantum : Volume I(A) Sections 1 and 2
Solicitors:
CP 2455/89 Phillips Fox for Plaintiffs
Crown Law Office for 12th Defendant Hesketh Henry for 14th Defendant
CP 111/94 Hesketh Henry for Plaintiff
Crown Law Office for 11th Defendant
INDEX OF SCHEME OF JUDGMENT
Section 1: Preliminary and stand alone matters 1
Overlap with EIGL's subrogation claims 31
Section 2: Claims based on recipient and accessory
liability
(Knowing receipt: dishonest assistance) 72
respect of either recipient or accessory liability 230
of action prima facie succeed 249
Section 3: The Plaintiffs' claims based on illegality 298
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298
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3.2 Factual background and related legal matters
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302
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3.3 The effect of any breach of s 40
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307
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3.4 The rule in Trevor v Whitworth
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310
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3.5 Tainting of the contract transferring the
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Page
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7.1 Introduction
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377
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7.2 Clean hands
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377
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7.3 Validation
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378
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7.4 Estoppel
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385
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7.5 Section 18C Companies Act 1955
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391
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7.6 Ratification
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406
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7.7 Other defences
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411
Page
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Section 8: Is subrogation available to EIGL re EAL v the Crown 414
issues between EAL/ET and EIGL 414
and what brought them about 417
payment/discharge of EAL? 424
amount to discharge and payment? 439
what is the result? 440
expense of EIGL? 445
enrichment: subrogation 467
Section 9: Results on the Plaintiffs' causes of action 469
VOLUME II
This volume contains the charts and exhibits referred to during the course of the judgment, arranged where possible in date order.
VOLUME III
This volume contains a summary which is part of the judgment.
GLOSSARY OF ABBREVIATIONS
AF&I Ararimu Farms & Investments Limited
AHL Ararimu Holdings Limited
AI One Ararimu Investments One Limited
AI4 Ararimu Investments Four Limited
AI4 Directors Hawkins and Darvell
Adams Grant Adams
Allan Christopher John Allan
Aurora Aurora Group Limited
Avant-Garde Avant-Garde Finance Limited
Aylesford Aylesford Securities
Aylesford A Shares 265 million A Class Preference Shares in the capital
of Aylesford, held by EIL and redeemed on 30 June 1988
Aylesford B Shares 265 million B Class Preference Shares in the capital
of Aylesford, held by EAL and then subsequently (as to 80 million) by EFL
BWL Buttle Wilson Limited
BWL Takeout Deed The Deed dated 19 October 1987 between BWL,
RCL, AHL and EHL in which EHL agreed that if necessary the Equiticorp Group would lend the funds to enable RCL and/or AHL to complete the purchase of the NZS/EHL Parcel from the Crown
BWL Underwriting Agreement The Agreement dated 19 October 1987 between BWL
and the Crown, in which BWL agreed to purchase or procure a nominee to purchase the NZS/EHL Parcel from the Crown on 20 March 1988
CHL(NZ) Capitalcorp Holdings Limited
Concorde Concorde Limited
Coney Miles Heathcote Coney
Darvell Robert Paul Darvell
Denton Hall Denton Hall Burgin & Warrens
Directors The directors of both EHL and EIGL - Hawkins, Adams, Coney, Gunthorp, Saunders, Stanes, Taylor, Walsh, Marcus Clark and Wilson
E.Int Equiticorp International Limited
EAL Equiticorp Australia Limited
EAL Takeout The "Subscription and Purchase Agreement Regarding Class B Preference Shares" between EIGL, Aylesford and EAL dated 30 June 1988, by which EIGL agreed that it would acquire 265 million Aylesford B Shares from EAL if required to do so on or before 30 June 1989
EFGL Equiticorp Finance Group Limited
EFHL Equiticorp Financial Holdings Limited (formerly Associated Midland Limited)
EFL Equiticorp Finance Limited
EFL Takeout The agreements dated 22 August, 20 September, and 27 September 1988 between EIGL, Aylesford and EFL, by which EIGL agreed that it would acquire 80 million Aylesford B Shares from EFL if required to do so on or before 30 June 1989
EFSL Equiticorp Financial Services Ltd
EHL Equiticorp Holdings Limited
EHL Directors "The Directors" in their capacity as directors of EHL
EHL Takeover Offer The written offer to the shareholders of EHL dated
28 May 1988 by which EIplc made a conditional takeover offer for all of the issued share capital of EHL
EIGL Equiticorp Industries Group Limited
EIGL Directors "The Directors" in their capacity as directors of EIGL
EIL Equiticorp Industries Limited
EIplc Equiticorp International plc
Elders Elderbank Limited
Elders' Loan The $105 million loan advanced on 18 March 1988 to AI4 through Setar 72 and Shoeshine 59 as intermediaries
ET Equiticorp Tasman Limited
EUT Chain Those companies through which the funding for the NZEUT passed, being CHL(NZ), Watstone 82 and Watstone 74
Ewoch Chain A term used by Equiticorp executives to refer to the companies Avant-Garde, Capitalcorp Investments (UK), Capitalcorp Europe, CHL - Hong Kong Branch and CHL(NZ)
FIL Feltrax International Limited
F&P Fisher and Paykel Industries Limited
FSL Feltrax Steel Limited
Gunthorp Ian Lindsay Gunthorp
Harford Graham Bramwell Harford
Hawkins Allan Robert Hawkins
HK Trustees Messrs P J Lawrence and M R Boyte
HKEUT The Hong Kong Employee Unit Trust
HKEUT Purchase Agreement The Sale and Purchase Agreement dated 30 August
1988 by which the HKEUT agreed to buy from AI4 88 million EIplc shares and 44 million EIplc options
HKEUT Parcel The EIplc shares and options sold by AI4 to the HKEUT
HKSB Hong Kong and Shanghai Banking Corporation
Mackay Paul Robert Mackay
Marcus Clark Timothy Marcus Clark
NZEUT The New Zealand Employee Unit Trust
NZS New Zealand Steel Limited
NZS/EHL Parcel The 92,961,364 ordinary shares in the capital of EHL
issued by EHL to the Crown pursuant to the NZS Purchase Agreement
NZS Purchase Agreement An agreement in writing dated 19 October between
the Minister and EHL by which the Minister agreed to sell to EHL its shareholding in NZS in consideration for shares in the capital of EHL which EHL agreed to issue to the Crown
Ratner Peter Edward Ratner
RCL Richardson Camway Limited
RWS Rudd Watts & Stone
Saunders Peter William Saunders
Setar 72 Setar Seventy Two Limited
Shoeshine 59 Shoeshine Fifty-Nine Limited
Shoeshine 70 Shoeshine Seventy Limited
Stanes Peter James Dale Stanes
Taylor Maxwell Colin Taylor
Vega Vega Limited
W73 Watstone Seventy Three Limited
W74 Watstone Seventy Four Limited
Watstone 82 Watstone Eighty Two Limited
WIL Wellesley Investments Limited
Walsh Brian Vincent Walsh
Windmeyer Joseph Windmeyer
Wilson William Wilson
SECTION 1: PRELIMINARY AND STAND ALONE MATTERS
The substantive hearing of this case commenced on 21 November 1994, and thereafter the Court sat more or less continuously upon it for 198 days until 21 December 1995. There were then six further sitting days on 23 February, 22 March, 19 April, 1 and 16 May and 21 June 1996, when the Court reconvened to hear further submissions on points requiring clarification as identified by me as trial Judge. The total sitting time was 204 days. There appears to be no argument but this is the longest, largest and most complex piece of civil litigation ever to be conducted in the High Court of New Zealand. It appears probable, also, that the sitting time at least, is a record within those common law jurisdictions with which New Zealand has the closest association, namely the United Kingdom, Australia and Canada.
A verbatim record of the evidence and submissions was kept and it filled 41 lever-arch files (15762 pages). The Plaintiffs' opening submissions, followed by closing submissions, together with 17 volumes of authorities, total in all 26 volumes. The Crown's submissions, opening and closing, plus authorities, occupy 12 lever-arch volumes, whereas EAL occupies a relatively modest seven volumes. During the course of the hearing approximately 3,000 exhibits were introduced, most of them from the electronic document bank, a limited number (approximately 370) were produced conventionally in hard copy.
Additionally, the causes of action in equity, knowing assistance (or more recently dishonest assistance) and knowing receipt, and the common law causes of action for money had and received which feature very largely in this judgment, all come from areas of the law of equity and corresponding areas of the common law, which have only begun to develop as a coherent body of law since the 1960s and are still evolving.
The factual matrix against which the contest has been fought is set in the last heady days of the Boom before the 1987 sharemarket collapse. Involved was one of New Zealand's largest high profile finance groups which after the crash sought desperately to stay afloat and succeeded for some 18 months. The intermeshing relationships of the many subsidiaries in the group and the complex and artificial measures taken either to disguise money movements within the group, or vainly attempt to bring them within the law, all make for a set of circumstances which at times is bewilderingly complicated.
Inevitably therefore, this judgment must be long, complex and tedious. The litigants and their advisers will presumably read every word. Appellate Judges in the hierarchy of the New Zealand Court system may be called upon to read all or part of it. But for the interested but otherwise uninvolved reader it would be best to go straight to Volume III where I have endeavoured to summarise the salient features of the judgment, indicating what facts I have found, what I hold the law to be and what the end result is, as between the Plaintiffs and the Crown (and EAL and the Plaintiffs).
At the commencement of each volume there is a glossary of abbreviations and an index of the scheme of the judgment. These should make it possible to identify and read specific parts of the judgment without having to wade through it all. Also Volume II is designed to be used concurrently with the other volumes and contains only charts, diagrams and copies of exhibits, all of which are organised by date order.
1.2 Broad factual background (substantially undisputed)
The Plaintiffs in this case are three companies, namely Ararimu Investments Four Limited (AI4), Equiticorp Holdings Limited (EHL) and Equiticorp Industries Group Limited (EIGL). All three companies were placed in statutory receivership in January
1989 subject to the provisions of the Companies Special Investigation Act 1958, and by order in Council dated 3 April 1989, they were placed in statutory management subject to the provisions of the Corporations (Investigation and Management) Act 1989. Also significant in the case is Equiticorp Australia Limited (EAL) which along with Equiticorp Tasmania (ET) maintains a cross-claim against the Crown. Both the Australian companies are in liquidation under the appropriate State or Commonwealth legislation.
Also appearing frequently are Rudd Watts & Stone, solicitors of Wellington, Rudd Watts & Stone, solicitors of Auckland (the same firm with offices in both the capital and Auckland) (RWS), Bell Gully Buddle Weir, Auckland solicitors (BGBW) and Buttle Wilson Ltd (BWL) a leading stockbroker, financial adviser and underwriter operating from offices in Auckland and Wellington at the relevant time. Other companies and persons who play a significant part will be mentioned and identified in due course, but at this stage the Managing Director of the Equiticorp Group, Mr A R Hawkins can be mentioned (Hawkins). Also the solicitors who acted for AI4, EHL and EIGL, Messrs Darvell and Harford of RWS, Auckland (Darvell and Harford), Mr Ratner of RWS Wellington who acted for the Crown (Ratner). The two Ministers of the Crown at the time who were involved, namely the Hon David Caygill, Minister of Trade and Industry and the Hon Roger Douglas, subsequently Sir Roger Douglas, then Minister of Finance, plus officers of Treasury, Messrs Chetwin (Deputy Secretary), Kwok (Deputy Solicitor), and Andrew, the officer primarily involved in the sale of New Zealand Steel Ltd (NZS), (Chetwin, Kwok and Andrew). Also Mr Galt of Industries and Commerce, (Galt) the official responsible for the transaction in that department.
The steel industry in New Zealand is based on ironsand deposits on the West Coast of the North Island. At the time NZS was launched in 1965 the method used for production of the steel was unique in the world. The process involves combustion of
high grade coal in special equipment in association with the ironsands to produce raw material for the industry in pellet form. The Government undertook to assist NZS in setting up the industry and underwrote the initial share issue, which was undersubscribed. As a result the Government ended up holding 46% of the share capital. The mill at Glenbrook was commissioned in 1968 and in early 1980 work began on a massive extension, the cost of which was again underwritten by Government loans and guarantees.
By February of 1986 the Government had guaranteed loans in excess of $1 billion and had itself advanced nearly $300 million. It was further envisaged that additional financial support in the form of guarantees for external borrowings of more than
$5 million and further loans in the order of $750 million would be required. The project was one of the “think big” undertakings initiated by the third Labour Government but carried through by the Muldoon administration.
All this was taking place within a year or so of the election in late 1984 of the fourth Labour Government and the adoption of the deregulation and privatisation policies of the new Minister of Finance, Sir Roger Douglas. The corporate restructuring of NZS was reluctantly allowed to proceed so that by early 1986 the Crown owned 81.2% of the share capital of NZS and had assumed sole responsibility to repay $1.138 billion of the project's loans and guaranteed a further $176 million loan. When approving the restructuring however, the Government announced its intention to sell its interest in NZS.
By late 1986 the Government had received a report from the international consulting firm Booze Allen and Hamilton, to the effect that a further $750 million of capital would have to be injected into the project over the following three years if it was to have any prospect of becoming viable. And indeed the advice was that the project overall, had no saleable value and further funds should not be spent on the extensions.
After much debate, the decision was made in December 1986 to approve a further reconstruction which resulted in the Government’s shareholding rising to 90%. By 1 October 1987, the total sum which the Crown had advanced to or invested in NZS, including write-offs, was between $2.6 and $2.7 billion. The investment could only be described as disastrous. Even so, the end was not in sight in terms of Government support. Under those circumstances it was entirely understandable that Mr Caygill and Sir Roger Douglas should have decided that the Government must get out. It was not to be a rushed sale, but the range of possibilities available from the Government’s advisers was that the mill either had no value or a maximum value of approximately
$200 million.
In March 1987 the Government appointed Samuel Montagu, (SM) London merchant bankers, and BWL as financial advisers and exclusive selling agents. Between March and July 1987 there were numerous investigations and negotiations by a number of interested parties. When an invitation to place a bid was issued however, only two unsatisfactory bids were received, one from Fletcher Challenge and a proposed partial management buy-out. The Fletcher Challenge bid was for only $70 million and came with stipulations for subsidised coal and electricity supplies and tariff protection for the product on the domestic market. None of that was acceptable and the bid was rejected out of hand. The partial management buy-out was never viable.
No target date was set for the sale, but there was a preference for it to be completed by the end of the financial year, namely 31 March 1988. Additionally, as Sir Roger Douglas pointed out when giving his evidence, a reasonably prompt sale was symbolically important, not only to demonstrate to the public that the Government was serious about its privatisation policy, but also to keep on side those members of the Labour Party Caucus who were not as committed as the Minister, to economic reform.
The Equiticorp Group had shown some interest initially, and it came back into prominence in late September, early October 1987. The financial advisers to the Government had initially been lukewarm about Equiticorp, considering it did not have the expertise or financial substance to be a viable purchaser. Indeed, the group had only been founded by Hawkins in 1984, and although it had experienced spectacular growth from the time of its incorporation, it was seen primarily as a finance company rather than an investment group. By October 1987, however, it was one of the largest publicly listed companies in New Zealand. During the 1984-87 period, EHL shares had increased rapidly from par at 50c to $4.00 by September 1987. Throughout this period of growth, Hawkins and interests associated with him, had maintained a shareholding of approximately 40%, and it was known within the company and in the market that Hawkins intended to maintain that ratio, or even improve it.
After July 1987, the officials concluded that the purchaser of NZS was likely to be New Zealand domiciled, and there was a re-adjustment of the relationship between SM and BWL the latter firm then taking a more prominent part, particularly in seeking out, informing and introducing prospective purchasers. Mr Clatworthy, a senior partner of BWL had the first contacts with Equiticorp, and it was late in September 1987 that BWL first inquired whether the Crown was interested in a deferred settlement “using a combination of debt and equity (with a suitable takeout after say three years)”. Simultaneously the Board of EHL authorised Hawkins and another director named Taylor, to open negotiations with a view to submitting a firm proposal at an early date.
The Government encouraged BWL to promote an offer from EHL. An offer was made on 6 October 1987 for $242.2 million for the Crown’s ordinary shares. The following day an amended offer was put in for both the Crown’s ordinary and preference shares, the combined holding being valued at $307.5 million. As anticipated the offer was to exchange EHL shares for the Crown’s NZS shares. It was supported by a BWL underwriting. Also initially, unbeknown to the Crown, there was a takeout arrangement
whereby Equiticorp would provide finance if necessary to a buyer to take the EHL shares off the Crown’s hands by 31 March 1988.
The reaction of the Treasury officials and Mr Galt was enthusiastic. It was the only offer on the horizon, and provided the opportunity for the Crown to exit NZS for a much better figure than that offered by Fletcher Challenge and without conditions attached, potentially by the end of the financial year. Obviously, the part to be played by BWL as the underwriter was of considerable interest to the Crown. BWL’s obligation to underwrite and its own sub-underwriting arrangements with two companies, Richard Camway Ltd (RCL) and Ararimu Holdings Ltd (AHL) - both closely associated with Hawkins - and their relationship with EHL as a financier of last resort, were spelt out in a series of letters which came to be known and were referred to throughout the trial as the takeout letters. There were four such letters which may be described briefly as follows:
1. A letter dated 6 October 1987 from RCL to BWL undertaking to find a buyer for the Equiticorp shares being taken by the Crown by March 1988, and should it fail in that, to purchase the shares itself; the letter indicating that in that event it would apply to EHL “and any other member or members of the EHL group of companies” for the necessary finance.
2. A letter dated 7 October 1987 from EHL to BWL undertaking first that in the event that RCL was required to purchase then EHL would procure another member or members of the EHL group of companies to lend to RCL “in the ordinary course of its or their business of lending money” the necessary finance. And secondly, BWL would be paid a fee for the underwriting commitment provided by it. The fee was approximately $4 million.
3. A letter dated 7 October 1987 from AHL to BWL in the same terms as the RCL letter but in relation to the EHL shares to be issued to the Crown for its preference shares in NZS.
4. A letter dated 7 October 1987 from EHL to BWL to fund the AHL takeout in the same terms as it had undertaken to fund the RCL takeout.
These letters were first seen on behalf of the Crown by Ratner. He had become a partner in RWS Wellington in January 1986. During 1985-1986 he did some work for NZS as an understudy to Mr Clark, who had been retained by the Crown on behalf of NZS for some time. Mr Clark however, withdrew from his partnership in RWS in 1986.
Mr Ratner was engaged by the Crown in connection with the sale of NZS mid to late September 1987. At the time he was advised of the general nature of the transaction but little more. He attended with his assistant, Ms Theresa Shreves, (who was using her married name of Dugan at that stage) at Treasury on the morning of 13 October for what turned out to be the start of a week of frenetic activity. Even before leaving his office in Wellington to attend the meeting at Treasury however, Ratner received from Ms Shreves, who in turn had received from a Mr Holyman, of SM, (Holyman) copies of the four takeout letters. It appears both Ratner and Shreves appreciated immediately upon reading the letters that they raised potential problems in relation to s 62 of the Companies Act 1955, which is the statutory enactment which prohibits the provision of financial assistance by a company for the purchase of its own or its holding company’s shares.
At the meeting at Treasury, which was attended by Messrs Andrew and Kwok for Treasury, Galt for Ministry of Trade & Industry and Holyman at least for part of the time on behalf of SM, (and there may have been others), Ratner and Shreves explained
the implications of s 62 and expressed a preliminary but nonetheless fairly firm view, that the transaction could not proceed on the basis set out in the takeout letters. Ratner’s impression was that his view on this matter was challenged and that it was put to him that the solicitors for EHL (who incidentally were his partners in Auckland) and for BWL (Mr Familton of BGBW) held a contrary view. By the end of the day, however, the Crown officials indicated that they were prepared to go along with Ratner’s view and he was left to find a solution to the problem. It is not clear why the takeout letters were delivered unsolicited to Ratner’s office, except that they came by way of a covering letter from another principal in BWL, a Mr Cimino. He was not called by either side, nor was Mr Holyman who delivered the letters by hand.
Wednesday 14 October, Andrew and Galt flew to Sydney to negotiate an increase in price with Hawkins who by then was operating mainly from the Sydney base of the group where it was doing a lot of business. Holyman (SM) and Clatworthy (BWL) also attended the meeting in Sydney. The Crown succeeded in negotiating a higher price for the ordinary shares and as a consequence the EHL offer rose effectively to
$327 million with the underwrite price for the buy-back of the Equiticorp shares being fixed at $3.52 per share.
Back in Wellington Ratner and Shreves researched the s 62 problem and firmed up on their views, reaching the point where they appreciated that if the Crown proceeded with knowledge of the takeout arrangements it could find itself in a position where it might have to refund any moneys paid on the subsequent sale. Shreves prepared a memorandum to that effect, document 274059, (Volume II, page 29) which identified the law correctly, referred to the leading case, Steen v Law [1964] AC 287; [1963] 3 All ER 770 and in particular had a section No.3 which discussed the consequences for the Crown of a breach by Equiticorp of s 62 and expressed certain conclusions in paragraph 6 which included the following:
“6(b) The consequences for the Crown of a breach of s 62 by Equiticorp could be that:
Ratner’s evidence was that he conveyed the substance of that memorandum to the Crown officials.
Also on 15 October Mr Ratner had a series of discussions with Mr Harford (RWS, Auckland) and Mr Familton of BGBW by telephone in Auckland, and probably one heated exchange with Darvell who disagreed with him about s 62. In those discussions, Ratner expressed his reservations about the takeout letters and said he wanted them unwound. Although his initial request to Darvell and Familton appears to have been unsuccessful, by Friday of that week he had received satisfactory draft letters from EHL, RCL and AHL through RWS Auckland, purporting to unwind the takeout arrangements. The terms and circumstances of Ratner’s discussion with Familton are controversial and will be discussed in greater detail later in the judgment. Suffice to say the versions of each practitioner as to what took place during that conversation are dramatically different. At the end of the day, Ratner did not obtain from Familton an unwind letter in the form in which he had requested it. It has to be said also that quite clearly on 15 and 16 October, while Ratner was asking for unwind letters Familton and Harford were in the process of finalising a deed (which became known as the BWL Takeout Deed) which put in place EHL’s obligation as a financier of last resort to find finance in the ordinary course of business for RCL and AHL should they become the ultimate purchasers.
Friday, 16 October was a very busy day for all concerned. The lawyers were under pressure from their clients to finalise the documentation so that the deal could be signed the following Monday. The officials in Wellington were under pressure to
provide a report to the Ministers (Sir Roger Douglas and Mr Caygill), recommending finalisation of the transaction, again so that the matter could be signed up on 19 October. The overall structure of the transaction was for EHL and the Crown to sign on 19 October 1987, settle the exchange of shares in December 1987, and then for BWL to buy-back on or about 20 March 1988. There were separate contracts between EHL and the Crown regarding the exchange of shares on the one hand and between the Crown and BWL regarding the sale of the shares in March 1988 on the other.
The report to the Ministers was under preparation throughout Friday, 16 October and on balance completed late that evening. By working late on Friday and again on Saturday, the solicitors managed to get the documentation ready for signature on Monday, 19 October.
Ratner had some input into the report to the Ministers. That was unusual but his evidence is he insisted on being advised of the terms of the report so that the s 62 difficulties were correctly spelt out to the Ministers. The text of the report satisfied him in that regard, and also recorded he had negotiated suitable letters to unwind the objectionable takeout letters. Early on Monday morning Andrew reported to the Ministers with copies of the documents to be signed to finalise the two contracts, one for the exchange of the shares, the other for the buy-back of the Crown’s EHL shares at a later stage by BWL. He also advised that the transaction was subject to Ratner’s certificate that the takeout letters had been satisfactorily unwound. Later that morning Ratner provided a certificate to the effect that the transaction was in order and could go ahead. This was despite the difficulties earlier averted to, regarding the obtaining of a suitable unwind letter from Familton on behalf of BWL.
The documentation was signed on the 19 October, and the Minister of Finance held a press conference the following day which was attended by Hawkins and others, when the sale to Equiticorp was formally announced. Both the Crown and Equiticorp issued
press statements contemporaneously. The two press statements when compared are rather different. Hawkins said that an international financier was involved and would “warehouse” the shares for some time, while the Minister of Finance’s press release emphasised that the price was a good one and that settlement by the end of the financial year would enable the Government to balance the budget.
On 20 October the share market crash occurred. The value of EHL shares immediately dropped, but initially it seems that what we now know as the crash, was thought to be no more than a dip in the market. By the March 1988 settlement date the All Ordinaries Index had fallen by some 47% and the EHL share price had dropped to between one-quarter and one-third of the $3.52 that was the basis of the calculation for the settlement figure of $327 million. Indeed, in just two days trading following 16 October 1987 the EHL share price lost 21% of its value. As the value of the shares slid, media speculation began to appear as to how the buy-back was going to be financed, and who was going to bear the loss between market value and buy-back price. Questions were asked in the House to the same effect, but the Government line was that it had a binding arrangement and it expected it to be honoured. It refused to be drawn into making inquiries as to who the financier concerned was, it being accepted on all sides that BWL did not have the resources to bridge such a wide gap between purchase and market price.
Nonetheless, there was anxiety in both Treasury and Trade and Industry as the share price continued to fall. This is exemplified by the fact that about 9 December, Galt inquired of Clatworthy as to why the EHL shares had fared so badly. This contact also provided Galt with an invitation to approach another BWL partner (McDowell) regarding the funding arrangements but he did not pursue it.
At the same time, EHL was discovering that becoming the effective owner of the Steel Mill was far from plain sailing. NZS relied very largely upon funding lines from
Japanese banks for working capital, and those banks became nervous when it was learned the Government was about to cease to be the major shareholder. EHL found it could not arrange suitable alternative funding in time to take over as anticipated on 20 December 1987. There was much toing and froing because EHL on the one hand wanted to take over as soon as possible for tax and depreciation reasons, but on the other, would have faced acute financial embarrassment if the working capital funding lines were summarily withdrawn by the Japanese banks, (as was threatened) immediately after the change of ownership.
Fortuitously for the Crown, the problem facing EHL was raised with Treasury at about the time that real anxiety had set in. The opportunity was taken to require from EHL in return for a delay in settlement to 20 January 1988, further security in the form of a guarantee of BWL’s underwriting obligations backed by a mortgage of the NZS shares. A Supplemental Agreement dated 20 December 1987 was entered into, varying the original arrangements accordingly.
By late 1987, early 1988, Hawkins and the directors of EHL realised they were not going to be able to find an international financier to fund the buy-back. They succeeded in obtaining $80-105 million from Elders Merchant Bank, but in the financial forecasts for the group for December 1987, January-February 1988, the possibility of having to fund the buy-back from resources and cash flows internal to Equiticorp, was being recorded, although it was not apparently fully appreciated by all the directors.
Hawkins and Darvell however, saw the probability and set about preparing a shelf company AI4, to be the nominee to purchase back the NZS/EHL Parcel and to be in funds by the end of March 1988 to do so.
During the early part of 1988 and up to settlement date of the buy-back by AI4 on 17 March 1988, funding of a total of $358,145,230 was collected from various sources. In summary, the funding was provided as follows:
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$105,000,000
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Equiticorp Australia Ltd- (EAL)
Equiticorp Finance Group Ltd/Equiticorp
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132,429,508 ($A122m)
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Financial Services Ltd (EFGL/EFSL)
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40,000,000
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Equiticorp Industries Group (EIGL)
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40,000,000
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Equiticorp Tasman Ltd (ET)
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8,179,245
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c. Underwriting fee paid by EHL
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32,536,477
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|
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$358,145,230
====== |
Although the above schedule shows the end result, there were for a variety of reasons, in most instances, a large number of steps between the production of the funds by the original financier on the one hand and their arrival in the Crown’s hands via AI4 on the other. The Plaintiffs produced as Exhibit C a Chart Book. Chart 1 gives an overview of the funding, showing the final accumulation of deposits that were assigned to the Crown to yield $327,224,013.61 in payment. The key to the Chart Book and Chart 1 are produced in Volume II, pages 141 and 142. The following charts, 2-14 inclusive, give a more detailed picture of what occurred.
The loans from EAL and EFGL/EFSL were recorded in four basic steps:
The funding of $132 million odd from EAL occurred in three tranches. The first of those was for $60 million which was paid by EAL on 1 March 1988 to Denton Hall, solicitors in Hong Kong as advances to 18 Hong Kong companies. From there the funds were paid on 2 March 1988 to the five Turks and Caicos companies and then to Concorde in Vanuatu. Concorde paid $60 million to AI4 which, through EAL placed the funds on deposit as to $A12.1 million with Dominion Finance Corporation,
$22.9 million with the National Bank and $25 million which was used to acquire EHL debenture stock. Those three deposits finally went to the Crown. Chart 3 of exhibit C which is reproduced in Volume II, page 143 shows the movement of the $60 million to the 18 Hong Kong companies through the trust account of Denton Hall, on to the Turks and Caicos companies and thence to Concorde and from there to AI4. That was all accomplished within 24 hours between 1 and 2 March 1988. The deposits established as a result remained in place in one form or another, until their final assignment to the Crown in settlement on 21 March. Although there were variations on the way through, the other two tranches of $A30 million and $A32 million, were processed in substantially the same manner.
So far as the $40 million from EFGL/EFSL was concerned, it was also shunted through 11 Hong Kong companies, five Turks and Caicos companies on to Vanuatu and thence to AI4 over a period of three days from 4 to 7 March. Thereafter it was amalgamated with other moneys being collected in a Bank of New Zealand term deposit for AI4 which was then passed on to the Crown in settlement on 21 March.
The ET funding of $A7.5 million, which converted to $NZ8,179,245, was dealt with differently. Initially the moneys were paid to Wellesley Investments Ltd (WIL), an Equiticorp Group off balance sheet company, and from there the funds were lent to Concorde and had a small amount of AI4’s money added to them. The total ended up on 15 March on term deposit with EFGL where they were amalgamated with other moneys and paid onto the Crown on 21 March.
EIGL's funding of $40 million occurred between 9 and 10 March 1988 in two tranches, one of $19 million and the other of $21 million. These moneys were paid through Capitalcorp Holdings Ltd (CHL(NZ)) to WIL, and thence to Concorde. Concorde paid the funds to AI4, which placed them on deposit with three separate banks. Those deposits were in due course assigned to the Crown as a part of the settlement of the NZS/EHL Parcel.
The other source of funding, apart from the Elders’ Loan, was a payment to AI4 called an underwriting fee, totalling $32,536,477, which was paid by EHL. Payment was made on 14 March, and went through various accounts to AI4. It was common ground between all the parties that the underwriting fee should simply be regarded as a payment/gift by EHL to AI4 towards the cost of buying back the NZS/EHL Parcel.
It is important to appreciate that the Crown did not know of all these complicated transactions, and indeed, had no way of knowing about them. Indeed, the Plaintiffs’ contention is not that the Crown knew of the details described above in relation to the funding of AI4. Rather the allegation is that the Crown must have realised it was the Equiticorp Group that was buying back its own shares, and that at certain points along the way between 13 October 1987 and final settlement on or about 21 March 1988, the Crown was put squarely on notice that that was where the funds were coming from, but went ahead regardless and without making any or adequate inquiry.
One event upon which the Plaintiffs placed particular emphasis is the receipt by Andrew of a letter on Equiticorp letterhead on 11 March 1988, dealing with the mode of settlement by way of assignment of deposits, and attaching a schedule of deposits. The letter and schedule in their original form with annotations made by Mr Andrew upon them, are documents 425/021 and 425/022, and are reproduced in Volume II, pages 104 and 106. The letter and the schedule will be the subject of careful examination later in the judgment. They were seen not only by Andrew, but also by Kwok and Ratner. The Plaintiffs’ contention is the only conclusion to be drawn from them was that Equiticorp was funding the buy-back.
As earlier indicated settlement was finally effected when all the deposits and the Elders’ funds of $105 million were assigned to the Crown. There was then another press conference attended by television crews, at which Hawkins symbolically handed over a cheque in settlement to the Minister of Finance, which was immediately thereafter destroyed.
As can be seen from the funding details set out above, the money provided from within the Equiticorp Group came primarily from finance companies and in particular EFGL/EFSL and EAL - the latter being the largest contributor. As already recorded, AI4 then used the funds to purchase EHL shares at prices three times or more above their market value. After settlement the value of the shares continued to slide. This was recognised dramatically by AI4 which reduced the value of its NZS/EHL Parcel (as the share purchase came to be called) from $327 million to $188 million within a month or two of acquisition.
The finance group companies, particularly EAL, were a vital source of money to keep the investment group of which EIGL was the major operator, afloat. The group was being dragged down by the general downturn as a result of the sharemarket crash, and the huge burden of providing working capital for NZS (to the tune of $200 million per
annum) until the mill came on stream and profits began to materialise. The finance group companies themselves however, depended largely on lines of credit provided by bankers who were only happy to continue to fund, provided the audited annual accounts of the borrowers, came through clean and healthy. Having made such large investments in AI4 whose major asset was the now written down but still over-priced EHL shares, the finance group was in trouble as the forthcoming 30 June 1988 audit approached. It was obvious that the auditors would look critically at the discrepancy between purchase and market prices of the EHL shares, and they were also concerned that the loans constituted financing of Equiticorp’s own shares.
The Plaintiffs’ contention is that the forthcoming audit was the catalyst for refinancing the original advances, and that in particular it was driven by pressure from EAL’s Board and the Chief Executive, Mr Brian Fitzgerald. EAL puts a different emphasis on the situation, contending that the investment group was motivated primarily by a desire to see EAL pass the audit satisfactorily, because if it did not, vitally required funds were likely to dry up. That difference in emphasis between the Plaintiffs and EAL will be examined further at a later stage. The evidence from the Plaintiffs’ witnesses however, (Paton and Ms Trainer) the Group Accountant and General Manager, Group Administration, respectively, was that they were instructed by Hawkins that EIGL was to fund AI4 to enable it to repay the finance group companies.
EIGL accomplished this by providing funding of repayments by AI4 to the original financiers as follows:
$A2.469 million
The refinancing was accomplished by a complex series of journal entries, associated with the provision of additional securities and guarantees collectively referred to during the hearing as the Aylesford transaction. Although Mr Woodhouse for EAL challenges the way in which the Aylesford transaction is depicted on Chart 17 of Exhibit C because it suggests a sequence of journal entry repayments whereas EAL contends they all occurred at the same time, nonetheless the Chart does aid in an understanding of what occurred. It will be found in Volume II at page 148.
What the Aylesford transaction set out to achieve was first to move the finance activities (including Aylesford which was an English company owned by the group which held preference shares in Guiness Peat plc, another English finance company in which the group held a substantial shareholding) out of the investment side of the Equiticorp Group and into the finance group itself. Secondly, to repay to EAL the loans made to the Hong Kong companies and thirdly to reduce the level of inter- company loans appearing in EAL’s balance sheet. So EAL invested in Aylesford preference shares (thereby moving Aylesford into the finance group) which enabled Aylesford to redeem certain preference shares held by Equiticorp International (EIL), thus moving Aylesford out of the investment group. EIL used the funds to pay inter- company borrowings from EIGL and EIGL used those funds by advancing some to AI4 and making payments direct to EAL via Capital Holdings (NZ) (CHNZ) thereby reducing the inter-company loans in EAL’s balance sheet. AI4 used the funds it received to repay EAL all of the original funding, provided via the Hong Kong companies which was used to fund the purchase of the EHL shares in March 1988, ($A95.4 million).
All these details were developed by Paton and Mr B Fitzgerald, Managing Director, of EAL after 30 June 1988, the accounting entries being posted in the journals about mid- August.
Although cash payments were passed from EIGL to EAL and back on 30 June 1988, it was common ground that they had no commercial effect and it appears probable that was merely window-dressing to enable EAL to demonstrate to its auditors the repayment of the Hong Kong company loans on that date.
Importantly also, however, EAL was provided with security for its investment in Aylesford by EIGL - the EAL takeout indicated by the dotted line in transaction H on Chart 17. EIGL undertook to purchase the Aylesford preference shares from EAL in certain circumstances and the security provided to support that undertaking was mortgages over Equiticorp shareholding in the Aurora Group Ltd, Fisher & Paykel Ltd and Feltrax International Ltd (FIL). The advances to AI4 were not the only moneys dealt with in the Aylesford transaction. While some $A95 million was repaid to EAL on behalf of AI4, EIGL’s position once the Aylesford transaction had been completed was that it was a potential debtor to EAL for $265 million. That debt had not been paid when EIGL was placed in statutory management in April 1989 and the consequence is that today, with interest added, EAL is one of EIGL’s largest creditors, and stands to recover 40% or more of any recovery made by EIGL against the Crown.
The Plaintiffs’ contention is that there was a total repayment of EAL's original contribution to the purchase of the NZS/EHL Parcel on 30 June 1988, substantially by means of the Aylesford transaction. EAL disputes that and maintains its own independent cross-claim against the Crown.
Additionally, again by way of journal entry, EIGL refinanced EFGL/EFSL’s contribution to the extent of $28 million for the original financing and also refinanced EAL directly again by journal entry in respect of the outstanding amount of
$A19.669 million. Similarly, by journal entry, the $A7.5 million advanced by ET was repaid.
Apart from repayments to EAL of $A5 million by AI4 in cash and $NZ3 million in cash by EFGL/EFSL, all the other transactions were by way of journal entry or investment in preference shares.
The Plaintiffs and the Crown jointly contend, as against EAL, that EAL has been completely repaid its advances. EAL refutes that contention on the basis that only if it was repaid the cash it advanced (as opposed to swapping one irrecoverable debt for another) would repayment be accomplished.
The Plaintiffs and the Crown part company at that point, because the Plaintiffs then contend that because EIGL refinanced EAL’s original advances, it is now subrogated to EAL’s claims against the Crown. EAL and the Crown say that subrogation is not available in those circumstances and that issue as to subrogation is addressed later in the judgment.
It should be noted that the EAL takeout provided for a top up in respect of securities if their value diminished during the term of the security. Top ups were required, and provided on two occasions between 30 June and when EIGL was placed in statutory management early in 1989.
For the sake of clarity it should also be mentioned that EIGL’s refinancing claims are alternative to claims by AI4 for the total sum of $327 million and EHL’s claims for the same amounts on the basis of return of capital.
To complete this overview of the factual background, two further aspects of the matter are briefly referred to. The first could be described as the restructuring of EHL. On 28 May 1988 Equiticorp International plc (EIplc), a company incorporated in the UK and resident in Hong Kong, made a conditional takeover offer for all the issued capital in EHL. By then, by virtue of the purchase of the NZS/EHL Parcel and because it had
been used as the vehicle for an undercover share support scheme, AI4 held 176 million EHL shares. It accepted the takeover offer on 29 August 1988, thereby exchanging its EHL shares for EIplc shares. Almost simultaneously two Equiticorp employee unit trusts were created, namely the NZ Employee Unit Trust (NZEUT) and the Hong Kong Employee Unit Trust (HKEUT). AI4 immediately sold to those employee unit trusts (EUTs) the EIplc shares and options obtained as a result of the takeover. The shares and options transferred to the NZEUT all derived from the NZS/EHL Parcel and a small balance was transferred to the HKEUT, but none of this improved EIGL’s and EHL’s prospects of recovering the advances that had been made. Indeed, in due course, when EIplc was placed in administration under the Insolvency Act 1986 UK and wound up on 11 July 1989, the shares and options acquired as a result of the takeover proved valueless. EIGL has claims based on this restructuring, also the Crown contends it is significant in respect of the restitutionary relief claimed against it.
The other matter to be mentioned is that the original pleadings issued in November 1989 were very different to those on which the Plaintiffs finally went to trial in November 1994. This was partly because the Statutory Managers had changed their view as to which companies should be the Plaintiffs. In particular, it was not until 1 October 1992 that AI4 was joined as a plaintiff since when it has been promoted as the leading claimant. Even more significantly, however, as the matter progressed to trial, first Elders settled for $25 million, then EAL settled for $9 million, and finally in September 1994, all the director Defendants and their third party professional insurers, plus BWL, RWS, the Bank of New Zealand and BGBW settled for a further
$30 million. The terms of the settlement brought to an end all cross claims between settling parties, and secured for the Crown certain rights to have the total $64 million settlement sum taken into account if damages are awarded against it.
I should also mention that part of the delay between the issue of proceedings in November 1989 and the start of the substantive hearing in November 1994, was due to
the fact that the action was stayed for a year or more while criminal proceedings were taken against Hawkins and his fellow directors. Also the record will show that there were numerous preliminary applications taken before the matter was ready for trial. They resulted in some 23 judgments being issued by myself up to the end of October 1994. Prior to my becoming the Judge in charge of the litigation as a result of the untimely death of the late Wylie J on 11 May 1992, that learned Judge also had issued a number of important preliminary judgments in the case.
1.3 Plaintiffs v Crown: Causes of action and defences
During closing, on 1 December 1995 Mr Farmer QC provided an up to date overview of the Plaintiffs’ causes of action. It is based, of course, on the Plaintiffs’ Sixth Amended Statement of Claim. The overview is set out below and projects the complexity of this litigation, and of necessity is followed by some explanatory paragraphs.
"Overview of the Plaintiffs' Causes of Action
The plaintiffs' causes of action are founded upon:
1. Breaches of directors' duty
2. Want of authority
3. Illegality
4. Receipt by Crown of money paid by AI4 in breach of directors' duty and illegality.
AI4's causes of action
Paras $
J.3.1 Knowing Assistance 197-201 327,224,013
|
J.3.1A
|
Knowing Receipt
|
201A-201E
|
327,224,013
|
|
J.3.1A
|
Statutory Trust
|
202-203
|
327,224,013
|
|
J.3.3.
|
Illegal Contracts Act
|
204-298
|
327,224,013
|
|
J.3.5
|
Money Had and Received
|
217-219
|
327,224,013
|
EHL's causes of action
|
J.2.6
|
Reduction of capital
|
196H-196L
|
327,224,013
|
|
J.2.1
|
Knowing Assistance
|
185-189
|
32,500,000
|
|
J.2.1A
|
Knowing Receipt
|
189A-189E
|
32,500,000
|
|
J.2.2
|
Statutory Trust
|
190-191
|
32,500,000
|
|
J.2.3
|
Illegal Contracts Act
|
192-196
|
32,500,000
|
|
J.2.4
|
Money Had and Received
|
196A-196C
|
32,500,000
|
EIGL's causes of action:
|
J.1.1
|
Knowing Assistance
|
166-173
|
270,462,828
|
|
J.1.1B
|
Knowing Receipt
|
173J-173N
|
77,300,000
|
|
EIGL's causes of action: (contd)
|
Paras
|
$
|
|
|
J.1.2 Subrogation
|
174-176
|
124,191,359
|
|
|
J.1.2B Unjust Enrichment
|
177B-177C
|
124,191,359
|
|
|
J.1.3 Statutory Trust
|
178-179A
|
270,462,828
|
|
(original funding)
|
179F-179J
180-184
|
77,300,000
251,462,828
|
|
|
(refinancing and interest)
J.1.5 Money Had and Received |
184G-184I
|
77,300,000
|
|
EIGL's assigned EFGL/EFSL causes of action
|
J.1.1A
|
Knowing Assistance
|
173A-173I
|
40,000,000
|
|
J.1.1C
|
Knowing Receipt
|
173O-173T
|
40,000,000
|
|
J.1.3A
|
Statutory Trust
|
179B-179E
|
40,000,000
|
|
J.1.4A
|
Illegal Contracts Act
|
184A-184F
|
40,000,000
|
|
J.1.5A
|
Money Had and Received
|
184J-184M
|
40,000,000"
|
Looking at the four points under the first subheading of the overview. Basically, as already indicated, the Plaintiffs allege that the directors of the various companies in the Equiticorp Group, which contributed funds to settle the purchase by AI4 of the NZS/EHL Parcel, breached their fiduciary duty to those companies by committing them to a grossly improvident purchase (want of authority) in breach of s 62 of the Companies Act 1955 (illegality), and that the Crown received the moneys paid to it by AI4 with knowledge of the directors’ breaches of duty and illegality. Accordingly, the
Plaintiffs allege that the Crown was either a knowing assister or knowing recipient of the moneys in question, and alternatively, that recovery can be effected either pursuant to s 54 of the Corporations (Investigation and Management) Act, or the Illegal Contracts Act, or at common law - Money Had and Received.
It will be noted that in each of the four remaining subsections of the overview, the causes of action for Knowing Assistance, Knowing Receipt, Statutory Trust, Illegal Contracts Act, and Money Had and Received recur.
This aspect of the Plaintiffs’ claims was further elaborated by Mr Farmer in the overview section of the Plaintiffs’ closing, using a graph which is set out hereunder and which recognises the groupings of the causes of action as Restitutionary, Participatory and Statutory, with causes of action along the bottom line. The diagram is set out hereunder:
CAUSES OF ACTION
(property based)
Participatory
(wrong based)
Statutory
In rem (restitution in specie)
In personam (compensation)
In personam (compensation)
Money had & received (common law)
Knowing receipt (equity)
Proprietary tracing (equity)
Knowing assistance
s 54 Corporations (Investigation and Management) Act
Illegal Contracts Act 1. s.6
2. s.7
I interpolate to deal with a matter which only surfaced late in the trial, in fact at the callbacks on 1 May 1996 and 21 June 1996. It will be noticed that in the schedules of causes of action there is no reference to equitable or proprietary tracing, whereas in the above diagram it appears. In the pleading itself, there is an ambiguous reference whenever knowing receipt is advanced reading as follows: "(Constructive Trust:
Knowing Receipt, Unjust Enrichment/Equitable Tracing)". But there is no separate prayer for relief in respect of a Tracing as opposed to a Knowing Receipt cause of action. On 1 May 1996, as a result of a passing question from the Bench, it emerged that the Plaintiffs intended to advance two separate causes of action in the one pleading. I had not appreciated that to be the case and the Crown complained that it was taken by surprise.
This dual approach was not brought out satisfactorily during submissions. It was mentioned only once in limited detail during the Plaintiffs' closing on 15 November 1995 in what was called "the overview" and was not returned to when the legal issues were developed in detail subsequently. I was not taken to the pleadings on that occasion. After the 1 May 1996 callback and without the benefit of specific reference to the places in the synopsis and transcript where the matter was traversed, I gave consideration as to whether or not I should recognise the claim. When it arose again on 21 June 1996, however, I called for and have now considered the references. There is just enough in them to require me to give the Plaintiffs the opportunity to apply for leave move to amend for the purpose of clarifying and keeping the claim alive. But the Crown's position can only be protected from prejudice by requiring such an application supported by draft pleadings and a memorandum of the factual and legal basis upon which the claim would be advanced.
As is recorded at the end of Section 9 of this judgment, there is to be a further hearing during the week commencing 22 July 1996 regarding costs, interest and ancillary matters. If leave is granted, the Plaintiffs' application for leave to amend will be heard during that week. If successful it may be on terms that the issue be
re-argued and if that is not possible during the week of 22 July 1996, then the matter may have to stand over until next year.
Irrespective of what transpires in regard to the application for leave to amend, it is my intention that this judgment is to be final and subject to appeal in relation to all other matters dealt with in it.
Returning to the schedules on pages 24 and 25. Also requiring explanation are the
J.3.1 etc references which appear on the left hand side of the overview, and the varying amounts claimed which appear on the right hand side.
The J.3.1. etc references should be related to the paragraph numbers which appear in the third column. The Plaintiffs’ Sixth Amended Statement of Claim is organised on the basis that each cause of action is identified by the letter J and appropriate following numbers. The paragraphs A-F plead the parties and other participants, and in C, E and
Turning to the varying amounts down the right hand column of the overview. Obviously, within the various claims there is a high degree of overlap. It has been common ground throughout, that if the Plaintiffs succeed they will not under any circumstances recover more than $327,224,013 plus interest and costs, but certain of the Plaintiffs may succeed on some causes of action and not on others, in which case lesser amounts would be recovered, but there would be no double recovery, either for the full, or for lesser amounts. The position of each of the claiming Plaintiffs (AI4, EHL and EIGL including EIGL’s claims to subrogation and as an assignee of causes of action originally vested in EFGL/EFSL) are now briefly explained.
The primary claims advanced by the Plaintiffs are those of AI4. That company was the immediate payer of the $327 million to the Crown. The refinancing referred to
from time to time is not relevant to AI4’s claims. The Plaintiffs have contended throughout that upon recovery by AI4 the competing claims of the original financiers on the one hand (EAL and ET) and the refinancier (EIGL) on the other, can be resolved. AI4 has undertaken to the Court that if it recovers it will hold such recovery in trust for those ultimately entitled, as either found by the Court or agreed by the parties.
EHL’s cause of action for reduction of capital for the full amount of $327.22 million is made by it as the holding company of the Equiticorp Group because as already recorded the entire sum, save for Elders' contribution of $105 million, was funded by EHL and its subsidiaries for the buy-back of the NZS/EHL Parcel. This claim, of course, is alternative to AI4’s claim and all the other original financing and refinancing claims. If, however, the claims of AI4 and EHL’s reduction of capital claims are not allowed, then EHL has a claim as an original financier for $32.5 million, (the notional fee paid to AI4 as nominee) which it claims on the basis of the five standard causes of action already discussed.
Leaving aside EIGL’s position as an assignee for the moment, it has a claim as an original financier for $77.3 million which is alternative to AI4’s claims and the capital reduction claim of EHL. A major issue, should the Crown be found liable, is whether or not EIGL can be subrogated to certain rights of EFGL/EFSL, EAL and ET against the Crown. The last mentioned group of subsidiaries originally contributed substantially and after adjustments still has a claim for $124.2 million as shown in the cause of action identified as J.1.2 under the EIGL subheading. In effect, EIGL says that by refinancing AI4 in whole or in part, the losses of the subsidiaries just mentioned shifted to EIGL which now steps into their shoes. I note in passing that there is no original financing claim advanced in respect of the funds provided by Elders, but EIGL advances claims arising from the fact that at a later stage Elders was repaid. It can be said therefore, that the refinancing claims of EIGL are alternative to:
However, the refinancing claims of EIGL are additional, not alternative to the following claims:
In the explanation just given of EIGL’s claims, reference is made also to its position as an assignee. That EIGL is the assignee of any rights EFGL/EFSL may have against the Crown is a formally agreed fact, so that EIGL’s standing to sue for the $40 million is not in dispute.
All these individual claims will have to be worked through in detail in due course. At this juncture, the objective is to sketch out the complexity of the claims made and the manner in which they overlap and inter-relate. Similarly, the outline that now follows of the defences raised by the Crown is no more than that.
At the forefront of the Crown’s case is what Mr Mathieson QC described as the “clean hands” defence, which applies to equitable causes of action and in respect of common
law causes of action has its counterpart in the maxim ex turpi causa non oritur actio (no action arises out of a disgraceful (illegal) or immoral matter). That major Crown argument will be discussed in 1.5 hereunder, but the thrust of it is that each of the Plaintiff companies was more deeply involved in the illegal provision of the buy-back funds for the NZS/EHL Parcel than the Crown. Further, each of the Plaintiff companies through its directors and executive officers knew far more about the details of the illegality and the sources of the funds than the Crown had any prospect of knowing. And the Crown is said to have been deceived by the false unwind letters and misleading press statements. So the Plaintiffs’ hands are said to be “unclean”, therefore equitable remedies should not be available. Similarly, their conduct was clearly illegal, and accordingly the common law causes of action should not lie either.
In addition to the contention that the Crown was deceived by the dishonest unwind letters it says it never had constructive, far less actual knowledge of the illegality in the form of breaches of s 62, which the directors and executives of EHL and its subsidiaries were perpetrating. It follows the Crown argues, that the knowing assistance and knowing receipt causes of action must all fail. Not only because of the lack of knowledge but because the Crown was a bona fide purchaser for value. So far as the money had and received causes of action are concerned, the Crown’s basic defence there is that the Plaintiffs have failed to show that the Crown received their money in circumstances where it should be obliged to repay. The Crown also has defences under s 18C of the Companies Act 1955, and on the basis of estoppel, but those will be dealt with in greater detail later. So far as illegality is concerned, the Crown alternatively denies that there were any breaches of s 62 in respect of the original financing of the purchase of the NZS/EHL Parcel and that otherwise, the BWL Underwriting Agreement was not itself illegal, but if illegality should be established the Crown submits the Court should exercise its discretion pursuant to s 7 of the Illegal Contracts Act and validate. The Plaintiffs also charge that the Crown knew that the purchase by AI4 was grossly improvident (because of the gap between value,
$90 million or less, and the purchase price, $327 million) and that therefore the directors of AI4 must have been acting without authority and in breach of fiduciary duty. The Crown denies that allegation also.
1.4 EAL's and Glenbook's claims against the Crown: Overlap with EIGL's subrogation claims
The issues addressed here will require fuller treatment later in this judgment. As recorded in the penultimate paragraph of 1.2 above, there was a comprehensive settlement with all of the Defendants, save the Crown, in September of 1994. At the time of that settlement, however, EAL, in its own right and as assignee of the rights of ET, had a cross-claim against the Crown for the amounts which those two Australian subsidiaries of EHL had contributed to the fund accumulated to purchase the NZS/EHL Parcel from the Crown. EAL was the major contributor and the sum is in the region of
$100 million of the total funds of approximately $222 million provided from the Equiticorp Group.
EAL's cross-claim was not affected by the settlement and is to be ruled upon in this judgment. If EAL succeeds an issue arises as to whether it is entitled to the recovery or whether the sums involved rightfully now belong to EIGL. EIGL is the major funding New Zealand subsidiary which subsequent to the settlement with the Crown in March of 1988 claims to have refinanced EAL and ET and thereby to have become subrogated to their rights against the Crown and entitled to the proceeds of any recovery.
The matter was put succinctly by EAL and what is set out hereunder is taken in large measure from the summary commencing at Section D, page 12 of EAL's opening.
As between the Crown and EAL, the Crown says EIGL's refinancing of EAL means that it has been repaid and now has no basis upon which it can claim. But, EIGL and
EAL dispute that. They say, correctly in my view, that repayment of EAL does not affect the Crown's liability on restitution-based causes of action.
The alleged refinancing obviously raises issues between EIGL and EAL. In a sense, the refinancing can be said to have had the effect of restoring to EAL/ET their original contributions and thus their losses have been made good. EIGL submits that, as the restoration was at its expense, unless it is subrogated to EAL/ET's rights as original financiers, they will be unjustly enriched at its expense. It can be seen that both the Crown and EIGL rely upon the alleged refinancing but each urges the Court to draw a different conclusion as to the effect of it. The Crown says it eliminates EAL/ET's loss. EIGL, however, says that the causes of action remain and are valid but the right to recover the loss has shifted to it. It will be appreciated, therefore, that EIGL's subrogation claims are premised on the Crown remaining liable on EAL's original causes of action.
EAL's response to the Crown is that whether or not it has been refinanced is irrelevant to the Crown's liability and in that, as indicated above, EAL and EIGL are on common ground. Alternatively, EAL says if the Crown can rely upon refinancing it can only do so to the extent that the refinancing did in fact restore the cash contributed. It is common ground that the refinancing did not restore cash rather it removed a liability. To EIGL, EAL responds, as it does to the Crown, that the refinancing did not restore the cash and further that, in any event, EIGL was a volunteer and there are other impediments to recovery by it.
By way of summary in its opening, EAL says that the refinancing gives rise to three broad issues as follows in paragraphs 63.1 to 63.3:
"63.1 The first is whether the Crown can rely on the transactions which EIGL and the Crown allege constitute the refinancing of EAL to diminish or eliminate its liability on the causes of action
pleaded by EAL. This is an issue between EAL and EIGL on the one hand and the Crown on the other. It is largely an issue of law.
Further discussion of these matters is now deferred to later in the judgment.
Glenbrook, of course, has its own separate proceeding against the Crown. Before its change of name, Glenbrook was called Equiticorp International Limited (EIL) and under that name it bore the cost of paying the underwriting fee to BWL and the sub- underwriting fees of AHL and RCL. It now claims those fees from the Crown on the bases that the Crown was a knowing assister of the breaches of fiduciary duty of its (EIL's) directors who wrongly approved the payments. The total claim is for
$5,785,480 and is discussed and ruled upon in 2.19 of the judgment.
These defences are advanced by the Crown on the basis that if all or some of the Plaintiffs' causes of action seemingly succeed, nonetheless, they will all be defeated by these two defences.
As a consequence, the argument in connection with them was given great prominence. It was introduced right at the beginning of the Crown's opening, was among the first
addressed in its closing, and again was one of the first addressed in its limited right of reply. I interpolate to say that, in this case, I directed all parties to open fully on the law, but because of the anticipated length of the hearing and because the Crown would have to close before it heard the Plaintiffs' final submissions, the Crown was given the right to comment or reply further on any aspect of the case, which at the time of closing it could not reasonably have dealt with.
The two defences in question fell very clearly into the category just mentioned. When the Plaintiffs opened, the defence was not mentioned. There was a hint of the Plaintiffs' answer after the Crown had opened, and before it closed, but the Plaintiffs' full argument did not emerge until after the Crown had closed. The consequence was that without opposition, leave was granted to the Crown after the Plaintiffs had closed, to comment.
The defence, however, was clearly set out in paragraphs 38, 71 and 79 of the Crown's Third Amended Statement of Defence to the Fifth Amended Statement of Claim of the Plaintiffs (no further defence was required of the Crown to the Plaintiffs' Sixth Amended Statement of Claim). Paragraphs 38 and 71 relate to EIGL and EHL respectively and are practically identical. Paragraph 79 deals with AI4. Paragraph 38 is set out hereunder:
"He denies the allegation in paragraph 173 and says that if the Crown participated in any dishonest and fraudulent and/or illegal design (which is denied) EIGL through its directors (or one or more of them) was a party to that design and is debarred from obtaining any remedy against the Crown either because he who comes to equity must come with clean hands or because of illegality or because ex turpi causa oritur non actio."
The introductory paragraph for the particulars reads:
"In so far as EIGL is suing in equity he relies on the following facts, acts, matters and circumstances as showing that EIGL does not come to equity with clean hands, and in so far as EIGL is suing in law he relies on the same facts, acts, matters and circumstances as showing EIGL is defeated by illegality or the principle reflected in the maxim ex turpi causa oritur non actio."
The particulars themselves start with the allegation "EIGL, acting through its Board or by individual directors:". Then follow some 17 particulars which in substance allege that a scheme was designed and implemented whereby EIGL and other EHL subsidiaries would contribute to the funding of the NZS/EHL Parcel by the ultimate purchaser AI4, knowing the transaction was grossly improvident and having an appreciable risk that it would be illegal. The particulars further state the companies:
"participated in a massive money-laundering exercise whereby funds originating from various members of the Equiticorp Group and transferred from them to AI4 and subsequently used by AI4 to purchase the NZS/EHL parcel were disguised as funds originating from other sources." (Particular 38.12)
Further particulars allege that false and dishonest statements were made to the media and to the Stock Exchange and that the Crown was dishonestly deceived as to the financing scheme which was implemented. It is also stated that the Plaintiff companies authorised the writing of the unwind letters which:
"falsely represented that previously notified funding arrangements were to be withdrawn and replaced by funding arrangements of a completely different kind, when in fact the previously notified arrangements or similar arrangements were intended to be, and were, retained "
(Particulars 38.16 and 38.17)
Paragraph 71, dealing with EHL is practically identical, except that a further Particular has been added, dealing with the underwriting fee for $32.5 million.
The position of AI4 in relation to the clean hands and ex turpi causa defences was addressed in paragraph 79, set out hereunder:
"He denies the allegations in paragraphs 197 to 201 and says that if there was any dishonest and fraudulent and/or illegal design (which he denies) the Crown did not participate in it and further says that if the Crown participated in any dishonest and fraudulent and/or illegal design (which is denied) AI4 through its directors (or one or more of them) was a party to that design and is debarred from obtaining any remedy against the Crown either because he who comes to equity must come with clean hands or because of any illegality or because ex turpi causa oritur non actio."
The particulars provided are introduced with the words "AI4 acting through Hawkins and/or Darvell:". There are then 11 particulars the substance of which is that AI4 was a party to a scheme whereby EIGL and other EHL subsidiaries would contribute to the funding of the purchase of the NZS/EHL Parcel by it. The particulars also allege that AI4 knew that the transaction was grossly improvident and that there was an appreciable risk it was illegal and that AI4 aided or procured the money-laundering exercise and dishonestly deceived the Crown by withholding from it information regarding the funding arrangements.
The Crown contends that in respect of each of the particularised items pleaded in support of paragraphs 38, 71, and 79, the impropriety (whether participation in an unlawful transaction or merely deceptive and dishonest behaviour) had an immediate and necessary relation to the equitable remedy sued for. Put another way, the Crown submits that in no instance was the impropriety so removed in point of time, or so unrelated in subject matter as to be irrelevant.
In opening their reply to these defences raised by the Crown, the Plaintiffs recognised that the Crown relies heavily on the dishonest unwind letters, without which the Crown submitted it would not have proceeded, and the contention that the Plaintiffs
themselves are suing on their own misdeeds in circumstances where the Crown was ignorant. In particular, the unclean hands defence was recognised, as alleged, to arise inter alia from the unlawful funding and the deceitful unwind letters. The Plaintiffs' first response is that on the facts the Crown's real concern, at the time the contracts were negotiated, was to have the sub-underwriting letters withdrawn so that it was "unfixed" with the knowledge of any sub-underwriting agreement which might be illegal. In other words, that the Crown simply wanted to purge itself of knowledge and after that was unconcerned as to how the deal was financed. That issue of fact will be addressed later in the judgment. At this juncture, the issue is whether or not, on the basis that the other causes of action pleaded succeed, they would, nonetheless, be defeated by these two defences.
In its opening submissions, the Crown developed the legal basis of the defences but it is unnecessary to go into all that law, because the Plaintiffs' defence is within a fairly confined compass. Among the material referred to by the Crown however, is an article by P H Pettit (Emeritus Professor of Equity, Universities of Bristol and Buckingham) published in the 1990 Conveyancer at p 416, entitled "He Who Comes into Equity must come with Clean Hands". Mr Mathieson, advancing this part of the argument for the Crown, submitted that the Professor had correctly assessed the significance of the clean hands defence. At pp 417 and 418 of the article he said:
"Though the principle behind the clean hands maxim can be discerned in earlier cases, the actual expression seems first to have been used judicially by Lord Mansfield in Fitzroy v Gwillim [1786] EngR 79; (1786) 1 TR 153, 154, though it was treated there as equivalent to the maxim 'He who seeks equity must do equity', which is distinct from, though commonly regarded as closely related to, the maxim with which we are concerned, namely that 'He who comes into equity must come with clean hands.' The one maxim is said to look to future conduct, the other to past. It is submitted, however, that the relationship between the two maxims, is in reality less close than is often suggested; the former maxim according to Wigram VC in Hanson v Keating [1844] EngR 836; (1844) 4 Hare 1 at 4-5, is a pithy way of saying that Equity will only grant relief on terms which ensure that the defendant is treated in a fair and equitable way. The clean hands
maxim means that a plaintiff may be refused equitable relief if his own conduct in relation to the transaction has been improper."
The article then moves on to recognise that the maxim is qualified and equity does not demand that its suitors should have led blameless lives which proposition is allied to the requirement that any wrongdoing must be closely related to the equity sued upon. It is also recognised (as is obvious) that sometimes the past conduct of a plaintiff will equally prevent the obtaining of damages at common law - where, for instance, a plaintiff has entered into an illegal contract. Of that situation Professor Pettit says, (supra at 422):
"Doubtless in such a case the plaintiff's hands are not clean, but there would be no need to rely on the maxim. Illegality would be the proper plea."
In his conclusion at p 424, the author recognises that the unclean hands defence is "a last resort defence when none of what may be called the nominate defences are available but where it would be unconscionable for the plaintiff to have a remedy".
Of unconscionability at p 425 the author says:
"Unconscionability is perhaps the common factor. The clean hands doctrine is perhaps no more than a background principle from which have developed particular equitable defences - innocent misrepresentation, equitable fraud, laches and acquiescence and unfairness and hardship. Most cases where the clean hands maxim is found in fact involve one or other of these defences and reference to clean hands is otiose. There remain exceptional cases which do not readily fall into any of these categories yet where the courts have taken the view that it would be unconscionable for the plaintiff to succeed, and these cases can be regarded as applications of a clean hands doctrine. They include cases where the plaintiff has been seeking to further a deception of the public: where the plaintiff is shown to have materially misled the court or to have abused its process: where the plaintiff has acted unlawfully ...: where there was a degree of sharp practice: ..."
As earlier mentioned the ex turpi causa defence is seen as the common law equivalent of the clean hands defence and in this particular case applies to the common law (Money Had and Received) and the statutory (Corporations (Investigation and Management) Act, and Illegal Contracts Act) causes of action.
Returning to the Plaintiffs' reply, the central proposition is set out in paragraph 13.10 of Volume 1 of the Plaintiffs' closing submissions as follows:
"13.10: The law is clear that companies - now in the hands of statutory managers - are entitled to sue third parties on behalf of the company's creditors in respect of losses suffered or property misappropriated by the wrongful acts of the directors, to recover those losses from third parties who have participated in that wrongful conduct, or who have been recipients of the company's property."
The Plaintiffs then rely on four authorities which support that proposition. The first is Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555. This is the celebrated decision of Ungoed-Thomas J and it is interesting to note that both the Plaintiffs and the Crown rely extensively upon it. The facts are complicated, but we are concerned only with the first of the two transactions involved. In it Cradock, the defendant, through an agent, purchased a company (which did not have a business, but did have substantial liquid assets), effectively with the company's own money and in circumstances where, at the end of the day, Selangor instead of holding cash, held an unsecured liability to Woodstock (a private investment company), which in turn was owed an unsecured liability by Cradock. Along the way another party, District (bankers to the plaintiff), assisted in what it knew was an unlawful scheme to enable Cradock to purchase the company in the manner outlined. The defendant, District, can be described for present purposes as a dishonest assister, while the defendant Woodstock is perhaps more correctly described as both a dishonest assister and a knowing recipient.
At the beginning of the judgment a number of legal issues are isolated. The one which is relevant to this case is headed "Illegality" and commences on p 1652. It is principally concerned with the first transaction which I have briefly described, and deals with a defence raised by a number of the director defendants and District and Woodstock, to the effect that because the English equivalent of s 62 had been breached the transaction was illegal, and therefore the plaintiff's claim should be refused, because it was a party to the illegality.
At p 1655 there is a discussion of the leading case, Steen v Law [1964] AC 287; [1963] 3 All ER 770. That was a case also in which directors committed a breach of their fiduciary duty and were required to reimburse the company sums of money illegally misapplied. Discussing the case Ungoed-Thomas J said:
"It was not contended that the directors were absolved from accounting by reason of the illegality of the loan by the company. Such illegality was clearly before the Privy Council and, if available against such a claim, provided a complete answer to it. Yet the point was neither taken by the defendants nor by the Privy Council; and it seems to me for the very good reason that the company was not relying for its claim on the unlawful loan and the relationship of creditor and debtor thereby created, but upon the misapplication by the directors of the company's moneys by way of the unlawful loan."
Then on p 1656 there is the passage set out hereunder upon which both parties relied: "In a claim based on an illegal breach of trust the claimant does
not rely on a right conferred or created by that breach. On the very contrary, he relies on a right breached by the breach, as the very words 'breach of trust' indicate. It is only on the footing that there is a breach of trust that the defence of illegality becomes relevant. So it is assumed, for present purposes, that there is a breach of trust against the plaintiff by those who are directors and by those who are claimed to be constructive trustees. The constructive trustees are, it is true, parties with the plaintiff company itself to the transaction which is illegal. The plaintiff's claim, however, for breach of trust is not made by it as a party to that transaction, or in reliance on any right which that transaction is alleged to confer, but against the directors and constructive trustees for perpetrating that transaction and making the plaintiff company party to
it in breach of trust owing to the plaintiff company. The breach of trust includes the making of the plaintiff a party to the illegal transaction. So it seems to me clear on analysis that the plaintiff is not precluded from relying on breach of trust by a party to an illegal transaction, to which the plaintiff is itself a party, when the breach includes the making of the plaintiff a party to that very transaction. Those who proved to be constructive trustees, sharing the responsibility with the directors for the breach of trust, share the liability too.
The result is that the plaintiff in this case would not, by reason of illegality, be prevented from being reimbursed money paid by it unlawfully under a transaction to which it is a party. But this does not mean that this would nullify the ordinary operation of illegality with regard to companies and parties outside the company, and not being or treated as being a trustee to it. But it would prevent such operation shielding those whose position or conduct makes them responsible as owing a fiduciary duty or as constructive trustee."
The Plaintiffs say that Selangor demonstrates that where a company's own directors act wrongfully that does not prevent it from bringing an action. Indeed, in Selangor that was the very basis upon which the plaintiff was able to sue.
The Plaintiffs' next authority is Belmont Finance Corp v Williams Furniture Ltd (No. 1) [1979] 1 Ch 250. This is a case in which there was an alleged conspiracy (involving two directors of Belmont) to defraud the plaintiff of substantial funds. Like Selangor it was a case in which breach of the English equivalent of s 62 was considered. Leave to amend had been applied for in the first instance and was refused.
In the Court of Appeal Buckley LJ, delivering the leading judgment p 261, line F said: "On the footing that the directors of the plaintiff company who
were present at the board meeting on October 11, 1963, knew that the
sale of the Maximum shares was at an inflated value, and that such value was inflated for the purpose of enabling the third, fourth, fifth and sixth defendants to buy the share capital of the plaintiff company, those directors must have known that the transaction was illegal under section 54.
It may emerge at a trial that the facts are not as alleged in the statement of claim, but if the allegations in the statement of claim are made good, the directors of the plaintiff company must then have known that the transaction was an illegal transaction.
But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal, and the matter for which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal."
On that basis Buckley LJ was of the opinion that the plaintiff company could not be regarded as a party to the conspiracy. So it was a case in which the directors' unclean hands were not allowed to defeat the plaintiff's claim.
The third case relied upon by the Plaintiffs is Brink's-Mat Ltd v Noye [1991] 1 Bank LR 68. This is another decision of the Court of Appeal on the issue as to whether an amendment to pleadings should be allowed, the principal judgments being delivered by Mustill and Nicholls LJJ. In this case, Brink's-Mat, as bailees were holding gold bullion. The bullion was stolen and subsequently smelted with base metals and recast. Two directors of Scadlynn Ltd (Chappell and Palmer), took part in the smelting operation and paid the proceeds of the sale of the smelted down bullion into Scadlynn's account, amounting to nearly £8 million. Then on an almost daily basis, and in impressive amounts, they withdrew it all between September 1984 and January 1985. Scadlynn's account was with Barclays Bank plc. For the purposes of the hearing, the Bank acknowledged that Brink's-Mat could make a claim alleging that the Bank owed Scadlynn a duty of care which it breached by allowing Chappell and Palmer to withdraw all its funds. And further, that Scadlynn in turn held as a constructive trustee for Brink's-Mat, which in turn held for the original bailor. Mustill LJ held that Scadlynn Ltd was the victim of wrongful arrangements to deprive it improperly of a large part of its assets and he cited Belmont Finance Corp v Williams Furniture Ltd (supra) at 261 and 262. His Lordship added at p 72:
"If the facts were such that the bank should have recognised the possibility of such an impropriety, and if the scope of the bank's duty of care was wide enough to impose an obligation to take steps to forestall it, I see no reason why the cause of action should not be enforced by Scadlynn for the ultimate benefit of the creditors who would look to those assets for satisfaction of their debts."
A little later the judgment continues:
"If one now proceeds to add in the second special feature of this case, namely that the moneys credited to Scadlynn's account were impressed with a trust in favour of Brink's-Mat the matter becomes even more clear. For this additional factor means that Scadlynn as trustee was under a duty to account to Brink's-Mat and Johnson Matthey, [the original bailors] as their respective interests might appear, and the ability of the company to comply with this duty became progressively diminished as the money was wrongfully bled from its account. It seems to me plain that the acts which created this situation were wrongs committed by the two men against the company, and the fact that they also controlled the company is entirely beside the point. On the facts which are being assumed for the purposes of this appeal the bank could not have been expected to know that the funds with which the two men were dealing belonged, not to Scadlynn, but to others. But if the facts are nevertheless enough to make it arguable that the bank should have known that something wrong was being done to Scadlynn, then ... Scadlynn would have a claim which ought to go to trial." [Emphasis added]
Nicholls LJ at p 73 said:
"On the facts alleged in the proposed amendments, Scadlynn was at all material times being used by Chappell and Palmer and others for a fraudulent purpose, viz, to realise the proceeds of sale of the robbery. But the plaintiff was not implicated in any such fraudulent purpose. On the contrary, along with the owners of the gold, the plaintiff was the intended victim of the scheme. Likewise, Scadlynn itself was an intended victim, in that Scadlynn was being used as a vehicle for committing a fraud on its creditors and a fraud on those beneficially interested in property held by Scadlynn. In those circumstances the fraudulent purposes of those controlling Scadlynn are not to be imputed to the company itself: see Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, per Buckley LJ at pages 261-2."
Finally, the Plaintiffs referred to the recent decision of Tipping J in Marshall Futures Ltd v Marshall [1992] 1 NZLR 316. In that case, by a different route the Judge reached the same result and concluded that unclean hands and ex turpi causa defences could not be raised where the action was brought by liquidators for the benefit of creditors. It appears, however, that the English line of authority upon which the Plaintiffs rely was not referred to Tipping J and Mr Farmer, with due respect to the New Zealand authority, based the Plaintiffs' case upon the English decisions.
The Plaintiffs' submissions were delivered on 16 November 1995, which predated the handing down of the decision of the Court of Appeal on the Crown's appeal from my judgment No 38 on 11 December 1995, now reported as Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528. Had the decision been to hand when Mr Farmer was making his submissions, however, he could have further cited a passage from p 536, lines 5 to 15 of the judgment of the Court, delivered by McKay J, in which after a discussion of the decision of the High Court of Australia in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 130 ALR 570 he said:
"We see no basis in Vadasz for applying the 'clean hands' principle in the present case, or the other maxim invoked that equity looks to the intent rather than the form. Mr Williams relied on a passage in the evidence as showing the illegal and dishonest nature of the funding of AI4 by EHL and its subsidiaries. That is the very basis of the plaintiffs' claim. The plaintiffs now, under the control of statutory managers, seek to recover for the benefit of their creditors and shareholders moneys which were dishonestly and illegally paid to the Crown, on the basis that the Crown received those moneys with knowledge of impropriety. The dishonesty of the directors who make such a payment has never been regarded in equity as providing a defence to a recipient who has knowledge of the dishonesty." [Emphasis added]
Exercising his right of limited reply, on the fourth-to-last day of the hearing in 1995, Mr Mathieson again put the issue of unclean hands at the forefront of his argument and mounted a vigorous counter-attack on the Plaintiffs' propositions.
In paragraph 4 of his synopsis he said:
"4. The essence of the only argument which the plaintiffs advanced to prevent the total rejection of all their causes of action because of unclean hands and the parallel ex turpi causa bar of the common law, is that they, the plaintiffs, were victims of their former directors' breaches of duty, and it is those directors who had the unclean hands."
Mr Mathieson argued that to treat third parties who have participated in the wrongful acts of directors on a par with third parties who have become recipients of the company's property is fallacious; and further, that in truth, the acts pointed to by the Crown are the acts of the companies themselves. It was the companies which gave unlawful financial assistance and dishonestly deceived the Crown with untrue unwind letters written on their behalf.
Counsel then addressed the Plaintiffs' argument referring first to Selangor, relying on the passage at p 1656 of the judgment earlier set out, and in particular upon the sentence in the final paragraph of the quote reading:
"But this does not mean that this would nullify the ordinary operation of illegality with regard to companies and parties outside the company, and not being or treated as being a trustee to it."
That passage on its true interpretation, Mr Mathieson submitted, prevents EHL and EIGL from suing the Crown on any of their causes of action (T/15431) because he said the Crown's wrong (if any) did not include the making of the Plaintiffs a party to the provision of finance in breach of s 62 or the issuing of deceitful unwind letters and untrue and misleading press statements.
Turning to Belmont, counsel submitted it could be distinguished, because there the directors were conspirators and no allegation of conspiracy is made here (I observe conspiracy was alleged originally but abandoned by the Plaintiffs at the beginning of
the hearing in the interests of saving time and concentrating on essential issues) and also that the conspirators were out to defraud the company. Similarly, so far as the Brink's-Mat case is concerned, the distinction there, according to Mr Mathieson was that the company, Scadlynn was the victim of the frauds being perpetrated.
At T/15436, having discussed each of the English authorities relied upon by the Plaintiffs, counsel said:
"Gathering up the threads of these various cases, we have the starting point of the Crown's opening and closing, that unclean hands operates as a defence however serious the wrong committed by the defendant, providing that the wrong has a direct bearing on the equity being sued for. You could not possibly have a closer connection between these three leading items of unclean hands and the equity being sued for, because the provision of unlawful financial assistance is near the heart of the case. The plaintiffs do not even put that in issue.
What emerges from these cases as a whole is that there is an exception to unclean hands where:
1. the Defendants are third parties who are guilty of knowingly assisting wrongdoing directors or;
2. where the only way in which the company can be said to have done something wrong is by pointing to the acts of directors who, at that very moment, were defrauding the company itself as their intended victim."
I have given these submissions of Mr Mathieson's anxious consideration, but in the end I am not persuaded.
As stated by Professor Pettit (1990 Conveyancer 416, 418):
"The clean hands maxim means that a plaintiff may be refused equitable relief if his own conduct in relation to those transactions has been improper."
Where the plaintiff is a company the question must be whether the directors' improper conduct is to be attributed to the company as:
"there is no such thing as the company as such, no ding an sich, only the applicable rules."
(per Lord Hoffmann, delivering the opinion of the Privy Council in Meridian Global Funds Management Asia Ltd v The Securities Commission [1995] 3 NZLR 7, 12, l 25.)
As observed by Lord Hoffmann, a company's rules of attribution are found both in its constitution and in the general rules of attribution which apply equally to natural persons, namely, the principles of agency.
The general principle of agency law that a principal is affected by any notice or knowledge his or her agent possesses is subject to an exception where the agent is acting in fraud of the principal. In such circumstances the notice or knowledge will not pass. This exception was applied in Belmont Finance Corp v Williams Furniture Ltd (No 1) [1979] 1 Ch 250. In that case, notwithstanding the director's knowledge of the scheme Belmont was considered a victim of the conspiracy and the director's unclean hands were not allowed to defeat Belmont's claim. The buy back of the shares by AI4 for $327 million, when in actual fact they were only worth $90 million on the open market (and the value was only that high because of an illegal share support scheme), is analogous to the transaction in Belmont Finance whereby Belmont purchased Maximum shares at an over-inflated value, for the purpose of enabling the defendants to buy shares in Belmont. Mr Mathieson sought to distinguish that case on the grounds that it involved allegations of conspiracy, however, I do not consider that is a valid ground of distinction.
On the basis of conclusions recorded later in this judgment, it must be taken, for the purpose of dealing with these two defences that the directors breached their fiduciary duty, by committing the Plaintiffs to unlawful breaches of s 62 for the purpose of
completing a grossly improvident transaction. The breaches were such that they could never have been authorised by the company. They had the effect of a massive reduction in the capital of the companies with no prospect of recovery, to the detriment of shareholders and creditors alike. In these circumstances, it was the delinquent directors who were responsible for the acts complained of, not the Plaintiff companies which were themselves victims of their directors' wrongdoing. The clean hands defence therefore fails as the dishonest and illegal conduct of the directors cannot be attributed to the Plaintiff companies.
Out of deference to counsel's argument I will advert briefly to the submission that the only way a company can escape having unclean hands is where either the defendants are third parties who are guilty of knowingly assisting wrongdoing directors, or the directors, at that very moment, were defrauding the company itself as their intended victim.
In this case, the Crown dishonestly assisted the wrongdoing directors by completing the sale of the NZS/EHL Parcel to AI4 despite its knowledge that Equiticorp money was being used to buy Equiticorp shares. That answers Mr Mathieson's first point, furthermore, it seems illogical to me with respect, to contend that the application of the clean hands defence depends upon the distinction between an assister and a recipient.
It is clear that fraudulent and dishonest breaches by trustees (in this case directors) are not required to establish a knowing receipt claim (Bowstead & Reynolds on Agency (16th ed 1995) 9-130; Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 407 per Lord Goff; and Powell v Thompson [1991] 1 NZLR 597, 608 per Thomas J). Knowing receipt liability is restitution-based (Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378; [1995] 3 WLR 64; [1995] 3 All ER 97 at 386). The recipient's
liability depends not upon the degree of impropriety of the trustees' conduct but upon the receipt of the property with the requisite knowledge. It is not logical to hold that on
the one hand a person may be a knowing receiver for accepting property paid over by the directors in breach of trust to the company, but on the other to assert the company will not be able to bring an action against this recipient due to the doctrine of unclean hands unless it can show the recipient assisted in or participated in the breach. That would be to expand by a back door approach the elements that must be proved in a knowing receipt action.
Further, I am unable to accept that the strained application of the principles emerging from the English cases, espoused by Mr Mathieson is correct, especially when applied to the facts of this case. The Crown's proposition, with respect, tends to treat Selangor as laying down a code or rule, similar to the error which the Privy Council pointed out in Royal Brunei Airlines v Tan (supra at 103) in respect of Lord Selbourne's formulation in Barnes v Addy [1874] UKLawRpCh 20; (1874) LR 9 Ch App 244.
As to the second point, I see no reason why in principle the only acts of the directors which will not be regarded as acts of the company giving rise to the unclean hands defence are those which "at the moment" of commission "defraud" the company as the "intended victim". In any event, it seems to me that the Plaintiff companies in this case, paying $327 million for shares worth less than $90 million, were the intended victims of the directors' machinations. And that approach is in accordance with Buckley LJ's conclusion in Belmont Finance that the company was a victim in the conspiracy.
Dealing with the ex turpi causa defence, the Plaintiffs said this in paragraph 13.4 of Volume 1 of their closing:
"13.14 In any event, the ex turpi causa principle does not survive the Illegal Contracts Act, which lays down a summary code by which illegal contracts are rendered void with all the normal consequential remedial incidents of that effect."
Elaborating on that paragraph of the synopsis, Mr Farmer pointed out that the common law rule is that no action can be brought upon an illegal contract - effectively the ex turpi causa defence always succeeded. All that changed in New Zealand, however, with the passing of the Illegal Contracts Act 1970. Section 6 abrogates the common law rule, which was thought to be too harsh. It does so by providing that an illegal contract is of no effect and no property passes. Effectively it reversed the common law rule. Accordingly, the Plaintiffs submit that the Crown's attempt to use the ex turpi causa maxim in the circumstances of this case runs contrary to the intention of Parliament when passing the 1970 Act. The Act provides that any reverse hardship as a result of the abolition of the common law rule as to illegal contracts is met, or ameliorated by the remedies provided in s 7.
Mr Mathieson did not address Mr Farmer's argument that the enactment of the Illegal Contracts Act brings to an end the application of the ex turpi causa maxim in New Zealand. In my judgment however, the submission made is unanswerable and on that basis, the common law actions survive also. I am strengthened in this conclusion by the comments of Lord Goff in Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340, 364 where he expressed the view that the Illegal Contracts Act is a system of discretionary relief, for cases concerned with illegal contracts, in substitution of the common law rules founded upon the in pari delicto principle.
1.6 Was (is) AI4 a subsidiary of EHL?
It should be appreciated (and will emerge clearly in a later section of this judgment) that AI4's position as a plaintiff is both more significant and less complicated than the other two. It is said by the Plaintiffs to be the main claimant. It dealt directly with the Crown and is the only Plaintiff able to advance the "gross improvidence" argument.
The Plaintiffs' Sixth Amended Statement of Claim is divided into sections running from A through to J, but with D, G and H wholly deleted consequent upon the Plaintiffs' settlement with various parties prior to the commencement of the substantive hearing. Section E deals with the "Legality of Transactions". In that section, at paragraphs 95 and 95A, it is pleaded that the purchase of the NZS/EHL Parcel by AI4 from the Crown was illegal because it breached s 40 of the Companies Act 1955. The significance of this, if proved, is that the assignment of the deposits to the Crown to pay the purchase price of $327,224,013 was void - title to the moneys did not pass.
It is convenient to resolve this issue as to whether AI4 was a subsidiary of EHL now, rather than later when the specific claims advanced in the Sixth Amended Statement of Claim are under consideration.
Section 40(1) provides:
"Except in the cases hereafter in this section mentioned, a body corporate cannot be a member of a company which is its holding company, and any allotment or transfer of shares in a company to its subsidiary shall be void."
None of the exceptions mentioned in subsections (2) to (5) of s 40 apply in this case.
Section 158 of the Companies Act 1955 defines holding company and subsidiary. The relevant portions are set out below:
"158. Meaning of 'holding company' and 'subsidiary' - (1) For the purposes of this Act, a company shall, subject to the provisions of subsection (3) of this section, be deemed to be a subsidiary of another company if, but only if, -
(a) That other company either-(i) Is a member of it and controls the composition of its board of directors; or
(ii) Holds more than half in nominal value of its equity share capital as defined in subsection (5) of this section; or
(b) The first mentioned company is a subsidiary of any company which is that other company's subsidiary.
(2) ...
(3) In determining whether one company is a subsidiary of another company -
(a) ...
(b) ...any shares held or power exercisable -(i) by any person as a nominee for that other company (except where that other company is concerned only in a fiduciary capacity);(ii) ...
shall be treated as held or exercisable by that other company:"
The inter-relationship of AI4 shareholders is best illustrated by the diagram produced hereunder which is Appendix 1 to the Sixth Amended Statement of Claim. The accuracy of this diagram was not disputed by the Crown. The 10% shareholder (other than AR Hawkins) in Setar 72 was Richardson Camway Ltd, a company controlled by Hawkins but not a subsidiary of EHL.
Ararimu Trust/AI4 Group Structure
Ararimu Trust Hawkins & Darvell
Trustees
Darvell Settlor
RCL
AR Hawkins
80% shares held 10% shares held 10% shares held
Setar 72
50% shares held
Shoeshine 59
50% shares held 50%
shares held
50%
shares held
AI4
Also of crucial importance is the Ararimu Trust Deed (201/814) executed during February 1988, which is to be found at page 92 of Volume II of this judgment. Stated very broadly, the Plaintiffs submitted that there are two routes by which AI4 can be said to be a subsidiary of EHL:
1. By Setar 72 and Shoeshine 59 holding their shares in AI4 as nominees of EHL (s 158(3)(b)(i) and s 158 (1)(a)(ii)); or
2. The Ararimu Trust holding its 80 percent shareholding in Setar 72 as nominee for EHL, with the result that Setar 72 was an EHL subsidiary. As AI4 is Setar 72's subsidiary (conceded by the Crown) the application of s 158(1)(b) means that AI4 is also EHL's subsidiary.
Again putting it very broadly, the Crown in response argued:
1. There is no evidence, documentary or oral, to support either of the Plaintiffs' contentions that shares were held as nominee for EHL; and
2. The Plaintiffs' interpretation of s 158 fails to distinguish between the two arms of the definition of subsidiary.
The Interpretation of Section 158
Section 158(1) is an exclusive definition of the ways in which company A is deemed to be a subsidiary of Company B. There are three such ways:
1. Company B is a member of company A
and
Company B controls the composition of company A's board of directors;
2. Company B holds more than half the nominal value of company A's equity share capital; or
3. Company A is a subsidiary of any company which is company B's subsidiary.
Section 158(1) is expressed to be subject to s 158(3) which, inter alia, provides that any shares held or power exercisable by any person as nominee for company B shall be treated as held or exercisable by company B. Thus the result of company C holding shares in company A as nominee for company B is that company B may end up being treated as if it held more than half the nominal value of the capital in company A, and company A will therefore be company B's subsidiary.
The treatment, in s 158(3)(b) of these shares as being held by company B corresponds to the second branch of s 158(1), namely company B holding more than half the nominal value of the share capital in company A. There was some argument by both the Crown and Plaintiffs as to whether s 158(3)(b) results in the nominator being a member of the subsidiary. In other words whether it extends the definition of "member" for the purpose of considering whether a company is a subsidiary. This was the basis for the Crown's submission that the Plaintiffs had failed to distinguish between the two arms of the definition of subsidiary. Whether or not this is so the Plaintiffs' interpretation does not seem to be the natural meaning of the provision which is directed towards the second branch where all that is required is that the shares be held, not that the company be a member. However, I do not need to conclusively determine that point as s 158(1)(a)(ii) is more apt for the particular facts of this case.
The Crown also argued it would be too liberal an interpretation of s 158 to hold that the fact that company B controlled the composition of the board of company A means the vehicle which holds the shares in company A must hold them as nominee for company B. Mr Mathieson argued this would mean the requirements in s 158(1)(a)(i) that B is a member of company A and controls the composition of the board would
always be able to be bypassed. As to that, I should say first that I do not intend to hold, and did not understand the Plaintiffs to be arguing that I should hold, that mere control by company B of the board of company A means the owner of the shares in company A holds them as nominee for company B. That clearly is not the case. Take, for instance, the situation of different classes of shares where only the holders of a certain class are allowed to vote or are eligible to be directors. The remaining shareholders will not be the nominees of the owners of the voting and/or director class shares. Robert Walker J makes the same point in Re Polly Peck International plc [1996] 2 All ER 433, 445 when he states:
"But neither agency nor nomineeship - nor, still less, sham or something akin to sham - is to be inferred simply because a subsidiary company has a small paid-up capital and has a board of directors all or most of whom are also directors or senior executives of its holding company."
Secondly, in relation to the bypass argument, I am unable to see why s 158(3) was inserted, and worded to override s 158(1), if not to extend the circumstances in which s 158(1) can be satisfied. The two branches of s 158(1) are alternatives. Choosing to rely on one and not the other is quite legitimate in my view. The Plaintiffs must still meet the requirements of the branch being relied upon, ie, in this case holding more than half the share capital.
In my view for AI4 to be a subsidiary of EHL the Plaintiffs must prove either:
1. The Ararimu Trust holds its 80 percent shareholding in Setar 72 as nominee for EHL, in which case s 158(3)(b) treats the Setar 72 shares as held by EHL thereby satisfying s 158(1)(a)(ii), so that Setar 72 is a subsidiary of EHL. This means AI4, as a subsidiary of Setar 72, is also a subsidiary of EHL (s158(1)(b)); or
2. Setar 72 and Shoeshine 59 both hold their shares in AI4 as nominees for EHL, in which case s 158(3)(b) treats the AI4 shares as held by EHL thereby satisfying s 158(1)(a)(ii).
Holding as a Nominee
"Nominee" is not defined in the Companies Act. There have been no reported cases in New Zealand on the meaning of nominee in relation to this section. Research conducted under my direction located no Australian or English decisions which were of assistance on the equivalents of s 158(3) in those jurisdictions.
In Gower's Principles of Modern Company Law (5th ed 1992) "nominee shareholder" is defined in the glossary of terms as:
"A person who holds shares but does not have any beneficial interest in them but holds them on trust for some other person."
In Schuh Trading Co v Commission of Internal Revenue CCA 7; 95 F 2d 404, 411, a case concerning the transfer of company assets to a nominee, the Judge said:
"The word nominee ordinarily indicates one designated to act for another as his or her representative in a rather limited sense. It is used sometimes to signify an agent or trustee. It has no connotation, however, other than that of acting for another, in representation of another, or as the grantee of another."
While it is generally inappropriate to have recourse to definitions in other statutes, it is nonetheless occasionally done. Richardson J in CIR v McDonald [1991] 1 NZLR 419 at 423 (CA) applied the meaning of "incurred", developed by the courts in relation to the Income Tax Act 1976, to the Corporations (Investigation and Management) Act 1989. His Honour said:
"There is nothing in the scheme and language of ss 42 and 44 of the Management Act to warrant according 'incurred' a different meaning in those provisions."
"Nominee" is defined in s 7 of the Income Tax Act 1976 which concerns determining when a company is under the control of any person. Nominee is also defined in relation to overseas persons or income in the Overseas Investment Act 1973, the Overseas Investment Regulations 1995 and s 245A of the Income Tax Act. While these three later definitions do not specifically relate to the subsidiary setting, the first is more apposite. Prior to amendment in 1994 s 7 of the Income Tax Act 1976 contained this definition:
"'Nominee', in relation to any person, means any other person who may be required to exercise his voting power in relation to any company in accordance with the direction of that person, or who holds shares or debentures directly or indirectly on behalf of that person; and includes any relative of that person:"
This section was repealed and substituted by s 7(1) statute No 76 of 1994. Under the new section a nominee is any person who holds any rights at any time on behalf of or to the order of another person.
The 1976 definition shows, in my view, that when referring to "nominee" Parliament has been concerned to cut to the core of the relevant arrangements and determine what the practical reality is rather than insisting on legally enforceable powers and obligations. While not attempting a definitive interpretation, nonetheless, taking the above definitions as a starting point, a nominee can be said to be a person/company/body which (directly or indirectly, generally or specifically, and perhaps irrespective of ultimate enforceability) holds any property on behalf of another or exercises some power at the direction of another. At the core of the concept is the question of control. Who calls the shots. In that regard the structure of ownership of shares in AI4 as set out in Appendix 1 above, is all important.
As mentioned earlier both parties are agreed AI4 is a subsidiary of Setar 72. The question therefore is whether either Setar 72 and Shoeshine 59 hold their shares in AI4 as nominees for EHL, or whether the Ararimu Trust holds its shares in Setar 72 as nominee for EHL.
The Ararimu Trust
As mentioned above, the full text of the Trust is to be found at page 92 of Volume II. The Plaintiffs point to the following in support of their claim that the Trust holds its shares as nominee for EHL:
1. Messrs Darvell and Hawkins created the ownership structure of the group (including the Trust). This is established by a letter from Darvell to Hawkins dated 12 February 1988, which is Image Number 397/011 to be found at page 85 of Volume II.
2. Mr Darvell was the settlor of the Trust. Ararimu Trust Deed 201/814 page 1
3. Messrs Darvell and Hawkins were trustees of the Trust. Ararimu Trust Deed 201/814 page 1
4. EHL had a considerable degree of control over the exercise of the trustees' powers:
5. EHL was obliged to pay all stamp duty, brokerage, charges and expenses incurred by the trustees (cl .8.8).
It can be see therefore that the Trust Deed's provisions set out expressly the extent of direct control EHL had over the trustees and the Trust. Most powers could only be exercised at the direction of, or with the consent of, EHL. The existence of such a degree of control establishes, in my judgment, that the Ararimu Trust held its shares in Setar 72 as EHL's nominee.
Shoeshine 59 and Setar 72
The factors relied upon by the Plaintiffs to establish that these companies each held their 50 percent shareholding in AI4 as EHL's nominee are:
1. Messrs Darvell and Hawkins created the ownership structure of the group (including the Trust).
Darvell to Hawkins letter 12/2/88 Image Number 397/011 which is to be found at page 85 of Volume II.
2. Messrs Hawkins and Darvell were the sole directors of all three companies.
3. The Articles of each company provided that the directors could only be appointed or removed from office by the holder of the majority of ordinary shares in the capital of the company.
(The Articles of Association are Image Numbers 763/053-87, 764/049-
74. But they have not been reproduced in Volume II. The point as I understood it was not disputed.)
The Plaintiffs submitted the structure of the Trust and its relationship to the companies gave effective control of them to EHL. Accordingly, what the Plaintiffs are relying on here is a form of indirect control through Messrs Hawkins and Darvell, the architects of the scheme and directors of all three companies. This is not as clear cut a case as the Trust where EHL had direct control and the Trust could be seen simply as its marionette. In the circumstances, the Crown's argument that "the Plaintiffs have failed to prove that the Ararimu Trust was effectively under the complete control and direction of EHL as opposed to that of Hawkins personally" has some bite when one considers the position of Shoeshine 59 and Setar 72. On balance, I doubt that the degree of control exercised over those two companies by EHL through Messrs Hawkins and Darvell was sufficient to conclusively show that they held the AI4 shares as nominee for EHL. In the circumstances, however, it is not necessary for me to decide the point.
For the reasons set out above, as they relate to the Ararimu Trust, I hold that AI4 was (is) a subsidiary of EHL. It follows that the contract transferring the NZS/EHL Parcel from the Crown to AI4 in return for the $327,224,013 in the assigned deposits was contrary to s 40 of the Companies Act 1955 and void.
1.7 Apportionment and Settlement Deed
I propose to deal with the issues of apportionment between the Crown and former Defendants and the effect of the Settlement Deed of 13 September 1994 ahead of detailed consideration of the specific causes of action and claims based upon them. This will enable adjustments, where appropriate, to be made as each claim is dealt with without the necessity for repetitious explanations.
The Crown set its position out in paragraph 100 of the Third Amended Statement of Defence (the pleading the Crown went to trial on) as follows:
"100. Should the Crown be held liable to the plaintiffs or one or more of them (which liability is denied) then the quantum of such liability should be reduced, either at law or in equity or by virtue of the Settlement Agreement dated 5 September 1994, in proportion to the culpability of the other participants in the transaction, and/or the causal potency of the acts and omissions of those persons in bringing about any loss suffered by the plaintiffs, or in creating the plaintiffs' entitlement to restitutionary relief, those persons being:
A R Hawkins R P Darvell EIGL Directors EHL Directors RSW
BGBW
Elders"
That pleading raises both issues of fact (the ambit of the September 1994 settlement) and law. I propose to deal with the issues of law first.
Reduction at Law or in Equity
Although the culpability of the other participants, and causal potency, were put forward as alternative bases for calculating the Crown's share of the Plaintiffs' loss initially, in closing the Crown emphasised the culpability approach as preferable in principle.
The Crown's basic submission was that the liability of a defendant, where all the other defendants have settled, should be confined to the proportion of the total loss that represents the non-settling defendant's blameworthiness.
Mr Mathieson submitted that the reasoning in Mouat v Clark Boyce [1992] 2 NZLR 559, that there is jurisdiction in equity to apportion between plaintiffs and defendants, is equally applicable to the splitting of liability between defendants. In that case Cooke P said: (supra at 563)
"As to the jurisdiction to apportion, it would be strange if after all these centuries the common law (in the widest sense of the expression) had been able to produce only instruments of remedy so blunt and inefficient that apportionment of responsibility where it rightly belongs is impossible. I do not believe that to be so."
The Crown also relied upon Albion Insurance v Government Insurance Office [1969] HCA 55; (1969) 121 CLR 342 at 350 where Kitto J reviewed the development of the doctrine of contribution between defendants concluding that it is based on natural justice and equality. He stated the reason for the doctrine as being "payment by the one discharges not only himself but each of the others, and qua sentit commodum sentire debet et onus" (ie, S/he who gains the advantage also must suffer (shoulder) the burden). Nothing, however, was said in that case by Kitto J to suggest this doctrine is or should be applicable between plaintiff and defendant, as opposed to between defendant and defendant.
Three American cases were also relied upon by the Crown to support assessing damages on the basis of the defendant's relative culpability. The first is the decision of the Supreme Court of the United States in McDermott, Inc v AmClyde [1994] USSC 8; (1994) 128 L Ed 2d 148. Stevens J, for the Court, said: (at page 154)
"The question presented is whether the liability of the nonsettling defendants should be calculated with reference to the jury's allocation of
proportionate responsibility, or by giving the nonsettling defendants a credit for the dollar amount of the settlement. We hold that the proportionate approach is the correct one."
There is a persuasive discussion of why the proportionate approach is preferable at pages 156-161 of the decision. As Mr Farmer pointed out, however, McDermott was an admiralty decision in which jurisdiction the liability of each defendant is assessed on the basis of his/her proportionate fault. (See syllabus by Reporter of Decisions in McDermott at 152 and comments by Stevens J at 156, as well as New Zealand Law Commission: Paper 19 published March 1992 "Apportionment of Civil Liability" at p 9.) It is an established procedure therefore in an admiralty action, where settlement occurs, to reduce the damages the non-settling defendants must pay by quantifying each defendant's proportion of responsibility. Equity and common law, on the other hand, have a different starting point and have always held that each concurrent wrongdoer is liable for all the plaintiff's loss, even though s/he may only have been partially responsible. McDermott, therefore, does not advance the Crown's argument.
Counsel nonetheless submitted that nothing turned upon the fact that McDermott was an action in admiralty. At T/6473-6474 Mr Mathieson said:
"It is submitted that it is plain that if the action were simply a tort action for negligence on the highway, with multiple defendants, some of whom had settled, the result would be exactly the same, having regard to the theoretical reasoning adopted by the court."
I am unable to accept that submission. A similar conclusion was reached by the majority in TBG v Bendis [1994] USCA10 1066; 36 F.3d 916 (10th Cir. 1994), the second authority cited by the Crown. This was a case involving breaches of US securities fraud law where liability is joint and several. On the question of whether McDermott was authority that the court could allocate proportional fault among the defendants, the majority held that different considerations applied in securities law where a defendant's relative fault is irrelevant to the plaintiff's right to recover. They said it is only in admiralty that the
issue of proportional fault remains relevant to the primary claim. The majority stated: (supra at 927-928)
"However, unlike securities law, admiralty law is comparative, which allows courts to allocate fault among the defendants in deciding the plaintiff's claim, regardless of whether the defendants have filed contribution claims....Although both admiralty law and securities law seek to allocate fault among defendants, they do so in different ways....A Court cannot assume jurisdiction over a contribution claim that is not before it simply because that claim has the same purpose as a comparative fault or other law that allows the Court to allocate fault in the primary claim."
The Crown relied upon the dissenting judgment of White JA. He sought to apply McDermott by analogy holding that the fundamental objective of contribution, (to ensure liability is distributed according to relative fault), is the same in both securities and admiralty law (supra at 931-932). For the reasons stated above I prefer the approach of the majority.
The third American case referred to by the Crown was Smith v Mulvaney [1987] USCA9 1644; 827 F 2d 558 (9th Cir 1987), a decision of the Court of Appeals for the ninth circuit. This was an action brought by a non-settling party against the settling parties for contribution. The court was required to consider whether contribution should be apportioned on the basis of the parties' relative culpability or whether a pro rata approach (where the total damages are divided by the number of defendants) should be applied. The decision had nothing to do with limiting the liability of the non-settling defendants' to the proportion of the loss representing their culpability. Therefore, that decision does not help the Crown either.
The Plaintiffs submitted the Crown's approach was the complete antithesis of the rule that joint wrongdoers are jointly and severally liable to the plaintiff for the whole of the loss; and the plaintiff may if s/he chooses, execute judgment against any one defendant for the full amount. This accords with the Law Commission's view of the law as it
currently stands in its preliminary paper No 19 (supra). At paragraph 25 the paper reads:
"25 In both situations, however, [joint concurrent liability and several concurrent liability] the concurrent wrongdoers were said to be liable in solidum: each of the wrongdoers was responsible for the whole of the damage. The plaintiff could therefore enforce judgment against whichever defendant the plaintiff chose. In practical terms one defendant might pay the entire award while the other escaped scot-free. This rule has not been abolished and remains a fundamental of the law of civil liability. "
Mr Farmer submitted that in Day v Mead [1987] NZCA 74; [1987] 2 NZLR 443 equity had been brought into line with the common law. But, to import the Admiralty rule would create a situation where equity would be radically different, and more extensive than, the common law. Counsel submitted, correctly in my view, that such a step would be unwarranted.
The Plaintiffs also referred to the House of Lord's decision in Fitzgerald v Lane [1988] UKHL 5; [1989] 1 AC 328 at 339 which reaffirms that contributory negligence is an issue between plaintiff and defendant while contribution is one arising only between defendants. Lord Ackner, in that case, makes it clear contribution between defendants is only looked at after the judgment amount that is to be entered against the defendants has been settled. He said:
"Apportionment of liability in a case of contributory negligence must be kept separate from apportionment of contribution between the defendants inter se. Although the defendants are each liable to the plaintiffs for the whole amount for which he has obtained judgment, the proportions in which, as between themselves, the defendants must meet the plaintiff's claim, do not have any direct relationship to the extent to which the total damages have been reduced by the contributory negligence, although the facts of any given case may justify the proportions being the same."
This is a complete answer to the Crown's submission that its liability should be reduced in proportion to the other participants' culpability. Relative culpability may be relevant to apportionment issues between defendants but as the law currently stands, it has no place in determining the quantum of a defendant's liability to a plaintiff.
As a matter of interest, I note the Law Commission came to the view the law should not be changed in this regard. At paragraph 93 of preliminary paper No 19 (supra) the Commission noted:
"a change to the present joint and several liability would represent a very significant departure from the fundamental concern of the common law that a plaintiff should be able to recover the full amount of his or her loss, any possible unfairness to defendants being subordinate to this principle."
At paragraph 168 the Commission concluded:
"The factor which weighs with us most heavily at present is the effect on plaintiffs which abrogation of the rule would have. We stress a number of times in this paper the commitment of the common law to the objective of fully compensating the plaintiff for all loss which has been suffered. Joint and several liability is one means of achieving this: any risk of an absent or insolvent defendant must be borne by a co- defendant (if there is one). If there is only one defendant and he or she is insolvent the plaintiff fails to recover. But if there are two defendants, the plaintiff can recover from either and, if D2 is insolvent, D1, not the plaintiff, bears that burden. Although it recognises the contrary arguments, the Law Commission has yet to be persuaded to recommend any departure from this position."
The Settlement Agreement
This Agreement, which was signed on 13 September 1994 (the terms of it having been approved by the Court on 26 August 1994), will be found at page 128 of Volume II. I have provided the complete document, but we are concerned primarily with clause 9 which reads as follows:
"9. If on the continuation of the proceedings as between Equiticorp and the Crown liability be established against the Crown, Equiticorp shall be entitled and the Crown shall be subject to the same judgment or judgments as between themselves as if the parties in schedules 2 and 3 had remained parties to the action to the intent that:
(a) Subject as hereunder the nature and extent of the Crown's liability, if any, to Equiticorp shall not be altered by reason of the settlement and in no case shall be increased;
(b) The sum of $64 million referred to in clause 8 shall be treated as a credit against the amount of Equiticorp's established loss or entitlement in such a way that:
(i) if the Court should hold the Crown solely liable, the sum shall be deducted from the amount of any judgment to which Equiticorp would otherwise be entitled;
(ii) if the Court shall hold the Crown to be liable (on the basis of equitable apportionment or otherwise) for a proportion of Equiticorp's loss or entitlement, that sum shall be treated as satisfying first such proportion of responsibility as is not attributable to the Crown and to the extent that it may be more than sufficient so to do secondly it shall be applied in reduction of the Crown's liability;
(iii) if the Court shall hold the Crown liable for the whole of Equiticorp's loss or entitlement but also that the Crown would have been entitled (but for the terms of this settlement) to contribution or indemnity from one or more of the parties named in schedules 2 and 3, that sum shall be treated as satisfying first the amount of such contribution or indemnity and to the extent that it is more than sufficient so to do secondly it shall be applied in reduction of the Crown's liability."
As can be seen from 9(a) and (b)(i) above, where liability is established against the Crown (as is the case for the reasons set out later in this judgment), the Plaintiffs are entitled to judgment in the usual way. In that regard the presence or otherwise of settling Defendants makes no difference because liability would be joint and severable.
Clearly the parties intended, that subject to 9(b), the "nature and extent of the Crown's liability" would not be affected by the settlement. By 9(b), however, the Crown's liability can be altered because in three possible situations the sum of $64 million is to be treated as a credit against Equiticorp's entitlement. The first possibility is pursuant to 9(b)(i) where the Court holds the Crown "solely liable" in which case the amount is to be deducted from the judgment. The Plaintiffs expressly accepted that interpretation and I did not understand the Crown to contend otherwise. As will appear later, I do hold the Crown solely liable and so the deduction as appropriate is made.
The balance of the clause (9(b)(ii) and (iii)), has no application. First, because as set out above, I have rejected the Crown's argument on equitable apportionment in any form as between it and the Plaintiffs. Secondly, because I do not consider I have jurisdiction to fix contribution or indemnity in respect of non-existent parties. Neither side discussed 9(b)(iii), which apparently envisages that possibility. Irrespective, however, even if I had such jurisdiction and exercised it, the result would not have benefited the Crown. Such contribution or indemnity as I would have found would have exceeded the settlement sum so that there would have been nothing left to apply in reduction of the Crown's liability.
In my view, Mr Farmer was correct when he submitted that by entering into this agreement the Crown, along with the Plaintiffs, settled with all the other Defendants. The consequence is that while the $64 million so far recovered must be recognised to avoid double recovery, the Crown cannot, either at law or pursuant to the agreement, seek to reduce its exposure on the basis of a notional assessment of the settling Defendants' culpability.
The end result, as already indicated, is that recovery by the Plaintiffs is subject to a reduction of $64 million on the basis set out above but there will be no apportionment of relative responsibility between the Crown and the Defendants who settled.
SECTION 2: CLAIMS BASED ON RECIPIENT AND ACCESSORY LIABILITY
All Plaintiffs have claims against the Crown upon the grounds of what are described in the pleadings as "Constructive Trust: Knowing Assistance" and "Constructive Trust: Knowing Receipt". The amounts of the claims vary, as do the facts upon which they are advanced. The details can be left until later in the section. It is sufficient at this stage to indicate that the same facts are relied upon for both types of action although, as outlined here and explained in greater detail later, there are significant differences between the two.
That the same facts can give rise to both liability as an accessory and a recipient is well established. Examples of cases where both causes of action have been argued (with varying degrees of success) include Powell v Thompson [1991] 1 NZLR 597 where Thomas J held Mr Thompson was liable under both the knowing receipt and knowing assister heads of liability; Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 where the defendant accountants were held liable as knowing assisters but not as knowing recipients as they did not receive the trust property for their own use and benefit; and Nimmo v Westpac Banking Corp [1993] 3 NZLR 218 where neither cause of action succeeded. Birks, in a chapter in McKendrick (ed) Commercial Aspects of Trusts and Fiduciary Obligations (1992) 149 at 151 entitled "Trusts in the Recovery of Misapplied Assets: Tracing, Trusts and Restitution", comments:
"Agip (Africa) Ltd v Jackson & Co conveniently shows that the same person may be attacked as both recipient and accessory."
In the case of claims to enforce a constructive trust on the basis of knowing receipt there are three broad requirements. First, the Plaintiffs must show a disposal of their money in breach of fiduciary duty or on some other unauthorised basis. Secondly, the
beneficial receipt by the Crown of that money. Thirdly, knowledge by the Crown that the payment over to it was in consequence of a breach of fiduciary duty or other unauthorised act.
In respect of the dishonest assistance claims (as the knowing assistance claims are more properly described) the requirements are first (as in the recipient causes of action) that the Plaintiffs have lost their money as a result of breaches of fiduciary duty or unauthorised acts. Secondly, that the Crown participated, by helping or assisting, in those breaches. Thirdly, dishonesty (objectively assessed) on the part of the Crown.
The levels of proof for knowledge on the one hand and dishonesty on the other differ and because recipient liability is restitution-based and accessory liability is fault-based, the remedies available are different also.
The main thrust of the Plaintiffs' case is in respect of the knowing receipt claims. The accessory claims are pursued, however, as I understand it, because of the possibility that one or more of the several arguments advanced by the Crown as to the ownership of the moneys in the first place, and standing to sue in respect of them, might succeed.
The structure of the section (as can be seen from the index) is to deal with the matters just referred to first, then move on to the facts regarding knowledge and/or dishonesty. Following that, the law regarding the knowledge and/or dishonesty found is discussed and, in particular, the level of knowledge required to attach liability to the Crown. That law is then applied to the facts and liability findings made. Quantum assessments follow.
2.2 Relevant facts and law other than knowledge
The moneys paid over to the Crown, on settlement, came from three sources. First, a loan from Elders Merchant Bank. Secondly, there were advances from EHL subsidiaries and finally, there was a payment direct from EHL itself. The details are set out hereunder:
|
Loan from Elders
Advances from subsidiaries of EHL
|
$105,000,000
|
|
EAL
|
90,532,832
|
|
EFGL/EFSL
|
40,000,000
|
|
EIGL
|
52,300,000
|
|
ET
|
8,179,245
|
|
EHL
|
32,500,000
|
|
(Less certain adjustments)
|
(1,288,065)
|
|
|
$327,224,013
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In this litigation, EIGL, EHL and AI4 are
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of course the plaintiffs. But EIGL also |
claims to be subrogated to the claims of EAL, EFGL/EFSL and ET to a total of
$124,191,359. The claim to be so subrogated is disputed by the Crown, EAL and ET. EIGL also advances its own independent claim as an original funder and as assignee of the EFGL/EFSL original funding. EHL has a similar claim, as an original funder. Additionally, EAL and ET maintain independent cross-claims, including claims based on knowing receipt and knowing assistance, against the Crown.
The original funding was collected in various bank deposits, established in the name of AI4 which, with the Elders' Loan of $105,000,000, provided the total of $327,224,013 that was transferred to the Crown. AI4 sues as the assignor of those deposits to the Crown claiming the right to sue both on that basis and as a constructive trustee of the original funders.
EIGL's right to be subrogated to the original claims of EAL and ET rests upon its claim that it effectively repaid the two Australian subsidiaries their original advances so that
it seeks to step into their shoes and pursue such rights as they formerly had against the Crown. The Crown agrees that the two Australian subsidiaries have been repaid but disputes subrogation. EAL and ET dispute both repayment and subrogation. The whole issue of repayment and subrogation, as mentioned earlier in 1.5, is a complex one to be dealt with later in this judgment in Section 8. In respect of the causes of action being dealt with here, however, but without deciding the issue at this juncture, I treat the EIGL right to subrogation as valid.
The claims by EIGL against the Crown are under the general heading in the statement of claim of J.1 and commence at paragraph 166. The claims by EHL against the Crown are under the general heading J.2 and commence at paragraph 185, while the claims by AI4 are under the general heading J.3 and commence at paragraph 197. The claims themselves are summarised below:
Here the allegations are that the funding was unauthorised or illegal and that the Crown participated by receiving the moneys and knowingly allowing or permitting the sale to proceed. The claim incorporates not only EIGL's original contribution to the funding but also its subrogation claim, its funding of the repayment of the Elders' Loan, and
$11,328,482 worth of interest that it paid on the advances made by EAL and EFGL/EFSL. The total claimed under J.1.1 is $270,462,828, as set out in paragraph 173.
J.1.1A: Constructive Trust: Knowing Assistance
This is an alternative individual claim for the $40,000,000 advanced by EFGL/EFSL, the rights to which claim were assigned to EIGL.
J.1.1B: Constructive Trust: Knowing Receipt
This is an alternative claim and the first of the knowing receipt claims. The amount claimed is $77,300,000. It comprises advances of $19,000,000 and $21,000,000 made on 9 and 10 March 1988 respectively, a security deposit of $25,000,000 associated with the loan of $105,000,000 from Elders, and interest paid by EIGL on loans advanced by EAL, EFGL/EFSL.
This is the constructive trust claim for the $40,000,000 amount taken over from EFGL and EFSL, claimed under J.1.1A on a dishonest assistance basis. The allegation here is simply that the money, having been provided without authority or in breach of trust, was received by the Crown with the requisite knowledge.
This is the subrogation claim in which EIGL, claiming to be subrogated to the rights of the original funders EAL, EFGL/EFSL and ET, claims through them the sum of
$124,191,359. This figure is less than the original advances but is adjusted because of certain repayments that were made between the time of the original advance in March 1988 and the time of refinancing later in the year. J.1.2 advances constructive trust, recipient and accessory causes of action along with other unrelated claims to be dealt with later.
The claims of EHL are contained in J.2.1 and J.2.1A. The first is a dishonest assistance and the second a knowing receipt claim. Both refer to the sum of $32,500,000 contributed by EHL to the total settlement figure. The $32.5 million involved here was actually designated by EHL as a fee payable to AI4 for undertaking the role of
nominee. But all counsel agreed that the stipulation of that fee was simply an attempt to avoid further breaches of s 62 and that, although strictly speaking not an advance to AI4, it should be seen as an amount contributed to AI4 to enable it to settle. The Crown during opening at page 30, paragraph 3.1 said, inter alia:
"It is agreed that the payment by EHL of $32.536 million as a placement or underwriting fee was a gift by EHL to AI4 via WIL, and that it was provided as part of the overall funding scheme for AI4's purchase."
The allegation made by the Plaintiffs is that the provision of that sum was both unauthorised and illegal because of the purpose for which it was to be used.
The claims by AI4 are in J.3.1 "Constructive Trust: Knowing Assistance" and J.3.1A "Constructive Trust: Knowing Receipt". Both claims are for the total settlement moneys of $327,224,013. The allegation being in respect of knowing assistance that the Crown participated with knowledge and in respect of knowing receipt that it received with knowledge.
The Crown challenges the right or status of the original funding companies (quite apart from the EIGL subrogation claims) to advance these causes of action. The Crown says they have not proved that the money advanced was theirs. This point was described as the "left of charts" argument during the hearing. The Plaintiffs produced elaborate and detailed coloured charts (all collected in Exhibit C) which represent diagrammatically the many days of detailed evidence given by Mr Paton. He is the former Group accountant for Equiticorp who, since the collapse of the Group in early 1989, has been seconded variously to the Serious Fraud Office and the Statutory Managers' Investigatory Team. The Crown submits, in short, that the starting point selected by Mr
Paton, and shown on the charts, is arbitrary and that the Plaintiffs have failed to discharge the burden resting on them - see Rhesa Shipping SA v Edmunds [1985] 1 WLR 948 (HL(E)), particularly at 955. As that case recognises, however:
"... the legal concept of proof of a case on a balance of probabilities must be applied with commonsense. It requires a judge of first instance, before he finds that a particular event occurred, to be satisfied on the evidence that it is more likely to have occurred than not." [Judgment of Lord Brandon, page 956]
A careful and detailed cross-examination by Mr Tompkins of the evidence given by Mr Paton often demonstrated that the money advanced by the original funder only came into that company's account a day or so before. In a number of cases, Mr Paton could not say where the money came from or why it had been paid into the funding company's account. But in each case, the money was in the original funder's account or otherwise under its control immediately before the advance and nothing was established under cross-examination, and no evidence was called by the Crown, to suggest that ownership had not been acquired. In my judgment, the Plaintiffs were clearly right when they submitted in closing:
"... even borrowed moneys become in law, as a general rule, the property of the borrower, the lender relinquishing its title to the moneys advanced in return for the chose in action represented by the borrower's obligation to repay."
I was left in no doubt, at any stage of the trial, that it was more probable than not that the original funders did have title, (albeit relative title in some circumstances), to the moneys they provided for the settlement. The only possible exception is the contribution of $32.5 million by EHL. It came from moneys borrowed from Elders and paid on to AI4 through EIGL. It was two or three days after that payment that, by journal entry, the advance was attributed to EHL. As recorded above, however, the Crown has agreed that the payment was "a gift by EHL to AI4" which is a sufficient foundation for the claim to be made. So, despite Mr Tompkins' cross-examination, at
the end of the day, both as a matter of law and commonsense I am satisfied that the "left of charts" argument does not succeed.
The Crown's challenge to AI4's title to sue is put on a different basis. AI4 was not an original funder - rather it was the ultimate repository of the funds advanced by all of the original funders. But the Plaintiffs say (correctly, as I hold later in this judgment) that the original advances, being in breach of s 62 of the Companies Act 1955, were illegal. The Crown says, if that be so, then pursuant to s 6 of the Illegal Contracts Act 1970 the contracts by which the advances were made were of no effect and no title passed, so AI4 can have no standing to sue. Indeed, the Crown's stance was that the Plaintiffs had to make a choice between suing through the original funders or through AI4, but that they could not do both - even on an alternative basis.
The Plaintiffs say that there are a number of bases upon which AI4 can sue. First, it is said that the Crown is, in effect, pleading jus tertii and that a long line of authority in tort (trover/conversion) culminating in the decision of the Privy Council in The Jag Shatki [1986] 1 AC 337 at 345, shows that is no defence. There Lord Brandon, delivering the opinion, said:
"For this purpose it is irrelevant whether A has the general property in the goods as outright owner of them, or only a special property in them as pledgee, or only possession or a right to possession of them as bailee."
But the application of this law, developed for the recovery of chattels in tort, hardly seems appropriate in the circumstances of this case.
The Plaintiffs are, however, on stronger ground in my view when they rely upon AI4's "relative title" and standing to claim as a constructive trustee of the original funders.
Relative title is claimed on two bases. First, AI4's prior possession of the choses in action (ie, the thirteen deposits) transferred to the Crown on settlement. Secondly, original title to the deposits by virtue of the contracts with the relevant banks when the deposits were made. That, it was submitted, was sufficient to give AI4 prima facie ownership, even if the original funders could defeat that title by tracing. It was submitted:
"... but while AI4's title was always burdened with the tracing rights of the original funders, it does not follow that AI4 does not retain any title of its own, at least until it finally accounts (if called upon to do so) for the assets to the tracing party. The Crown will, in the normal way, be protected from double jeopardy by rules which allow judgment to be entered only by one of the parties." [paragraph 50.9, of section 50, of the Plaintiffs' closing]
In support of those propositions the Plaintiffs rely primarily upon Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548. The brief facts of this decision of the House of Lords (which will be referred to again later for other purposes) were that a partner in a London firm of solicitors became a compulsive gambler. He drew cheques on the firm's trust account and lost much of the money at the Playboy Club. The firm sued the Club and its right to do so was challenged. In the leading judgment under the subheading "Title to the Money" Lord Goff said at page 572, line F:
"So, in the present case, the solicitors seek to show that the money in question was their property at common law. But their claim in the present case for money had and received is nevertheless a personal claim; it is not a proprietary claim, advanced on the basis that money remaining in the hands of the club is their property. Of course there is no doubt that, even if legal title to the money did vest in Cass [the compulsive gambler] immediately on receipt, nevertheless he would have held it on trust for his partners, who would accordingly have been entitled to trace it in equity into the hands of the club."
A further passage, in the judgment of Lord Goff commencing at page 573, line H and on to page 574 is also relevant, albeit that the discussion concerns a claim at common law, for money had and received. The passage reads:
"The relationship of the bank with the solicitors was essentially that of debtor and creditor; and, since the client account was at all material times in credit, the bank was the debtor and the solicitors were its creditors. Such a debt constitutes a chose in action, which is a species of property; and, since the debt was enforceable at common law, the chose in action was legal property belonging to the solicitors at common law." [I interpolate to draw attention to the comparable position of AI4 in relation to the deposits it had made with various banks.]
"There is in my opinion no reason why the solicitors should not be able to trace their property at common law in that chose in action, or in any part of it, into its product, ie cash drawn by Cass from their client account at the bank. Such a claim is consistent with their assertion that the money so obtained by Cass was their property at common law."
The difference between the cause of action in the case in the House of Lords and this case does not, in my judgment, affect the question of who has title to sue in the type of situation under discussion. On the basis of the above, it is my conclusion that AI4 had standing to sue.
The concept of relative title was also recognised in the judgment of Morritt LJ in the as yet unreported case of Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division) Evans, Saville, Morritt LJJ, 9 May 1996). The case dealt with a void share swap agreement and the question whether the bank (Kleinwort) had received a windfall gain as a result of hedging arrangements. At page 17 the Lord Justice said:
"... I do not accept the proposition that if the loss has been passed on it is necessarily unjust for the claimant to recover what La Forest J described a 'windfall'. The concept of relative titles is not unfamiliar, for example in the case of trespass to land. If in accordance with the relevant principles the defendant has been unjustly enriched by the payment by the plaintiff it seems to me that the plaintiff has a better title than the defendant to any 'windfall' available, not least so as to be in a position to satisfy any claim made against him by those from whom 'the windfall' was ultimately derived. I do not suggest that this is a proprietary claim, merely that proprietary principles are applicable by analogy to claims in personam of Lipkin Gorman v Karpnale (1991) 2 AC 548, 572."
Equally sound, in my view, is the proposition that AI4 can sue as constructive trustee: knowing recipient in respect of the original funders. The directors of AI4, Messrs Hawkins and Darvell, knew that the moneys they caused the company to assign to the Crown had been collected from the Equiticorp group and that the purchase of the NZS/EHL Parcel was grossly improvident and would leave AI4 hopelessly insolvent and unable to repay in the short to medium term, if ever. Even if the directors closed their eyes to that obvious truth, the Statutory Managers of AI4 have properly recognised the indisputable fact that AI4's title was subject to a constructive trust in favour of the original funders which was breached by the payment to the Crown. Accordingly, AI4 now under the control of the Statutory Managers, claims on the basis that it is a constructive trustee which has breached the trust and which is not only entitled, but obliged, to sue the Crown to recover the trust property which was misapplied.
In support of that argument the Plaintiffs cite Young v Murphy (1994) 13 ACSR 722, a decision of the full court of the Supreme Court of Victoria. The case concerned the standing of new trustees to sue for alleged breaches of trust and duty arising out of the administration of the trust by the displaced trustees. Brooking J said, at 725:
"The standing of a trustee to take proceedings to have a breach of trust redressed against a trustee or former trustee or a stranger who has become liable to redress a breach of trust is well recognised. Not only may a trustee take such proceedings, but he runs the risk of himself committing a breach of trust if he fails to do so. His obligation to take the proceedings
(unless they would be futile) is part of his duty to get in the trust estate, which includes rights of action against co-trustees or former trustees and strangers for breach of trust. This is clear as a matter of both principle and authority. Moreover, since the trustee will take the proceedings for the benefit of the beneficiaries, he can sue even if he was a party to the breach of trust or some other breach of trust."
On the following page the Judge continued:
"Similarly in Wentworth v Tompson (1859) 2 Legge 1238 the Full Court of New South Wales, in rejecting the suggestion that a trustee could not sue his co-trustees for breach of trust where he had been himself a party to that breach, observed at 1241 that it was the duty of each trustee to recover the trust fund, for the benefit of the objects in it. In the same way, Scott on Trusts, 4th ed s 294.2, in asserting the right of a trustee who in breach of trust transfers property to a person who has notice of the trust or pays no value to sue the transferee notwithstanding his own breach of trust, rests that view on the circumstance that the trustee is suing for the benefit of the trust estate. Likewise it is said in Scott, s 200.2, that a co- trustee is not debarred by his own misconduct from maintaining a suit to redress a breach of trust committed by a trustee, since the purpose of the suit is to maintain the interests of the beneficiaries."
Philips J agreeing with Brooking J said, at page 745:
"As Mr Justice Brooking's review of the cases demonstrates, a defaulting trustee remains obliged, notwithstanding his own wrongdoing, to make good the trust property and, if necessary, to institute proceedings against those who participated in the wrongdoing to make good the loss. Whatever the consequences might be in respect of his own liabilities, the trustee does not cease to be so obliged; certainly he does not become disqualified from proceeding."
The Plaintiffs submit that the rules applying to express trustees equally apply to constructive trustees and they rely upon the decision of the English Court of Appeal in Brink's-Mat Ltd v Noye [1991] 1 Bank LR 68. In that case Scadlynn Ltd was held to be a constructive trustee of the proceeds of gold stolen from Brink's-Mat. Scadlynn's directors withdrew the proceeds from its bank account and Brink's-Mat sought to bring an action against the bank seeking to enforce Scadlynn's rights in respect of wrongful payments out. It should also be mentioned that the original owners of the gold were Johnson Matthey. Brink's-Mats were bailees, and Scadlynn was the company in which the thieves of the gold, who melted it down and sold it off, were the shareholders and directors. Mustill LJ said, at page 72:
"...Scadlynn as trustee was under a duty to account to Brink's-Mat and Johnson Matthey, as their respective interests might appear, and the ability of the company to comply with this duty became progressively diminished as the money was wrongfully bled from its account. It seems to me plain
that the acts which created this situation were wrongs committed by the two men against the company, and the fact that they also controlled the company is entirely beside the point. On the facts which are being assumed for the purposes of this appeal the bank could not have been expected to know that the funds with which the two men were dealing belonged, not to Scadlynn, but to others. But if the facts are nevertheless arguable that the bank should have known that some wrong was being done to Scadlynn then ... Scadlynn would have a claim which ought to go to trial."
As can be seen in the above case, Scadlynn, as a constructive trustee, was defrauded of the money it held on trust and was thus entitled to bring a claim against the bank for breach of its contractual common law duty of care, for money had and received and as a knowing assister.
A similar approach was taken by Tipping J in Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 at 330 to 331. This was another case of a trustee company misapplying the trust property then later suing third parties for having assisted its breach of trust. An argument that the trustee was an inappropriate plaintiff was rejected. The judgment relied on the fact that the trustee company was no longer in the hands of its defaulting directors but was now under the control of a liquidator.
The same kind of approach can be seen in Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd [1994] HCA 61; (1994) 182 CLR 51. In that case Mason CJ held that where a tax had been wrongly imposed and passed on by the insurance company to its policy-holders, the company could nonetheless sue, as a constructive trustee, for the recovery of the wrongly paid tax provided it satisfied the court that it would account to the policy-holders, for example, by giving an undertaking. In this case Mr Farmer QC, as senior counsel for the Plaintiffs, has it made it clear from day one that if AI4 recovers, it will regard itself as holding the recovery in trust for such of the original funders who are ultimately found to be entitled to reimbursement either as creditor or beneficiaries.
I should also mention the Plaintiffs' contention that the Deed of Assignment of Deposits (Image Number 431027, to be found at page 113 of Volume II) entered into between the Crown and AI4 amounted to a novation of the original Underwriting Agreement (Image Number 278181 to be found at page 58 of Volume II) between the Crown and BWL.
The Deed gives that impression in clauses 1.1 and 2.2 set out hereunder:
"1.1 This Deed sets out the terms and conditions upon and subject to which the Crown will receive from the assignor full and legal and beneficial right, title and interest over the Deposits for the completion of all monetary obligations contained in the agreements referred to in the recitals above."
"2.2 The Crown hereby accepts the assignment of the Deposits in satisfaction of all monetary obligations of EHL, BWL, EIL and the Assignor pursuant to the Agreements."
On the other hand, however, clause 7 of the Underwriting Agreement states:
"7. NOTWITHSTANDING the procurement by BWL of a nominee or nominees to purchase all or any of the clause 2 Purchased Assets and the clause 3 Purchased Assets BWL shall be and remain liable to pay the clause 2 Purchase Price and the clause 3 Purchase Price as principal obligor." [Emphasis added]
The following requirements must be met before a novation can be said to have occurred:
1. The novation must either be under seal or supported by consideration.
2. There must be a clear intention to substitute a new obligation for the original one.
3. The consent of all parties must be obtained - this may be express or inferred from conduct.
4. No particular form is necessary (ie may be oral or written) unless the contract is a type which requires a particular form.
See Chitty on Contracts - General Principles (27th ed 1994) para 19.050; 9 Halsbury's Laws of England (4th ed 1974), paras 580-585; Burrows Finn & Todd Cheshire & Fifoot's Law of Contract (8th ed (NZ) 1992) 538, 543. In my judgment it is doubtful whether the second and third requirements above have been satisfied. The second because the intention is not clear given the incompatibility between clauses 1.1 and 1.2 of the Deed and clause 7 of the Underwriting Agreement set out above, and the third because BWL is not a party to the Deed. It would have been a simple matter to have included BWL and made the Deed an Assignment of Deposits and Novation had that been the intention.
On balance, I consider that novation did not occur, but, in view of my conclusion that AI4 has the capacity to sue either as owner of the deposits or as a constructive trustee I need not reach a final conclusion on the point.
I am therefore of the clear view that all three Plaintiffs have standing to bring the claims that they make against the Crown.
Having outlined the claims made and concluded that the Plaintiffs are entitled to advance them I now turn to examine the Plaintiffs' allegations that their money ended up in the hands of the Crown.
So far as AI4 is concerned, there can be no argument. The funds in the form of the assigned bank deposits went direct from it to the Crown. As did the moneys drawn down from Elders.
The facts so far as the original funders are concerned, however, are rather more complicated. I described them in limited detail at pages 14 to 17 of 1.2. Although much of the evidence given by Mr Paton during the 20-odd days that he was in the witness box was devoted to a meticulous examination of each step on the journey from original funder to AI4 of the various sums involved, a fully detailed rehearsal is not necessary. This is partly because of concessions made by the Crown, partly because no evidence was called to the contrary, but mostly because, at the end of the day, the Plaintiffs have in fact proved overwhelmingly that all the money, save for Elders' contribution of $105,000,000, was sourced originally from EHL or its subsidiaries.
In section 13 of the synopsis of the Crown's opening, dealing with inter alia the money flows, the following paragraphs are relevant as concessions made by the Crown:
"General
13.1 Your Honour has heard, for many weeks, detailed evidence and has been taken to a blizzard of documentary material relating to the complicated method by which the plaintiff companies of their own volition provided funding to AI4, so that AI4 could, in March 1988, purchase the NZS/EHL Parcel from the Crown, as nominee of BWL under the BWL Underwriting Agreement.
The Crown's Position on the Facts of the Initial Funding
adduced by the plaintiffs establishes that no-one (with the possible but speculative exception of Mr Hawkins and Mr Darvell, neither of whom the plaintiffs have called to give evidence), at the time and certainly not the Crown, had anything remotely approaching the encyclopedic knowledge which Mr Paton now has, and which the Charts represent. He did not have such knowledge at the time, and he of all people probably was in the best position, outside of Mr Hawkins ..."
Similarly, in the Crown's closing at page 335, paragraph 25.24, when discussing the cash flows it was said:
"25.24 In essence, the Crown accepts that, with the exception of the areas identified in the Schedule, Mr Paton has correctly reconstructed the transactions involved in the initial funding. But it is submitted that the plaintiffs cannot rely on that reconstruction to establish their various causes of action, and in particular they are unable to use the Charts to establish tracing at common law. The Charts and Mr Paton's evidence, do not establish that it was the initial funders' money which was received by the Crown. That fundamental requirement underlies the bulk of the equitable and common law causes of action advanced by the initial funding plaintiffs against the Crown."
Quite apart from the above concessions, and the documentary evidence analysed by Mr Paton and the absence of evidence to the contrary, there are two other pieces of evidence which are not disputed. One is the fact that in the financial forecasts for the Group placed before the combined Boards of EHL and EIGL for December 1987 and January/February 1988, a contingency item for $327 million to purchase back the NZS/EHL Parcel regularly appeared. The other is the evidence given by Helen Frances Trainer, General Manager, Group Administration, a position she held from July 1985 onwards. As such, she attended Board meetings and had cheque signing authority. Her evidence was that she became aware that AI4 was being positioned to make the purchase of the NZS/EHL Parcel as a result of the cheques she was asked to sign. She also said that the Takeout Deed was never submitted to the Board either before or after signature and that such ratification as there was, was obtained by referring to it in prepared minutes in an uninformative and fudged way at the last meeting of the year for
1987. Ms Trainer was also able to recount that, when in July 1988, at a meeting of the combined Boards of EHL and EIGL in Sydney, Mr Hawkins declared that Equiticorp had funded the purchase there were "some stunned faces" - obviously the members of the Board who were not in the know. Of the directors the Crown concedes that Hawkins certainly knew; Gunthorpe and Taylor probably knew; Adams, Kearney and Walsh possibly knew and submits that the external directors, Marcus Clark, Saunders and Wilson probably did not know. So far as AI4 is concerned, without doubt, the Crown concedes both Hawkins and Darvell knew.
As already indicated, I have no difficulty in finding that of the $327 million paid to the Crown $222 million was provided by EHL or its subsidiaries. The balance of
$105 million was provided as to $80 million by Elders and $25 million by the Hong Kong Shanghai Bank which amounts were paid into the RWS trust account and for some reason then fed through two more EHL subsidiaries (Setar 72 and Shoeshine 59) before passing to AI4 and on to the Crown.
Logically, the next issue is whether the Plaintiffs have proved that their money was paid over to the Crown either in breach of fiduciary duty or without authority.
In addition to the lack of authority allegations the Plaintiffs advanced a large number of additional alleged breaches of fiduciary duty. It is, of course, trite law that directors are effectively trustees of the company's assets and owe duties of good faith, not only to the company and its shareholders, but also to its creditors. The obligation to creditors is especially important when the company is facing financial difficulties - see Australian Growth Resources Corp Pty Ltd v van Reesema (1988) 13 ACLR 261 at 268 to 271. Equally established is the principle that the directors owe such duties to the individual companies in the group and not to the group as a whole - see Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 6 to 7 and Linter Group Ltd v Goldberg (1992) 7 ACSR 580 at 620. In the end, the Plaintiffs' case comes down, in the main, to the breach of s 62 issue. I
have already found that Equiticorp money was used to purchase Equiticorp shares. There can be no doubt that that breached s 62 and since it was unlawful it was beyond the powers of either the directors or the company and therefore unauthorised. The Crown does not dispute that - it says, rather, that it had no knowledge of it.
The Crown does, however, dispute that the Plaintiffs have proved that there were breaches of fiduciary duty in relation to s 62. Mr Mathieson points to the fact that none of the directors, or Mr Darvell, were called by the Plaintiffs and submits that the directors were entitled to rely upon Darvell's legal advice. Counsel argued that as a consequence absence of bona fides has not been established. The advice relied upon is contained in two letters, one of 12 February 1988 (Image Number 397/011, page 85 of Volume II) and a second of 16 February 1988 (Image Number 401/027, page 90 of Volume II). The last mentioned letter is brief, and in the second paragraph so poorly drafted as to be almost incomprehensible. But the thrust of it is to indicate that the proviso to s 62(1)(a) referring to "the lending of money as part of the ordinary course of business" avoids the general prohibition against companies within a group providing finance to purchase group shares. The advice is non-specific and was clearly regarded by Mr Hawkins as "indicative" only. He so referred to it when reporting to the BNZ in a confidential memorandum (Image Number 429/056, page 107 of Volume II), on developments a few days later, in which he stated:
"Obviously this transaction is sensitive to Section 62 of the Companies Act. We have received indicative clearance from Rudd Watts & Stone and Deloittes in respect of this. Final clearance and long term structure should be given after a meeting scheduled for 30 March (between Rudd Watts/Deloittes/ AR Hawkins/ W Wilson)."
The meeting referred to never took place.
If Messrs Darvell and Hawkins had been called and had given evidence that they genuinely believed that providing $222 million of Group money to buy back the
NZS/EHL Parcel was "in the ordinary course of business" I might have believed them. But I very much doubt it. As it is, given the intelligence and experience of both men, I readily drawn the inference that neither of them could have believed, in good faith, that the proviso covered the position. Indeed, that goes for all the other directors of the combined Boards of EIGL and EHL. They were all experienced and successful business or professional people who, almost without exception, had respectable tertiary qualifications.
It is enough for the Plaintiffs to establish, however, that the disposal of the money was without authority and in that regard, the state of mind of the directors, individually or collectively, does not matter. For the sake of completeness I should record also that all counsel agreed that proof of the directors' fraudulent or dishonest participation in the scheme was never required for knowing receipt and that Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 2 AC 378; [1995] 3 WLR 64; [1995] 3 All ER 97 has now established that it is not required for dishonest assistance either. In other words, it is the recipient's knowledge or the assister's honesty that is crucial, not the state of mind of the trustees/directors responsible for the initial breach. See Tan at page 102, lines B to C and Harpum "Accessory liability for procuring or assisting a breach of trust" (1995) 111 LQR 545.
Finally, there is the allegation of gross improvidence. It is one which can only be made, in my judgment, in respect of the short period between 11 March 1988, when the Crown was informally advised that AI4 was to be BWL's nominee, and 22 March 1988, when settlement was completed. It can only be made against Messrs Hawkins and Darvell as the sole directors of that company. Both knew that AI4 was a shelf company; with no assets and no capacity to generate income. To procure AI4 to purchase shares worth, at most, $90 million (Hawkins knew that was an inflated figure because of an illegal share support scheme that was operating) with $327 million of
borrowed money was to render it immediately insolvent. It could not even meet the interest payments on the borrowed money, let alone have any prospect of repayment.
The Crown, nonetheless, argues that Hawkins had such confidence in the Equiticorp Group that he would have seen the purchase as advantageous. The Crown did not call him into the witness box to say so and I very much doubt that I would have believed him in any event. The Equiticorp Group, which was placed in Liquidation and Statutory Management barely a year later, was by March 1988 already in dire straits and Hawkins was far too experienced not to have known it. The purchase of the NZS/EHL Parcel by AI4, in my view, was just one of a number of desperate moves to maintain Equiticorp's credibility in the market place - and it worked temporarily. I find the allegation that the purchase was known to be grossly improvident proved against Messrs Hawkins and Darvell as directors of AI4.
That the funding of AI4 with Equiticorp money was in breach of s 62 of the Companies Act 1955 and therefore illegal, is not disputed. That the funding and the purchase of EHL shares worth not more than $80-90 million for $327 million was grossly improvident, although not formally conceded by the Crown, is also beyond argument. On the grounds of both illegality and improvidence it can be said that what happened was grossly prejudicial to the shareholders and creditors of the Plaintiff company. The directors who led or allowed the companies to fund the transaction as described, clearly breached their fiduciary duties and acted well beyond their authority. Whether Hawkins in particular also had a private agenda to increase his effective shareholding in EHL using group money, thereby defrauding his fellow shareholders, need not be decided at this point. I observe in passing also, that Hawkins and all the directors were sued as defendants in this litigation in the first instance, but all wisely elected to settle in September of 1994 prior to the substantive hearing commencing.
As will be discussed later, liability as a constructive trustee or recipient of money paid in breach of trust or fiduciary duty, (as was the case here with the payments made to the Crown) depends on proof of knowledge of the breaches of trust. That being so, it is necessary to survey the evidence as it relates to the Ministers, officials, agents and advisers of the Crown to ascertain what knowledge, actual or constructive, each of them had at the material time. As can be seen from the index, later parts of this section will address the questions of imputation to the Crown of any knowledge found and the aggregation of individual items of knowledge to form a composite whole.
The order in which I have elected to examine the knowledge of the individuals involved, is based primarily upon considerations of orderly presentation rather than chronology or relative importance.
It is appropriate also to acknowledge at this point the firm but justified and wholly appropriate submissions made by Mr Mathieson in Part 3 of his closing under the heading “Dangers of the Use of Hindsight”.
The first paragraph of the synopsis, 3.1 sketches out the nature of the danger and I set it out in full below, adding excerpts from paragraphs 3.7, 3.8 and 3.9.
“3.1 The Court must be astute to avoid the ‘unjustified wisdom’ of hindsight. The parties and the Court now, of course, know what happened to the sharemarket. They now know what kind of people were involved in Equiticorp and what kind of company Equiticorp was. They now know how AI4 was funded. But these and several other matters were not, and could not have been, known to the Crown in October 1987 to March 1988. The Court must be careful to avoid attributing to the Crown and its agents and officials knowledge which now might seem, in hindsight, obvious, but which at the time, in the context of the “bull” sharemarket, the sharemarket crash, and the confusion and uncertainty of the months which followed, was obscured and realistically unknowable. In particular it was not known how far the sharemarket price of EHL would fall, and it was unknowable by even the most knowledgeable market observer, at any time between 20 October and the settlement, whether the market would bounce
back, or whether the EHL shares would rise in value despite general market trends.”
“3.7. Detailed consideration has been given, over months of trial, to events which occurred many years ago, and which may have taken mere minutes to occur. It is unreal for the plaintiffs, and it would be wrong for the Court, to approach the assessment of the Crown’s witnesses’ reaction to letters, or sentences, or words buried in dense and detailed reports, as if the persons reading them or reacting to them had nothing else to do but consider and think about the reports, and weigh all the possible implications of the words or the phrases used in them. These are examples of the wrong approach to the case. Such an approach is dangerous because, whatever the law as to constructive knowledge, its application must depend on the facts known at the time, in the light of the circumstances prevailing at the time...”
“3.8 Many of the decisions which the plaintiffs now characterise as unlawful, unwise, unauthorised, and inexplicable, were made by the directors and executives of the Equiticorp companies. With minor exceptions, none of those people have been called as witnesses by the plaintiffs to explain their actions. The Court must be careful to avoid judging with hindsight the commercial decisions made at the time, and to characterise them as, say, “grossly improvident” when valid and reasonable commercial justifications may well have existed in the minds of those who made them, ...”
“3.9 The hindsight approach is totally wrong in respect of the plaintiffs’ (presumed) accumulation approach to the events of the period October 1987 to March 1988. This has been foreshadowed in some of the cross- examination. It is presumed that the plaintiffs will seek to accumulate several facts each of which will be said to provide some ground for suspicion by the Crown of funding breaching s 62. By putting them together, they will contend that the Crown in the end ought to have been suspicious of such funding, even if it was not in fact. But this contention fallaciously confuses the inference which the jury may properly draw from numerous items of circumstantial evidence, each of which points to guilt in a criminal case though none by itself proves guilt, and the reasoning process which was in fact gone through by a non-judicial person such as Mr Ratner who had no cause to accumulate neutral items, none of which in fact made him suspicious.”
I have endeavoured to keep those admonitions in mind throughout my assessment of the performance of the Crown team, although as we proceed, I shall endeavour to explain why I reject the contention advanced in 3.9 above (which I interpolate to say was given very practical application during the cross-examination of Mr Gerrard, a
senior London commercial solicitor called as an expert by the Plaintiffs) to the effect that various events occurring particularly during the period of time from when serious negotiations commenced to settlement, should not be regarded as having a cumulative effect.
2.3 What did Ratner know
Mr Ratner, a partner in RWS, Wellington, was the principal legal adviser to the Crown. His retainer, for the purposes of this litigation, commenced about mid-September 1987 and ceased, again for our purposes, shortly after settlement of the sale by the Crown of the NZS/EHL Parcel to AI4 on or about 21 March 1988. In large measure, Mr Ratner, of all the Crown team, knew about or had the most opportunity to find out about the alleged wrongdoing of the Plaintiffs' directors and of necessity was closely involved in the formation and documenting of the contractual arrangements between the parties and the settlement of the NZS/EHL sale to AI4. His role in the whole matter can be described as crucial, even pivotal, and for that reason his position on the issue of knowledge is the first to be discussed. In a later section I will deal with the question of the extent to which the knowledge of Mr Ratner and other agents of the Crown can be imputed to it. The Plaintiffs' case relies upon not only what was in fact known, but also upon what would have been known, but was not known because a blind eye was turned, or the kind of inquiries the circumstances called for were not made.
Mr Ratner read his prepared brief on 24 August, and for the balance of that day and 10 non-consecutive days between 25 August and 15 September, he was under cross- examination and re-examination, the re-examination lasting less than a day. There was a substantial break between 31 August and 11 September, it having been arranged some months earlier, that the case would be adjourned for the week, 4 to 8 September inclusive.
In accordance with the ground rules established at the pre-trial conference, Ratner's original signed statement of evidence in chief, dated 5 September 1994, was served on the Plaintiffs and EAL prior to the commencement of the substantive hearing on 21 November 1994. In anticipation of Ratner being called on or about 24 August, however, an amended brief, dated 16 August 1995, incorporating new material was served on the Plaintiffs and as a consequence, again in accordance with the ground rules, leave was required to adduce the new material. It was granted by consent, subject to a condition that the Plaintiffs be permitted to cross-examine upon the new material. An order was made incorporating that condition because again the ground rules prohibited cross-examination on alterations or amendments in statements without leave.
As with the other Crown witnesses to be discussed in those portions of the judgment identified as 2.4 to 2.9 it is neither appropriate nor practical to traverse all the Ratner evidence in detail. My approach will be to indicate what I accept or reject and why and to quote economically from the record and refer only to the most significant documents.
The Period up to 20 October 1987
This period can be conveniently dealt with under one heading. By 20 October 1987, which, co-incidentally was the start of the sharemarket crash, binding agreements had been entered into between the Crown and EHL for the exchange of NZS shares for EHL shares and between the Crown and BWL whereby the on sale of the Crown's EHL shares was underwritten by BWL. The on sale was to take place five months later on 20 March 1988. Additionally, by 20 October 1987 (although the Crown disputes knowledge of this fact), BWL had also contracted with RCL, AHL and EHL to the effect that if it could not find a purchaser RCL and AHL would buy and EHL would provide finance "in the ordinary course of business" to enable those two companies to complete the purchase.
Almost all the significant developments during this period took place over a week of frenetic activity commencing on Tuesday, 13 October and completing on the following Tuesday, 20 October. During that week Mr Ratner had numerous contacts with Crown officials advising and assisting in connection with the two transactions the Crown was involved in. The officials concerned were Mr Andrew of Treasury, who took the leading role, Mr Kwok, assistant solicitor to the Treasury, who was involved in an ancillary supervisory capacity, and Mr Galt, the lead official in the Department of Trade and Industry. The shares in NZS were held by the Honourable David Caygill, the then Minister of Trade and Industry but the sale was of equal or greater concern to Treasury as it was to receive the proceeds in due course. Mr Ratner also had dealings during that week on behalf of the Crown with Mr Familton of BGBW, acting for BWL, and Messrs Darvell and Harford of RWS, Auckland, acting for Equiticorp.
About a week before 13 October a formal offer from Equiticorp was received and referred to Mr Ratner. As already indicated the offer was to exchange the Crown's NZS shares for EHL shares. Additionally, there was the offer by BWL to the Crown that if the Equiticorp offer was accepted then BWL would underwrite the on sale of the Crown's EHL shares in March of 1988. It was immediately apparent that with RWS, Auckland (Darvell and Harford) acting for Equiticorp and RWS, Wellington (Ratner) acting for the Crown there was a conflict of interest. Mr Ratner resolved that problem with the Crown prior to 13 October on the basis that a "Chinese wall" would be established between the Auckland and Wellington offices and that only designated practitioners in the Wellington office would have access to the file. Mr Ratner and his qualified assistant, Ms Shreves (who at that time was using her married name of Dugan) were the people in the Wellington office who dealt with the matter.
The conflict of interest issue having been resolved and a report on the offer having been provided by the Crown's financial advisers a series of meetings were set up at Treasury
for Tuesday, 13 October. The purpose of the meetings was to review both the EHL and BWL offers, consider the legal issues and put in place procedures to bring the matter to a conclusion. Because BWL was to assume the role of underwriter it played no part in the advice given to the Crown on the underwriting aspect of the matter. Also, when it joined in the offers made to the Crown as a potential underwriter BWL disclosed to the Crown that it was to receive a fee from EHL for performing that service and specifically stated that it did not consider that the assumption of the role of underwriter raised any conflict of interest in relation to its joint role with SM as financial advisers and agents to the Crown for the sale of the NZS shareholding.
When reporting to the Crown on the offer made by Equiticorp and the associated offer to underwrite by BWL, however, Samuel Montagu specifically recorded that it had had confidential discussions with BWL and was aware of the nature of the underwriting arrangements and requested immediate discussions with the Crown's legal advisers in relation to them. The letter conveying that advice was provided by Mr Holyman who was based in the Sydney office of SM and primarily involved in the NZS sale. Mr Holyman was not called as a witness, but as he was representing an experienced and reputable London Merchant Bank, the inference can be drawn that he appreciated that the introduction of EHL as the financier of last resort for the on sale of the Crown's EHL shares five months later might cause problems in that it would involve Equiticorp funding the purchase of its own shares. Again, although the evidence is not precise on the point, the inference can also be drawn that it was because of his specific request that Mr Holyman was present at the meeting on 13 October.
Prior to that meeting, Mr Holyman hand delivered to Mr Ratner's office in Wellington a letter from Mr Cimino, a partner in BWL Ltd, dated 12 October. That letter is Image Number 271046 and will be found at page 16 of Volume II. Addressed to Mr Ratner in his capacity as legal adviser to Treasury it enclosed what it described as "the sub- underwriting documents which support our letter of 7 October 1987 undertaking to the
Crown to purchase Equiticorp shares to be issued pursuant to the takeover offer for New Zealand Steel".
Attached to the BWL letter were letters from RCL - Image Number 265007, AHL - Image Number 266015 and EHL - Image Number 266037. These letters will all be found in Volume II at pages 7, 11 and 13 respectively. In substance they provided that if BWL failed to find a buyer then RCL and AHL would purchase but in that event EHL would provide funding "in the ordinary course of business".
The author of the covering letter, Image Number 271046, Mr Cimino, was not called by either side and it was not established precisely who decided the letter should be sent and how it came about that Mr Holyman delivered it. Be that it as it may, upon reading the letter and its enclosures, both Mr Ratner and Ms Shreves appreciated immediately that the involvement of EHL created s 62 problems. Mr Ratner said that he was annoyed. He took the view that BWL, as the potential underwriter, was trying to "spread the risk" to the Crown by "fixing" the Crown with knowledge of the potentially illegal funding by EHL. He apparently did not consider that BWL was acting improperly or unethically by endeavouring to lighten its burden or area of responsibility in this way, but he did consider that for what he understood was to be a substantial fee, BWL should carry all the responsibility. He saw the introduction of this matter as an additional complexity which he could have done without. The point comes out clearly in the cross-examination at T/10668, line 12 to T/10669, line 9, when Mr Familton's evidence on the point is being put to Mr Ratner. The record reads:
"He goes on and says that you said to him that you didn't want to be fixed with knowledge of the funding arrangements with EHL described in the letters:
'This was said quite early on in the conversation. The phrase "did not want to be fixed with knowledge" was one which struck me at the time as unusual and has been clear in my mind ever since.'
What do you say about that paragraph?--- I would say that he is correct, that I told him that what I objected to, amongst other things, about the 6 and 7 October letters was the fact - in fact, again, as you take me through it, it is quite clear to me I must have told him about the 6 and 7 October letters because my complaint to him was, and I do not debate that I used the term 'did not want to be fixed with knowledge', but I used the term in connection with, 'You gave us these things, you fixed us, you guys fixed us with the knowledge of it,' I objected to that. Had you gone ahead and had those arrangements in the first place, without telling us, without us having anything to do with it, there wouldn't have been from our viewpoint - I'm going too fast - there wouldn't have been from our viewpoint a section 62 problem. It might have existed, but the Crown would have had no involvement in it. So there was a two- fold point that I was making to him: number one, the arrangements breached 62 and, number two, he had made it my problem because he, or somebody within Buttle Wilson, had chosen to give us those letters."
Notes were kept of what transpired at the meeting on 13 October by Mr Ratner and Ms Shreves and certain of the officials including Mr Galt. All the notes were handwritten. None of them purports to be completely comprehensive. They were all admitted into evidence and cross-examined upon and from them and the evidence of their authors and others who attended the meetings a reasonably clear picture emerges of what transpired in relation to the s 62 problem thrown up by the support structure letters delivered by Mr Holyman.
Mr Ratner made it clear that his concern was that s 62 would be breached by such an arrangement and that the Crown could not, and should not, proceed if EHL was to be the financier of last resort. As indicated in earlier portions of this judgment, the Crown, however was anxious for the sale to go through and for Treasury to receive cash if not immediately, then in the near future. Either at the meeting on the 13 October or later in the week the officials became aware that Messrs Darvell and Harford, for Equiticorp, and Mr Familton, for BWL, were of the view that the arrangements set out in the support structure letters did not offend s 62 because of the exception to be found in
subsection (1)(a) which provides that the general prohibition does not apply where the lending of the money is in the ordinary course of the business of the company.
Mr Ratner has a clear recollection that his view of the matter was challenged by the officials in that they questioned how it came about that the Auckland lawyers acting for the other parties had a different view. It appears that on 13 October, Ms Shreves spoke to Mr Harford by telephone advising him of the joint concern of herself and Ratner regarding s 62 and was advised at that stage that it was considered in Auckland that subsection (1)(a) avoided the difficulty. It appears, however, that Mr Ratner firmed up on his view during the course of the day. By the time the meeting broke up the officials were accepting of the opinion that there was a problem and wanted Mr Ratner to further consider it. Although Mr Holyman was at the meeting, during part or all of the day, nobody recalls him making a contribution. But the Crown accepts that on the balance of probabilities by his attendance he would have learned of the s 62 problem, if in fact, he was not already aware of it.
After the meeting had concluded at Treasury Ms Shreves received a telephone call from Mr Andrew advising that he and Mr Galt were going to Sydney the following day, 14 October, to see Mr Hawkins regarding an increase in price. Mr Andrew also advised that the Crown officials had decided to accept Mr Ratner's advice that the support arrangements would have to be dismantled and would report to the Ministers on the basis that they should rely only on the value of the Equiticorp shares and the underwrite of BWL when deciding whether or not to proceed and should disregard EHL's offer to stand in as financier of last resort.
There were, of course, a number of other aspects of the transaction as a whole, quite apart from the s 62 problem, which required the attention of Mr Ratner and Ms Shreves. But it seems that during 14 October and into 15 October, Ms Shreves thoroughly researched the s 62 problem and completed a memorandum, Image Number
274059 (Volume II, page 29), in which she correctly identified the legal problems and the potential consequences for the Crown if it ultimately proceeded to sell its shares to RCL or AHL (or indeed any other company) knowing that those companies were being funded by Equiticorp in breach of s 62. Mr Ratner's evidence was that as Ms Shreves worked on this memorandum she discussed the conclusions she was reaching with him and that either on 13 October, or at least by the time the memorandum was completed, he had thought the whole matter through to the point where he realised that potentially there was a danger that if the Crown did proceed, relying upon the support structure as outlined in the letters, it could end up having to repay the money and be left with the EHL shares. Although the memorandum itself was not distributed to the officials, Mr Ratner's evidence was that the substance of it was conveyed to them.
In the meantime, Messrs Andrew and Galt, accompanied by Mr Clatworthy, of BWL, and Mr Holyman, of SM, had seen Hawkins in Sydney and negotiated an increase in price to a total valuation of $327 million-odd. Certain information was gathered by the officials in Sydney about the Equiticorp group including the latest annual accounts. This material was considered during the flight back across the Tasman and Mr Andrew began drafting up a report to the Ministers. Back in Wellington, Mr Ratner was considering how to go about having the offending support structure removed.
It was the Plaintiffs' submission that the Court should draw the inference that Mr Ratner was not so concerned to ensure that there was no breach of s 62, rather, his mission was to "unfix" the Crown's knowledge of the offending arrangements and make sure that thereafter no further information reached it which could put it on notice of any breach of s 62. As we shall see shortly, Mr Familton had the clear impression as a result of a telephone conversation he had with Mr Ratner that that was what he was about and Mr Harford, in his evidence, also insisted that in the whole matter no-one was deceived but no admissible evidence was available to support that view. Mr Ratner conceded, however, that the steps he finally took did not eliminate the
possibility that some other arrangement offending s 62 could be introduced without the Crown's knowledge. It may be that at some stage, Mr Ratner thought only in terms of purging the Crown of its knowledge of the advised arrangements and thereafter insulating it from further contamination. There are hints of such an approach in the Shreves memorandum on the law and, Mr Ratner, after he had certified that the matter was resolved, advised the Crown officials that they need not make further inquiry as to what the replacement support structures for financing the on sale might be. But even if Mr Ratner harboured the view submitted by the Plaintiffs I am satisfied that he never articulated it as a strategy to the Crown officials. So the Crown did not go into the transaction on the basis that the support structure as originally advised remained intact and that all that had been accomplished was some cosmetic adjustments to make it appear that the Crown did not know about it.
The strategy which Mr Ratner decided upon was threefold. First to insist that the parties who had provided the support structure letters withdraw them. Secondly to require that those parties thereafter not advise the Crown of any substitute arrangements that might be made. Thirdly to advise the Crown officials that no further inquiry should be made as to how the on sale was to be funded. Referring to the third leg of his approach, Mr Ratner said at T/10408, lines 4 to 7:
"Rightly or wrongly the view that the Crown did not need to know was the view that I took. It was a view that I expressed and it was a view that I put. It was my notion, if that is wrong, well, it is; but it was mine and I accept responsibility for it."
The significance of the advice not to inquire further was brought out quite early in Mr Ratner's cross-examination, the passage commencing at T/10196, line 15 and completing on T/10107, line 19:
"MR GRIEVE: What I said to you was this: The position was not that you did not want to know anything at all about what was put in place as
an alternative?---If you would stop right there, that's the point, that is not correct.
Why not?---Because the position was not that I had no particular desire to know whether it was good or whether it wasn't good. I had no objection if somebody told me something was perfectly legal, I had no objection to that, but to take the next step and say I positively wanted to find that out, I took the view and I still believe it is correct, the Crown had no obligation to know, the Crown did not want to participate in those arrangements. A consequence of its not participating meant it would not know, it would not know if the news was good, it would not know if the news was bad. I accept that is a consequence of not knowing. It simply wouldn't know. But you say to me, Did I not want to know if someone had come along and said, good news, we have arrangements with Hong Kong & Shanghai Bank - of course that would have been fine.
HIS HONOUR: But if they had come along and said, Here's another deal and you looked at that and said, No, that breaches section 62, you would have been right back in the position you were in when those three letters turned up unsolicited on your desk?---That is correct, Your Honour, and I would have advised the Crown not to proceed on that basis."
It appears that relatively early on the morning of Wednesday, 15 October Mr Familton was advised by BWL that Mr Ratner had raised s 62 problems. At this stage I interpolate to explain that by this time BWL was acting in three capacities. Having been retained initially in conjunction with SM (early in 1987) as financial advisers and selling agents for the Crown (Clatworthy and Pryke) an approach was made to the Auckland partners of BWL (Cimino and MacDowell) to see if they could assist EHL in its bid to buy the NZS shares. The Crown agreed again subject to suitable "Chinese wall" arrangements being put in place. And then, of course, BWL comes in not as an agent but a principal and contracting party in its role as the underwriter in respect of the subsequent sale of the Crown's EHL shares. But it was as agent for EHL that Mr Cimino was advised of Mr Ratner's s 62 concerns and he was asked to contact Mr Familton about them. It is apparent, therefore, in some way or another, the knowledge had got back either to Equiticorp or the BWL advisers of Equiticorp that Mr Ratner had taken a stand on s 62 which had to be resolved before the deal could be wrapped up. There was some urgency about this because Equiticorp was anxious to
finalise the transaction with the Crown and head-off other bidders which it thought (erroneously, it transpires) were hovering in the wings. Additionally, Hawkins, who was a major shareholder in RCL and AHL, the potential purchasers of the Crown's parcel in late March, required time to arrange finance so the transaction had to be finalised more or less at once if the Crown was to have any prospect of getting cash before the end of the financial year.
Before discussing Mr Familton's contacts with Mr Ratner on the topic of unwinding the proposed support structure, however, his (Familton's) position on s 62 should be sketched out. Late in the preceding week he had attended with his assistant, Mr McDonald, at the offices of RWS, Auckland where he conferred with Messrs Darvell and Harford. At that time, Darvell was riding high and apparently enjoyed a reputation for competence and success as a commercial lawyer which I doubt he deserved. Be that as it may, however, although at that conference Mr Harford raised the question of breach of s 62 Mr Darvell was emphatic that the exception in subsection (1)(a) covered the position. Mr Harford, who had only just been admitted as a junior partner in RWS, deferred to Mr Darvell and Mr Familton frankly acknowledged that he was prepared to accept Darvell's opinion without further independent inquiry. In addition, Mr Familton knew that his client, BWL, although a successful and prominent stock broking firm could not, without sub-underwriting arrangements in place, afford to expose itself to potential liability such as that it would face if RCL and AHL were the ultimate purchasers and EHL finance was not available. Either at that stage or shortly thereafter he became aware that without the EHL commitment as a financier of last resort his client, BWL, was not prepared to underwrite.
It was against that background that Mr Familton telephoned Mr Ratner in Wellington. There is a stark difference between the two as to what transpired. It was not a situation as Mr Mathieson endeavoured to persuade me during closing where these two experienced solicitors were talking past each other. One or the other's version is the
truth. Mr Ratner is one of those practitioners who does not keep notes of telephone conversations. Mr Familton, on the other hand, is one who does. He kept a note of this discussion which is Image Number 205103 and will be found at page 33 of Volume II, a transcribed copy of which is Image Number 930105 to be found on the following page. Both the original and the transcription were admitted by consent and examined in the evidence.
Mr Familton's version of what transpired is first that both Mr Ratner and Ms Shreves were present on a conference call basis when he got through. Although called to give evidence by the Crown Ms Shreves did not say anything about this conversation so the conflict falls to be resolved on an assessment of the respective reliability and veracity of Messrs Ratner and Familton alone. Mr Familton says he asked Mr Ratner about his s 62 concerns who then expressed the view that subsection (1)(a) did not apply. Essentially Mr Familton says they agreed to disagree on that point after a brief debate. Mr Ratner then said "He did not want to be fixed with knowledge of the funding arrangements with EHL". That expression Familton said was one that struck him as unusual and had remained fresh in his mind ever since. Mr Ratner went on to say that he was therefore seeking a letter in favour of the Crown advising that the arrangements had been withdrawn and that there was no present intention of EHL providing funds. In his prepared statement Mr Familton said at paragraph 94:
"I made it clear to Ratner that BWL could give no such statement. Ratner then suggested various alternative wordings for a letter along much the same lines. These suggestions, which I jotted down as we talked, were that the letters were at an end, that the letters had been replaced by different arrangements, that the letter from EHL to BWL was not in force, or that there was no present commitment from the EHL group to provide assistance."
Transcribed document 930105 - Familton's note of the discussion fits with that evidence. Mr Familton also said that although he was not prepared to provide a letter
in the terms that Mr Ratner was seeking the conversation was "not in any way confrontational". But he went on to say in paragraph 95:
"I could not have agreed to anything like that; I had no authority to abandon BWL's backstop position. I was not prepared to give letters in the terms requested when it was clear to me that the take-out deed which was being prepared was to the same effect as the letters of 6 and 7 October. I was not prepared to be a party to what would have been a misrepresentation that the original funding arrangements had been replaced by different arrangements."
I interpolate to say that the "Takeout Deed" referred to was one which he was in the process of finalising with Mr Harford on behalf of EHL and which secured for BWL EHL's commitment as a last resort financier. It is appropriate also to mention that in the discussions Mr Familton had had with Messrs Darvell and Harford it had been made clear that Equiticorp had in fact secured, in principle, funding arrangements from the Hong Kong Shanghai Bank (HKSB) but they could not be put in place to meet the timetable to which the parties wished to adhere hence the EHL undertaking which was effectively "BWL's backstop position". Similar information had been conveyed to Mr Ratner who did not see BWL as "a big risk" because he expected an international financier, probably HKSB, would soon be in place.
At paragraph 100 of his prepared statement Mr Familton also said:
"It was clear to me that Ratner wanted to establish a position that the Crown had no knowledge of any ongoing funding arrangements involving EHL at the point that the formal documentation was entered."
There is some corroboration on that point from Mr Ratner himself who said in evidence in chief (paragraph 39) that he told Mr Harford in effect "You sort out your backup arrangements and do not tell us what they are". And later, in cross-examination of his discussions with Mr Harford at T/10191, lines 22 to 24, the following question and answer is recorded:
"... you told Mr Harford that whatever alternative arrangement was put in place, you didn't want to know about it?--- That's correct."
Mr Familton's evidence was that all he agreed to provide was a letter to the effect that once the Underwriting Deed between the Crown and BWL had been entered into it should be regarded as superseding BWL's earlier letter undertaking to fill that role.
Mr Ratner, on the other hand, says that this telephone conversation was one of the "most extraordinary" he had ever had. At first, he said that at the time of the discussion he had in front of him a draft of the letter that Mr Familton said he would provide. Subsequently, when it was pointed out to him that the discussion took place on 15 October and the draft he was referring to had not been faxed to him until approximately 1pm on the following Saturday, 17 October, he then amended his testimony and said that if he did not have the draft then the terms of the draft were discussed with him. He agreed that that draft, which is identical to the letter he finally received, did not unwind or withdraw as he had requested and he said that he realised immediately he received it or shortly thereafter that that was so. But Mr Ratner insisted that although the terms of the letter that he discussed with Familton were clearly not what he required, nonetheless, Mr Familton insisted that the letter would accomplish exactly what he wanted.
The draft of the letter sent on Saturday, 17 October is Image Number 276093, which will be found on page 54 of Volume II and on the next page to the letter itself, is its final form, in exactly the same terms signed by Mr Cimino. As can be seen, it does not, in any sense, address the unwinding of the support structure and relates exclusively to the agreement between BWL and the Crown. As I understood Ratner's evidence, the extraordinary nature of the conversation related to the fact that Mr Familton contended that a letter, such as the one provided, could in any sense be said to comply with
Mr Ratner's requests. As we shall see shortly, however, on 19 October Mr Ratner gave a certificate to the Crown to the effect that the support structure letters had been unwound, thereby representing that this letter did in fact perform the function which he says he insisted to Mr Familton it did not, and which, he recognised when giving his evidence in this case, was quite ineffective for that purpose.
Mr Ratner's justification for saying to the Crown in his certificate that the matter could proceed, however, was that although the letter did not say what he required, nonetheless, Mr Familton had said that it did, and since he had letters from the other three parties involved giving him the unwind assurance that he required, he decided it was safe to proceed. That, on the face of it, is a fairly fragile proposition and, of course, it collapses completely if in fact Mr Familton did not say that the letter did what Mr Ratner required of it a fortiori if Mr Familton's evidence that he refused such a letter is accepted.
Mr Ratner adopted the stance in evidence-in-chief and in the first two or three days of cross-examination that he knew the letter was unsatisfactory but that he clearly recalled Mr Familton maintaining that the letter did perform the function he required, which led him, of course, (after some hesitation) to say that Mr Familton was not telling the truth. That hesitation is demonstrated by two passages in the cross-examination, one at T/10488, lines 13 to 28, and the other following at T/10489. They read as follows:
"Did it occur to you that Mr Familton's reluctance to give you the sort of letter that you wanted stemmed from the fact that Buttle Wilson was in fact unwilling to accept that risk?---No, it did not.
He at no stage acquiesced in your proposal that the transaction be unwound, did he?---[Witness hesitates, significant pause] I would say he did. I understood that to be the case.
I'm going to come to it later on in this cross-examination, but putting it broadly, he has said that at no stage did he agree to the transaction being unwound, that he simply had no authority to make that concession on the part of his client. What do you say about that?--
-[Another significant pause] I hesitate to make comments about something of that sort, but I don't agree with that.
It is directly contradictory to what you are saying?---Yes, it is." [References to pauses added from my notes taken at the time and my recollection of this passage of evidence.]
"I have had dealings with Mr Familton since that time. I find it difficult to think of him as an untruthful person, but I read the fax that he sent, I understood our conversations throughout to mean the unwind had been agreed and all we were ever arguing about was the form of the letter."
The record of the evidence Mr Ratner had given at the criminal trial when Hawkins, Darvell and various other directors of EHL were on trial in June of 1992 was then put before him. The record was duly proved and shows that at that trial Mr Ratner said that this very letter did serve his purposes and made "perfect sense" and that he could not recall any discussion with Mr Familton about it. So confronted Mr Ratner argued with the cross-examiner as to the meaning of the questions asked in the criminal trial and the answers he gave. He complained that he did not have time during the criminal trial to analyse some of the questions that were being asked and on occasion conceded that he had not answered the questions very well. All to no avail, however. It was patently obvious that what he said his attitude to the letter was in June of 1992 was quite different to what he had said in the trial before me. Also, whereas, at the criminal proceedings he said he could not recall any discussions with Familton, in this trial he was adamant that Mr Familton had insisted (illogically and unreasonably said Ratner) that it did unwind. In the course of cross-examination of Mr Ratner on the criminal record he was taken to the evidence given in those proceedings by Mr Familton. Familton's version of events then was, in all material respects, the same as that given during this trial.
In addition, however, there were interrogatories delivered to the Crown regarding this particular letter. Interrogatory 46.6 dealing with this letter asked:
"Precisely what did the Crown's legal advisers understand to be the effect of the letter from BWL?"
The answer given was:
"That the 'sub-underwriting documents' had been withdrawn so that the Crown could no longer rely on EHL to provide funding for BWL (by lending funds to RCL and AHL) to purchase the shares in EHL which the Crown would receive."
The answers to the interrogatories were verified by an affidavit by Mr Andrew sworn on 28 January 1994 which records that the interrogatories themselves were delivered on 29 October 1993. Mr Ratner agreed that he would have been consulted regarding this reply and it is clear that in 1993 he was still adhering to the view that he had expressed during the criminal trial in 1992 that the letter was satisfactory. Confronted with that answer Ratner insisted that he knew almost immediately he received the letter that it was inadequate and of necessity he was obliged to accept that that evidence given in the trial before me was inconsistent with the answer given with his assistance to interrogatory 46.6 set out above. Another answer which Mr Ratner disowned under cross-examination was 41.5 verified by the same affidavit sworn by Mr Andrew. The topic was the unwind letter from AHL but as can be seen the answer embraces the BWL letter as well. The question and answer are set out hereunder:
"If the answer to the preceding question is 'yes', what were the reasons why the Crown required the letter to this effect before agreeing to proceed with the sale of its shareholding in NZS to EHL?"
The answer given was:
"Because the Crown, as a result of advice from RWS (Wellington) believed the financial arrangements referred to in the EHL letter of 6 October breached the Companies Act. The Crown was not prepared to proceed with a transaction which breached the Act. The only way it could know that the offending transaction had been removed would be to obtain assurances from the parties involved - EHL, AHL, RCL and BWL. The purpose of the letters from each was to provide that assurance."
There were a number of other aspects of Mr Ratner's evidence that were unsatisfactory on the issue of his telephone discussion with Mr Familton. But given the improbability of what he suggests combined with the inconsistency of that evidence compared with what he said in the criminal trial in 1992 and the sworn interrogatory answers he was a party to in 1993, together with his unsatisfactory demeanour, which tended to be argumentative and bordering on discourteous when pressed, I have no difficulty in saying that I prefer Mr Familton's version of events.
The consequence is that from an early part of Thursday, 15 October 1987 Mr Ratner, as the chief legal adviser of the Crown, knew that so far as BWL was concerned the support structure was not going to be unwound. I should add perhaps that the Crown attacked Mr Familton's credibility vigorously during cross-examination. It was suggested to him that the letter of 19 October was sent late and ambiguously worded for the express purpose of misleading Ratner and taking unfair advantage of him in the knowledge that settlement was to take place that day. But I reject that along with another suggestion made by the Crown that an adverse view should be taken of Familton's decision later in the week to not send a copy of the Takeout Deed between BWL and EHL to the Crown. On that latter point I accept Mr Familton's explanation that he had got the clear message from Mr Ratner on 15 October that the Crown did not want to be fixed with knowledge of the support arrangements and since the Crown was not a party to the Takeout Deed he thought it inappropriate to forward it.
We can now turn briefly to Mr Ratner's dealings with Messrs Darvell and Harford on or about 15 October. Mr Harford's evidence, which I accept, is that at some stage on 15 October he entered Darvell's office to find him talking on conference call with Ratner about s 62 and in particular whether s 62(1)(a) was applicable to the support structure arrangement. Mr Ratner is a North American with a distinct accent and one can accept that Mr Harford would recognise his voice over the telephone microphone immediately. Mr Harford says the discussion was heated. Mr Ratner says he does not
recall it but it may have happened. Darvell, who incidentally was acquitted at the end of the criminal trial in 1992, was not called by either side. He was said by Mr Harford to be unwell at the time of the hearing and has since died of cancer.
Mr Ratner had two discussions with Mr Harford on 15 October. Mr Harford, like Mr Familton, had a practise of keeping notes of telephone conversations. In respect of the first of the two conversations, Harford's note is Image Number 930173, which is to be found at page 35 of Volume II. Having recorded that Mr Ratner was on the telephone he noted a number of items, two of which read, as can be seen from the document "He's still hung up on s 62" and "Discussing deed between AHL and BWL and RC and Equ - suggested alterations". This note was ruled provisionally admissible by the Court of Appeal in Equiticorp Industries Group v Attorney-General [1995] 2 NZLR 303. The admissibility was made subject to the trial Judge hearing evidence direct from the author of the note. Mr Harford made it clear that he had no recollection of the telephone conversation and that his memory was not refreshed by viewing the note so that all he was able to say was that in view of his practise of keeping an accurate note he believed that what is recorded in it actually happened. In particular that the deed which by then was in draft form was discussed by him with Mr Ratner. Mr Ratner, on the other hand, insisted that he was never aware of the deed; had never been told of its existence and that no such discussion had taken place. But he did agree that he had had a discussion with Mr Harford in which alternative wording for the support structure takeout letters was explored. One thing that was clearly established as a result of evidence being given both by Mr Harford and Mr Ratner about this filenote is that at the time Mr Ratner would not have had a draft of the deed in his possession and, indeed, was never sent either a draft or a copy of the final deed. So that alterations to the deed in terms of suggesting precise wording or fine tuning of the drafting did not take place. Given those circumstances, it is quite conceivable that while discussing the broad structure of the takeout facility to be provided by EHL if need be, Mr Harford may have talked in terms of the draft deed that was under
preparation, while Mr Ratner thought in terms of the letters that had been supplied and alterations to them. But, the evidence shows that Mr Harford usually kept a fairly full note of telephone conversations which, by and large, have turned out to be fairly accurate. On balance, I prefer his evidence that the note is accurate to Mr Ratner's recollection that the deed was not mentioned. So, at that point Ratner acquired knowledge that a deed formalising the support structure was under preparation but no more.
On balance, the probability is that when the first discussion recorded in Image Number 930173 took place, Mr Ratner had not reached his final conclusion as to how he would proceed to deal with the s 62 problem. Later in the day he again spoke to Mr Harford and Harford's note of that conversation is Image Number 930169 to be found on page
36 of Volume II. In this telephone conversation Mr Ratner was able to give Mr Harford precise details of the sale that had been negotiated the day before in Sydney and, in particular, he clearly required of Harford at that time, letters saying that the support structure letters that had been delivered by Holyman on 13 October, had been unwound. The precise reference in the second Harford note is "- You want letters from Equ - saying letters unwound". And, at the bottom of the note in a box there are two references one of which is "Equ - W-d - letter" which Mr Harford agreed meant Equiticorp, withdrawal letter.
From the content of this second discussion it seems probable that Messrs Darvell and Harford had not been persuaded that their view that s 62(1)(a) covered the situation was wrong. Moreover, Mr Harford was adamant that as the junior member of the RWS, Auckland team he would not have had authority to agree to such unwind letters and that he did not agree at that time. Nonetheless, towards the end of that day he raised with EHL the Crown's requirement regarding unwind letters and was authorised to provide them. The following day, at approximately 6pm, RWS, Auckland faxed to Mr Ratner copies of letters from EHL and AHL (Image Numbers 275201 and 275202 respectively
to be found on pages 38 and 39 of Volume II) confirming that the funding arrangements outlined in the earlier letters had been replaced and that those letters "should not be relied upon in any way by the Crown". Later that evening, Mr Ratner faxed RWS, Auckland advising that the form of the two letters so far received was acceptable and requesting a similar letter from RCL. Next day, a letter in identical terms (Image Number 275200 to be found on page 37 of Volume II) arrived from RCL signed "pp RP Darvell". Mr Darvell was a director of RCL and Mr Harford agreed that he had signed the letter on Darvell's behalf and on his instructions. This was a matter of some anguish for Harford when giving his evidence, because he frankly acknowledged that he should have declined to comply with Mr Darvell's instruction because the terms of the letter were directly contrary to the Takeout Deed which at that very time he was in the process of finalising with Mr Familton. Mr Harford explained, as can be accepted, that he was coming to the end of what had been an extremely busy week, getting all the documentation in place and making sure that it was all ready to mesh at the settlement on the following Monday, 19 October. He said that had he not been so rushed and over-committed he would have seen the inconsistency and stood out. But he did not. The letter went. Mr Ratner says he checked with Mr Harford to confirm that he had authority to sign. Mr Harford doesn't recall that and suggests that the appropriate person to check with was Darvell. But, as it has never been suggested that the letter was signed without authority on behalf of RCL, the precise point at the end of the day is not of great significance.
Mr Ratner, however, swore that it was inconceivable to him that one, let alone two, of his partners would have misled him as to what was actually happening. He relies heavily upon this letter and the other two that came through RWS, Auckland from companies which at that time were regarded as successful and reputable, as providing a sound basis for the Crown accepting that the support structure had indeed been unwound.
An aspect of the matter appropriately mentioned at this point, however, is that several of the Crown officials and the Crown's legal advisers acknowledged that whilst they understood that ultimately the HKSB was to be the provider of the funds for the purchase of the Crown's NZS/EHL Parcel they also knew that, with the unwind only having taken place on Thursday, 15 or Friday, 16 October, there was insufficient time to put in place another support structure before settlement on Monday, 19 October. Mr Ratner said, in evidence, that he still believed that had sufficient effort been put into the matter, the HKSB facility could have been finalised in time for 19 October. But the banking and finance experts called disagreed with that and, in any event, the Crown did not believe that it had happened. So Mr Ratner and any official who saw the unwind letters must have known that the reference to "new funding arrangements now in place" in the letters from EHL, AHL and RCL was not correct.
By Friday, 16 October the officials, and especially Messrs Andrew, Chetwin, Galt and Kwok, were busily engaged in preparing a final report to the Ministers of Finance and Trade & Industry recommending the sale of the Crown's NZS shareholding on the basis discussed, and in anticipation of acceptance of the recommendation, execution of the formal documentation the following Monday. The evidence before me was that the convention is that such reports are prepared exclusively by Crown officials without input from outside advisers who would not usually even receive copies. In this instance, however, because the report had to address the s 62 problem which had developed, Mr Ratner insisted on having some input. Also at least some of the officials regarded him as one of the team and as a consequence he saw a draft of the document. He recommended certain changes, not all of which were accepted, but one which was appears in what became paragraph 16 of the report and concerns the question of the unwind letters. The draft report upon which Mr Ratner's handwritten amendments appear is Image Numbers 275184 to 275192 inclusive and is to be found at pages 40 to 48 in Volume II. As can be seen on pages 3 and 4 of that draft, which are Image Numbers 275188 and 189, paragraph 13 became paragraph 16 under the general
heading "Buttle Wilson takeout offer". On page 4, the draft, as prepared by the officials, (primarily Mr Andrew), ended the paragraph with this sentence:
"Accordingly, the Crown's legal advisers have negotiated with Buttle Wilson's lawyers the provision of formal undertakings to the Crown that the objectionable parts of the support structure have been unwound."
That sentence, as can be seen from the handwritten alterations which Mr Ratner agreed were his, was then changed to read:
"Accordingly, the Crown's legal advisers have negotiated with Buttle Wilson's and Equiticorp's lawyers for the provision of suitable letters to the effect that the letters previous (sic) cited have been withdrawn."
Although Mr Ratner did not see the final report it is apparent, the first and third pages of it, which are to be found in Image Number 275389 on pages 49 and 51 of Volume II, and in particular paragraph 16, went forward in the form recommended by him.
Two things are immediately obvious from the above narrative. First, Mr Andrew saw BWL as the party to give the undertaking since it was the party to benefit from the funding from EHL. Secondly, Mr Ratner knew when he made that alteration on 16 October that in fact BWL through Mr Familton had refused to withdraw and that his negotiations in that regard had failed.
There is some uncertainty about exactly when and under what circumstances the two Ministers agreed to accept the recommendation in the report. There is no doubt there was a tension between Mr Ratner and Mr Andrew about the wording of the report, Andrew leaning in favour of leaving it up to the Ministers to decide whether they would risk proceeding with a possible s 62 problem in the offing and for that reason tending to play down the advice that Ratner had given. Mr Ratner on the other hand was anxious that they should be fully aware of the dangers. He was not entirely
satisfied with the way the report was worded finally but, as he pointed out, it was not his report. He could not dictate its terms and in the end what went forward from his point of view was something of a compromise.
Both Ministers gave evidence and said that, as worded, the report gave them no anxiety about the matter proceeding and that they took what was reported in the section on the BWL takeout as indicating that a problem that had previously existed had been resolved.
Sometime between late on Friday, 16 and early on Monday, 19 October the Ministers gave their approval. Early on the 19 October, Mr Andrew sent to them the documents to be executed for the transfer of the shares and the purchase back by BWL of the NZS/EHL Parcel at a later stage. The letter is Image Number 278198 (page 56 of Volume II). It envisages signatures being appended at 2pm that day but records in paragraph 1 that:
"The Crown's legal adviser, Mr Peter Ratner of Rudd Watts & Stone, has cleared these agreements for signature pending the receipt of letters from EC and Buttle Wilson dealing with the Companies Act problem discussed in our paper of 16 October 1987."
A little later in the day Mr Ratner supplied his certificate to the Secretary of the Treasury. It is Image Number 278003 to be found at page 57 of Volume II. The relevant passage in the certificate reads:
"We have also reviewed letters of today's date from Buttle Wilson Limited, Equiticorp Holdings Limited, Richardson Camway Limited and Ararimu Farms & Investments Limited concerning certain financing arrangements which had previously been put in place and which have now been superseded ... On the basis of the foregoing, we advise that the aforesaid agreements are in proper form to be executed by the Minister of Trade and Industry."
Under cross-examination and when answering questions from the Bench, Mr Ratner insisted that this certificate was accurate. He said that what he was certifying was that the documentation was in proper form. So far as the unwind letters were concerned his argument was that he had letters from RCL, AHL and EHL which unwound and that therefore the letter from BWL was not strictly necessary, and, in any event, since he had the assurance of Familton that in his view the letter did unwind, there was no point in spending further time arguing and it was safe to proceed.
One of the interrogatories addressed by the Plaintiffs to the Crown (46.13) inquired whether Ratner discussed the BWL letter of 19 October with the Crown's officials and subsequent questions took the matter further by inquiring if so, with whom and what was said. The answer was given in respect of interrogatory 46.14(c) as follows:
"Mr Ratner advised he was not happy with the letter as it was not as unequivocal in its terms as were the letters from EHL, AHL and RCL. However, as the other three letters had been received and the BWL letter did not contradict them, Mr Ratner believed it was reasonable to go forward rather than continue to argue with BWL."
Under cross-examination, however, Mr Ratner qualified the answer given in that interrogatory saying that it should really have said that it was his "best belief" that he so advised and when I put it to him squarely he said that he was not in a position to swear on oath that he had so advised. On the other hand, we have Messrs Chetwin, Andrew, Galt and Kwok all saying on oath that they have no recollection of the BWL letter having been referred to them and that if it had been some would have wanted more inquiries undertaken, others would have wanted to advise the Ministers before the signing took place.
In two places in his cross-examination, however, Mr Ratner said emphatically that if Familton had refused to unwind then he would not have given his certificate. The point comes out most dramatically between line 15 on T/10994 and line 5 on T/10996.
Mr Grieve was cross-examining and put his question at line 15 on T/10994 after which I asked a number of questions and that portion of the record is set out hereunder in full:
"I won't go over his evidence with you again, but you will recall that I put to you that he says that at no stage did he give you any comfort and that you were going to get from him what you wanted?---And I have indicated - in the sense of getting a letter different from the one that he gets, I agree with that. However, to the extent that we talked about what I wanted, why I wanted, he said, "Here it is, this does what you want".
HIS HONOUR: Hypothetically, if he had said to you, My client won't agree to unwind, I can't give you the letter you want, and it was left there, and along came this letter that didn't do what you wanted, what would have happened then so far as you were concerned?--- This would have changed everything, Your Honour, and I would never have expected to get - if his client was not prepared to unwind, then there was no point in giving me a letter. I never wanted any letter. This notion that seems to have been advanced at some point that one gets letters to do what the law of merger of contract does anyway is beyond me. In my entire practice, I have never ever, ever gotten a letter that says, previous arrangements get merged. I have sometimes seen clauses in contracts for parol evidence rules that refer to that, but I have never in my life sought, obtained, asked for or seen a letter.
Just put the question of the letter and what practice was [to one side]?--- Had matters stood as you suggest, Your Honour, then absolutely, it would have caused questions in my mind because then I would have one of the parties saying the transaction is not being unwound and somebody else saying it was. Of course I would have had to ask questions. That was never suggested.
I presume that you, under those circumstances, wouldn't have been able to give you certificate of 19 October?---We would never have gotten that far because I - the 16 October report to officials never would have been written.
When you said a moment or two ago that that would have changed everything, presumably it would have changed the advice you gave to the Crown?---Yes, sir.
And what would the advice on those hypothetical circumstances have been?---The advice would have been, I would have then proceeded on the assumption that the transaction was not being unwound, at which point my advice to the Crown would have been, I don't think you can do this, I accept that there is an argument that says section 62(1)(a) applies, in my opinion the better view and the correct view is that it does not. Your choice.
And presumably, "and be warned if I am right and they're wrong and"--?--
-And everything goes wrong, as indicated, you can end up having to give back the money." [Emphasis added]
Since the letter patently did not do what Mr Ratner wanted and I have found as a fact that Mr Familton made it clear that his client would not unwind the hypothetical situation referred to is in fact the reality. Mr Familton's refusal did change everything and Mr Ratner, as he himself concedes, should thereafter have proceeded on the assumption that the transaction was not being unwound, or at the very least, that there was a substantial probability that it was not.
The following day, 20 October, the sale was formally announced and both the Crown and EHL issued press statements. The Crown's statement was an accurate summary of the two contracts that had been entered into. The penultimate paragraph of the statement read:
"'This sale will contribute to achieving a budgeted fiscal surplus in this financial year', the Ministers said."
Equiticorp's statement referred to the fact that it would be joined by Fisher & Paykel as a 20% shareholder and then said in the third last and penultimate paragraphs:
"Sharebroker, Buttle Wilson Ltd, has arranged a guarantee that the Crown will receive $327 million in cash by the 20th of March 1988 for its Equiticorp shares. Those shares will be placed with an international finance group and will be subject to a put and call option arrangement which will allow Richardson Camway Ltd/Ararimu Holdings Ltd to acquire them on 20th March 1990 for a price of $5 per share. Richardson Camway and Ararimu Holdings are companies associated with Equiticorp's chairman, Alan Hawkins. These companies will continue to control 40% of Equiticorp."
Those statements, the day after the documents had been signed, were hardly in keeping with the Crown's understanding that there would not be time to introduce another financier by 19 October. The evidence of both lawyers and officials was that they were not concerned by those statements and, in any event, by then the officials at least were
cognisant of Mr Ratner's advice that once the letters were unwound there was no need to make further inquiry as to how the buy-back was to be financed.
Before leaving this period which ends on 20 October, I refer briefly to an argument advanced by Mr Mathieson regarding the absence of motive on Mr Ratner's part to report as he did if in fact the position was that Mr Familton had not assured him that the BWL letter effected an unwind. The argument was that he, Ratner, had nothing personally to lose one way or the other, his fee would be paid in any event and it was incomprehensible that he should report that all was in order if it was not. Why Mr Ratner behaved in this way is of relatively limited significance in view of my firm finding that he did. But there are two possibilities which emerge from the evidence.
First, it needs to be remembered that Mr Ratner had only recently been admitted to partnership and had landed this very large instruction from Treasury at the beginning of a declared assets sale programme. Furthermore, it was very evident that the Crown was anxious for the matter to go through and to receive cash and that advice that it could not proceed or should not proceed would, as Mr Galt put it, have been "unwelcome". Or, as Mr Ratner himself recognised in evidence, the Crown would have been "extremely reluctant to walk away". Mr Ratner had been left by the Crown to solve the problem. He had implied, if not expressly declared, at or about the time the 16 October report was prepared for the Ministers that he had found a solution. So, professional vanity and a desire to please and retain a very valuable client are possible explanations.
Secondly, Mr Ratner may have persuaded himself, despite Familton's refusal and the unsatisfactory nature of the BWL letter, that the right decision was for the Crown to proceed. Obviously it was not his prerogative to so decide, and doing so in circumstances that necessitated the suppression of information that should have been passed on and the providing of a misleading certificate, compounded the impropriety.
But, under cross-examination, Mr Ratner indicated several times that that was his thinking. Samples are set out hereunder: T/10656, lines 12 to 21:
"... it seems to me entirely likely, logical, that had I said anything at all to the officials about the letter, the BWL letter, and I am putting this to you on the basis of logic, not on the basis of a specific recollection, so I don't wish to be misunderstood, but it seems likely to me I would have said something along the lines of: I have a letter from Buttle Wilson that is unsatisfactory, it doesn't matter, go ahead. Or probably even more, It is not entirely satisfactory, it doesn't matter; I'm satisfied, go ahead."
T/10664, lines 16 to 23:
"... you are quite correct, I had a letter that was unsatisfactory, I didn't know why [Familton] wouldn't give me a letter that was in the terms that I wanted. It was one of these lawyers' arguments, as far as I could determine. I have them all the time, much more often than I would like to, but I do. Then I have to decide if the thing in front of me, can I live with it, and I decided that we could live with it."
T/10726, lines 16 to 22:
"... I got the letter, I looked at the letter, okay. It wasn't what I wanted, I knew that. He had said to me it is. This is an argument lawyers have constantly, endlessly, day after day. This is one of the things that commercial lawyers do, Mr Grieve. We have to make a decision when faced with it, Is what is there in front of me good enough? I made a decision."
T/10738, line 26 to T/10739, line 21:
"... It was Mr Familton's argument that the letter did in fact give me what I wanted, and it was carefully crafted, in my view, to look just that way. That's the whole argument we had. Sorry, I do not understand why you find this such a difficult concept. It seems to me very obvious.
It didn't satisfy you, did it?--- No, it didn't. Sorry ultimately I looked at it and said, 'In the context of everything that has happened, it is good enough".
When you say 'in the context', do you mean taken together with the other letters about which you were satisfied?--- Yes, that is correct.
HIS HONOUR: How could it be good enough if, as you said a day or so ago, it was gobbledygook and meant nothing?--- Because, Your
Honour, Buttle Wilson was not - I don't want to get hung up on terminology. It was recipient of a promise. If the other parties to the promise withdrew it, then they withdraw it, and it wasn't for Buttle Wilson to say yea or nay. Therefore, having had the other parties say, 'We have withdrawn it,' having had a letter here which doesn't say it hasn't been withdrawn, counsel saying to me, 'This does say it has been withdrawn,' I felt I had enough to satisfy myself on the writing that it had been withdrawn. That judgment may be incorrect, but that is the judgment I took."
Finally, at T/10922, lines 17 and 30 when answering questions from the Bench:
"... what precisely was the decision that you made?--- The decision was whether or not the letters which we had received were satisfactory. Also, I guess, I also had to make the decision about whether or not the agreement itself was in proper form, was I prepared to give the certificate, but I was certainly thinking about, in giving that answer, Your Honour, whether or not the certificates were, the letters we had received, were appropriate.
What precisely was the decision you made about the letters?--- The decision I made was that they were appropriate.
Including the BWL one?--- Taken all together, yes, Your Honour."
But I make no finding in respect of either possibility as to Mr Ratner's motives because, as I have already mentioned, they are of limited significance compared with the firm findings of fact that I have been able to make.
I should also mention that, initially, when Mr Ratner considered the Equiticorp offer he was also concerned that Equiticorp was to pay BWL a fee for underwriting the buy- back. Subsequently, however, he reached the conclusion that the payment of such a fee was in the nature of a commission and that by combination of ss 61 and 62 of the Companies Act 1955 it was permissible. Although the fee was mentioned in the report to the Ministers of 16 October as being in breach of the Act, or potentially so, all witnesses for the Crown said that it remained in as a matter of oversight because of the pressure under which everybody was operating. The Plaintiffs do not seek recovery of that fee but Glenbrook maintains its original claim and seeks judgment in respect of it.
The Period from 20 October 1987 to 27 January 1988
After 20 October 1987 there was relatively little activity for a month or so so far as Mr Ratner was concerned. Initially, there was optimism that the substantial fall in share prices that occurred on or about 20 October was a temporary aberration of the market, which would soon recover. As time went on, however, and share prices in general, and Equiticorp's in particular, continued to slide, a degree of anxiety set in. It was clearly present among some of the officials, particularly Messrs Andrew and Galt and Mr Ratner acknowledged that he shared it.
As indicated in the factual overview earlier in the judgment, Equiticorp quickly found that owning and running the steel mill was an enormous drain in its cash resources. The situation was severely exacerbated by the very real threat that upon transfer of the shares from the Crown to Equiticorp various funding lines from Japanese banks would be summarily withdrawn. All this led to a direct approach by Equiticorp to the Minister of Finance for a delay in transfer of the shares. The request was put on the basis that Equiticorp had already found $180 million of working capital and could afford no more in the meantime, so it needed time to establish alternative lines of credit, or to persuade the Japanese banks themselves to continue their support. The Crown saw this as an opportunity to improve its security position by requiring a guarantee that BWL would perform and produce a buyer, or buy itself, and it sought support for that guarantee by way of a mortgage of the NZS shares. Mr Andrew had some reservations about this because he saw the possibility that the Crown could end up again holding the NZS shares, and thus be back in the unenviable position that it thought it had extricated itself from by the 19 October share swap. But the Minister of Finance gave his approval and part of the thinking seemed to have been that the Crown did not want the embarrassment of NZS possibly becoming insolvent before the on sale of the EHL shares the following March. Mr Galt's anxiety was that if BWL defaulted the Crown would end up without its New Zealand Steel shares and with grossly
devalued EHL shares and that under those circumstances criticism inevitably would be levelled at the officials involved and himself in particular. So he was pleased and relieved when Equiticorp agreed.
What was proposed, however, again confronted Mr Ratner with the prospect that a guarantee supported by a mortgage of shares owned by an Equiticorp subsidiary, to support the purchase of a block of Equiticorp shares, would run foul of s 62. In co- operation with Mr Darvell he evolved a scheme which he frankly acknowledged was a "device" to get round s 62. A trust was set up under which the subsidiary holding the shares, namely Equiticorp International Ltd (EIL), was both the manager and the beneficiary. The trust gave the guarantee and mortgaged the shares. Once that was all in place and ready to be implemented Mr Darvell got cold feet about EIL appearing to be other than a completely independent trustee. So at the eleventh hour he arranged to substitute another company known as Shoeshine 70 Ltd as trustee. This was certainly an irritation, probably an embarrassment, for Mr Ratner but Mr Darvell had already effected the change and Mr Ratner was therefore left with no alternative but to advise his client that this further change should be implemented. Mr Ratner's letter of advice is Image Numbers 369124/125 which are to be found at pages 79 and 80 of Volume II and in the middle of the second paragraph there is a sentence which indicates that s 62 anxieties were driving the change. It reads:
"We were advised by Equiticorp Holdings' solicitors that this change was made to preserve the independence of the trustee of that trust which would have been open to question on the basis that Equiticorp International Ltd is a wholly-owned subsidiary of Equiticorp Holdings Ltd."
Whether this whole arrangement breached s 62 is not the issue at the moment. The significance of this episode is that Equiticorp again appeared in a situation where it was assisting in the financing of the buy-back of its own shares. And, therefore, inevitably in my judgment, despite Mr Mathieson's strenuous submissions to the contrary, the
initial problems with the support structure letters would have been brought back into the forefront of the thinking of the lawyers and officials acting for the Crown.
The delayed transfer of the shares duly took place on or about 20 January 1988 but almost immediately there was further trouble with certain Japanese banks and another merchant bank, Southpack. In the end, the Japanese banks were placated by the Minister writing a simple letter expressing the opinion that, in the Crown's view, it was the beneficial owner of the NZS shares held by the trust because it had a mortgage over them. Counsel debated whether the view expressed in the opinion was sustainable and although Mr Ratner, who advised on it contended that it was, he nonetheless acknowledged that to some extent it was a matter of "perception" so far as the bankers were concerned.
March 1988
Throughout November/December 1987 and February/March 1988 there was speculation in the media and in the financial market. Also questions were asked in the House. The issue always came back to who was going to buy the NZS/EHL Parcel and why, and how would the purchase be financed. Interest was maintained in the topic because, as time went on, the gap between the value of the shares at settlement and the purchase price of $3.52 per share pursuant to BWL's Underwriting Agreement widened. Finally, as settlement loomed, the shares had dropped to less than $1 and there was no apparent reason why any party not already committed should enter into such an improvident transaction. All the Crown officials admitted during cross- examination that once the NZS shares were mortgaged as security for the guarantee of performance by BWL, as underwriter, Equiticorp on the face of it had a real interest in seeing the matter completed. Otherwise it stood to lose both the NZS shares and the NZS/EHL Parcel, which had been issued to pay for them. To a man, however, they said that although that followed logically it had not occurred to them as a reason why
EHL might be coming back into the picture. Mr Ratner admitted that, although he did not take a great deal of notice of media speculation and was unaware of the questions being asked in the House, he nonetheless did speculate informally with Messrs Andrew and Galt in particular, as to whether the Crown would get paid and, if it did, who would be coming up with the cash. It is against that background that the events from 11 March 1988 through to 23 March, by which later date settlement was completed, must be considered.
Unbeknown to Mr Ratner, Mr Andrew had been discussing the mechanics of settlement direct with one AJ Small, Investment Groups Manager of Equiticorp Industries Group Ltd. Mr Andrew had apparently agreed that, contrary to the provisions of the contract between the Crown and BWL signed on 19 October 1987, which required settlement by way of a bank cheque, that settlement could take place by way of assignment of bank deposits. Pursuant to that oral arrangement, Mr Small faxed a letter to Andrew on 11 March 1988 attaching a schedule of the deposits to be assigned. The original of the letter is Image Number 425021 which is to be found at page 104 of Volume II and a second copy, upon which Andrew's handwritten notes are typed is Image Number 930019 will be found on the following page of Volume II. Attached to the letter was the schedule which is Image Number 425022 to be found at page 106 of Volume II. It should be noted that as at 11 March AI4, the ultimate purchaser, had not yet been nominated by BWL nor had it accepted nomination. But Mr Andrew, apparently, had been informally advised that AI4 was to be nominated.
On 14 March, at 10.15am, Mr Andrew faxed the letter and schedule to Mr Ratner. Mr Ratner's evidence is that upon receiving it and reading it he was annoyed that Andrew had agreed to accept settlement in this way without consulting him. And when he looked at the schedule and saw EFS as one of the deposit holders he was concerned that that stood for Equiticorp Financial Services and his reaction was that that might raise a s 62 issue. He soon satisfied himself, however, that this was not a
concern by considering the issue of who really owned the deposit. Otherwise, his evidence under cross-examination (the Small letter and schedule were not mentioned by Ratner in chief), was that he was not alarmed by either the letter or the schedule and not alerted to the prospect that Equiticorp might be funding the purchase. He was then taken to the terms of the letter and the use of the pronouns "our" and "we" and more particularly to the third paragraph which reads:
"While we now have all the funds required for the settlement in place we are still ensuring our group liquidity position is as strong as possible to cover any possible withdrawal of short term funds leading up to the settlement date."
Mr Ratner was asked what he made of those portions of the letter when he read it. He began to answer on the basis of what he readily acknowledged was purely ex post facto reconstruction. But he said that that was the best he could do. At T/11068, line 10, he said:
"Sorry, any questions you ask me about this letter are ex post facto reconstructions. If you don't want me to indulge in those, then my answer is, I can't tell you anything about the letter, because I do not have an independent recollection of the letter. My focus was on the list of deposits."
Mr Ratner did acknowledge, however, that he would have read the letter. He was then asked to re-read it and to explain how looking at the letter now, the reference to "our group liquidity position" could mean anything other than a reference to the liquidity position of Equiticorp Industries Group Ltd. It will be noted that there is no mention in the letter of AI4. To that he suggested the group could have been the Richardson Camway Group but he agreed it was not mentioned anywhere. Then for two or three pages of cross-examination his theme was first, I don't recall how I interpreted the letter at the time. I didn't have any concern. He did say, however, "I know that I talked to Mr Andrew and although I have no recollection of what he said to me my
reconstruction is that he must have told me something that Small told him that allayed any concerns that I had". Mr Grieve, cross-examining, pressed him as to where he got the idea that there had been such a discussion with Small. He was asked whether it was something that someone else had suggested to him as an explanation and he replied at T/11073, line 22:
"No, but we've established that I talked to Doug, I see a letter from Small, I end up not having a concern -, that's the best I can do. I'm absolutely frank with you, Mr Grieve, I do not recall what he said to me."
He went on to say that the fact that the letter was on Equiticorp letterhead was not something that came to mind at the time. And then there is an important passage on T/11076, between lines 4 and 23, Mr Grieve still cross-examining:
"Would you accept that if the proper interpretation of this letter is that 'our group liquidity position' is a reference to EIGL's liquidity position, would you accept that on that basis there would be a potential section 62 concern raised?---I would say it's more clearly accurate to say if one went through the letter and read all the 'we's' as references to 'Equiticorp' and if one thought about it and understood the letter that way, then, yes, I can accept that there would be a section 62 problem alerted by the letter.
I suggest to you, particularly for you, it would have been raised again in those circumstances if you had looked at the letter like that because of the history of the matter, namely, that right at the beginning you had had a section 62 problem which you thought had been resolved?---No, I would say it would be entirely independent, but I think we are probably mincing words over nothing. I accept that had I read the letter in the way which you suggest now, that it would have raised an issue."
I do not accept Mr Ratner's evidence that the letter and schedule of 11 March 1988 (Image Numbers 425021/22) did not raise the issue of Equiticorp funding in his mind when he saw it on 14 March 1988. In view of my finding that he knew BWL had not agreed to the unwind and the way in which other s 62 concerns had cropped up plus the acknowledged anxiety as to who would fund in the changed circumstances, I find it inconceivable that presented with this letter on Equiticorp letterhead, signed by the
Group Manager of Equiticorp Investments, it did not trigger past events in his mind and cause him to face the probability that Equiticorp was involved in the funding of the purchase of the NZS/EHL Parcel. It strikes me also as being inherently improbable that a s 62 issue was raised in Mr Ratner's mind by the letters "EFS" tucked away in the middle of the schedule but the letterhead and signature and contents of the letter itself did not. It may be that having given the "need not inquire" advice Mr Ratner found himself in a cleft stick, but irrespective, I did not believe him on this issue.
During closing submissions Mr Mathieson, at paragraph 16.15 of his synopsis, submitted that Andrew did report the understanding he had gleaned from Small to Ratner. I questioned the accuracy of that submission and on the following day having reviewed the material, Mr Mathieson acknowledged that the evidence justified only a weaker proposition, namely, that there was a strong possibility that Andrew reported his understanding to Ratner. But that evidence was all in Ratner's cross-examination and neither Andrew nor Ratner in their statements of evidence had made express reference to the point. Finally, at T/12173, lines 5 to 10, Mr Mathieson said:
"So the upshot, Your Honour, is that the question whether Mr Andrew reported his understanding to Mr Ratner should be answered; it is possible that he did but there's no definite evidence that he did."
I agree that that accurately records the position but of course it provides no foundation upon which to conclude that Mr Ratner's assessment of Mr Small's letter and schedule of 11 March was influenced by anything Small may have said to Andrew.
As already mentioned, the Plaintiffs called Mr Gerrard, a senior London solicitor, as an expert. The Crown called Mr Magarey, a Brisbane practitioner with wide Australasian experience. The admissibility of the type of evidence adduced was confirmed on appeal in Attorney-General v Equiticorp Industries Group [1995] 2 NZLR 135.
Without doubt the advantage of listening to the views of these two highly experienced lawyers, and seeing them tested under cross-examination, helped in my overall appreciation of the complexity of the case. At the end of the day, however, as so often happens when expert evidence is called, my conclusions are based primarily if not almost exclusively upon my own perceptions, assessments and, particularly in this case, findings of fact.
Nevertheless, there is limited support from both experts for the conclusion expressed above regarding the March letter and schedule (Image Numbers 425021/22) and their effect upon the mind of Mr Ratner.
Having referred to the third paragraph of the letter ("group liquidity position") Mr Gerrard said at T/3328, line 20 to T/3329, line 3:
"Your Honour, if EHL had been acting as a mere conduit or coordinator of the bank deposits for the settlement, the liquidity of its own group could not have been affected, nor could any lack of liquidity on its part have impaired the ability of AI4 to complete the settlement, ... In my opinion, the paragraph to which I have referred was an additional indication of possible EHL involvement in the funding of a purchase that a solicitor in Ratner's position should not have ignored."
Mr Magarey was rather more equivocal. At T/11498, line 22 and on to line 4 on the following page, having been asked to consider the letter, the record reads:
"And I am suggesting to you that the terms of this letter in those circumstances ought to have raised alarm bells in Mr Ratner's mind and alerted him to the fact that Equiticorp was funding the acquisition of the NZS/EHL parcel of shares; what do you say about that?--- Well, I can see why you are asking me. There's nothing on the face of it that talks about EHL financing the shares. Indeed, in the large paragraph near the bottom, he talks about Allan, and I assume that to be a reference to Hawkins, in terms which suggest that it is he who is funding. I can see the point. You would have to form a view on that. I am very neutral on it."
And right at the end of the Plaintiffs' cross-examination, T/11500, line 17:
"I suggest to you that at a minimum this letter and the terms of it were sufficient to require Mr Ratner to make further enquiry?--- Well, I think on balance I would accept that."
A day or so later on 16 March, BWL gave formal notice, pursuant to the provisions of its agreement with the Crown, that it nominated AI4 to purchase the NZS/EHL Parcel. RWS, Auckland, as solicitors for AI4 immediately confirmed that AI4 accepted the nomination and there was then a flurry of activity while a Deed of Assignment of Deposits from AI4 to the Crown was prepared. Indeed, it seems that in anticipation of AI4's nomination consideration of the Deed had commenced on 15 October. The development of this Deed from first draft through to executed copy is conveniently collected in Exhibit D which is a folder presented by the Plaintiffs intituled "Sequence of Deeds of Assignment of Deposit". The first draft sent by RWS, Auckland (Harford) to Mr Ratner and Ms Shreves at Wellington was on 15 March and it contained on page 3 to be found under tab 1A in Exhibit D a recital reading as follows:
"E. Pursuant to a certain Deed bearing date the 19th October 1987 between BWL, EHL, RICHARDSON CAMWAY LIMITED a duly
incorporated company having its registered office at Auckland ("RCL") and ARARIMU HOLDINGS LIMITED a duly incorporated company having its registered office at Auckland ("AHL") (hereinafter called "the Sub-Underwriting Agreement") RCL and AHL covenanted with BWL to use their best endeavours to find a person or persons to purchase the EHL Shares from the Assignee as the nominee or nominees of BWL on or before the 20th March 1988 at the Clause 2 Purchase Price and the Clause 3 Purchase Price (as those terms are defined in the Underwriting Agreement)."
Returning that draft by fax with required amendments the following day, Mr Ratner struck out recital E adding the word "delete". I interpolate to say that when Mr Ratner was taken to Exhibit D and invited to consider the sequence of drafts he made it clear that he had no independent recollection of the preparation of this document but
confirmed the authenticity of the drafts and the sequence in which they had proceeded. He agreed that he had looked carefully at the first draft, in all probability following his usual practice of reading the whole thing through for a start to get the sense of it, and then going back and reading carefully. He was asked whether in respect of recital E he had noted the reference to the date (19 October 1987), that BWL and EHL were described simply by initials whereas RCL and AHL were given their full descriptions, but he replied at T/11086, lines 3 and 4, "I can't say that I would have particularly noted that fact". It was put to him that when he read recital E he must have appreciated that the four parties named were the original parties to the support arrangement and he said (T/11086, lines 16 and 17) "If I had given the matter any thought, yes, I would have known that". The record then continues:
"You did give this recital some thought, did you not? I gave it enough thought to see that it referred to an agreement to which we were not a party, nothing to do with us, so I crossed it out."
Mr Grieve then took the witness through other aspects of the recital which correspond with or relate to the earlier support arrangement and put it to Mr Ratner that, given his previous concerns and reaction to the original support arrangement, this recital must have again raised the whole issue of the support arrangement in his mind. To which Ratner replied at T/11087, line 24:
"I say it did not. You are suggesting I read it then with the care with which we are going over it now. I was trying to finalise an agreement. I looked at it, it was an agreement in which we had no interest. I simply crossed it out."
Pressed further on the matter he said that it did not occur to him to make inquiries. Finally, there was the following passage of evidence on T/11091, lines 7 to 29 which reads:
"Do you accept now, looking at it, that it is obvious that this is indeed a reference to the support arrangement that you thought had been unwound?---Knowing what I know now, yes.
Do you accept, from the text of the recital E, that if you looked at it carefully, accepting for a moment your view of it that you didn't, do you accept that it was there to be seen, that this was indeed a reference to that support arrangement?---Again, looking at it now, following the very point that you make, it is apparent from reading what it says, the effect of it in terms of an agreement that I know nothing about, that it only refers to that portion of the support arrangements which everybody would have expected to be there anyway, namely, Richardson Camway and Ararimu Holdings. So had I given it attention, which I did not, but had I, I would have seen facts stated there which I would have expected in any event to see and know about.
But it would have raised a query about Equiticorp's inclusion in the agreement, would it not?---If, and only if, I had sat there, carefully looked at the thing, looked at EHL, and then said, 'Um, wonder why they didn't describe the whole thing?' I accept that."
On its own, and in isolation, the inclusion of the original recital E might not have taken the Plaintiffs' case very far. But it came only a day or so after the time at which Mr Ratner saw the letter and schedule of 11 March in respect of which he admits the schedule raised a s 62 question in his mind and I have already held that the letter must have also. In those circumstances, I find myself unable to accept Ratner's evidence on the point. On the balance of probabilities, it must have aroused his suspicions and if it did not, it ought to have. Some three or four drafts later, however, another reference to an agreement between the four parties to the original support arrangements, dated 19 October 1987, re-appeared as recital G (Tab 4 of Exhibit D, page 3 or Image Number 431019), reading as follows:
"G. The Crown has agreed, at the request of the Assignor, to accept an assignment of certain deposits of moneys (hereinafter defined) in satisfaction of Clause 2 Purchase Price and Clause 3 Purchase Price (as those terms are defined in the agreement made between BWL, EHL, Richardson Camway Ltd and Ararimu Holdings Ltd and dated the 19th October 1987) as hereinafter provided."
Mr Ratner agreed that when that re-appeared he considered it and it seems from the evidence that was probably on 17 March, but decided to not insist on its deletion. So, that recital in that form was in the executed copy and when asked why that was so Mr Ratner replied, T/11095, line 17:
"Because I decided that having it in there was no disadvantage to the Crown and therefore there was no reason to take it out ..."
He went on to explain that he did not cross it out because it was in the execution document. It was put to him that that was no reason why it shouldn't be crossed out and he replied, T/11096:
"In putting something to the Crown, I felt that it would have. (That is it would have mattered if there was a crossing out.) If there was no good reason to have to take out, and my conclusion was that there was no good reason to take it out, because it didn't hurt anything, then I saw no reason to mess up the document."
As with the original recital E, in isolation, little if any significance can be placed upon the words towards the end of the recital G. Indeed, Mr Gerrard, having initially expressed the opinion that recital G should have put Ratner on notice, finally, at the end of his cross-examination, agreed to withdraw that criticism. But it also comes only two or three days after the 11 March letter and schedule had been considered and hard upon the heels of exhibit E and my conclusion is that it was enough, in all the circumstances, to renew inquiries as to exactly what was being referred to and the significance of it in terms of a potential breach of s 62.
Finally, right at end of proceedings, there was the actual day of settlement which physically took place in the boardroom of RWS, Wellington, where the Crown was represented by Ms Shreves. She described a rather hectic, even at times chaotic, afternoon because on settlement she was required to ensure that each deposit assigned
would be honoured in due course in favour of the Crown. An undertaking from each bank or institution had to be presented and checked. Mr Ratner accepted that it was possible that during the course of that settlement, the Crown received into its possession two documents identified as Image Numbers 430295 and 430010, both dated 16 March, one from RCL to BWL and the other from AHL to BWL, both directing BWL to nominate AI4 in terms of the Takeout Deed of 19 October 1987 which replaced the support structure letters. These two documents, which are to be found at pages 108 and 109 of Volume II, were discovered by the Crown. Both Mr Ratner and Ms Shreves say that they don't recall seeing or considering them and are unable to explain how they came to be on the Crown's file held at RWS, Wellington. But they were there and must have been provided to the Crown's legal advisers at some stage and as can be seen from the first paragraph of those letters the existence of a deed involving the four parties to the original support structure arrangements is clearly indicated. But, in view of the uncertainty as to how they came to be on the Crown file, and whether or not in particular Mr Ratner ever saw them, the safe course is to disregard them in terms of what he knew as the Crown's agent and whether that particular knowledge should be imputed to the Crown.
Conclusion
The end result is that I find as a fact that Mr Ratner did know that BWL had refused to unwind the original support structure and that the probability was that the settlement moneys, (save for Elders' $105 million), were coming from the Equiticorp Group in breach of s 62 of the Companies Act 1955. His failure to take action in those circumstances, judged objectively, was dishonest. He either closed his eyes to the obvious or recklessly and wilfully failed to make those inquiries which an honest and reasonable commercial person would have made.
2.4 What did Clatworthy know
Mr Clatworthy, both in 1987 and 1988 and at the time of trial, was a director of BWL. BWL had originally been a defendant sued by the Plaintiffs but was one of those who settled in September of 1994.
Mr Clatworthy declined to provide the Plaintiffs with a written statement but he did review a draft statement of certain other documentation that had been prepared by counsel advising BWL while it was still a party. He appeared on subpoena issued at the request of the Plaintiffs.
As already recorded, BWL in association with SM became part of the financial advisers and agency team for the Crown early in 1987. In or about early September 1987, Mr Clatworthy and another director, named Pryke, were primarily engaged in the sale of NZS. Then, in or about August of 1987, when Equiticorp became a potential bidder Hawkins also sought assistance from BWL. A Chinese wall was set up and with the Crown's approval two other directors, Messrs Cimino and McDowell, began to advise Equiticorp.
Mr Clatworthy was the only director or employee of BWL to be called by either side to give evidence.
As earlier mentioned, the first round of negotiations (when bids were invited from specified parties) finished May/June of 1987 and up to that stage Equiticorp was not seen as a viable purchaser. Thereafter, however, Mr Clatworthy kept in touch and because there were no other cash buyers in prospect the kind of deal that Equiticorp finally entered into, whereby it issued share capital to the value of the NZS shares held by the Government, began to look attractive.
The Crown was informed of this possibility in late August of 1987, after which it grew in favour so that by the time of a meeting on 15 September, attended by the two Ministers concerned and heads of departments, the Government, and particularly, the Minister of Finance and Mr Andrew of Treasury, strongly encouraged Mr Clatworthy to pursue the possibility. At that meeting it was indicated that in principle BWL would take up the role of underwriter to ensure that the Equiticorp shares acquired by the Crown in such a transaction could be sold on without too much delay. That BWL would have the support of EHL was also disclosed.
Once it became apparent that a deal along these lines could be done, matters moved rapidly. On 6 October Equiticorp formally made a bid for the Crown's ordinary shares in NZS and the following day amended it to include the preference shares as well.
The next step was for SM and BWL to formally report on the offer and they did that in a joint report which is Image Number 271034, which is to be found at page 17 of Volume II. The most significant part of the report is paragraph 4.2 commencing on page 4 and completing on page 5 under the heading "Buttle Wilson's Takeout Facility". It was explained that BWL, in conjunction with Equiticorp's offer, had undertaken to purchase all the Crown's Equiticorp shares should the offer be accepted before 20 August. The last two paragraphs of the section are significant. They read as follows:
"Having regard to Buttle Wilson's role as part of the Montagu's advisory team Buttle Wilson do not believe it to be appropriate for them to comment on the take-out facility other than for the fact that it's the type of facility commonly used in transactions of this nature.
Montagu have had discussions with Buttle Wilson in relation to the take-out facility and the performance guarantee and have been advised on a confidential basis of the nature of the performance guarantee. Montagu requests immediate discussions with the Crown's solicitors to discuss the nature of Buttle Wilson's take-out facility and related performance guarantees."
The report itself is signed by Mr Holyman for SM and Mr Clatworthy for BWL. At T/4800 and T/4801, when giving his evidence-in-chief, Mr Clatworthy discussed the preparation of the report. He said that whilst BWL insisted on the takeout arrangements being included they agreed that as it was a joint report it was appropriate for SM to discuss them independently with the Crown's legal advisers. But, of course, the substance of the takeout arrangements and the fact that EHL would be involved had already been disclosed at the earlier meeting on 15 September. Furthermore, Mr Clatworthy gave evidence to the effect that somewhere between 5 and 8 October more specific advice was given to the effect that the sub-underwriters, supporting BWL's underwrite, would be EHL and companies associated with Hawkins. This was done because Clatworthy took the view, which was apparently accepted by the officials and SM, that the Crown would need to know that there was a substantial sub- underwriter available. It was clear that BWL could not itself support a potential underwrite in the region of $300 million. But Equiticorp's value at that time was thought to be in the region of $2 billion, which was quite sufficient to provide the cover required.
When the amended offer came in on 7 October the offer itself was referred immediately to the Crown, Mr Clatworthy writing to Mr Chetwin, assistant secretary of the Treasury, Image Number 266104 which is to be found at page 15 of Volume II. That is the letter in which BWL draws attention to its undertaking to purchase the shares that would be acquired by the Crown if the offer was accepted and advised in the penultimate paragraph that it did not see a conflict of interest by assuming this new role. The letter further informs the Crown that BWL will be paid a fee by Equiticorp for providing the takeout facility. The final paragraph indicates that the evaluation of the offer is in hand and that evaluation was, of course, the report of 12 October referred to above.
It will be apparent that up to this point, namely, 12 October 1987, BWL has made it very clear to the Crown that it will be relying upon EHL to sub-underwrite its obligation to purchase the Crown's shares. It will be recalled that Mr Clatworthy was not one of those attending the meeting at Treasury on 13 October and it appears from his evidence that he was quite unaware that Mr Cimino had written the letter to Mr Ratner enclosing the support structure letters. Nor did he know that Mr Holyman proposed to deliver those letters to the Crown. So he was unaware that on 13 October Mr Ratner advised the Crown that there were real difficulties with EHL being involved as the last resort financier under the sub-underwrite arrangement with BWL. Odd as it may seem, Mr Clatworthy was adamant that nobody informed him that Mr Ratner had raised objection or that subsequently he insisted upon the support structure letters being unwound. He knew of Mr Familton's advice to BWL that any problem with s 62 was avoided because the financing would be in the ordinary course of business for EHL and he also knew that the Takeout Deed securing the sub-underwrite protection for BWL was under preparation and, indeed, that it was to be signed on 19 October. Although he was uncertain as to the details, he knew the execution took place and had the document in his possession shortly thereafter. Once everything had been signed up, Mr Clatworthy was not called on to any great extent by the Crown between that time and settlement in March of 1988. He remained throughout that time in ignorance of the fact that Mr Ratner had advised the Crown that the support structure had been unwound and he did not find out about the unwind letters until very much later when he was interviewed in connection with the criminal proceedings in which he was ultimately called as a witness.
Mr Clatworthy's evidence also was that despite the dramatic fall in the value of Equiticorp shares he remained unconcerned that the sub-underwrite, which depended upon Equiticorp funding, would hold up. His fellow directors of the company, Messrs Cimino and McDowell, were in touch with EHL and provided him with reassurances which he accepted.
In his capacity as a shareholder and director of BWL Mr Clatworthy actually became aware around about 21 December 1987 that an international financier to fund the buy- back had still not been found because, on that date, according to the arrangement between Equiticorp and BWL, BWL's fee for providing the takeout facility was increased because its exposure was to extend beyond the time originally anticipated.
On 26 January 1988, Equiticorp issued a New Zealand Stock Exchange announcement which is Image Number 380020 which is to be found at page 82 of Volume II, which indicated that there had been a change in arrangements; with the advice that the shares, when purchased back from the Crown, would be held by Elfic Nominees Ltd as a nominee holder, that company being a wholly-owned subsidiary of Elders Merchant Finance Ltd. Mr Clatworthy sent copies of that statement to Messrs Chetwin and Galt at the Treasury, and Messrs Pryke and Opiat at BWL, Wellington, and SM, Sydney, respectively. He expressed the hope that this announcement would "satisfy the news media and the Opposition, who have been continuously inquiring as to where the shares are going and who is funding them". That letter is Image Number 380014 which is to be found at page 81 of Volume II.
Finally, on the eve of settlement, as required by the Takeout Deed, Mr Clatworthy along with Mr Cimino, as directors of BWL, formally advised the Crown that AI4 was to be the purchaser. The nomination and AI4's agreement to fulfil that role all took place on 16 March and the nomination itself was triggered by letters from AHL and RCL (the originals of which were found, it will be recalled, among the Crown's discoverable documents) which are Image Numbers 430010 and 430295 which are to be found at pages 109 and 108 respectively of Volume II.
It appears that when BWL was required to nominate AI4 it did so without any further information or assurances to the effect that AI4 would be able to effect the purchase.
That, I found rather surprising since if AI4 defaulted BWL would still be obligated under its arrangements with the Crown. But Mr Clatworthy said that he had received assurances from Mr McDowell and he was reassured by the recent statement from Equiticorp; he had no qualms about AI4 performing.
The end result is that BWL, in its capacity as financial adviser to and agent of the Crown, knew from the inception that EHL would be a potential supplier of funds to purchase back the NZS/EHL Parcel from the Crown and specifically authorised SM to disclose the exact details of the arrangement to the Crown's solicitors by way of the discussions requested in the 12 October report. The fact that those arrangements were to remain in place was confirmed by Mr Clatworthy to Messrs Holyman, Opiat and Hicks of SM on 14 October 1987 in Sydney. Thereafter, BWL as the Crown's agent knew that the Takeout Deed between itself, RCL, AHL and EHL was being drawn up and was executed on 19 October, and continued to be aware of its existence right up until and after settlement in March 1988. I am satisfied that it never occurred to Mr Clatworthy to specifically advise the Crown of the execution of the Takeout Deed and its continued application because, having never been advised of the requirement for withdrawal letters, and knowing that his own firm had not agreed to an unwinding of the support arrangement, he imagined the Crown's knowledge of the role to be played by EHL was the same as his own.
2.5 What did Holyman know
After the Equiticorp offer of 7 October came to hand, Messrs Holyman and Clatworthy settled down to evaluate it and prepare their report of 12 October, the first page of which is Image Number 271034 which is to be found at page 17 of Volume II. The passages from paragraph 4.2 dealing with Buttle Wilson's takeout facility were quoted in paragraph 2.4 above. Of necessity there was a complete disclosure by Clatworthy to Holyman of the arrangements and the part which EHL would play as a financier of last
resort in the sub-underwrite arrangements. So Mr Holyman knew all about those arrangements by the time the report of 12 October was delivered. Indeed, as we know, on the morning of 13 October he delivered to Mr Ratner's office the support structure takeout letters which subsequently Ratner insisted should be withdrawn.
Mr Holyman is recorded as being present for part of the time at the meeting or meetings held at Treasury on 13 October and on the balance of probabilities he was present when Mr Ratner indicated that, in his view, the matter could not proceed on the basis envisaged. In his closing submissions, Mr Mathieson properly conceded that that finding could be made. So Mr Holyman knew from then on that there was a real question mark as to whether EHL could provide the ultimate backstop for BWL.
The next day, 14 October, saw Holyman together with Clatworthy, Andrew and Galt in Sydney to negotiate an increase in the price with Hawkins. As earlier recorded, an increase was agreed subject to certain conditions one of which was that the Crown was to accept the offer promptly and the deal was to be formally signed up not later than 20 October.
Although apparently available at the time of the hearing in Sydney Mr Holyman was not called by the Crown but certain documents under his hand became evidence as a result of being included by consent in the electronic document bank. Mr Clatworthy gave clear evidence of discussions that he had in Sydney with Holyman and other members of Samuel Montagu after it became apparent that the deal was about to be finalised. At T/4803, having given evidence of his disclosure of the takeout arrangements to Mr Holyman in connection with the 12 October report, Mr Clatworthy was then asked whether there were any other occasions when he discussed that information with Mr Holyman, and he said there were two others. At line 17 of the page mentioned he said:
"...One, which I remember quite clearly, was at the time that we were in Sydney to finalise pricing arrangements with Mr Hawkins, and that date was either around about the 13th or 14th.
Who was present on that occasion?---That would have been myself, Mr Holyman, Mr Opiat, and I believe there was, I think, Mr Hicks from Samuel Montagu.
What was said at that time?---As I recall, it was to see whether - I was enquired of, as to whether there were any changes in substance to what I had disclosed earlier to them, now that it looked as though - it looked as though formal documentation would now proceed.
What was your answer to that query?---That, as far as I was aware, there was no change to what I had informed them of the week earlier."
The next day, Mr Holyman further reported to the Crown saying in his report inter alia that BWL "had certain commitments in terms of the sub-underwrite" but that the Crown should, nonetheless, rely primarily upon the value of the EHL shares. So he knew, and so advised the Crown on 15 October, that the support structure was still in place so far as BWL was concerned.
The other occasion Clatworthy recalled after I had ruled that he could look at an interrogatory answer to refresh his memory, although in orthodox terms the interrogatory could not be regarded as a contemporaneous document. I allowed that evidence in de bene esse on or about 1 May 1995, and on 18 May I delivered Judgment 33 (now reported as Equiticorp Industries Group Ltd v R [1995] 3 NZLR 243) in which I ruled that the evidence would be received and my reasons for so doing. With his memory refreshed as a result of looking at the interrogatory Mr Clatworthy was able to say that he showed the now executed Takeout Deed between BWL, EHL, RCL and AHL to Mr Holyman. At T/4809, at line 21, he was asked:
"Do you remember the occasion on which this was done?---It would have been one or two days after 19 October.
Was there any reason for showing him the material, at that stage?---As I recall, they had requested the final documentation. As I referred to earlier, again as I recall, that the underwriting agreement and takeout deed had not been drafted ahead of 14 October.
Was the material shown to Mr Holyman, or made available to him. Can you remember?--- I believe that he purely read the document and did not request a copy for his own records."
It is clear, therefore, that Mr Holyman, of SM, knew of the takeout arrangements on 12 and 14 October and within one or two days of its execution on 19 October 1987 he perused the completed Deed.
2.6 What did Andrew know
Mr Andrew's academic qualifications and experience as a civil servant are impressive. He holds the degrees of Master of Commerce in Economics from Auckland University and Master of Public Affairs from Princetown University in New Jersey. He joined the Treasury in 1975 and has worked in a variety of areas including international economic policy, aid and monetary policy. In the 1978 to 1980 period he was seconded to the World Bank as assistant to the Australian Executive Director. When he returned to Treasury he worked on a number of energy intensive industry projects including the proposed extension of NZS. During the 1983-1984 period he was seconded to the Leader of the Opposition's office as an economic adviser. In that capacity he worked closely with the then Member of the Opposition, the Honourable Roger Douglas. He went back to Treasury following the election in 1984 of the fourth Labour Government where he worked on a number of State trading activities including New Zealand Rail, Air New Zealand and increasingly specialised in the development of the State owned enterprises policy. In his prepared statement Mr Andrew emphasises that NZS was by no means his major pre-occupation and that indeed he estimates only 5% of his working time was spent on it and his evidence is that there were a number of other major transactions that he was involved in. I take judicial notice of the fact that the period that we are concerned with was one of considerable economic and structural reform so far as State owned enterprises were concerned.
It happens that between 28 August 1987 and 12 October 1987 Mr Andrew was on leave and during his absence the NZS sale file was jointly looked after by Mr Galt, of Trade and Industry, and a Mr Judge in Treasury. Immediately upon his return from overseas, however, Mr Andrew again became the lead official responsible for the disposal of the Crown's NZS shares and he received a detailed briefing on what had occurred during his absence.
Mr Andrew's return co-incided with the action-packed week between 13 October and 19 October during which Equiticorp's offer was assessed, recommended, accepted and finalised in formal contractual documents. Over the same period the Agreement for the Crown's on sale to BWL or its nominee was concluded. Independently of the Crown, EHL's back up arrangement with BWL and potential purchasers of the Crown's NZS/EHL Parcel were also finalised.
As indicated in the preceding sections of this judgment there was an intensive conference or series of conferences held at Treasury on Tuesday, 13 October. At the head of the agenda was Equiticorp's offer to exchange shares and the allied offer of BWL to underwrite an on sale of those shares before the end of March 1988. There were, of course, a large number of matters to be discussed, among them the advice given by Mr Ratner, of RWS, that the support structure of which BWL had advised, offended s 62 of the Companies Act 1955 and that the Crown should not proceed with the deal so long as that structure was in place. As we shall see, Mr Andrew did not necessarily accept that advice when it was first given, but by the end of the day it appears that he had been persuaded that the support structure advised by BWL was a problem which would have to be resolved. Resolution of it was left in Mr Ratner's hands, but it was recognised as a result, that if the BWL arrangements were dismantled then BWL itself would not have the resources to meet its underwriting obligations if a buyer could not found. As a consequence the Crown, ultimately, would have to rely upon the value of the EHL shares as its security. Mr Andrew, however, was not only
au fait with but entirely in sympathy with the conclusion that had been reached by the Ministers of Finance and Trade & Industry, and accepted by Cabinet, that NZS should be sold. He was comfortable with the recommendation that in effect the Government would be better off as a minority shareholder in EHL than to remain exposed as the major shareholder in NZS.
Although Mr Andrew denied it, I am satisfied that sometime between 13 and 16 October and most probably on 13 October, he challenged Mr Ratner's view of the applicability of s 62 to the support structure which BWL favoured. I base my conclusion in that regard in part upon Mr Ratner's emphatic and detailed evidence to the effect that Mr Andrew put to him the views expressed by Messrs Darvell, Harford and Familton regarding s 62(1)(a). But more particularly because, in the Crown's answer to the Plaintiffs' interrogatory number 28.7(c) it was said of discussions about s 62(1)(a):
"Mr Ratner said it was his view the exception did not apply. Mr Andrew questioned this as he knew a contrary view was being expressed by Messrs Darvell, Harford and Familton."
Despite having that answer put in front of him and having his attention drawn to the fact that he himself had sworn the affidavit confirming that diligent inquiry had been made, Mr Andrew said he could not recall being consulted about the answer and he was emphatic at T/6829, lines 5 to 10, that he did not ever question Mr Ratner's view about s 62 on the basis of the views of Messrs Darvell, Harford and Familton.
Be that as it may, however, as is already indicated, in due course Mr Andrew accepted Mr Ratner's advice although he showed a tendency later in the week to play down its significance and the dangers faced by the Crown in relation to it.
By way of narrative only, I mention that on 14 October in company with Mr Galt and certain other advisers Mr Andrew journeyed to Sydney to negotiate with Mr Hawkins for an increase in the offer being made by Equiticorp. The negotiations were successful but Equiticorp insisted on the whole matter being formally documented and contractually binding within the week. The pressure, of course, was then on to prepare a recommendation to the Ministers and obtain their approval to accept the amended Equiticorp offer. Mr Andrew, who was primarily responsible for the drafting of the report, commenced the task apparently during the flight back to New Zealand on 15 October and, in all probability, by late evening on 16 October the report was available and presented to the Ministers. It went through several drafts before it was finalised. Other officials in Treasury, such as Mr Chetwin, the assistant secretary, and Mr Kwok, the assistant solicitor, contributed, and somewhat unusually, and according to Mr Ratner at his insistence, the draft was made available to him for his comments. In
2.3 of this judgment at pages 118 and 119, I have recorded how Mr Andrew first drafted the question of the resolution of the s 62 problem referring only to BWL giving an undertaking that the structure had been unwound and how that was amended by Mr Ratner to refer to negotiations with both BWL and Equiticorp's lawyers for suitable letters unwinding the earlier support structure letters. Mr Ratner's amended wording must have conveyed to Mr Andrew that by then suitable unwind letters had been negotiated and also that the time available was so short that BWL would not have had time to arrange substitute or alternative financing to back the underwrite. That point is specifically recognised in the Crown's answer to interrogatories administered by Elders, answer number 18.10 which reads:
"The Crown concluded that in order to meet the timetable for the sale of NZS, it was prepared to accept the risk of having to sell EHL shares on the market if BWL was unable to proceed. Therefore further underwriting was not required as the Crown had been told that arrangements could not be completed in the time available. BWL's 'requirements' were neither known nor of concern to the Crown."
Also another answer, number 36.7(c), given by the Crown to the Plaintiffs' interrogatories throws light on the possible tension between Mr Ratner and the officials concerning the extent to which the danger of a breach of s 62 should be recognised. That answer, which deals with that portion of the report to the Ministers of 16 October headed "Buttle Wilson Takeout Offer" reads:
"The substance of comments received were incorporated in the final draft which was sent to the Ministers dated 16 October 1987. The amendments to the letter reflected concerns that the letter to the Ministers correctly state the position. With respect to paragraph 12 (renumbered 15), Mr Ratner recalls a discussion that the Crown might want to go forward with the EHL commitment - the draft suggested a conservative approach by lawyers - 'absolute legality'. Mr Ratner said the proposal was not legal. The words in his handwriting are the compromise..."
The draft being referred to in that answer is Image Number 275184 which is to be found at page 40 of Volume II of this judgment. The final report is Image Number 275389 which is to be found at page 49 of Volume II.
On Monday, 19 October - the Ministers having accepted the officials' recommendation in the 16 October report - Mr Ratner certified that the unwind letters referred to in the report had arrived. Mr Andrew did not see the unwind letters (indeed, nor did any other official except, perhaps, Mr Kwok but even he did not see BWL's letter) but Mr Ratner's advice was accepted and so far as Mr Andrew knew at that stage the problem was solved. Furthermore, although Mr Andrew said he could not recall it when he was giving evidence, I am satisfied that about that time Mr Ratner advised the officials that now that the unwind letters had been provided the Crown need not inquire further as to what financial support BWL had arranged in substitution. Again, Mr Ratner was emphatic that he gave that advice. I place equal if not greater weight, however, upon Mr Galt's evidence (which I will discuss in detail in the next section) to the effect that he recalls specifically that that advice was firmly given. Of course, such
advice was in line with the general conclusion reached by Mr Ratner and Ms Shreves that as long as the Crown did not know about any illegal funding it would not be at risk.
Once the documents were signed on 19 October the s 62 problem so far as Mr Andrew was concerned appeared to have gone away but there was of course a steady decline in the value of the EHL shares after the sharemarket crash on 20 October. This was beginning to cause real concern to the officials who recognised that there were "risks of the support arrangement for the takeout collapsing" (see, filenote of Mr Galt Image Numbers 930141/143 of 9 December 1987 to be found at pages 68 and 71 of Volume
II) when Equiticorp requested a delay in the exchange of shares (ie, the settlement of the sale of the NZS shares to Equiticorp) from 22 December 1987 to 20 January 1988. The reason for this, as earlier recorded, was that Equiticorp was in danger of losing certain substantial funding facilities provided by Japanese banks to NZS if the Government ceased to be the majority shareholder. Time was required to negotiate renewals of, or find replacement, funding facilities. The advent of this development provided the Crown with an opportunity to improve the security of its position. The recommendation to the Minister of Finance in that regard is contained in Image Number 330056/7 which is to be found at page 72 of Volume II. As can be seen in paragraph two of that letter, attention is drawn to the fact that under the then current agreement the Crown was to transfer its shares several months ahead of the on sale to BWL and "with the fall in the price of Equiticorp shares this means higher exposure than was originally contemplated". Also in paragraph four of the letter it said:
"From the Crown's viewpoint, the proposal gives an additional option of, in the event of a problem with receiving the cash, retaining the New Zealand Steel shares. So the proposal can only be of benefit subject, of course, to detailed formulation of the proposal by the lawyers."
As discussed by me in Judgment 38, the matter was finally dealt with by way of the Supplemental Agreement, dated 21 December 1987, which is Image Numbers 341036
to 341039 inclusive to be found at pages 75 to 78 of Volume II. It provided for a guarantee of BWL's obligations pursuant to the Underwrite Agreement and a mortgage of the NZS shares to support it. The shares were to be held by Equiticorp International Ltd ("EIL") as trustee for a trust called the New Zealand Steel Unit Trust. The trustee was to give the guarantee and then mortgage the shares in support of it. Mr Ratner acknowledged in his evidence that the arrangement was a "device" to get round s 62 and it seems that both Mr Andrew and Mr Galt knew that such an arrangement was thought necessary to avoid breach of the section. So a s 62 problem re-emerged at about this time and was revisited again on 18 January when Mr Ratner advised Messrs Galt and Andrew that, contrary to the original arrangement, EIL would not be the trustee and would be replaced by another company, Shoeshine 70 Ltd, as trustee. The letter giving this advice is Image Number 369124/125 which is to be found at page 79 of Volume II. Within the second paragraph, 5 lines from the bottom of the first page and on to the second page there appears this sentence:
"We were advised by Equiticorp Holdings' solicitors that this change was made to preserve the independence of the trustee of that trust which would have been open to question on the basis that Equiticorp International Ltd is a wholly-owned subsidiary of Equiticorp Holdings Ltd. For that reason, the deed of guarantee and mortgage of shares will be executed by Shoeshine 70 Ltd rather than Equiticorp International Ltd."
In my judgment, the purported taking of extra security by way of the Supplemental Agreement and the variation of that agreement because EIL was so obviously a subsidiary of EHL was part of the knowledge that Mr Andrew had of the significance of s 62 and the need to be alert to the potential risks to the Crown's position in relation to it.
Although Mr Andrew, in company with the other officials, showed a healthy disregard for media speculation and an understandable scepticism in relation to questions asked in the House of Representatives, he was nonetheless aware as the March settlement
date approached of speculation and comment in both the financial markets and the House. It was promoted largely by the further dramatic fall in value of the EHL shares and the ever widening gap between the price at which the on sale BWL had underwritten was to be effected, and what the market was prepared to pay. Despite the additional security taken, the value of the EHL shares which had been relied upon back in October 1987 was massively eroded and the capacity to perform by BWL or its nominee, became an increasingly crucial consideration. Among the officials themselves, and Mr Ratner joined in this, there was speculation as to what was going to happen. Who was going to purchase? Where would the purchaser find financial backing in the circumstances? The question was "would the Crown get paid". On the other hand, it was known that there had been no approach by BWL to renegotiate the underwriting contract, far less to be released from it. So, comfort was taken from that and otherwise, as a result of Mr Ratner's "need not inquire" advice, the tendency was to turn a blind eye because it was not regarded as any of the Crown's business.
Somewhere about the middle of February 1988, Mr Andrew had been touch with a Mr Howard Small of EHL apparently inquiring as to what percentage of the total EHL shares on issue was represented by the NZS/EHL Parcel. The answer was 19.55% but Mr Andrew was unable to say why he had made that inquiry. It appears, however, that subsequent to that there were further discussions between Messrs Andrew and Small, and one or more of them concerned the settlement of the on sale by the Crown of its EHL shares to BWL or its nominee. Mr Andrew had no recollection or record of those discussions and Mr Small was not called by either side. On 11 March 1988, Mr Andrew received at Treasury a facsimile, which is a letter Image Number 425021 with a schedule of bank deposits attached, the schedule is Image Number 425022 and copies are to be found at pages 104 to 106 of Volume II.
The letter was on Equiticorp Holdings letterhead, marked 'strictly confidential' and was signed:
"Yours faithfully
EQUITICORP INDUSTRIES GROUP LTD ("EIGL")
H.J. Small
INVESTMENTS GROUP MANAGER".
Earlier in the year, on 25 January, there had been a Stock Exchange announcement by Equiticorp which suggested that Elfic Nominees Ltd, a nominee company of Elders Merchant Bank, was the financier so the reference to funding from Elders in the schedule was not unexpected. In other respects, however, Mr Andrew acknowledged that the letter raised s 62 concerns. In particular, the wording of the letter in first and third paragraphs and the reference to "EFS" under the fourth entry in the schedule.
Of this letter and schedule, Mr Andrew said, in his prepared statement of evidence in chief at paragraph 118:
"I do not recall any discussions with Mr Small before 11 March 1988 but there may have been some. When Mr Small wrote to The Treasury on 11 March 1988 [Image 427/163] advising that settlement with the Crown would be entirely by assignment of bank balance deposits, I was a little surprised at the mode of settlement. I do not recall now who agreed on this from the Crown's point of view. I am sure I would have talked to Mr Ratner about this but do not now recall. It is clear that after whatever discussion there was, the Crown did agree. The detail of the wording of the Deed of Assignment of Deposits was in any event entirely a matter for Mr Ratner to satisfy himself about. While I was surprised that Equiticorp was co-ordinating the final settlement, on the other hand I had not given any thought to the manner in which it would be completed."
And later at paragraph 122:
"I refer to Image 425/163. There are 4 cryptic notes in my handwriting in the lower right corner. Note 1 refers to the question of Equiticorp's letterhead as against AI4's. It is my recollection that I raised this question with Mr Small. I came away from that conversation with the understanding that Equiticorp was providing agency services to AI4 for the completion i.e. they were doing the book work."
Mr Andrew explained he had circled the letters "EFS" on the schedule and gave other significant evidence in paragraph 127:
"The reason I circled 'EFS' on the Schedule attached to Image 425/163 was because I did not know what it was. All the others were well known Australasian Banks. I certainly did not at any stage inquire from Mr Small where the finance for the purchase of Equiticorp shares was to come from nor did he at any stage volunteer such information." [Emphasis added]
Understandably those statements were challenged in cross-examination. Throughout the first three days of cross-examination Mr Andrew maintained that his telephone conversation with Mr Small, which is referred to in paragraph 122, allayed his concerns that Equiticorp was possibly involved in some capacity other than simply a facilitator. But towards the end of the day on 16 December, something different came out. I took the matter up with Mr Andrew when there was a break in the proceedings at T/7016, line 11:
"HIS HONOUR: Since we have interrupted, can I just ask you something, Mr Andrews. A little while ago the question was asked:
'So that section 62 was still an issue in your mind in March in connection with the settlement?---Well, it was that I had the Equiticorp letterhead. It did say to me, well, 'Ararimu versus Equiticorp?' 'What's Equiticorp doing providing here providing the cash, and talking about the final settlement?'
Now, why did you say 'What's Equiticorp doing here providing the cash'?---Sorry, the bit that was more accurate was the second, the last piece you read out, of them handling - suddenly Equiticorp popping up to handle the final settlement details, that's why my question arose.
My question to you is: why did you say 'What's Equiticorp doing here providing the cash, talking about the final settlement'?--- I was probably not accurate when I said that. The bit I was trying to convey was my recollection that I was concerned to see Equiticorp handling the arrangements and that's what I read this letter to be signalling to me.
Well, how did it come about that you said in your evidence only a few moments ago that when you saw that letterhead one of the things that it triggered in your mind is what was Equiticorp doing here providing the cash?---I misspoke, Your Honour. What I was
trying to say was that the question I had was about Equiticorp arranging the settlement. It was an inaccuracy on my part.
Well, I want to know, Mr Andrew, whether when you saw that letter that is on the screen now, one of the things that went through your mind was, why is Equiticorp providing the cash?--- No, Your Honour, that's not a recollection I have. The question I recall having is, I was surprised to see Equiticorp coming in and arranging the final stage of the settlement. I was inaccurate in what I said. You know, when you are trying to answer a question, words don't always come out 100 per cent what you are meaning to say."
Cross-examining counsel returned to the matter when the case resumed the following Monday, 19 June. It was then established that the letter, although received by facsimile 4.33pm on 11 March by Mr Andrew, was not sent to Mr Ratner until 10.15am on 14 March, but he insisted that although s 62 concerns had been raised by the letter they were allayed as a result of the discussion he had with Mr Small. He acknowledged that the references to "we" and "our" in the first paragraph and the third paragraph reading:
"While we now have all the funds required for the settlement in place, we are still ensuring our group liquidity position is as strong as possible to cover any possible withdrawal of short term funds leading up to settlement date."
plainly referred to Equiticorp. Mr Andrew insisted that he did not read the letter as indicating that EHL was providing the funds for the purchase.
Mr Andrew was then taken to the record of the criminal trial in June of 1992 when he gave evidence. He was referred specifically to the words "our group liquidity position" in the third paragraph of the letter from Small and then at T/7036, line 17 the record reads:
"When you were asked about this in the criminal trial, in answer to the question, 'what that means to anyone reading the letter is that the funds are coming from Equiticorp surely?' You said, 'Yes'. Do you remember saying that?--- No, I do not remember saying that.
And when it was put to you, 'there is no need to refer to the liquidity position otherwise, is there?' You said, 'I am not a banking specialist, but probably not'. Do you remember saying that?--- No, I don't.
Do you dispute saying those things in the criminal trial?--- I just don't have a recollection of saying those words. I am a bit surprised by them."
And on the following page at lines 7 to 9 he said of the answer that he had given:
"I am not comfortable with that answer. It doesn't - it is not with - when I read this now, it is not the way I would react."
Mr Grieve cross-examining put the record, which was subsequently proved and became Exhibit EAL 6, to the witness and while Mr Andrew was not prepared to dispute the record he said he was just not happy with the answer. Counsel persisted and on T/7041 commencing at line 17 the record reads:
"If you gave that evidence, plainly it was an acceptance by you then that the third paragraph of the 11 March letter meant that the funds were coming from Equiticorp. That's what your acknowledgment in the criminal trial means, if you gave it, doesn't it?--- I certainly acknowledge that there was no reason to refer to the liquidity position otherwise.
And that what that sentence in the third paragraph meant to anyone reading the letter was that the funds are coming from Equiticorp?--
- That's not how I read that paragraph.
No. Listen to the question, please. What I put to you, was that your answer in the criminal trial?--- Uh huh.
Was that what the third paragraph meant to anyone reading the letter, was that the funds were coming from Equiticorp, a proposition to which you assented; correct? --- Yes, in that transcript I did, sir.
Yes, you did, didn't you? --- Yes.
Looking at it now, on what basis, just in terms of the letter, is your understanding different?--- Well, I believe it is just consistent with Equiticorp acting as an agent for Ararimu.
HIS HONOUR: Do you give that answer on the basis of what's written there in the third paragraph, or on the basis of what's written there and a conversation you had with Mr Small?--- It has to be on very much the former, Your Honour, because I only have a general impression of the conversation with Small on this whole letter, so just on the basis of my reading of this letter." [Emphasis added]
Counsel tried again, but at the bottom of T/7042 Mr Andrew insisted that the third paragraph in the letter "is absolutely consistent with them [Equiticorp] just operating as an agency role".
Later on the same day at T/7058, Mr Grieve took Mr Andrew to his depositions for the criminal trial which were taken on 28 November 1991. These were also duly proved and came into the record as Exhibit EAL 5. Cross-examination by Mr Craddock QC at the deposition hearing commenced on page 59 and in the trial before me at T/7058, line 3, the cross-examination by Mr Craddock at page 65 of the depositions was drawn to Mr Andrew's attention:
"And then Mr Craddock at the top of the next page drew your attention to the third paragraph of the letter and he said, 'You are being told again on Equiticorp letterhead, while we now have all the funds required for the settlement in place we are still ensuring our group liquidity position is as strong as possible'. And the proposition was then put to you, 'What that means to anybody who reads it, is it not, Equiticorp has got the funding, we're still going to ensure our group position is strong, is that not right?' And you answered, 'I certainly read it that way, yes'. Does that correctly record the answer you gave at depositions?--- I have certainly got no basis to contest it, sir.
Right. So looking at that now, do you accept that then, that is - and I should be careful here - in March 1988, when you received the letter, you read it as meaning that Equiticorp has got the funding and that they were going to ensure that their group position was strong?--- Well, I go on to say that this gets back to the agency role.
I'm coming to that?--- But I accept that this seems to be the way I answered. I have signed it, I have to --
No, please listen carefully to the question. I know it is a little complicated and I know you have been here a long time, but the question was directed to your state of mind back at the time that you received the letter. Did you read the letter then, in March 1988, to mean that Equiticorp has got the funding and that they were still going to ensure that their group position was strong?--- I have no recollection of my state of mind in March 1988 in respect of the point, the question you are raising.
Mr Craddock went on to say, 'I suggest to you it was as plain as could possibly be said, that the funds were coming from Equiticorp, the
first part. Was it not plain to that extent?' And you said, 'Yes, although as I said this morning, I discussed the position of Equiticorp versus the principal to the transaction with Mr Small'. Do you accept that that accurately records your answer?--- It appears to be, sir.
Well, I am sorry to persist, Mr Andrew, but I don't accept 'it appears to be' as being the answer. Looking at it now, do you accept that that transcript correctly records your answer, yes or no?--- I have to accept that, yes.
Mr Craddock then went on and said, 'That's not my point' and it appears that you then said, 'I got assured that Equiticorp was acting as the agent. Someone has to have organised the funds. Equiticorp was acting as the agent'. Do you accept that that correctly records what you said?--- Yes.
Mr Craddock then obviously taking issue with what you said, asked you about whether you had a number of degrees from a university and you agreed to that, didn't you?--- Yes.
And then he put it to you, 'Nobody could write we have all the funds required for settlement in place, we are still required. Our group liquidity position is strong unless they were providing the funds'. Do you remember him asking you that?--- No, I don't, sir.
The answer that you gave is recorded as being, 'That's true, it's a question of whose funds they were'. Does that correctly record your answer?--- Yes, I would accept that it would.
Then he put it to you, 'But the group liquidity position would only be affected if it was the group's funds' and you answered, 'It was operating as a bank so the decisions of depositors and other debtors with claims upon the institution could make a lot of difference'.
MR MATHIESON: The word 'debtors' has been crossed out and the word 'creditors' has been popped in there.
MR GRIEVE: 'It was operating as a bank so the decisions of depositors and other creditors with claims upon the institution could make a lot of difference'; does that correctly record your answer?--- Yes.
Mr Craddock went on to say, 'That's the very point I'm putting to you. It's because of those claims on Equiticorp, it's liquidity position could be affected, is it not?' And you said, 'Yes, quite possibly'. Do you remember that?--- No, I don't remember it.
Does that correctly record your answer?--- Yes.
Having regard to that material, the answers that you gave in the deposition hearing and the material that I put to you before the morning adjournment, I suggest to you that back in March 1988 you then read this letter as indicating that the funds were in fact coming from Equiticorp; what do you say to that?--- I have no recollection of reading the letter in that manner, sir.
Having regard to the material you have had put to you about what you said earlier on oath, do you really now dispute that that is how you looked at the letter back in March 1988?--- I just don't have information in my head which allows me to take - to respond to
that. I just don't have a recollection of how I viewed that letter at that time on that particular detail. [Emphasis added]
So do I understand you correctly to say that you have no basis for disputing that that is how you read the letter at the time, simply you have no recollection, so you can't answer one way or the other. Is that the position?--- I have no recollection beyond what I said in my evidence, on ascertaining that Equiticorp's role was acting as an agent in the transaction."
Finally, at the end of the cross-examination by Mr Grieve it was put to Mr Andrew that his statement in this Court (which he said was a mistake) that upon reading the letter of 11 March (Image Number 425021) the question that came into his mind was "what is Equiticorp doing providing the cash" was substantially the same as what he had said in the criminal trial. At T/7095 and on to T/7096, commencing at line 2, the record reads:
"You see, when you said on Friday that what came into your mind when reading the letter, was 'What is Equiticorp doing providing the cash' and when you compare that to your evidence in the criminal trial, 'What that means to anyone reading the letter is that the funds are coming from Equiticorp surely?' and your answer is 'Yes'. That evidence is, in substance, the same, isn't it?--- But I have tried to say that in both cases my understanding as I went on to talk about the agency role, and in terms of His Honour's questioning of me on Friday, it didn't come out the way I was - it wasn't expressing the thoughts and the information I had. The question about Equiticorp was in terms of organising the transaction and hence then the critical agency role that was the centre of my understanding of the issue.
So are you saying that when you gave evidence in the criminal trial there was just this little slip of the tongue, like you say there was a slip of the tongue on Friday afternoon; is that how you want to put it?--
- Well, I am certainly not perfect in the way of words I tried to express of information sitting in my head at any one time, but if - I think if you read the criminal and the depositions pieces together or in totality, they do strongly emphasise that point about the agency role, sir. I'm aware that I am under oath in all of those hearings and in this hearing, but you know, all I can say is I do make mistakes. I don't express myself consistently as well as I would like to do so. This is a very pressured environment and mistakes do creep in. I regret that."
But Mr Andrew, nonetheless was adamant that he totally rejected the suggestion that he had read the letter in the way cross-examining counsel was putting to him saying lower down on T/7096 at line 24:
"I reject it totally. If that had been the case, the transaction would not have proceeded. I was aware of the funds coming from Ararimu Investments who had been nominated by Buttle Wilson. That's where the funds were coming from, as I understood it."
I am obliged to say that I did not believe Mr Andrew when he protested that his statement "What is Equiticorp doing providing the cash" made late on Friday afternoon, 16 June, was a mistake. Nor do I accept his suggested inability to express himself clearly - he is far too intelligent and experienced for that. On the contrary, I consider that what occurred, (as submitted by Mr Grieve in closing), was a classic example of a witness refusing to acknowledge the truth and then dropping his guard and blurting it out.
I was confirmed in that view when, on the following Monday, Mr Andrew's acknowledgments to the same effect in the criminal trial in 1992 and at depositions in 1991, were proved and put to him and he vainly attempted to resile from them.
The letter of 11 March 1988 (Image Number 425021) in my judgment, while obviously not saying expressly that Equiticorp was funding the purchase of its own shares from the Crown, raised such a probability that that was the case, that specific inquiry as to where the funds were coming from could not be avoided. Mr Mathieson's determined submissions to the contrary - the continuing effect of the unwind letters: the alternative inferences to be drawn from the references to Hawkins and Ararimu in the third paragraph: the Small conversation - notwithstanding.
Furthermore, all the other Crown officials acknowledged that the letter is at least open to the meaning the Plaintiffs place upon it. Mr Chetwin as we shall see being particularly candid in that regard.
I should, perhaps, record in passing that the evidence of Mr Small's conversation with Mr Andrew (not recorded anywhere and not recalled with any precision) was of course not proof of the true position. Indeed, the impression given was demonstrably false. It was, of course, received only as relevant to Mr Andrew's knowledge or belief at the time.
I also avert to the Crown's argument that the rule in Jones v Dunkell [1959] HCA 8; (1959) 101 CLR 298 applies in this case because the Plaintiffs did not see fit to call Mr Small and the Court should therefore infer that nothing he could have said would have advanced the Plaintiffs' case. In the event, however, that proposition is of limited or no significance in view of the Plaintiffs' concession that "the evidence establishes that Small told Andrew 'that Equiticorp was providing agency services to AI4'." (Plaintiffs' Closing Section No 38, page 152, Volume 2). The Plaintiffs also conceded that Equiticorp did manage the settlement on behalf of AI4 and that as at 11 March all the deposits (apart from the moneys to be drawn down from Elders) were in place in AI4's name. But, of course, the issue in this case is not where, and in whose name the funds were held on 11 March but, rather, from what source those funds were derived.
Finally, I mention the issue of recital G in the early drafts of the Deed of Assignment of Deposits. The evidence showed that Mr Andrew had seen one of those early drafts and had actually underlined in red ballpoint a portion of three lines of recital G immediately above the reference to the agreement having been made between BWL, EHL, RCL and AHL on 19 October 1987. The original of the draft so underlined was produced and is exhibit EAL 8. Mr Andrew acknowledged that in answer to the Plaintiffs' interrogatory 95.5(a) he said that he did not recall seeing recital G. He acknowledged that that
answer was wrong and he described it as "sloppy" work. On its own this issue of whether or not Mr Andrew saw recital G and realised the significance of it would not be of sufficient weight to advance the Plaintiffs case. Along with all the other unsatisfactory aspects of the witness's evidence, however, it adds something, but not a lot.
My conclusion then is that Mr Andrew did know as a result of receiving the letter and schedule of 11 March 1988 that the probability was that Equiticorp in some way was funding the purchase of its shares from the Crown by AI4 and as a consequence a specific inquiry as to the source of the funds could not be avoided. That amounted to a wilful shutting of the eyes or a reckless failure to make such inquiries as an honest and reasonable party would have made.
2.7 What did Galt know
Mr Galt was, of course, an official in the Department of Trade and Industry. That Department was involved in the disposal of the Crown's shareholding in NZS because the Minister of Trade and Industry held the shares on behalf of the Crown.
Nonetheless, as Mr Galt acknowledged in paragraph 7 of his prepared statement, "Treasury generally was the lead department in advising the Ministers on the sale". This was primarily because Treasury was involved in the "financial implications of the project". As earlier indicated, both Treasury and the Department of Trade and Industry were satisfied that the Crown should quit its shareholding and involvement in New Zealand Steel because of the vast amounts already spent on the project and the absence of any prospect of an economic return on that capital.
Because Treasury was the lead department, Mr Andrew of that Department was the official to whom most matters were referred in the first instance and with whom
Mr Ratner tended to have his direct dealings. Furthermore, the sale of the Crown's NZS shares to EHL in return for a parcel of EHL shares was initially straightforward. It was the on sale of the Crown's NZS/EHL parcel of shares to BWL or its nominee that became the problem area, and it was the on sale that was to produce the cash and that led to Treasury having the primary involvement.
Mr Ratner, as a matter of form, tended to advise both Ministers jointly in writing, but Mr Galt was often not informed of day to day developments. For example, in respect of the crucial 11 March 1988 letter from Small with the schedule of bank deposits attached, Mr Galt never saw it and was never advised of its existence. As we shall see in due course, he only had a vague idea as to how payment for the NZS/EHL parcel of shares was effected.
So far as matters up to 20 October 1987 were concerned, therefore, Mr Galt, having become aware of the s 62 problem associated with the original support structure wherein Equiticorp was the financier of last resort, accepted Mr Ratner's advice that the problem had been solved. So at that stage, as Mr Galt said in his prepared statement at paragraphs 51 and 52:
"51. The real risk as I saw it was that the Crown would be left with Equiticorp shares, but having said so, that was not such a risk because Equiticorp was seen at the time to be sound.
52. Being left with Equiticorp shares was still a better proposition, I thought, than having to inject further millions into NZS."
And in the last sentence or two of the following paragraph, 53, Mr Galt said:
"At the time [that is at or about 20 October 1987] I expected the deal to be reformulated in a way that did not breach section 62. I took the view that the financing was Equiticorp's business, and I expected that they would remove the section 62 problem as I believed the deal could stand on its own, and therefore should have been 'bankable' with other financial institutions."
The reference to the "financing" being "Equiticorp's business" is significant and remained pretty much Mr Galt's mind set throughout. Additionally, he was unequivocal in his evidence that Mr Ratner had been "pretty firm" in his advice that once the unwind letters came in there was no need for the officials to further inquire. He described that as a piece of advice that had "remained in his mind throughout the years" and my assessment is that as the matter progressed it played a significant part in the way he viewed developments.
It was not long, of course, before those developments began to materialise. The crash occurred simultaneously with the signing of the documents. Although there was initial optimism that it would be short-lived, by December 1987 it was realised that share prices generally, and EHL share prices in particular, were not going to recover in the near future. In his evidence in chief, Mr Galt said, in paragraph 67:
"67. I became concerned in December, as by then the market had clearly taken a large fall, which appeared likely to be sustained for a considerable period. I discussed with Mr Andrew the possibility of the Crown taking further steps to protect itself. I could see that with the Equiticorp share price falling, Mr Hawkins and/or any other purchasers might have more difficulty in funding the purchase of the shares than might have been expected prior to the fall in the sharemarket price. "
As a consequence of those concerns Mr Galt telephoned Mr Clatworthy, on 9 December 1987 and a record of his conversation is Image Numbers 930141 and 930143 to be found at pages 68 and 69 of Volume II. Also within that image is a record of a follow-up conversation with Mr Andrew in which Galt learned for the first time that Equiticorp had made an approach to the Minister of Finance for a delay in the settlement of the transfer of the shares from 20 December 1987 to 20 January 1988.
This approach by Equiticorp provided the Crown with an opportunity to improve its security position. The evidence shows clearly that immediately Mr Galt was anxious to capitalise on the position. What Mr Galt wanted to do was to tie the hand over of the New Zealand Steel shares to Equiticorp, to the payment of cash that the Crown had contracted to receive from BWL or its nominee. Mr Andrew was not quite so enthusiastic initially because the last thing he wanted was for the Crown to end up once again holding NZS shares with all the attendant potential costs involved. I interpolate to explain that all the officials agreed that although the Crown had no binding legal obligation to continue to prop NZS up, nonetheless, politically it was not a viable option for the Crown simply to allow the project to collapse leaving large claims by both domestic and international creditors unpaid.
It is important also to appreciate that in the wake of the sharemarket crash, because legislative authority was required to enable the Minister of Trade and Industry to hold the Equiticorp shares pending the on sale in March, the matter not only came before the House but also was the subject of regular comment in the media especially those publications dealing with business and financial matters.
Some passages from Mr Galt's cross-examination illustrate the thinking and anxieties that prevailed. At T/7750, between lines 21 and 27, Mr Farmer cross-examining:
"... it was in your mind by early December, wasn't it, that, given Buttle Wilson's lack of substance, the Crown - relative lack of substance - the Crown was heading for a massive loss on its Equiticorp shares unless Buttle Wilson had in place some satisfactory support arrangements that would guarantee $327 million in cash to the Crown in March?--- That's certainly right."
A bit later on T/7755 between lines 26 and 30:
"... but the fall in the share price certainly suggested to me that there was a real risk that Buttle Wilson, or someone associated with that, anyway,
might try to pull out. The Crown could be stuck, as we had always thought, with Equiticorp shares, and I could see somebody being called to account for that, including me."
I remember the above evidence being given quite vividly because the comment that he might be personally called to account was made by Mr Galt with some feeling. Later on T/7758, between lines 12 and 25, he said:
"It was the concern that we might be left having to explain, I guess, to the public and to Ministers how we had ended up with some low value Equiticorp shares in return for a very substantial steel mill, even though we considered that steel mill to involve some problems and risks with it. That would have been a concern.
So what you wanted to do, when you sought that mortgage of New Zealand Steel shares from Equiticorp, was to provide a direct link between Equiticorp's New Zealand Steel asset and Buttle Wilson's contractual obligation to the Crown to find $327 million?--- Well, that's certainly right. We wanted to get cash for the Government shares."
While these negotiations were going on, Mr Galt reported to his Minister by letter on 18 December 1987, Image Number 338010 to be found at page 74 of Volume II. In the second paragraph of that letter Mr Galt said in the first sentence:
"At this stage, we are still negotiating with Equiticorp to have the company provide the Crown with some additional security to cover the unlikely event of Buttle Wilson defaulting on its obligation under the take- out agreement to provide cash to the Crown."
Looking at the matter with hindsight, when being cross-examined, Mr Galt was able to see that what he had said in that letter would involve Equiticorp breaching s 62 by providing financial support in connection with the purchase of its own shares by Buttle Wilson. At the time, however, he was drawn into the negotiations between Mr Ratner on the one hand and Mr Darvell, from RWS, Auckland, on the other, whereby to circumvent the provisions of s 62, it was proposed that the shares should be placed in a trust and that the trustee (EIL) would guarantee BWL's performance and mortgage the
NZS shares to support the guarantee. He tended to see that as appropriate because of his view that at the end of the day it was Equiticorp's business to see that the Crown got paid. Mr Farmer took him through the various steps in considerable detail and then secured his agreement to a summary of them, at the end of which, he endeavoured to, as he put it, "boil it down further" at T/7771, between lines 2 and 25:
"You are happy with those answers?--- Yes, I'm happy with those.
I want to suggest to you, trying to boil it down further, it would be a reasonable summary to say that you took the view that the financing of the sale of shares, looking at the transaction as a whole - I will put those words in- that the financing of the sale of shares, which was part of the transaction as a whole so as to generate cash to the Crown, was Equiticorp's business or something at least that it had an interest in doing?--- Yes, well, the Crown was also interested in getting cash for its New Zealand steel shares, to make the whole thing work, so Equiticorp would have to be aware of that and interested in seeing that the Crown was satisfied with the total thing.
But try and restrict yourself, if you can, to my proposition, Mr Galt: That you took the view, looking at the transaction as a whole - I would like you to answer 'yes' or 'no', if you can - looking at the transaction as a whole, you took the view that the financing of the sale of the shares so as to generate cash to the Crown, which was part of the transaction as a whole, was Equiticorp's business, or something that it, at any rate, had a real interest in, in achieving?--- Yes.
Is that a fair summary?--- Yes, I think it is."
And still further, at the top of T/7772, the record reads, lines 1 to 5:
"So that, in short, consistently with that and with Mr Ratner's advice that you needn't enquire further, you elected not to enquire thereafter into what the support arrangements were and what the financing was that might be involved in them?--- Well, that's certainly right."
Under cross-examination, Mr Galt frankly acknowledged that a s 62 problem seemed to have been re-introduced by the mortgage of the NZS shares and that once that mortgage was in place there was a significant incentive for Equiticorp to see that BWL did perform, otherwise it stood to lose the NZS shares.
At T/7783, lines 16 to 25, the question of the incentive was addressed:
"And they were brought back into the picture in a way which gave them, that is to say Equiticorp, a very real incentive to make sure that the Crown got cash in March in the sum of $327 million, because if they didn't then they might lose New Zealand Steel altogether; isn't that right?--- Yes, I think they certainly would have been given an incentive to that effect.
And the incentive, in the legal form that it finally took, was in the form of a mortgage over New Zealand Steel shares against the contingency of the Crown receiving $327 million, wasn't it?--- Yes."
But he then qualified that answer somewhat and Mr Farmer came back to it again on T/7786, between lines 19 and 30, where the record reads:
"Look, Mr Galt, it is really quite simple: once the mortgage was in place, if Buttle Wilson defaulted to the Crown, Equiticorp had to find the cash if it wasn't going to lose New Zealand Steel; isn't that absolutely right?--- Well, yes, if Buttle Wilson defaulted.
And the whole point of the mortgage was to cover the contingency of Buttle Wilson defaulting, wasn't it? Otherwise why else have a mortgage?--- Well, yes, that's right; that's the point of the mortgage. I guess that while Equiticorp certainly had all those incentives to come up with the cash, though, I don't think it necessarily follows from that that they would actually do it."
Other passages in the cross-examination satisfied me that Mr Galt did not necessarily fully understand the s 62 implications of the trust holding the shares, guaranteeing BWL's performance and mortgaging the shares to support. I also accept his evidence to the effect that, while Mr Ratner had been very insistent about the unwind letters back in October 1987, the form of the extra security and the way it was dealt with towards the end of December 1987 was not emphasised as a matter of complexity or great importance. At T/7793, lines 7 through to 31 the record gives the flavour of the way Mr Galt saw it:
"But, you see, on 19 October section 62 had disappeared as a problem because Equiticorp had disappeared from the financing or the provision or the purchasing of the Equiticorp shares from the Crown, hadn't it?--- Indeed.
Here we have now - what is being contemplated here, as you have agreed, is Equiticorp coming back into the picture and playing some kind of role in the purchasing or financing of the Equiticorp shares from the Crown. We had them coming back into the picture, didn't we?-
-- Yes, that is apparently what was happening.
It is obvious and that's why you would have discussed it with Mr Ratner, that section 62 comes back in, doesn't it, as well as Equiticorp? As Equiticorp walks in the door in respect of the sale of the Crown shares so, too, does section 62, doesn't it?--- Well, presumably.
And so Mr Ratner was faced yet again with this problem: How do we get around section 62 - the problem he had way back on 13 October?--
- Yes. I think there is a difference. Whereas it was seen as a very real problem back then, I don't think there was any suggestion that there was anything particularly difficult about this. I think he simply made a, you know, recommendation of the appropriate way to proceed here and I don't think there was any lengthy discussion or suggestion that there was very much of a problem here."
Security, having been put in place by the Supplemental Agreement of 20 December 1987, Mr Galt acknowledged that he was "somewhat pleased and relieved" that the Crown had secured this advantage. The matter, however, surfaced again towards the end of January 1988 when, as we have already seen, Equiticorp decided that to "preserve the independence of the trustee" it was inappropriate for EIL, a wholly- owned subsidiary, to be the trustee and Shoeshine 70 Ltd was substituted. The advice of Mr Ratner to the Ministers, for the attention of Messrs Galt and Andrew, is set out in Image Number 369124 which is to be found at page 79 of Volume II.
At T/7836 of the record Mr Farmer took Mr Galt through the position as it existed at around about 20 January 1988 and that page is set out hereunder:
"You would agree though, wouldn't you, that, whether they broke the law or not, if Buttle Wilson didn't have watertight support arrangements in place, it was all going to come back onto Equiticorp's plate, wasn't it, if it didn't want to lose New Zealand Steel?--- Well, I think it could well come back to haunt Equiticorp.
And looking at a $200 million plus deficit, there were no new independent financiers who were going to come to Buttle Wilson's rescue, were there? That's pretty obvious, wasn't it?--- I think it is probably unlikely that there would be someone else coming in to make up a
$200 million deficit, that's certainly right.
So it was pretty obvious also, wasn't it, that if Buttle Wilson didn't have watertight arrangements in place there were only two choices for Equiticorp: One was lose New Zealand Steel, and the other was provide the funding itself, in breach of section 62?--- Well, that could well be the main choice for Equiticorp.
And that was obvious at the time, wasn't it, at least if you had thought about it?--- Well, I think that was probably the way it would work out, yes, at the time.
And you didn't, though, think about it, did you, because, apart from anything else, Mr Ratner had earlier told you, these were not matters that you need enquire into, first; and, secondly, by this time the position taken by Crown officials was that this was Equiticorp's and Buttle Wilson's business, as to how the cash was to be generated on 20 March?--- If we are talking about this as of around 20 January, I think it is more the latter point that you referred to than the former, ..."
Towards the end of January 1988, along with other officials, Mr Galt received Image Number 380014 (a letter from Mr Clatworthy), with Image Number 380020 (a Stock Exchange announcement issued by Equiticorp) attached, containing further information and now advising that the NZS/EHL parcel of shares would be held by Elfic Nominees Limited and the purchaser would by AR Hawkins and companies associated with him. Those documents are to be found at pages 81 and 82 of Volume II and, in particular, Mr Clatworthy's letter expresses the hope that this announcement "will satisfy the news media and the Opposition, who have been continually inquiring as to where these shares are going and as to who is funding them". Mr Galt acknowledged that those questions were being asked and, indeed, it seems that he again considered those issues in some detail when he read an article published in The National Business Review which is to be found under Tab 14 of Exhibit EAL 7. The exhibit has, in handwriting, up in the right hand corner "February 4, 1988". Mr Galt acknowledged that that was his handwriting and that therefore he must have read this article and in it all the
inquiries briefly averted to in Mr Clatworthy's letter are discussed in some detail. The article is also Image Number 389009 to be found at page 83 of Volume II.
Although Mr Galt remained anxious about the identity of the buyer and whether or not settlement would ultimately take place he was not further involved in the settlement. As already recorded, he did not see the letter of 11 March 1988, Image Number 425021 to be found at page 104 of Volume II. The closest he came to it was that he happened to visit Treasury briefly on the day of settlement and saw Mr Andrew in his office working on the financial details. He did not attend RWS's office on the day that the assignment of the deposits occurred.
Some two months later, however, on 16 May 1988, Mr Galt wrote a short note which is Image Number 498088 to be found at page 126 of Volume II which he headed "New Zealand Steel - end of the saga". In that note he said:
"the New Zealand Steel sale went through exactly as envisaged on 20.3.88, with Equiticorp handing over its cheques in full payment for the Crown's shareholding [some thirteen cheques drawn on different New Zealand banks in fact]. An official ceremony was held in Roger Douglas's office to commemorate the event."
Of that note, in cross examination at T/7873 between lines 1 and 9, Mr Galt was asked:
"... What explanation do you have for the fact that you wrote at that time 'Equiticorp handed over its cheques in full payment for the shares'?--- Well, I have just been thinking about this now, and that ceremony in Roger Douglas' office actually involved Allan Hawkins handing over the cheque to the Crown, to the Ministers concerned. He actually wrote out a personal cheque, which he filled out for about 5 cents, interestingly enough."
He was asked further questions and on the following page between lines 9 and 29 he said:
"...What I meant was on that occasion did you see Mr Hawkins as standing there representing Equiticorp?--- Well, I suppose symbolically representing Equiticorp, yes.
So when he wrote out a cheque, symbolically you saw that as an Equiticorp cheque; is that what you are saying?--- Well, symbolically, yes.
And that is, you say, what led you two months later, nearly two months later, to write in your note that Equiticorp handed over its cheques?--- Well, I think that's right. The basic way I had always thought about the sale was Equiticorp purchasing New Zealand Steel.
Isn't the difficulty about that explanation, just looking at your note, that you go into rather a bit more detail, don't you, because you say 'Equiticorp handing over its cheques in full payment for the Crown's shareholding, some 13 cheques, drawn on different New Zealand banks', in fact?--- Well, to be honest, I think that part of the note is certainly not accurate and I don't think I understood exactly what was going on at the time in any case, because in fact, as I have learnt more recently, those weren't cheques from Equiticorp."
Further, on T/7875, between lines 2 and 17 the following appears:
"... What I am suggesting to you, Mr Galt, is that at the time that you wrote this note you did have an understanding that Equiticorp's moneys had been used that had been drawn from a number of different sources - you thought 13 - which may or may not have been right, but you did think that Equiticorp moneys had been drawn from a number of sources and used to pay for the shares; isn't that right?--- Well, no. I don't know if that's right or not. It's always possible that I could have been thinking of that at the time that I had written it.
And it's probable, isn't it?--- Well, it is certainly - well, it's quite likely or probable that I may have, at the exact moment I was writing this, have been thinking of this as being something, you know, parallel to the sort of symbolic nature of the transaction."
Mr Grieve, in closing compared this with Mr Andrew's reaction to the 11 March letter "What's Equiticorp doing here, providing the cash ...". Counsel submitted that this note (Image Number 498088) is a "window into the mind of Crown officials" and he argued that it showed the mind set throughout of Mr Galt, that at the end of the day it was Equiticorp's job to see that the Crown was paid.
Because he was kept somewhat on the periphery and, in particular, because he did not see the letter of 11 March 1988, my conclusion is that there was no wilful or reckless failure to make such inquiries as an honest and reasonable person would make on the part of Mr Galt. But viewed objectively even though, on balance I do not think Mr Galt thought of it this way, the circumstances that he was aware of were sufficiently suspicious to call for inquiry.
2.8 What did Chetwin and Kwok know
Mr Chetwin was at the relevant time Deputy-Secretary (Industries Branch) at the Treasury. Today he is the Secretary of Labour. He has had almost thirty years in the public service and he worked for Treasury between 1969 and 1994.
Mr Kwok joined the Government in 1975 having been in private practice for about a decade prior to that. He was assistant Treasury solicitor from February 1983 to 26 August 1993 when he was appointed the Treasury solicitor.
Dealing first with Mr Chetwin's position. He was the most senior official involved and as Treasury was the lead department, he had the overall supervision of the sale of the Government's NZS shares.
Mr Chetwin confirmed that the sale of the NZS shares was the first sale of a State- owned enterprise and was one that was watched carefully with some interest as a consequence. Subsequently, Mr Chetwin was involved in all the other sales of State- owned enterprises which included entities such as Petrocorp and the State Forests. One can accept therefore that over the period of the sale and settlement of NZS, Mr Chetwin was heavily engaged in a number of significant transactions.
Mr Chetwin summed up his view of the Equiticorp offer when it came in at paragraph 47 of his prepared statement as follows:
"47. The options were to take the risk on Equiticorp shares or the risk on NZS shares. The first I saw, in common I believe with the other officials, as the better risk. There were no other options because the Equiticorp offer was the only one."
Furthermore, when the s 62 problem was exposed in connection with the support structure that BWL initially said it would rely upon, Mr Chetwin's concern was with the takeout and "how secure BWL's ability was to perform its obligation to the Crown".
Mr Chetwin recalls being advised that the s 62 problem had been resolved and he signed the report of 16 October 1987 on behalf of Treasury. He was not present, however, and never became aware of Mr Ratner's advice that once the unwind letters came in further inquiry was not required. Furthermore, he was not aware, as were the other officials, that the late unwind of the support structure which BWL had intended to rely upon meant that it was too late to put an alternative support structure in place before the agreement became binding on 19 October.
By early December 1987, which of course was subsequent to the crash, Mr Chetwin was aware of press comment and general speculation about BWL's takeout. In paragraph 51 of his prepared statement, having referred to an article in the Sunday Star of 29 November 1987, which he said he had not read, he said:
"... but I was aware of press comment and general speculation about the takeout. The assumption was that Mr Hawkins was involved somewhere but I do not remember what, if anything, I thought about that at that stage. Reading the article now it suggests to me that someone somewhere was going to 'take a bath'. That in itself would have caused me no concern - providing it was not the New Zealand Government. There is nothing in the article which suggests to me that Equiticorp was involved." [Emphasis added]
Those comments were taken up by Miss Elias QC when cross-examining. The record, at T/8262 commencing at line 6 and on to T/8264 at line 4, reads as follows:
"Yes. In relation to paragraph 168.4, where you say that you didn't do the actual arithmetic although you knew that prices had fallen, you knew enough, Mr Chetwin, did you not, to know that, as you have said in your brief, somebody was going to 'take a bath' on these shares; that is right, isn't it?--- That was my assumption, yes.
You knew enough to know that it was, on its face, a grossly improvident transaction for any purchaser, did you not?--- No, I didn't know that.
Do you say that it is not improvident to pay three times the value of an asset, or are you making some other point in that answer?--- The issue as I saw it was whether or not the transaction was one that would stand up at the time it was entered into. As with any asset, prices go up and prices go down, and people who are in the investment business and firms in the investment business, sometimes gain and sometimes lose in those situations. That is not a matter of improvidence; it's a matter of commercial practice.
As at March 1988, would you not agree that to pay $327 million for an asset worth approximately $90 million, on its face, is grossly improvident?--- Unlikely, possibly; grossly improvident, no.
Unlucky if you assume that the purchaser was constrained to enter into a transaction, is that what you are saying?--- It would be very similar to a situation where I had entered into an agreement to buy a house and after I entered into it, the property prices fell. It doesn't invalidate my judgment at the time, but it does mean that on that particular swing, I am in a situation where I had to take a loss. In another situation, I may have made a gain.
So your answer is tied into obligation, is that right?--- Tied into obligation? Clearly, there was an obligation. There was a contract.
Right. I see, If there had not been such an obligation, would you accept that, on its face, the transaction appeared to be grossly improvident?--- If there hadn't been an obligation, it wouldn't have arisen.
Can you answer the question which is: would you accept that if there hadn't been an obligation, the transaction would appear, on its face, to be grossly improvident?--- I'm not sure I understand the question, because it seems to me not to make sense.
HIS HONOUR: The question was:
'Can you answer the question which is:
would you accept that if there hadn't been an obligation, the transaction would appear, on its face, to be grossly improvident?'
There is nothing complicated about that. Either you agree it would appear to be grossly improvident if there was no obligation, or you
don't?--- Your Honour, if there hadn't been an obligation, I would be extremely surprised if such a transaction would take place.
MISS ELIAS: And is that not because it would be grossly improvident, Mr Chetwin?--- I suppose that would be the case, yes."
Miss Elias asked further questions between lines 4 and 24 on T/8264 as follows: "As at March 1988, you had no knowledge, did you, as to whether AI4
was obliged to enter into this transaction?--- No.
In relation to paragraph 168.5, you say that you did not know that members of the Equiticorp Group were contributing to the funding for the purchase of the NZS/EHL parcel. It's the case, isn't it, that you didn't know who was funding the purchase of the NZS/EHL parcel?--- That is correct.
In relation to paragraph 168.6, when you answer that you did not know that AI4's assets would be substantially depleted by the acquisition of the NZS/EHL parcel, would you accept that anyone in the position of AI4 paying the price it was paying, anyone's assets in that position would be depleted?--- I didn't know what AI4's was.
No. I am just trying to ensure that your answers are complete to these questions, to these allegations. Would you accept that anyone paying $327 million for an asset worth no more than $90 million would suffer depletion of their asset position?--- I would accept the logic of that, yes."
In my judgment those answers amount to a candid admission that the purchase by AI4, (which was under no legal obligation to accept nomination), of the NZS/EHL Parcel for
$327 million, when it was not worth more than $90 million was grossly improvident. But clearly, Mr Chetwin did not regard that as anything that the Crown need be concerned about.
Mr Woodhouse, when cross-examining on behalf of EAL and ET, explored with Mr Chetwin what his attitude would have been had he known that BWL had declined to withdraw and that there was no time to put another support structure in place before the transaction was finalised on 19 October. The record of that cross-examination commences at line 19 on T/8509 and continues through to line 1 on T/8511 and reads:
"Mr Chetwin, if Buttle Wilson had declined to give an assurance to the Crown that the earlier disclosed arrangements had been withdrawn, that is also something you would expect to have drawn to your attention, is it not, particularly as it is explicitly referred to in that 16 October report?--- Given the reference in the 16 October report, yes.
Mr Chetwin, just in relation to these matters that I have raised with you, and going back to your expectation that Buttle Wilson wouldn't have signed the agreement with the Crown without some form of subunderwriting agreement in place, going back to those topics and the ones we have covered since: can I ask you, in addition to what you said on that matter, to assume two things. Firstly, that you had been advised that Buttle Wilson could not put new arrangements in place, that is to say, subunderwriting, by 19 October, and, secondly, that you had been advised that Buttle Wilson had declined to provide to the Crown a letter confirming that the earlier arrangements involving Equiticorp had been withdrawn. Sorry, it's a rather long proposition, but do you have that?--- I understand the two assumptions.
If you had then considered Buttle Wilson's position - and I emphasise Buttle Wilson's - when it signed the agreement on 19 October, there was only one reasonable conclusion to draw, was there not, in relation to any support arrangements Buttle Wilson had, and that is, I would suggest for your answer, that there was still in place some arrangement of some sort as earlier disclosed involving some form of Equiticorp financing? Does that not follow, and of course taking those two assumptions?--- Taking those two assumptions, I would certainly have been given cause to enquire as to what was going on.
You would have taken that active step, but perhaps if I could ask you just then to address the specific question. If you had been sitting in your office speculating about Buttle Wilson's position, the conclusion that you would have drawn, in the light of the evidence you have given and the assumptions I put to you, is that the previously disclosed arrangements involving Equiticorp remained in place?--- That would be a logical conclusion to draw from those assumptions."
As can be seen, Mr Chetwin, again with complete candour, acknowledged that in the circumstances placed before him the logical conclusion would have been (as put to him by Miss Elias) that "the previously disclosed arrangements involving Equiticorp remained in place". That, of course, is the conclusion which I have held Mr Ratner should have reached because, unlike Mr Chetwin, he knew of BWL's refusal to unwind and of the inability to find another financial backer in the time available.
Prior to re-examination, I asked Mr Chetwin some questions and, in particular, I asked him to consider the third paragraph of the letter of 11 March 1988 which is Image Number 425021 to be found at page 104 of Volume II. Mr Chetwin's answer was that he had been, he believed, informed of the substance of Mr Small's comment to Mr Andrew and on that basis his assumption was, when he read the letter, that Equiticorp was acting as a banker or agent for the purchaser. He further said in evidence, however, that he would have expected some note of the discussion with Mr Small to be recorded by Mr Andrew and agreed that without that prior knowledge the paragraph "could have had other interpretations". The passage in which the last point was addressed is on T/8526 between lines 10 and 17 and reads as follows:
"But if you had not had any prior information and this letter arrived, giving you this information, would you have had an anxiety that perhaps Equiticorp was coming back into the picture, funding in some way, or would you have felt---?--- If I had not had other information which led me to make the assumption I did, then I think I would accept that the paragraph could have had other interpretations, yes."
I am satisfied that Mr Chetwin did not have any actual knowledge that Equiticorp was funding the purchase of the Crown's block of shares by AI4. I am also satisfied that, although he was overall in charge of the transaction, he did not have sufficient hands- on contact to be aware of BWL's refusal to unwind and the impossibility of replacing the support structure at short notice. But clearly, if he had been aware of those things, he would have felt obliged to make further inquiry.
On the other hand, he knew that somebody "was going to take a bath" and as recorded above, my conclusion is that he knew, in all the circumstances, that the purchaser of the Crown's shares was entering into a grossly improvident transaction.
Turning to Mr Kwok's position. Messrs Andrew and Galt saw Mr Kwok as an in-house backup for the advice that Mr Ratner was giving. Mr Kwok, on the other hand, said in paragraph 11 of his prepared statement:
"I was involved in the NZS transaction only to the extent that Mr Douglas Andrew thought he needed me. In essence, the accountability for the legal work rested with Mr Ratner, an experienced commercial practitioner retained by the Crown for the very purpose of providing expert legal advice on aspects of the sale."
And he said later in paragraph 16 that when RWS "did work on the transactions, they did not channel advice through me but went directly to Mr Andrews". So far as the Equiticorp offer was concerned, presented as it was along with the BWL offer to underwrite, Mr Kwok said that that was discussed informally in Treasury and in paragraph 25 of his prepared statement he recorded:
"We talked about the risk, how good the EHL shares were and how good BWL was. BWL was putting itself on the line. It was at risk if it could not complete. We believed they would protect themselves against that risk. In the ultimate analysis if they could not complete we were still better off holding EHL shares than NZS shares - because we could see nothing but further cash injections into NZS."
On the s 62 problem clearly Mr Kwok left the running to Mr Ratner and when the unwind letters came in he considered that the problem had been overcome. He said in his evidence in chief at paragraphs 39 and 40 that he saw the unwind letters from EHL, RCL and AHL but he apparently did not see the letter from BWL. In paragraph 40 he said that he did consider making inquiries about substitute arrangements but then concluded that the purchaser's funding arrangements were not the Crown's business.
Mr Kwok was not directly involved in any of the developments in December 1987 or January 1988 but he did say that he was worried that the delay in settlement might end up as a "total failure to perform". He had no involvement in the settlement
arrangements and had assumed that there would simply be one cheque handed over on settlement.
In paragraph 50 of his prepared statement, referring to the letter of 11 March 1988 he said:
"50. I saw the list of institutions transferring the deposits, which came with the letter from EHL dated 11 March 1988 (Image Number 425/164). I assumed that EHL was acting as a banker. It was a complicated transaction and someone had to pull the funds together. I remember thinking it looked complicated but it was only two days from getting the money, all the problems and hitches had been dealt with, and it was not after all surprising that the money was coming from various sources given the size of the transaction. The fact that the money might be ultimately coming from EHL simply did not occur to me. It struck me as involving a lot of bits and pieces but knowing the commercial environment, it could simply have been their investment strategy."
Mr Kwok also said in his evidence in chief that he saw the Deed of Assignment of Deposits but did not particularly notice recital G in the deed.
I gained the clear impression that, except for such matters as the legislation that was required to enable the Minister of Trade and Industry to hold the NZS/EHL parcel of shares until on sale, Mr Kwok left the legal aspects of the transaction to Mr Ratner although he accepted that he had a responsibility in respect of them. Mr Kwok had no file or notes of his own on the matter and on several occasions his recall of his involvement was demonstrated to be inaccurate from documents put to him through the imaging bank. Generally, the records showed, along with Crown answers to interrogatories, that at the time Mr Kwok accepted a greater degree of responsibility than he was prepared to admit to when giving evidence. But he nonetheless accepted that the statement in the report to the Ministers of 16 October 1987, Image Number 275389 (which is to be found at page 49 of Volume II), did rather understate the
position to the Ministers because his conclusion was that the support structure originally suggested was clearly illegal.
Overall then, although I consider that Mr Kwok should have insisted on seeing the BWL unwind letter along with the others, and I was left with little confidence in the accuracy or reliability of his recollection of the matters that he was involved in, I saw no wilful or reckless failure to make appropriate inquiries until cross-examination on Image Number 425021, the 11 March letter, commenced. The topic starts at line 7 on T/8872 and goes on to T/8877, line 20. It is also touched upon on T/8878.
The first thing I observe in respect of the cross-examination is that, unlike Messrs Andrew and Chetwin, Mr Kwok does not suggest that his view of the letter was coloured by anything that Mr Andrew told him that Mr Small had said. Indeed, at the bottom of T/8874 and again at the bottom of T/8879 answers given suggest that there was no discussion that would have had a bearing.
Perusal of the pages mentioned will show that Mr Kwok started by being as emphatic as he was in evidence in chief that the letter did not raise any questions in his mind. Thus, for example, on T/8873 between lines 19 and 23 the following two questions and answers appear:
"And the third paragraph, did you read that?--- I'm sure I would have read the whole letter.
Surely when you read the third paragraph, those concerns about section 62 must have then rung some alarm bells, did they not?--- No, categorically, no."
The cross-examination continued in that vein for another two pages, but on T/8876, starting at line 3 a dramatic shift occurred and before the end of that page is reached the record shows him acknowledging that the interpretation of the letter which he deposed to in evidence in chief was wrong. By the time we get to line 21 on T/8877, he seems
to be admitting that he may not have looked very carefully at the letter. My recollection is that at about that point there was a complete capitulation in which he rather abjectly said that he got it wrong and he did not feel he could do anything more than acknowledge that.
I set out hereunder that portion of the record starting at line 12 at T/8876 and completing at line 21 on the following page where Mr Kwok accepted that he was wrong:
"...Each of those sums, if your understanding is correct, was going to come from the financial institution listed?--- Yes.
With the possible exception of the fifth reference, EFS Australian deposit, there is no reference to Equiticorp in that second column, is there?-
-- No, there is not.
So that on the face of the document, there's no suggestion, is there, that any of the money is coming from Equiticorp?--- That is correct, yes.
Well, why then do you say that it is obvious from the letter of 11 March that Equiticorp's liquidity was going to be affected by the payment of these deposits, because none of them came from Equiticorp?--- That is correct.
Right. Plainly, I suggest to you---?--- I got it wrong. You've got it wrong, have you not?--- I've got it wrong.
Did you realise that, that you had it wrong, when you gave that answer four or five minutes ago?--- No, I did not. I wouldn't have given you that answer had I thought it was wrong. That was what I thought the position was.
Looking at it now, it's plain, isn't it, that this reference to group liquidity position in the letter of 11 March in fact relates to Equiticorp's liquidity position-- When you put the two bits together, yes.
And you saw both these bits of paper at the time, did you not?--- Yes, I did.
Are you now saying that you didn't give this matter the same sort of attention back then that you have given it now?--- That's probably correct.
So you just, you say, concluded without any enquiry that this was all right, these deposits were coming from Equiticorp, so that explains the reference to 'Our group liquidity position'?--- To the extent I thought about it at all, yes.
Are you now saying that you might not have thought about it very much at all at the time?--- That is entirely possible. But, you know, you asked me what I thought it meant and I said that is what I think it
means. I was wrong, I accept that I am wrong. I can't - I don't think I can do any more than that."
On T/8878 between lines 3 and 18, Mr Grieve cross-examining put a series of questions which led to Mr Kwok acknowledging that if he had read the letter in March 1988, as he acknowledged he should have read it, then the possibility that there was another s 62 problem related to the funds for settlement coming from Equiticorp would have been raised calling for inquiry. That portion of the record is set out hereunder:
"So do I have it correctly from you now that if you had given this proper attention at the time, you would have realised that this statement, 'We are still ensuring our group liquidity is as strong as possible', if you had read it correctly at the time with this list of deposits, it would have raised in your mind considerable alarm bells, would it not?--- It would have raised the issue as to what did that really mean, and in that context, yes, I believe, had I read it that way, I would have made some more enquiries.
Because it may well have indicated to you that Equiticorp was in fact providing the funds for this settlement?--- It certainly would have raised the possibility.
That as a possibility?--- That as a possibility, yes.
And then the spectre of section 62 would have really raised itself again, would it not?--- It would have, yes."
I find it difficult to accept Mr Kwok's evidence that when he read the letter he did not recognise the potential for a breach of s 62 which, under cross-examination, he acknowledged. There was, in my judgment, on his part, when he saw the letter shortly after it was received by Mr Andrew, if not a wilful and reckless failure to make the kind of inquiries called for, then certainly the circumstances were such as to put him (if acting honestly and reasonably) on inquiry.
2.9 What did the Ministers know
Advancing the Plaintiffs' closing submissions on the facts, Mr Grieve in section 23, at paragraph 34 specifically recorded "no submission adverse to the credibility of the
former Ministers is made". That acknowledgment was, in my judgment, properly made.
Both Ministers denied that they had any knowledge that the on sale of the NZS/EHL Parcel to AI4 involved a breach of s 62. Since they both were heavily engaged in other matters of greater substance at all times material to the case, and were completely dependent upon advice given them by their officials, there did not come before them any material sufficiently concrete to cause them to make inquiry as to where the settlement funds were sourced from.
Looking at the position of the Honourable David Caygill who was both Minister of Trade and Industry and Minister of Health at the relevant time. He described NZS in his evidence in chief as a "bottomless pit" and in cross-examination as a "monstrous liability". His objective was to end the Crown's exposure to further expenditure of taxpayers' money on a project which had already consumed in excess of $2.1 billion.
As the matter progressed he was peripherally aware of press speculation and although questions were asked in the House, he regarded them as directed primarily to two issues. First, had the Government obtained a proper price for the steel mill and, secondly, would it get paid. Furthermore, Treasury had the expertise to conduct the sale so that the hands-on control was left to officials of that Department.
Because the Minister of Trade and Industry was, as it were, once removed from the immediate implementation of the agreement he tended to still see the transaction as one in which Equiticorp was purchasing NZS. This can be seen in two passages in his cross-examination. The first at T/6659 between lines 16 and 20 where the record reads as follows:
"Can you think why Equiticorp might have been approached rather than BWL in the first instance?--- I don't know that they were approached in the first instance. All I can assume now - you are asking me a hypothetical question - is that fundamentally the Crown was selling New Zealand Steel to Equiticorp."
And, again, at T/6682 when he was being asked about the letter of comfort that was sent to the Japanese bankers, the Minister said he thought it would help the Crown to get paid. He was asked why he thought that and replied, between lines 11 and 17:
"...Well, I'm not sure that I thought any of this at the time, Your Honour, but - and maybe that is all I should say, but it seems to me that we were, taking the broader view of the initial transaction, selling to Equiticorp, that inasmuch as they were, taking a broad view of the matter, acquiring ownership of New Zealand Steel, they were entitled to the Crown's assistance."
That approach seems to be in line with what I have earlier described as Mr Galt's "mind set" that it was in the end Equiticorp, not BWL or its nominee which was paying.
Although, as was acknowledged by Mr Chetwin during his cross-examination, the final sale to AI4 at $327 million of shares worth not more than $90 million was demonstrably grossly improvident from the purchasing company's point of view, that fact was not focussed upon by the officials and not drawn to the attention of the Minister. Mr Caygill put it fairly enough, I thought, at T/6670, between lines 24 and 29 when being pressed to concede that the circumstances should have alerted him when he said:
"At the risk of sounding defensive or stressing the obvious, I was busy throughout this period on other matters, and would, I believe, have been content to have continued to assume that there was no problem in the absence of anybody reporting to me such a problem."
Turning to the position of the Minister of Finance. Sir Roger, in his evidence in chief expressed sentiments similar to those of the Minister of Trade and Industry in relation
to the desirability of the Government quitting its involvement in NZS. Referring to the investment of $2 billion plus in paragraph 15 of his evidence in chief, Sir Roger said "the Government had taken a huge hit and wanted to get out". Paragraph 16 of the statement reads:
"16. My personal view was (and remains) that Government had been proved to be a poor manager of risk. I had no confidence that we would not have to front up with a further substantial contribution."
Having made what he called the "hard decision" to cut the Crown's losses and get out, Sir Roger then focussed on the recommendations that were made by officials regarding accepting Equiticorp's offer and executing the formal documentation. Thereafter he had no involvement in the preparation of, or process leading to, the Supplemental Agreement which was signed by Mr Caygill and he was not involved in the settlement of the transfer of the NZS shares in January 1988.
He acknowledged, of course, that he was aware that subsequent to the collapse of the sharemarket on 20 October the market value of EHL shares had declined, but he did not follow through on that in detail and said:
"consistent with my role as a Minister of the Crown I would not have thought about these matters because I had confidence in the knowledge that my officials would raise with me any matters which they considered I should spend time on."
But he was adamant that if any aspect of illegality had come to his attention he would not have allowed the Crown to become involved.
Sir Roger also made it clear, and I accept, that while the decision had been made to sell the Crown's NZS shareholding there was no great urgency about it. He acknowledged, however, that it would have been convenient, even "nice", if the sale could be effected
by the end of the financial year to support a budget surplus. He also recognised that there was a symbolic significance in seeing the sale, which was the first of the State- owned enterprises type disposals, brought to fruition. It would show both his caucus colleagues and the public at large that the Government was serious about its assets sales programme, but I accept that none of the decisions he was making in this area were for short-term gain. Nonetheless, the officials working with the Minister inevitably were conscious of this preference and the advantages of bringing the sale to a conclusion.
So far as the Plaintiffs' allegations in paragraph 168.4 and 168.6 of its Fourth, Fifth and Sixth Amended Statements of Claim are concerned alleging that AI4's purchase was grossly improvident and that its assets would be substantially diminished by the acquisition, Sir Roger, in his evidence in chief, denied any knowledge of AI4 or of the matters alleged in the paragraphs mentioned. He was not cross-examined on those points.
He was cross-examined, however, on certain passages in Hansard and in particular on a Question on Notice dealt with in the House on 2 December 1987 which appears at page 1423 of Exhibit I which contains Hansard extracts from 12 November 1987 to 8 December 1987. I interpolate to say that I warned counsel about the danger of breach of Parliamentary privilege when Hansard was introduced but Mr Mathieson took no objection and I was not able to see that Sir Roger was being challenged on anything that he had said in the House. The first part of the question inquired as to the identity of the international financial group that was to acquire the Equiticorp shares and to that the Minister replied that that was BWL's business. The questioner (Mr Murray McCully, MP for East Coast Bays) asked a supplementary question and I quote now from Hansard:
"MURRAY MCCULLY: As the value of those shares in Equiticorp on the sharemarket yesterday was approximately $185 million less than the $327 million that Buttle Wilson Ltd has guaranteed to pay for them
next March, and more than $320 million less than the $464 million that companies associated with Mr Hawkins have agreed to pay for them in March 1990, does the Minister not accept that the Government should take some interest in the identity of the company that will provide the
$327 million, and in the ability of that company to meet all contractual commitments?
Hon. R.O. DOUGLAS: No. My concern is to get the $327 million."
That passage having been referred to Sir Roger he was then asked at T/8205, line 20: "So at that point, you plainly became aware that the Crown's Equiticorp
shares had dropped significantly in value, did you not?--- Certainly.
Did that cause you any concern?--- I don't - it would not have caused me concern. If there had been a problem, then Treasury would have drawn it to my attention. That would have been within the ambit of their authority and responsibility.
So you don't think you might have, for example, said to one of your Treasury officials, 'Look, these Equiticorp shares have taken a huge dive, is everything all right?'?--- No, I don't believe so because, in any case of this nature, it would be understood if there was a change in circumstances which I needed to worry about, then they would draw it to my attention."
That was as close as the evidence in chief or cross-examination got to exploring the issue of whether or not the Minister appreciated that the purchase was grossly improvident from AI4's point of view. As he did not know of the existence of AI4 and the circumstances had not been drawn specifically to his attention, like the illegality issue nothing is proved against Sir Roger in regard to that aspect of the matter.
2.10 Obligations of disclosure pursuant to Crown's contract with SM/BWL
The relationship between SM/BWL and the Crown was formalised on 19 March 1987 in document 233/153 to be found at page 1 of Volume II - a letter setting forth the terms upon which agreement had been reached.
That SM proposed to employ inter alia BWL was recognised expressly in the agreement and throughout the case counsel argued on the basis that both SM and BWL were bound by the terms of the contract. I hold that to be the case.
Initially, the Crown argued that the above contract terminated on 15 October 1987 when agreement was reached orally in Sydney or, at the latest, on 19 October when the oral agreement was formalised in signed documents prepared by the solicitors for the parties.
Requested to reargue the point however, on the first call-back date (23 February 1996) Mr Mathieson conceded that the contract did not terminate until, at the earliest, the point at which the shares were swapped. Originally that was to have been 20 December 1987 but it was varied to 20 January 1988.
That concession, in my view, was properly made. I need only refer to paragraph (d) on page 3 of the contract document to demonstrate that the conclusion that the contract remained on foot after the agreements were entered into on 19 October 1987 is inescapable. That provision (paragraph (d), page 3) recognised that inevitably the contract would be conditional upon certain statutory consents that would be required. Logically it then went on to address the situation if the consents were not forthcoming. It provides that, in those circumstances, the Crown and SM:
"shall enter into discussions in good faith with a view to agreeing as soon as practicable such changes to the timing, fee or other aspects of this agreement as are reasonable in the circumstances".
Those words clearly envisage a contract which continues to bind the parties after the initial acceptance of a conditional offer by the Crown, settlement or completion of which is envisaged at a later date.
Mr Mathieson submitted, nonetheless, that the obligations of SM/BWL and, in particular, Messrs Holyman and Clatworthy, ceased once the agreements had been entered into on 19 October 1987 because there was nothing more for them to do. The consequence, counsel argued, was that neither had any obligation to pass on to the Crown the knowledge they both had within days of the signing that, on that same day, the Takeout Deed had been executed whereby EHL committed itself, as a financier of last resort, in respect of the BWL Underwrite Agreement with the Crown.
Mr Mathieson submitted that the Agreement should be so construed because the whole thrust of it was to bring about a sale. The run-on, after that major objective had been accomplished, related solely to the quantum and date of payment of fees. Counsel advised that he had searched for a case in which, what he called the cessation of relationship coupled with a continuation of the contract for fee purposes to a later date approach, is demonstrated. Such an authority had not been found and the closest of any help was Keppel v Wheeler [1927] 1 KB 577. The issue in that case was whether an estate agent's obligations were at an end once a purchaser had been introduced and agreed to purchase "subject to contract" but before formal contracts had been exchanged. A better offer came to the agent's attention while negotiations were still proceeding but, because of a bona fide error, he thought there was no point in passing it on to the vendor. A strong Court of Appeal, which included Bankes and Atkin LJJ, held that the agent had such a duty and was liable to compensate the vendor for the difference in sale price. Bankes LJ said at 586:
"...it seems to me that an agent may well say: 'I have done everything which, assuming that the matter went through, would entitle me to receive my commission,' and yet remain under the obligation of an agent to disclose such matters as the particular offer in this case."
That authority, with respect, appears to me to be as much against the Crown as for it.
The contract here does not expressly say that the agent's obligations cease once an agreement, which it is recognised would be conditional, is signed. Nor do I consider that a reading of the whole contract leads to that conclusion. It was not suggested I should, and, in any event there is no basis for, implying a term to that effect. Indeed, to the contrary, I consider that any implication should be the other way.
On page 4 of the contract there is a paragraph dealing with the definition of a "viable offer". It provides that such an offer means one made by a person who inter alia is "ready, willing and able to perform its obligations to complete ...". Irrespective of the identity of the parties required to comply with that provision, the words "ready, willing and able to perform" must be read as relating to performance that is within the law. A fortiori where the Crown is a party.
In those circumstances, what was the position of Messrs Holyman and Clatworthy when they learned, after the contracts were entered into, that the underwriting follow- on contract, by which the Crown was to get cash, was to be performed potentially in an illegal manner?
In my judgment, under those circumstances, there was an obligation to disclose that fact to the Crown on all or any of the following three bases:
1) A term implied at law that skill and care would be exercised. In my view it would be a breach of that term not to apply sufficient skill and care to appreciate that such information should be passed on.
2) A term implied by the Court to give business efficacy to the contract. Or, if the earlier rule is applied, can anyone doubt what the answer would have been if the officious by-stander had asked: "Supposing after the offer is accepted and documented SM/BWL learn that the
implementation of the on sale envisaged is to be funded in breach of s 62 and therefore illegally. Will SM/BWL be under a duty to advise the Crown?".
3) A straight breach of fiduciary duty to keep the Crown informed and not suppress information which ought to be passed on.
There can, of course, be circumstances in which the usual rule that an agent's knowledge is imputed to the principal does not apply. That issue aside, however, (it is discussed elsewhere in this judgment) I hold that pursuant to the contract of 19 March 1987 (Image Number 233153) the knowledge of Messrs Holyman and Clatworthy that the Takeout Deed had been signed on 19 October 1987 and bound EHL to fund BWL's obligation under the Underwrite Contract, was knowledge those two agents were obliged to disclose to the Crown.
2.11 Imputation of agents' knowledge (Ratner, Holyman and Clatworthy) to the Crown
I have already recorded what each agent knew in 2.3, 2.5 and 2.4. Furthermore, in respect of Messrs Holyman and Clatworthy, I have held in 2.10 that their contract obliged them to disclose what they learned after 19 October 1987 provided it was relevant and came to them in their respective capacities as agents and advisers of the Crown.
In a nutshell, Mr Ratner knew that BWL would not agree to unwind the support structure, or provide a letter to that effect in October 1987 and that he had suppressed that information from the Crown. Messrs Holyman and Clatworthy knew within days of the signing of the contracts between EHL and the Crown, and BWL and the Crown, on 19 October 1987 that, on that same day, the Takeout Deed confirming the original support structure had been signed. In March 1988, Mr Ratner knew that the letter of
11 March from Mr Small, combined with the other circumstances he knew of, showed that EHL was funding the purchase of the Crown's NZS/EHL Parcel or that there was such a probability, that that was the case, that inquiry was called for.
The rules relating to the imputation of agents' knowledge to their principals, and the exceptions and qualifications to such rules, were worked out substantially last century, in equity, in the context of the transfer and mortgage of land - essentially conveyancing law. They are discussed in all the standard textbooks, for example, Bowstead & Reynolds on Agency, (16th ed 1996), paragraphs 8-204 and following and in 1(2) Halsbury's Laws of England, (4th ed), paragraphs 149 to 150. Paragraph 149 is set out hereunder:
"149. When imputed to principal. Where in the course of any transaction in which he is employed on his principal's behalf, an agent receives notice or acquires knowledge of any fact material to such transaction, under such circumstances that it is his duty to communicate it to the principal, the principal is precluded, as regards the persons who are parties to such transaction, from relying upon his own ignorance of that fact, and is taken to have received notice of it from the agent at the time when he should have received it if the agent had performed his duty with due diligence."
An authoritative statement of the principles underlying the rules is to be found in the third edition of Spencer Bower & Turner, The Law Relating to Estoppel by Representation at page 133 where the text reads:
"The law imputes to any party to a contract or transaction knowledge of all facts or circumstances of which any agent of his for that purpose and in that contract or transaction is actually or presumptively cognisant. This principle is based upon three considerations - first, fairness as between the parties; second, public necessity and business convenience; thirdly, the strong probability that in the vast majority of cases the presumption accords with the facts, that is to say, that the knowledge presumed by the law to have been communicated to the principal has actually been so communicated."
Citing an identical passage from the 2nd edition of the above work, Richmond J at first instance in Blackley v National Mutual Association of Australasia Ltd [1970] NZLR 919 at 928, line 30 said:
"While no authority is cited for this statement, it accords with the impression which I have gained from my reading of the authorities."
Following the same judicial path more than 25 years later I respectfully agree. One or two of the leading authorities are sufficient to provide confirmation.
First the case of Boursot v Savage [1866] UKLawRpEq 68; (1866) LR 2 Eq 134, a decision of Kindersley VC where at 142 he said:
"It is a moot question upon what principle this doctrine rests. It has been held by some that it rests on this:- that the probability is so strong that the solicitor would tell his client what he knows himself, that it amounts to an irresistible presumption that he did tell him; and so you must presume actual knowledge on the part of the client. I confess my own impression is, that the principle on which the doctrine rests is this: that my solicitor is alter ego; he is myself; I stand in precisely the same position as he does in the transaction, and therefore his knowledge is my knowledge; and it would be a monstrous injustice that I should have the advantage of what he knows without the disadvantage. But whatever be the principle upon which the doctrine rests, the doctrine itself is unquestionable."
The other example is Bradley v Riches (1878) 9 Ch D 189 at 196, a decision of Fry J where he said:
"Now, upon that the cases seem to me lay down the rule clearly. You must, in the first place, look at what are the circumstances of the case as to knowledge. If the circumstances of the case are such as in the ordinary course of business between solicitor and client they are, then the solicitor must be assumed to have communicated the fact to his client, and the knowledge of the agent is, to use the language of Lord Chelmsford in Espin v Pemberton [1859] EngR 264; (1859) 3 De G & J 547, the imputed knowledge of the client. It appears to me to be clear that that presumption or imputation is a thing which the client cannot be allowed to rebut. If it could be rebutted it, was amply rebutted in Le Neve v Le Neve [1748] EngR 438; (1747) 3 Atk 646. If it could
be rebutted, the language of Lord Hatherley in Rolland v Hart [1871] UKLawRpCh 89; (1871) LR 6 Ch. App 678 would not be upheld. His Lordship says: 'The purchaser of an estate has, in ordinary cases, no personal knowledge of the title, but employs a solicitor, and can never be allowed to say that he knew nothing of some prior encumbrance, because he was not told of it by his solicitor. It cannot be left to the possibility or the impossibility of the man who seeks to affect you with notice being able to prove that your solicitor did his duty in communicating to you that which according to the terms of your employment of him, was the very thing you employed him to ascertain.' Therefore, what I have to do is look at the circumstances in order to see whether the presumption or imputation of knowledge arises."
There was little dispute between counsel on these matters although counsel placed more emphasis on the application of the maxim qui facit per alium facit per se and the rule of policy that the principal must take the burdens along with the benefits of the agency. Thus in his closing submissions (section 23 dealing with the imputation of Mr Ratner's knowledge to the Crown at 23.14) Mr Mathieson submitted:
"If Mr Ratner possessed knowledge the parties did not intend to unwind or knowledge of any fact which caused his suspicions to be aroused such information or suspicion would, in the ordinary course of events, be imputed to the Crown."
My conclusion is, then, that the knowledge of all three agents is to be imputed to the Crown unless one or more of the established exceptions applies. I now turn to consider that possibility.
The Crown says that the fraud exception applies here in relation to Mr Ratner's misleading, if not fraudulent, certificate of 19 October 1987 (Image Number 278003 to be found at page 57 of Volume II) and perhaps, by implication, in respect of his continued suppression of that knowledge in March of 1988 when, as I have already held, he had a further duty to disclose. The decision of Kennedy v Green [1834] EngR 1072; (1834) 3 My & K 699 is usually cited as the authority which first established the fraud exception. Almost thirty years later in the case of Thompson v Cartwright (1863)
[1863] EngR 864; 33 Beav 178; 55 ER 335; aff'd [1863] EngR 1021; (1863) 2 De G J & S 10 the Master of the Rolls said at pages 337-338 of the English Report:
"The case of Kennedy v Green [1834] EngR 1072; (3 My & K 699), which is always cited on these occasions, establishes a very important principle, but one which must be very cautiously applied to the cases of notice of facts given to the solicitor employed by the client. That case establishes, that if the solicitor employed by the client was the actual perpetrator of a fraud, it is reasonably certain that he would not communicate that fact to his client, and that consequently the client cannot be treated as having had notice of that fact. ...
I take the rule to be, generally, that the client must be treated as having had notice of all the facts which, in the same transaction, have come to the knowledge of the solicitor, and that the burthen of proof lies on him (the client) to shew that there is a probability, amounting to a moral certainty, that the solicitor would not have communicated that fact to his client."
A modern application of the principle is to be found in Belmont Finance Corp v Williams Furniture Ltd [1979] 1 Ch 250 where at pages 261-262 Buckley LJ, having pointed out that if the allegations in the statement of claim were made out the directors of the plaintiff company must have known that the transaction was illegal, continued:
"But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was the victim of a conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal."
A consideration of the underlying principles of the fraud exception suggests it has two or possibly three bases. First, there is the pragmatic proposition that, because it is all but a moral certainty that a fraudulent agent is not going to inform the principal of his or her deceit, the presumption of imputation should not apply. A more soundly based consideration, however, is the proposition that emerges in some of the cases to the
effect that fraudulent activity is right outside the ambit of the agency, and therefore logically, and on principle, it should not be imputed. Allied with that approach is the view that, as in tort, the principal is not responsible for the acts of the agent who is pursuing his or her own agenda rather than the principal's.
These points can be seen in the case of Cave v Cave [1880] UKLawRpCh 119; (1800) 15 Ch D 639 at 644 where it was said, when discussing the fraud exception:
"This exception has been put in two ways. In the very well-known case of Rolland v Hart Law Rep 6 Ch 678, Lord Hatherley put it substantially in this way, that you must look at the circumstances of the case, and inquire whether the Court can see that the solicitor intended a fraud, which would require the suppression of the knowledge of the incumbrance from the person upon whom he was committing the fraud. In Thompson v Cartwright [1863] EngR 864; 33 Beav 178 the late Master of the Rolls put it rather differently, and it would appear that in his view you must inquire whether there are such circumstances in the case, independently of the fact under inquiry, as to raise an inevitable conclusion that the notice had not been communicated. In the one view notice is not imputed, because the circumstances are such as not to raise the conclusion of law, which does ordinarily arise from the mere existence of notice to the agent; in the other view - that of Lord Chelmsford and Lord Hatherley - the act done by the agent is such as cannot be said to be done by him in his character of agent, but is done by him in the character of a party to an independent fraud on his principal, and that is not to be imputed to the principal as an act done by his agent."
A more modern example is the case of Deutsche Ruckversicherung Aktiengesellschaft v Walbrook Insurance Co Ltd [1995] 1 Lloyds Law Reports 153 at 165 where Phillips J observed that he had found this area of the law "one of great difficulty". He recognised two competing arguments for the foundation of the fraud exception. The first was that the court will not infer knowledge of a fact known to an agent where, because of the agent's fraud or other breach of duty, it would be contrary to commonsense to draw such an inference. The other argument, however, was that if you have a situation where an agent's fraud, default or wrongdoing caused loss to parties, the loss or prejudice should fall on the party by whom the agent was trusted or employed.
Further guidance is obtained from the second Restatement of the Law of Agency . In chapter 8, which is titled "Liability of Principal to Third Persons: Notice Through Agent" at paragraph 282 the statement is:
"282. Agent Acting Adversely to Principal
(1) A principal is not affected by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his own or another's purposes..."
On the following page Comment on Subsection (1) quoted above includes inter alia:
"If, however, the agent fails to reveal this fact in order to accomplish some fraud of his own antagonistic to the interests of the principal, the principal is not bound, for the same reason that no liability is imposed upon a master for the tort of a servant acting entirely for his own purposes
..."
Corpus Juris Secundum, on the other hand puts the basis of the fraud exception in terms of the presumption of communication not applying. At paragraph 440 of "Agency" it is stated:
"Since the rule that notice to an agent is notice to the principal does not apply where the circumstances are such as to raise a presumption that the agent will not transmit his knowledge to his principal ... in the absence of a holding out or apparent authority which is relied upon, the principal is not charged with knowledge of an agent who is acting adversely to the principal's interests, or who deals for himself with the principal."
It can be seen therefore that the same debate has emerged in the United States as to the correct basis for the exception. Perhaps the clearest American statement of this jurisprudential difference of opinion is found in Ætna Casualty & Surety Co v Local Bldg & Loans Ass'n, 162 Okl 141, 19 P.2d 612, 616, 617, 86 ALR 526, quoted in Great
American Indemnity Co v First National Bank of Holdenville, Okl (1938) 100 F2d 763 (CCA 10):
"In this connection it is the general rule of law that the knowledge of an agent is imputed to the principal. The reason for this rule, recognized by most courts, is that it is presumed the agent will communicate his information to the principal. This reason has been criticized by some eminent authorities who urge that the real reason is based upon the broader ground of policy and expediency to safeguard the affairs of business and society. Pomeroy on Equity Jurisprudence (4th Ed.) vol. 2 par. 676.
Regardless of the reason for the rule, there is a universally recognised exception; namely, that the knowledge of the agent will not be imputed to the principal when such knowledge concerns a transaction in which the agent is 'Engaged in the commission of an independent fraudulent act on his own account and the facts to be imputed relate to this fraudulent act'. 21 RCL page 884.
The reason for this exception recognized by the authorities which place the reason for the rule upon the basis of presumed communication is that where the agent is committing a fraud it would be contrary to common sense to presume that he would communicate the facts to his principal. The reason for the exception, recognised by the authorities who place the rule upon the ground of expediency and policy, is that when engaged in the perpetration of a fraud, the agent is not really acting for his principal, but is really acting for himself entirely outside the scope of agency."
Statements adopting the "agent acting outside the scope of his authority" approach can be found in Anderson v General American Life Insc Co (1944) 141 F 2d 898 (CCA 6) certiorari denied 65 S Ct 554, 323 US 798, 89 L Ed 637 where the Court quoted Chief Justice Taft (writing as Circuit Judge for the sixth circuit Court of Appeals) in Thomson-Houston Electric Co v Capital Electric Co 65 F 341, 343 (CCA 6):
"Such a presumption [that the agent performed his or her duty] cannot be indulged, however, where the facts to be communicated by the agent to the principal would convict the agent of an attempt to deceive and defraud the principal. The truth is that where an agent, though ostensibly acting in the business of the principal, is really committing a fraud, for his own benefit, he is acting outside the scope of his agency, and it would therefore be most unjust to charge the principal with knowledge of it."
That statement was also applied in Munroe v Harriman (1936) 85 F 2d 493, 495 (CCA 2) certiorari denied Harriman Nat Bank & Trust Co of City of New York v Munroe 57 S Ct 194, 299 US 601, 81 L Ed 443 where Circuit Judge Swan described it as "the real basis for this exception".
Applying those underlying principles to the circumstances of this case; while it could be said that Mr Ratner's decision to provide a misleading/fraudulent certificate raises the moral certainty that he would not disclose his knowledge that BWL had held out, there is no sense in which it could properly or sensibly be said that he was not, throughout, acting as agent for the Crown. In my judgment the foundation for the fraud exception, based upon the recognition that in such circumstances the agent is not acting for the principal, is more persuasive than the practical commonsense approach. Even when providing the misleading certificate Mr Ratner was also performing the function of certifying that the other three letters had been received and that the documentation was (BWL's position aside) in order for signature. In a wider sense he can be seen as carrying through the decision which he had elected to make on behalf of his client that, despite BWL's stance, it was safe to proceed. Furthermore, although there were positive acts of misrepresentation in October 1987, what happened in March 1988 was simply a suppression of information.
The cases show that suppression is not fraud. The Crown recognised this in closing. The synopsis at 23.17 submitted:
"The Crown cannot and does not contend that the mere failure to communicate the knowledge or suspicion constituted the fraud."
Rolland v Hart [1871] UKLawRpCh 89; (1871) LR 6 Ch App 678, at 682 to 683 was cited:
"It must be made out that distinct fraud was intended in the very transaction, so as to make it necessary for the solicitor to conceal the facts from his client in order to defraud him."
Then at 23.18 it was said:
"The fraud, if there was one, was in having the suspicion or knowledge simultaneous with providing on 19 October 1987 the letter certifying the agreements were in proper form for execution. The letter was provided specifically to meet Mr Andrew's requests for such an assurance."
Atterbury v Wallis (1856) 25 LJ Ch 792 is usually cited as authority for the proposition that mere suppression is not enough. Bowstead & Reynolds (supra) relies upon that case in paragraph 8-207 under the heading "Fraud of Agent" where the text states:
"It is clear, on the one hand, that the mere fact that the agent does not communicate his knowledge or information which he has, from fraudulent or other motives, is not sufficient to negative notice to the principal."
The report of Atterbury is somewhat truncated and the reasoning of the Lord Justices is not, with respect, altogether clear. Nonetheless, in Waldy v Gray [1875] UKLawRpEq 72; (1875) LR 20 Eq 238 at 251-252 the Judge said:
"Now, I take the law to be plain that, although a mere suppression of a deed will not, according to the case of Atterbury v Wallis of itself bring with it the same consequences as other fraud, yet the suppression of a material personal fact - the suppression of a thing done by a man in direct violation of his duty as trustee - is an act which must relieve a Defendant of all imputed knowledge of the transaction upon any theory of notice through a solicitor."
Also in the judgment of Kindersley VC in Boursot v Savage (supra at 142), discussing the fraud exception, it was said:
"It is insisted, however that the doctrine cannot apply in this case, because Holmer was committing a fraud, and the client is not to be affected with constructive notice of a fraud committed by his solicitor. But if the client would be affected with constructive notice of a trust, the existence of which is known to his solicitor, in the case where there is no fraud, the fact that the solicitor is committing a fraud in relation to that trust cannot
afford any reason why the client should not be affected with constructive notice of the existence of the trust. It is the existence of the trust, and not the fraud, of which he is held to have constructive notice; and the constructive notice of the existence of the trust must be imputed to him, whether there is a fraud relating to it or not."
My conclusion is that the fraud exception does not apply to prevent the imputation of Mr Ratner's knowledge to the Crown.
So far as Mr Clatworthy is concerned, the Crown argued that he was under no duty to disclose that the Takeout Deed had been signed because he was unaware that the unwind had been required. It was put this way in paragraph 10.37 of the Crown's opening:
"10.37 Clatworthy's own knowledge after 15 October, ie that the BWL Takeout Deed, encapsulating the arrangements notified to the Crown on 6 and 7 October was proceeding, is not to be imputed to the Crown. In any event the only knowledge that would be of any significance would be knowledge that the Unwind Letters were a dishonest charade, but he had no such knowledge. He could not have had such knowledge because it is established (Transcript 4939-4940) that he had no knowledge of the Unwind Letters at the time, or that it was intended to send such letters."
Having advanced that submission, Mr Mathieson then interpolated that the evidence referred to was seen by the Crown as "some of the most important in the case" (line 6, T/6283). I gathered that comment was made because the Crown sees the evidence referred to as blocking off the imputation to the Crown of knowledge which Mr Clatworthy undoubtedly had. I do not accept that submission. Mr Clatworthy was the first agent of the Crown to disclose orally, (late September 1987), that EHL was to be the financier. He also advised as a financial consultant that the Crown would need to be satisfied that BWL could perform. In those circumstances, I consider it follows logically that, when he became aware that the Takeout Deed had been signed so that BWL's performance was now reaffirmed and placed on a formal footing, he had a duty
to advise. Any assumption he made that the Crown would already know about the Takeout Deed did not, in my judgment, absolve him. Furthermore, at the time that the Crown was formally advised that BWL was to be the underwriter, Mr Clatworthy expressly recorded that neither he nor his firm saw any conflict of interest in the dual role of underwriter and adviser. The letter in question earlier referred to is Image Number 266104 to be found at page 15 of Volume II. The advise contained therein was never withdrawn or qualified which means, in my view, that there is no basis upon which it could be said that Mr Clatworthy's knowledge of the execution of the takeout was exclusively BWL information in respect of which the Crown had no rights. Clearly, his was a case of suppression, not fraud.
Mr Holyman's position is rather different, as earlier indicated, he, on the balance of probabilities, did know that the Crown's legal advisers had recommended that the support structure be unwound. In those circumstances, when he discovered that that had not happened and that that structure had been formalised in a deed, he clearly had a duty to advise immediately. But, again, mere suppression is not fraud. Accordingly, Mr Holyman's knowledge should be imputed to the Crown also.
There are three other matters that can be dealt with briefly. First, in earlier editions of Bowstead the fraud exception was said to apply in the case of fraud or misfeasance. Indeed, Halsbury still states the law that way. The only authority advanced in support of that proposition appears to be the case of Re Fitzroy Bessemer Steel Co Ltd (1884) 50 LT 144, a decision of Kay J in the Chancery Division. A careful study of that case, however, shows that it does not support the addition of misfeasance. It was in fact a clear case of fraud, the agent accepted a bribe. The ratio decidendi of the case was founded upon the equitable rule that a person in a fiduciary position cannot make a profit out of his or her office. The case has had a sparse history. It was referred to in the Blackley v National Mutual (supra) litigation, both at first instance and on appeal, but not in relation to misfeasance as opposed to fraud. The only other case I have
found where it has been referred to, is a decision of the New Brunswick Court of Appeal Irving Oil Ltd v S & S Realty Ltd (1983) 48 NBR 2(d) 1. Although the headnote of that case states that the court:
"... applied the rule that notice to or knowledge of an agent will be imputed to his principal, unless the agent takes part in any fraud or misfeasance against the principal ..." [Emphasis added]
a reading of the judgment shows that it was the fraud exception only which was applied. Stratton J, delivering the judgment of the court, said inter alia: (at para 22)
"In support of his submission counsel cited the decisions of In re Hampshire Land Co Ltd [1896] 2 Ch 143, Houghton & Co v Nothard, Lowe and Wills [1928] AC 1 (HL) which are generally accepted as authority for the proposition that it would be contrary to commonsense to impute to a principal an agent's knowledge of a fraud or an irregularity in a particular transaction for which the agent is himself responsible. However, I do not think this proposition can have application except where there is proof that the agent himself intends to defraud his principal either alone or in concert with a third party thereby making it necessary for him to conceal the facts from his principal in order to carry out his intention: see Bowstead, page 336." [Emphasis added]
In addition, on the facts, it was a case where the court refused to impute the agent's knowledge to the principal because the other party knew that the agent was not going to pass it on. That is another exception which rests upon the decision in the case of Sharpe v Foy [1868] UKLawRpCh 112; (1868) LR 4 Ch App 35 but which has no relevance in this case.
Secondly, the Plaintiffs argued that because the fraud exception had not been pleaded or referred to in opening the Crown should not be permitted to rely upon it in closing. Mr Farmer submitted that had there been such a pleading, Mr Ratner's stance under cross-examination might have been quite different and, in particular, his partisan support for the Crown's position would not have been present. There is substance in that submission, but my view is that while an affirmative defence relying upon fraud
must be pleaded, incidental matters of law need not be unless specifically directed. Here, the Plaintiffs plead the imputation of the agents' (and, in particular, Mr Ratner's) knowledge and all the Crown has done is seek to show that the allegation has not been made out because of, inter alia, the fraud exception.
Had the Plaintiffs sought clarification as to whether the exception was to be raised, I would have been amenable to ordering that it could not be unless pleaded. But no such application was made before Mr Ratner's evidence was given. When, late in the piece, during closing submissions, the Crown sought to so amend, the application was resisted and after a negative indication from the Bench, abandoned.
Admittedly, it is something of a grey area. The old rule that matters of law should not be pleaded has certainly gone. But it has not yet been replaced by one to the opposite effect. On balance, my view is that justice required that the Crown be permitted to take the point.
The complaint that the exception was not referred to in opening has little merit. It was not until Mr Ratner came under cross-examination that fraud or suppression emerged clearly so far as he was concerned.
The third matter to be considered, is whether the presumption of imputation can be rebutted. This possibility was not touched on during closing address, but I gave counsel the opportunity to make submissions during a callback on 14 March 1996. In particular, I had drawn attention to the judgment of Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER 685 at 700 and especially to the discussion under the heading "The Agency Theory" which commences at page 702 and completes on 705. There the Lord Justice commences by warning that:
"The circumstances in which the knowledge of an agent is imputed to the principal can vary a great deal and care is needed in analysing the cases. They fall into a number of categories which are not always sufficiently clearly distinguished."
The judgment then proceeds to identify four categories:
(i) Agent's knowledge affecting performance or terms of authorised contract
(ii) Principal's duty to investigate or make disclosure
(iii) Agent authorised to receive communications
(iv) Agent's duty to principal irrelevant.
Counsel were in agreement that in respect of category (iv) the imputation can be rebutted. Mr Mathieson submitted that Messrs Ratner, Clatworthy and Holyman all fall into this last category, whereas Mr Farmer contended they fall into (ii) or (iii).
Elaborating on category (ii) the El Ajou judgment at 702, line J reads: "(ii) Principal's duty to investigate or make disclosure
Secondly, there are cases in which the principal has a duty to investigate
... The duty to investigate may arise in many circumstances, ranging from an owner's duty to inquire about the vicious tendencies of his dog (Baldwin v Casella [1852] EngR 158; (1872) LR 7 Exch 325 at 326-327) to the duty of a purchaser of land to investigate the title. Or there may be something about a transaction by which the principal is 'put on inquiry'. If the principal employs an agent to discharge such a duty, the knowledge of the agent will be imputed to him. (There is an exception, the scope of which it is unnecessary to discuss, in cases in which the agent commits a fraud against the principal.)"
I am persuaded that Messrs Ratner and Holyman were engaged, inter alia, to assist the Crown to discharge its duty to investigate the possibility that BWL or its nominee would, in breach of s 62, use Equiticorp money to purchase the NZS/EHL Parcel. The Crown had, of course, been "put on inquiry" in that regard first by Mr Clatworthy's oral
intimation of what was envisaged and secondly by the arrival of the support structure letters from BWL in Mr Ratner's office on 13 October 1987. As I explain in more detail elsewhere (section 2.14) Mr Ratner, having advised of the s 62 danger, was given the task of investigating and ensuring that the Crown's title to the money to be paid for the NZS/EHL Parcel would be unencumbered by any prior equitable claim. Mr Holyman, likewise, recognised a duty to investigate and, as a consequence, requested urgent discussions with the Crown's solicitors and it was by his hand that the offending support structure letters were delivered. I infer that his attendance at the meeting on 13 October 1987 was because of the duty to investigate and the contribution he could make as a result of his confidential discussions with BWL. Reference to those discussions, and his request for urgent discussions with the Crown's solicitors, will be found in the formal report he sent to the Crown dated 12 October 1987 which is Image Number 271034 at pages 4 and 5 under the heading "4.2 Buttle Wilson's Takeout Facility" (to be found at page 17 of Volume II).
Mr Clatworthy's position, however, was peripheral. When a fortnight or so before 13 October 1987 he had orally explained to the officials BWL's role as underwriter, and that the Crown would need to be satisfied it could perform, he also advised that Equiticorp would be the financier of last resort. But the s 62 problem apparently was not recognised at that stage, and when it was, it was agreed between BWL and SM that BWL should not be further involved in advising on that aspect of the matter. Reference to that decision will also be found in Image Number 271034 in paragraph 4.2.
In respect of category (iii) the El Ajou judgment of Hoffmann LJ at 703, lines C to D states:
"(iii) Agent authorised to receive communications
Thirdly, there are cases in which the agent has actual or ostensible authority to receive communications, whether informative (such as the state of health of an insured: Blackley v National Mutual Life Assurance [1972] NZLR 1038) or performative (such as a notice to quit: Tanham
v Nicholson [1872] UKLawRpHL 7; (1872) LR 5 HL 561) on behalf of the principal. In such cases, communication to the agent is communication to the principal."
Mr Farmer argued that BWL/SM were covered by this category because their function was to negotiate with prospective purchasers which involved receiving information to pass on to the Crown. Clearly, that was the case. It was through BWL that Equiticorp made its first tentative inquiries as to whether the Crown would be interested in the kind of deal that eventuated. And it was through BWL that the Crown sent back encouraging signals. Whether this was quite the type of transaction that Hoffmann LJ had in mind when he formulated category (iii) is perhaps debatable. But, Mr Clatworthy's ostensible authority to receive and pass on information in that way is beyond question and it seems sound in principle that his knowledge should be imputed to the Crown as a matter of law rather than a rebuttable presumption of fact. It was in that same capacity that Mr Clatworthy learnt of the execution of the Takeout Deed.
Mr Mathieson also argued that BWL/SM did not have the status of "classical agents" because they did not have power to bind the Crown. On that basis he argued that their knowledge should not be imputed to the Crown. In the circumstances of this case, and for the reasons set out above, I am unable to accept that submission.
In all the circumstances, then, I am of the view that the knowledge of all three agents is properly imputed to the Crown.
Finally, during his reply on the rebuttable presumption argument on 14 March 1996, Mr Mathieson argued that the Court should be slow to impute knowledge in this case. Counsel submitted that a finding of dishonesty, for example, should not be made unless there was actual knowledge.
Thomas J said something similar in Powell v Thompson (supra) when dealing with an assistance rather than receipt case. At page 618 of the report, lines 10 to 15 he said:
"The Court's readiness to impute the agent's knowledge to the principal will, of course, be much more inhibited where a plaintiff asserts that the principal's conduct is unconscionable for the purpose of establishing liability under the 'knowing assistance' head of liability. In determining whether or not the defendant's conduct was unconscionable, it will generally be critical to ascertain the extent of his or her personal knowledge. While imputing the knowledge or dealings of the agent to the principal for this purpose cannot be absolutely excluded, the occasions when it will be appropriate to do so are likely to be rare."
Obviously those comments must be equally applicable to knowing receipt in respect of Baden categories (ii) and (iii). More generally, however, with respect, my examination of the cases in relation to the rule of imputation and the exceptions to it, leads me to the conclusion that such inhibition as there may be is not as powerful as Thomas J suggests. Furthermore, the observations were made pre-Tan and appear to assume a subjective rather than objective test for dishonesty. Also they do not address the situation of a company (or in this case, the Crown) where, as discussed elsewhere, the knowledge of directors and senior officers (officials) must of necessity always be of the imputed kind.
Be all that as it may, however, my view is that, rare or not, in this case the knowledge which Mr Ratner and the other two agents had throughout, is properly imputed to the Crown.
2.12 Discoverability
On the basis that I have found that there were facts which called for inquiry by the Crown in the context of one or more of Baden (ii), (iii), (iv) or (v) and that there was an absence of such inquiry: the next question is whether constructive knowledge should be
imputed to the Crown without more (the fraud exception aside). Or whether, as the Crown submits, the Plaintiffs must prove on the balance of probabilities that such inquiries would have exposed the truth.
I approach this issue with three considerations in mind - one or two of which I have already averted to. First, rules of equity established long ago to deal with conveyancing issues should not be mechanically applied to commercial circumstances. Secondly, the better course is to examine the underlying principles of the old rules to see whether they can be employed appropriately to do justice in the circumstances of the case under consideration. Thirdly, if the principles underlying the old cases can be seen to be relevant and reliable then it is appropriate to give them a modern application.
The Crown adopts the approach espoused by Peter Gibson J in Baden v SG Développement du Commerce SA [1992] 4 All ER 161 at 247, where he concluded at line (j):
"It is for the plaintiffs to discharge the onus of proving that the failure to inquire caused loss, ..."
He added that to presume loss would effectively release a crucial part of the burden resting upon the plaintiffs.
Mr Mathieson accepted that liability depends upon a link between knowing receipt (knowledge) and loss, rather than between a failure to inquire and loss. Nonetheless counsel argued that in order to get to a finding of knowing receipt the true significance of the inquiries not made must be ascertained.
When advancing those submissions, the Crown was aware that the Plaintiffs were relying upon the dicta of Millett J in Agip (Africa) Ltd v Jackson [1992] 4 All ER 385
at 407. Mr Mathieson made several points to show that for Baden categories (iv) and
(v) at any rate, to impose constructive knowledge rather than to require proof that inquiry would have led to the truth, would result in a basis for equitable liability more demanding than that imposed in tort. Attention was drawn to the paraphrase of Baden
(v) by Richardson J in Westpac Banking Corp v Savin [1985] 2 NZLR 41 at 52 at line 50:
"Knowledge obtainable from inquiries which an honest and reasonable person would feel obliged to make, being put on inquiry as a result of his or her knowledge of suspicious circumstances" (emphasis added).
The word "obtainable" added by Richardson J to the original formulation indicated, counsel submitted, the need to prove that such knowledge was obtainable by inquiry. Comfort was also drawn from the words of Millett J in Macmillan Inc v Bishopsgate Trust (No 3) [1995] 1 WLR 978 at 1000 where he said at line d when describing constructive notice:
"that is to say notice of such facts as he would have discovered if he had taken proper measures to investigate them."
Finally, the Crown submitted that had inquiries been undertaken they would not have produced other than untruthful answers.
A choice must be made. Which view should be followed, that of Millett J or that of Peter Gibson J? And irrespective, on the balance of probabilities, what knowledge, if any, would inquiry have yielded?
The passage in Baden upon which the Crown relies, which is substantially paragraphs 285 and 286 of Peter Gibson J's celebrated judgment, is set out hereunder:
"285. The second area of dispute relates to the knowledge to be imputed to a bank which ought to have made but failed to make inquiries or having
made inquiries failed to await the answers thereto. As I have said, Mr Price submits (and Mr Leckie accepts) that the court must ascertain on a balance of probabilities what would have been the actual answers to the inquiries which were never made and whether those answers would have put the honest and reasonable banker on further inquiry. It is hard, therefore, to see much room for the operation of the presumption of truthfulness on which Mr Price relies. I suppose that it would apply only in circumstances where the court could reach no conclusions on the facts, but counsel are again at one in saying that the mass of evidence in the present case enables the court to reach a view as to the answers that would probably have been given. It is therefore an academic question in this case whether there is, as Mr Price contends, or is not, as Mr Leckie contends, a presumption of truthfulness applicable to a failure to inquire and I propose to express only briefly the view to which I incline.
286. Although Ungoed-Thomas J in the Selangor case [1968] 2 All ER 1073 at 1118, [1968] 1 WLR 1555 at 1607 was able to say that the weight of authority establishes the presumption of truthful answers to inquiries which ought to have been but were not made, as Brightman J in Karak [1972] 1 All ER 1210 at 1233, [1972] 1 WLR 602 at 631 noted, the point was conceded before Ungoed-Thomas J. It is true that Brightman J said that the remarks of Ungoed-Thomas J were not to be read as meaning that there was an irrebuttable presumption of truthfulness and that he further stated his view that it was open to the defendant bank to prove the inquiries would have produced acceptable answers so that the failure to inquire led to no loss. But he then referred to authority to establish that the onus of proving the causal connection between the breach of duty to inquire and the loss lay on the plaintiff. He went on to hold that on the facts inquiry would have revealed the impropriety of the transaction under consideration. In other words he did not apply any presumption of truthfulness against the bank. As at present advised I would adopt the same approach. It is for the plaintiffs to discharge the onus of proving that the failure to inquire caused loss, and to apply the presumption would effectively release a crucial part of that burden; I doubt if it is right to found a constructive trust on so artificial a basis."
The conclusions reached above are to be compared with the dicta of Millett J in Agip, page 407 under the heading "Causation" which are also set out hereunder:
"Causation
Although no argument was addressed to me on this question, the judgment of Peter Gibson J in Baden's case contains a lengthy discussion of the position of a party who is put on inquiry but fails to inquire. He concluded that there is no presumption that, had inquiries been made, truthful answers would have been given, but that the plaintiff must prove that inquiry would have disclosed the truth, for the burden lies upon him
to prove a causal connection between the failure to make inquiry and the loss.
Peter Gibson J was considering the question in the context of constructive notice, but a similar question appears to arise in the context of imputed knowledge of type (iii). For my part, I doubt that this is the correct approach even in cases of constructive notice, but I entirely reject it in cases of dishonesty. There is a great weight of judicial authority as well as principle against it. In my judgment, it derives from a misunderstanding of the basis of the constructive trustee's liability. He is not liable for failing to make inquiry, but for the misapplication of property. He is under no duty to make inquiry. His only duty is to act honestly. If he makes inquiry, he does so for his own protection. If he does not make inquiry, the loss is not caused by his failure to do so but by his participation in the misapplication of the plaintiffs' funds. He is liable only if he acted with knowledge; and this must be judged in the light of all the circumstances known to him and any explanation actually given to him. But it is not, in my view, to be judged by considering the hypothetical explanations which might have been given to him if he had sought them. If it were otherwise, his liability would depend on whether the fraudster would have been sufficiently inventive to be able to supply a plausible explanation if asked for one. In the present case, it would depend on whether the defendants should be assumed to have directed their inquiries, which ex hypothesi they did not make, to Mr Zdiri or to his superiors. Such considerations are or ought to be irrelevant. They have been repeatedly denounced in the strongest terms: 'A more dangerous doctrine could not be laid down, nor one involving a more unsatisfactory inquiry ...' (see Jones v Williams [1857] EngR 575; (1857) 24 Beav 47 at 62[1857] EngR 575; , 53 ER 274 at 280 per Romilly MR, cited with approval by Stirling LJ in Re Alms Corn Charity [1901] UKLawRpCh 145; [1901] 2 Ch 750 at 762 and by Bankes LJ in A L Underwood Ltd v Bank of Liverpool [1924] 1 KB 775 at 789, [1924] All ER Rep 230 at
235).
In my judgment, the fact that a false but credible explanation would or might have been given is no defence to a party put on inquiry who makes none. Mr Jackson and Mr Griffin are not to be held liable for the misapplication of the plaintiffs' funds because they failed to make inquiries which would have discovered the fraud, but because they dishonestly assisted in the misapplication. Their failure to make inquiries which honest men would have made to satisfy themselves that they were not engaged in furthering a fraud is merely the evidence from which their dishonesty is inferred." [Emphasis added]
On both principle and authority I consider that Millett J in Agip is right. As already recorded the one aspect of principle Mr Mathieson was not prepared to dispute, was, that a constructive trustee's liability does not rest upon a failure to inquire. His or her duty is to act honestly and the causal link must be between his or her knowledge and
the loss suffered by the misapplication of the Plaintiffs' funds. But, as already indicated, Mr Mathieson submitted that since Baden (iv) and (v) involve, in reality, issues of negligence rather than probity, the Millett J approach should not apply if liability is to be fixed on the basis of either of the categories just mentioned.
The cases cited by Millett J, particularly Jones v Williams; Jones v Smith and the Alms Corn Charity are all summed up in the judgment of Stirling LJ in the last mentioned case at page 762 where he said, having given the facts of the other two cases:
"Lord Romilly M.R., in the course of his judgment in that case, said (Jones v Williams [1857] EngR 575; 24 Beav. 47 at 62): 'With respect to the argument, that it was unnecessary to make any inquiry because it would have led to no result, I think it impossible to admit the validity of this excuse. I concur in the doctrine of Jones v Smith [1841] EngR 1169; (1841) 1 Hare, 43, 55 that a false answer, or a reasonable answer given to an inquiry made, may dispense with the necessity of further inquiry, but I think it impossible, beforehand, to come to the conclusion, that a false answer would have been given, which might have precluded the necessity of further inquiry. A more dangerous doctrine could not be laid down, nor one involving a more unsatisfactory inquiry, viz, a hypothetical inquiry as to what A. would have said if B. had said something other than what he did say.' In the doctrine there laid down I fully concur..."
So far as Mr Mathieson's reliance upon Millett J's statement in Macmillan Inc (supra) is concerned, I think it misplaced. The words Millett J used obviously echo words used by Lord Browne-Wilkinson in Barclay's Bank plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180 at 195- 196 which are quoted in the paragraph following that in which Millett J used the words relied upon. The passage from O'Brien reads:
"The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify
whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it." [Emphasis added]
It seems to me that the words I have emphasised above are qualified very substantially by the final sentence of the passage which confirms precisely the view advanced by Millett J. The approach taken in that final sentence has been firmly established in equity since early last century. In Kennedy v Green decided in 1834 and reported in [1834] EngR 1072; 40 ER 266 at 274 Lord Brougham LC said:
"The doctrine of constructive notice depends upon two considerations: first, that certain things existing in the relation or the conduct of parties, or in the case between them, beget a presumption so strong of actual knowledge that the law holds the knowledge to exist, because it is highly improbable it should not; and next, that policy and the safety of the public forbids a person to deny knowledge while he is so dealing as to keep himself ignorant, or so as that he may keep himself ignorant, and yet all the while let his agent know, and himself, perhaps, profit by that knowledge.
In such a case it would be most iniquitous and most dangerous, and give shelter and encouragement to all kinds of fraud, were the law not to consider the knowledge of one as common to both, whether it be so in fact or not. Under one or other of these heads, perhaps under both, comes the other principle, which is quite undeniable, that whatever is notice enough to excite attention, and put the party on his guard and call for inquiry, is also notice of everything to which it is afterwards found that such inquiry might have led, although all was unknown for want of investigation." [Emphasis added]
I pause to observe that, in Macmillan, Millett J was applying the doctrine of constructive notice in a wider sense to a commercial, as opposed to a conveyancing, transaction. The same thing, it seems to me, was happening in O'Brien where the House of Lords took the established rules, looked at the underlying principles and applied them, appropriately modified, to late 20th century spousal undue influence situations. The view that in O'Brien well established principles were being applied is also advanced by Mee in an article published in the Cambridge Law Journal (November 1995, pages 536 to 544) entitled "Undue Influence, Misrepresentation and
the Doctrine of Notice". At page 537 under the heading "The Doctrine of Notice" the author says:
"It is important at the outset to determine precisely what Lord Browne- Wilkinson intended when he referred to the 'doctrine of notice'. It is arguable that this doctrine may take different forms when applied to a variety of legal problems. However, it is submitted that his Lordship clearly intended to apply the principles of notice originally developed by equity to determine priorities over unregistered land and now formulated in section 199 of the Law of Property Act 1925. This conclusion becomes inevitable upon an examination of the manner in which Lord Browne- Wilkinson explains the doctrine throughout his speech."
My application of the doctrine of notice or knowledge in this part of the case, upon analysis, may be seen to rest likewise on the earlier conveyancing principles developed in equity. I am comfortable with that. It is appropriate in the particular circumstances of this case. But that is not to deny the validity of the admonition earlier mentioned that the rules should not be applied in a mechanical or unsophisticated way to modern commercial situations.
The one aspect of Mr Mathieson's argument that I have not so far discussed relates to his submission that Baden (v) involves negligence not dishonesty and the imputation of constructive notice where inquiry should have been made, and was not, is not appropriate there because it produces a different result, and applies a more demanding standard, than would be the case if the claim were brought in tort. That submission does not sit comfortably with what Lord Browne-Wilkinson had to say in O'Brien (supra) but in any event, as a matter of policy, a failure to inquire when put on notice should result in constructive knowledge being imputed.
Against the possibility that a different view of the law may be taken elsewhere, I turn to consider whether, on the balance of probabilities, appropriate inquiries would have uncovered the truth.
At the threshold of such consideration, however, the problem referred to by Millett J in Agip, as to who to inquire of, presents itself. So far as Equiticorp was concerned, should the inquiry have been made solicitor to solicitor? Was it enough to take the word of someone in middle management, like Mr Small, the author of the 11 March 1988 letter? Or, was the issue so important that at least the Managing Director and, more probably, the Chairman of Directors and Board should have been approached? What of BWL? Should the approach have been made to Mr Clatworthy, or, would it have been more appropriate, to instruct the Crown solicitors to approach Mr Familton? Also should inquiry have been made of Mr Holyman at SM?
Of two things I am quite satisfied. They are that if either Mr Harford or Mr Familton had been asked (subject to any instruction from their clients not to disclose information) they would have given truthful answers. Mr Familton played a straight bat from the outset and he would not have changed. Mr Harford, against his better judgment and as matter of personal regret, had allowed himself to be used earlier but he would not, in my judgment, have been a party to a repeat deception. I cannot be so sure about Mr Darvell. Also in the changed circumstances I am not prepared to assume that Mr Ratner would have continued to default on his fiduciary duties to his client. See the comparable view of Fry J in not dissimilar circumstances in Bradley v Riches (1878) 9 Ch D 189, 196. In due course, I think Mr Ratner would have disclosed the true position as it was back in October 1987. That disclosure, of course, would have given the Crown a much more solid basis for challenging Equiticorp.
Before turning to Equiticorp, however, I consider what the result of inquiries to Mr Clatworthy of BWL and Mr Holyman of SM would have been. Mr Clatworthy was the first person to indicate to the officials that BWL would underwrite, relying upon EHL as a financier of last resort. It was also from his firm (although he was unaware of it) that the support structure letters which offended s 62 were sent to the Crown for
consideration. His evidence was that he was never told that the Crown required the support structure to be unwound; that he knew the Takeout Deed had been signed; assumed that the Crown knew it as well and only became aware of the Crown's unwind requirement when the Serious Fraud Office began to investigate a year or eighteen months after the Group collapsed. So there would seem to be no reason why he should not have been prepared to disclose in March 1988 that EHL remained BWL's backstop, which I surmise is the reason why BWL was prepared to nominate AI4. Because if AI4 had failed to settle, BWL would have been required to purchase and would, under those circumstances, have called upon EHL to honour its commitments under the Takeout Deed.
Mr Holyman was not called as a witness. I therefore had no opportunity to assess him personally, but he was the representative of a reputable London Merchant Bank, hand- picked by the Crown to give it financial advice. There is no reason why I should not assume that he, like Mr Clatworthy, would have informed the Crown truthfully of what he knew, namely, that the Takeout Deed had in fact been signed on 19 October 1987 and bound EHL.
In considering the position of Messrs Clatworthy and Holyman, I have not overlooked the fact that if the on sale of the Crown's EHL shares had fallen over at the eleventh hour SM and BWL would not have earned their success fee. Also EHL might have been difficult about paying the fee earned by BWL for underwriting in the first instance. But I must assume that neither Mr Holyman nor Mr Clatworthy would have allowed considerations like that to persuade them to answer the Crown, in the circumstances under consideration, other than truthfully. All that might have happened was that they would have declined to answer one way or the other. But that, surely, would simply have added to the Crown's anxiety that all was not well.
Turning to EHL. If Hawkins ran true to form, he no doubt, in the first instance, would have sought to bluster his way out of it saying the moneys (exclusive of the
$105 million from Elders) had been borrowed off-shore and it was none of the Crown's business. It is quite on the cards also that he would have sought to muzzle not only other members of the Board and executives within Equiticorp, but the EHL solicitors in RWS, Auckland, and their brokers in BWL, Auckland (Messrs Cimino and McDonald). But, once again, that kind of shut down would have led to greater suspicion on the part of the Crown and, incidentally, would have added to the pressures upon Mr Ratner to make a clean breast of all that he knew.
In my above discussions on this topic, I have concentrated on knowledge of the breach of s 62, which made it illegal for Equiticorp money to be used to purchase Equiticorp shares. So far as the gross improvidence of the purchase by AI4 is concerned, the view I take is that the Crown had actual knowledge of that. Mr Chetwin knew "somebody was going to take bath" and when AI4 was nominated the "somebody" was then identified. Also I observe that Mr Mathieson's contention that the Crown could not afford to refuse to settle because it would have been sued for breach of contract, is undermined to the point of being without substance when it is realised that had AI4 issued proceedings, it would not have been able to prove loss. What loss could there be when AI4 was to buy $327 million worth of shares at $3.52 per share when, on the day that hypothetically settlement would have been refused, they were trading at 90 cents (propped up in fact by an illegal share support scheme) and still falling.
As I have worked my way through these various scenarios I am conscious that I have moved steadily away from probabilities into the realm of speculative possibilities, which is precisely what Millett J, and the Judges in the older decisions upon which he relied predicted would happen.
Although it be a possibility (albeit a real one in my view) rather than a probability I add this as a coda. Upon vigorous inquiry being made, it might well have been that Equiticorp would have turned to the Crown and said 'Yes, we are funding for the balance of $222 million; we have not informed you of this because you told us, through Mr Ratner in no uncertain terms when you required the unwind letters, that you did not want to know what we did from then on. We cannot raise the money anywhere else, so, you either get paid this way or not at all.'
I observe, also, that a course open to Equiticorp which would have made accounting sense, but probably would have damaged the image of the Group to such an extent that it would have collapsed earlier than it did, would have been to decline to fund; leave BWL to face the liability alone and when sued, pursuant to the Takeout Deed, raise illegality as a defence, thereby thwarting its enforcement.
In conclusion, then, I hold that, in law, there was no onus upon the Plaintiffs to show that if proper inquiries had been made the truth would have been exposed. But if I am wrong in that, then my conclusion on the facts is that, on the balance of probabilities, from one of the many sources of information available to the Crown (not least of which was its own solicitor, Mr Ratner), the truth would have emerged.
2.13 The knowledge of the Crown: aggregation
As noted at the commencement of section 2.11, I have now made findings as to the knowledge of each of the officials and agents of the Crown.
While the knowledge of the agents is imputed, the position as regards the officials is different. The Crown, like a company, can only act through servants and their knowledge is constructively that of the Crown. That is the position as regards Messrs Chetwin, Andrew, Kwok and Galt.
The question then becomes whether the sum of the knowledge of each individual agent and official can be aggregated to make up a composite whole. A total pool of knowledge residing in the Crown by which its position as an alleged dishonest assister or knowing recipient can be judged.
I am satisfied that such knowledge can properly be aggregated.
Authority for the above proposition is drawn from four of a number of cases cited by the Plaintiffs in their closing submissions. First is the case of National Bank of Australasia v Morris [1892] UKLawRpAC 2; [1892] AC 287. This is a decision of the Privy Council. It concerned an action by the Official Assignee to recover payments by a bankrupt into an overdrawn bank account. The question was, did the Bank know of the insolvency. At the time of the payment into the account it was known at Head Office in Melbourne, but that information had not been communicated to a branch office in Sydney where the account was held. Delivering the decision of the Judicial Committee, Lord Hobhouse, having set out the facts, said at the foot of page 290:
"But, whatever may have been the state of Balfour's knowledge, it is the Bank who are sued, and they cannot get rid of knowledge which is brought home to them at Melbourne by alleging the ignorance of their agent at Sydney."
The second case, Brambles Holdings Ltd v Carey (1976) 15 SASR 270, concerns the prosecution of a transport company for overloading. A large piece of machinery was to be transported from Alice Springs to Adelaide. Provided it was correctly placed on the low-roader, so that the weight was evenly distributed over all the wheels, no offence would be committed. A fully instructed driver was despatched from Adelaide, who was to liaise with the Depot Manager in Alice Springs, who was also knowledgeable. The driver met with an accident and the Depot Manager left before his replacement, who had not been instructed, arrived. The replacement driver did his best but did not
place the load correctly, and, as a consequence, the company was prosecuted and convicted. Bray CJ heard the appeal. He upheld the conviction on the basis that the state of mind of the company is the aggregation of the knowledge of all those involved. At page 275 he is reported as saying:
"Of course, if mental states like knowledge or belief are to be attributed to a notional and metaphysical entity like a corporation, this can only be done by attributing to it the knowledge or belief actually possessed by some one or more of its officers: Leonards Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705; Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; [1972] AC 153. Very difficult questions can arise in this connection. I do not think, however, that it is necessary to enter into them now. It is enough to say that, in my view, it is a fallacy to say that any state of mind to be attributed to a corporation must always be the state of mind of one particular officer alone and that the corporation can never know or believe more than that one man knows or believes."
The next authority is Krakowski v Eurolynx Properties Ltd (1995) 130 ALR 1, a decision of the High Court of Australia delivered in June of 1995. This is a rather more complex case. The plaintiffs had been induced to purchase a building by a representation that it was leased to a strong tenant at $156,000 per annum. In fact, the tenant had been induced to take up the lease by a payment that amounted to a years rent. The representation had been made by the defendant's solicitor, who produced a copy of the lease to the plaintiffs on the instruction of a company executive named Gilbert. The solicitor did not know of the side-deal with the tenant, and Gilbert failed to appreciate that it was of significance to the purchasers. However, two agents of the defendant company, who had been involved in the transaction, although not directly involved in the representation, did appreciate the significance of the inducement paid to the tenant in terms of the plaintiffs' assessment of the value of the asset. A majority of the High Court, Toohey J dissenting, held that the knowledge of the company was the aggregate of all the persons involved. At page 15 of the report, in the body of the combined judgment of the majority (Brennan, Deane, Gaudron and McHugh JJ) at line 34 and following it was said:
"The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone as to his appreciation of the significance of the separate agreement. Account must be taken of the evidence that Eurolynx' agent (Cini) and Eurolynx' officer (Ryan) who had first procured the agreement of Mermelstein (as agent for the purchasers) to buy unit 12 knew that the purchasers were willing to buy on the footing that the rent reserved by the lease was what the tenant had been and was willing to pay for a lease of the property offered to them. In other words, they were willing to buy at a price 10 times the amount of the rent which the property itself would yield. Their knowledge was the knowledge of Eurolynx, for they were the persons who were responsible for the initial negotiations and who had set the scene in which the representation had been made by the s 32 statement and the proffered contract of sale. ...
A division of function among officers of a corporation responsible for different aspects of the one transaction does not relieve the corporation from responsibility determined by reference to the knowledge possessed by each of them."
Finally, I refer to the decision of Wootten J in the Supreme Court of New South Wales Re Chisum Services Pty Ltd (1982) 1 ACLC 292. This was an action by liquidators of a company against a bank. The liquidators alleged that the company's account with the bank had been taken out of overdraft at a time when it was insolvent. The liquidators succeeded because the Manager of the branch had sufficient knowledge to cause him to "suspect" and that was enough under the relevant legislation. But the Judge went on to discuss the situation which he identified in the following passage at page 298 of the judgment immediately after quoting Lord Hobhouse in National Bank of Australasia v Morris: (supra)
"A more difficult question raised by the submission is this. If an officer at Head Office had information, eg that a petition had been presented against a company, which was not sufficient to give him reason to suspect the matters set out in subsec. 4(c), and the Manager of the Branch had other information which also was not on its own sufficient to provide reason to suspect those matters, yet the two lots of information if present in one mind would have been sufficient to provide reason to suspect those matters, would the bank lose its protection?"
No final conclusion on that issue was required or provided, but the Judge saw the key to the issue as the existence as between those involved of a duty and opportunity to communicate. Given the close-knit team of officials operating in Treasury, all with a duty to communicate with Messrs Galt and Ratner, the Chisum case, in my view, provides support for the aggregation of knowledge in this case.
The Plaintiffs' argument on this topic was not fully developed until closing which was after the Crown had closed. It was referred to briefly in the Crown's limited right of reply at page 53, paragraph 18, as follows:
"18. Aggregated knowledge. The facts making it appropriate to discuss the aggregation of the knowledge of individual officers/agents (43.53-43.54) do not exist here."
When making that submission, Mr Mathieson also reminded the court that the Crown was entitled to rely on the advice it had received that the original letters had been unwound and that, counsel submitted, remained the deciding factor. As my findings of fact earlier in this judgment and the discussion above show, I have concluded contrary to the submission made that the factual situation disclosed by the evidence requires that aggregation be considered.
2.14 The level of knowledge required in this case in respect of either recipient or accessory liability
In 2.3 to 2.9 I have set out what the Crown officials, Ministers and agents actually knew. In 2.10, 2.11 and 2.13 I have explained how that knowledge became the knowledge of the Crown. In a sense, all the knowledge the Crown acquired could be described as imputed. Thus what the officials and Ministers knew first-hand was knowledge of the Crown just as the knowledge of those who are the directing minds and wills of a company, becomes its knowledge. See Meridian Global Funds
Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 at 11 and 12. By the process by imputation the knowledge of the agents also became that of the Crown.
It will be appreciated that none of the information aggregated to the Crown gave it actual knowledge that the NZS/EHL Parcel was to be paid for with Equiticorp money. On the other hand, the Crown did have actual knowledge that the purchase by AI4 was grossly improvident so that the directors authorising it must have been breaching their fiduciary duties and acting outside their authority.
Concentrating, however, on where the money was coming from. The question is whether the knowledge which the Crown had should have caused it to make inquiries. More precisely, what level of knowledge should the law regard as sufficient to hold the Crown liable in the kind of circumstances thrown up by a case such as this?
A convenient starting point is the decision of Peter Gibson J in Baden v SG Developpment du Commerce SA [1992] 4 All ER 161. In that judgment at page 235 of the report between lines G and J and page 236, lines A to C the Judge said:
"250. What types of knowledge are relevant for the purposes of constructive trusteeship? Mr Price submits that knowledge can comprise any one of five different mental states which he described as follows: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. More accurately, apart from actual knowledge they are formulations of the circumstances which may lead the court to impute knowledge of the facts to the alleged constructive trustee even though he lacked actual knowledge of those facts. Thus the court will treat a person as having constructive knowledge of the facts if he wilfully shuts his eyes to the relevant facts which would be obvious if he opened his eyes, such constructive knowledge being usually termed (though by a metaphor of historical inaccuracy) 'Nelsonian knowledge'. Similarly, the court may treat a person as having constructive knowledge of the facts (type (iv) knowledge), if he has actual knowledge of circumstances which would indicate the facts to an honest and reasonable man.
"251. Formulations (iii) and (v) are taken by Mr Price from authority (see Belmont [1979] 1 All ER 118 at 130, [1979] Ch 250 at 267 per
Buckley LJ and Selangor [1968] 2 All ER 1073 at 1104, [1968] 1 WLR 1555 at 1590 per Ungoed-Thomas J respectively)."
The Baden judgment was handed down in April 1983 and since then the five point formulation has received a mixed reception. The debate has ranged widely in both academic writings and judgments. Its main focus has been on whether liability should be restricted to Baden categories (i) to (iii), which are seen as requiring dishonesty, or more extensively to include Baden (iv) and (v) which are equated with, but not necessarily identical to, negligence. Thus in The Law of Restitution published in 1993 Professor Burrows has a subsection in chapter 4 headed "Dishonesty or Negligence?" while Professor Birks in the 1989 reprint of his work An Introduction to the Law of Restitution has an Endnote at page 477 headed "Third Party Recipients, The Personal Liability Becomes Fault-based, Contradictions With Other Restitutionary Liabilities".
Examples of decisions in which both sides of the argument have been surveyed are Westpac Banking Corp v Savin [1985] 2 NZLR 41; Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700, a decision of Knox J delivered in July 1991 and more recently Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 3 All ER 97, where a wide range of possibilities including dishonesty (judged objectively) and negligence are discussed. In the last mentioned case, so far as accessory liability is concerned at any rate, the Judicial Committee favoured a new description namely, "dishonest assistance" and said that "the Baden scale of knowledge is best forgotten".
Nothing would be gained by again rehearsing the competing arguments. In my view Professor Burrows comes close to the core of the issue when he identifies the difference as one between dishonesty and negligence. The concomitant of that division is whether constructive knowledge is enough to found liability. On the other hand, it has to be recognised that the Baden categorisation has been criticised for its rigidity and there is
general acceptance that overlap is inevitable as one category of knowledge shades into another. Indeed, Knox J in Cowan de Groot (supra) at page 761 between lines G and J said:
"I share the reservations expressed by Millett J in Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 at 405, [1990] Ch 265 at 293 regarding over-refinement in making the distinctions implicit in the classification or a too ready assumption that categories (iv) and (v) are necessarily cases of constructive notice only. In my judgment it may well be that the underlying broad principle which runs through the authorities regarding commercial transactions is that the court will impute knowledge, on the basis of what a reasonable person would have learnt, to a person who is guilty of commercially unacceptable conduct in the particular context involved." [Emphasis added]
Blanchard J in Nimmo v Westpac Banking Corp [1993] 3 NZLR 218 expressed a preference for the Knox approach and the Privy Council in Tan expressly endorsed it at page 107, line d as capturing the flavour of the objective standard of dishonesty.
At first blush, the Baden debate in New Zealand might appear to have ended with acceptance of all five categories. Professor A J Oakley has a chapter in the book Cope (ed) Equity - Issues and Trends (1995) entitled "Liability of a Stranger as a Constructive Trustee: Some Recent English and Australian Developments". At page 87 of the text, having reviewed the English, Australian and New Zealand authorities he said:
"In striking contrast to the somewhat uncertain state of Australian law and the wholly unsatisfactory state of English law, the courts of New Zealand have shown both unanimity and consistency. Every single authority decided in the last decade has concluded that liability for 'knowing receipt' will be imposed on anyone falling within any of the five categories of knowledge identified by Peter Gibson J in Baden v Societe Generale."
He then cites Savin [1985], Powell [1991], Equiticorp [1991], Lankshear [1993] and Nimmo [1993]. None of those cases, however, involved a finding of recipient liability based on categories (iv) or (v). Nor do three or four subsequent cases, including the
decision of the Court of Appeal in Westpac Banking Corp v Ancell (1993) 4 NZBLC 103, 259. All the endorsements were obiter. The closest any judgment comes to applying Baden categories (iv) and (v) is that of Tompkins J in Marr v Arabco Traders Ltd [1987] NZHC 1338; (1987) 1 NZBLC 102,732 at 759. Also in Tan (supra) at page 105 between lines E and F there is a survey of New Zealand cases which recognises, accurately with respect, that there is a divergence of view in this jurisdiction, albeit the focus there was accessory liability. Clearly then, in New Zealand, as in England and elsewhere, the debate is not yet over.
So far I have not expressly differentiated between recipient as opposed to accessory liability. I propose now, however, to discuss knowing receipt as distinct from dishonest assistance.
The Plaintiffs argue that their knowing receipt causes of action are restitutionary. The Crown disputes that and contends that they are fault-based so that if successful the remedy would be equitable compensation. I apprehend that one reason for this divergence of view is the effect the restitutionary remedy would have on the calculation of the amounts to be paid if the Plaintiffs succeed. Another reason, although not put at the forefront of the Plaintiffs' argument is that restitution, with its emphasis on the unjust enrichment of the defendant at the expense of the plaintiff, sits more comfortably with liability based upon constructive knowledge (Baden categories (iv) and (v)).
Recipient and accessory liability are historically linked because Lord Selborne LC, in his celebrated oral judgment in Barnes v Addy, dealt with them both in the same breath, so to speak. But, Burrows argues, (persuasively in my view), that the link should be severed. His thesis is developed at pages 155 to 156 of the text (supra) where he says that intermeddling by assistance in a breach "indisputably" invokes liability for a wrong "triggering compensation not restitution". Whereas "knowing receipt does not constitute a breach of [a primary] duty: the only duty is the remedial one of giving up
the enrichment received". That this is the correct approach seems to have the endorsement of the Privy Council in Tan (supra) at page 105, line F where the judgment records:
"The issue in this appeal concerns only the accessory liability principle. Different considerations apply to the two kinds of liability. Recipient liability is restitution-based, accessory liability is not." [emphasis added]
Mr Mathieson argued that "this was mere dictum" and that had Lord Nicholls intended "to engage in a huge leap between separate categories" he would have said so clearly. I do not agree. The words underlined are an unambiguous statement of exactly where the difference lies.
Charles Harpum took a similar view, commenting upon Tan in (1995) 111 LQR 545 at page 546, stating:
"The Judicial Committee explicitly recognised the concept of accessory liability for procuring or assisting a breach of trust or fiduciary duty. It was akin to certain of the economic torts, particularly those of inducing the breach of a contract or interfering in its performance. Such liability was 'secondary' in the sense that it arose only where there had been a breach of trust, and it was quite distinct from the liability imposed on the recipient of a trust property transferred in breach of trust. 'Recipient liability is restitution-based, accessory liability is not': [1995] 3 W.L.R. 64 at p. 70. This is a matter of some significance. Although many writers and some judges have treated receipt-based claims as restitutionary, others have regarded them as founded on equitable wrongdoing (see most notably, Re Montagu's S.T. [1987] Ch. 264; P D Finn, Equity, Fiduciaries and Trusts ed. D W M Waters (1993), p. 195). The former are now likely to be vindicated." [Emphasis added]
Lawson J in International Sales and Agencies Ltd v Marcus [1982] 3 All ER 551 at 558, line a took a similar view when he said:
"...the knowing recipient of trust property for his own purposes will become a constructive trustee of what he receives if either he was in fact aware at the time that his receipt was affected by a breach of trust, or if he
deliberately shut his eyes to the real nature of the transfer to him (this could be called 'imputed notice'), or if an ordinary reasonable man in his position and with his attributes ought to have known of the relevant breach. This I equate with constructive notice. Such a position would arise where such a person would have been put on inquiry as to the possibility of a breach of trust. I am satisfied that in respect of actual recipients of trust property to be used for their own purposes the law does not require proof of knowing participation in a fraudulent transaction or want of probity, in the sense of dishonesty, on the part of the recipient. That is a test which relates, not to knowing recipients of trust property for their own use, but to those who knowingly participate by assisting in a breach of trust."
Millett J in Agip (Africa) v Jackson [1992] 4 All ER 385 (decision, May 1989) discussing knowing receipt and knowing assistance said at page 404, line j to 405, line a:
"The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not. Tracing claims and cases of 'knowing receipt' are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of 'knowing assistance' are concerned with the furtherance of fraud."
Closer to home, Thomas J in Powell v Thompson (supra) at 607, lines 15 to 25, having referred to the knowing receipt and knowing assistance categories said:
"The two categories differ, however, in a much more basic respect. In the 'knowing receipt' class of case the underlying basis of the defendant's liability is the unjust enrichment of the defendant at the expense of the plaintiff. The defendant gains the trust property; the plaintiff is deprived of it. In the 'knowing assistance' type of case the basis of liability is the conduct of the defendant in participating in a breach of trust. Trust property may or may not pass. That is immaterial to this head of liability.
Succinctly put, the distinction is that in the 'knowing receipt' cases it is the fact that the third party gains a material advantage at the plaintiff's expense which is regarded as 'unconscionable' - in the sense of unreasonable or inequitable; in the 'knowing assistance' cases it is the behaviour of the defendant which is regarded as 'unconscionable'.
Failure to appreciate this distinction has lead to much of the confusion relating to the type of knowledge the stranger must possess before being held liable as a constructive trustee."
Blanchard J in Nimmo (supra), acknowledging Thomas J's judicial and extra-judicial expositions on the topic, said (page 225, line 2):
"... it is probable that unjust enrichment is the basis for the imposition of a constructive trust in the case of knowing receipt: ..."
I am prepared to hold that unjust enrichment is the foundation for recipient liability and that therefore the remedy is restitutionary. Having reached that conclusion, the next question is whether there is any reason why constructive knowledge in the Baden (iv) and (v) sense should not be sufficient to attract liability in such a case.
Firm warnings have been issued in the past against the introduction of the conveyancing rules of constructive notice developed last century into commercial transactions. The one most frequently quoted is from the judgment Lindley LJ in Manchester Trust v Furness [1895] UKLawRpKQB 140; [1895] 2 QB 539 at 545 where the Lord Justice pointed out that when dealing with land, title is everything and there is time to investigate pursuant to a well-recognised procedure. Whereas, in commercial transactions, possession is the focus and expedition is often essential.
A more modern approach, however, was recognised by Megarry VC in re Montagu's Settlement Trusts [1992] 4 All ER 308 (judgment, March 1985) at page 324, lines B and C when he said:
"There is today something of a tendency in equity to put less emphasis on detailed rules that have emerged from the cases and more weight on the underlying principles that engendered those rules treating the rules less as rules requiring complete compliance, and more as guidelines to assist the court in applying the principles."
That approach was espoused by Thomas J in Powell v Thompson (supra at 606) where his Honour said he proposed to decide the case before him not on the basis of the many conflicting authorities cited in argument but:
"...on the basis of the principles of equity which underlie the varying decisions - and which accord with reason and common sense."
That process can be seen at work also, in my view, in the decision of the House of Lords in Barclay's Bank plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180 where the judgment of Lord Browne-Wilkinson seems to apply the old rules to late 20th Century spousal undue influence. To similar effect are the Privy Council's comments in Tan at page 103 where it was said that a too rigid application of Lord Selborne LC's formulation in Barnes v Addy:
"... has been inimical to the analysis of the underlying concept. Working within this constraint, the courts have found themselves wrestling with the interpretation of the individual ingredients, especially 'knowingly' but also 'dishonest and fraudulent design on the part of the trustees' without examining the underlying reason why a third party who has received no trust property is being made liable at all".
Although I have earlier quoted from the decision of Lord Brougham LC in Kennedy v Green [1834] EngR 1072; (1834) 3 My & K 699; 40 ER 266 in another context, I repeat the passage from page 274 because of its relevance to what follows:
"The doctrine of constructive notice depends upon two considerations: first, that certain things existing in the relation or the conduct of parties, or in the case between them, beget a presumption so strong of actual knowledge that the law holds the knowledge to exist, because it is highly improbable that it should not; and next, that policy and the safety of the public forbids a person to deny knowledge while he is so dealing as to keep himself ignorant, or so as that he may keep himself ignorant, and yet all the while let his agent know, and himself, perhaps, profit by that knowledge.
In such a case it would be most iniquitous and most dangerous, and give shelter and encouragement to all kinds of fraud, were the law not to consider the knowledge of one as common to both, whether it be so in fact
or not. Under one or other of these heads, perhaps under both, comes the other principle, which is quite undeniable, that whatever is notice enough to excite attention, and put the party on his guard and call for inquiry, is also notice of everything to which it is afterwards found that such inquiry might have led, although all was unknown for want of investigation.
"These principles are so plain that they need not be supported by reference to authority, ..." [Emphasis added]
There is a sense in which the underlying principles from the 19th century conveyancing cases have a direct relevance to this case. On one view of the facts the function performed by Mr Ratner in October 1987 was very similar to that undertaken by solicitors in the old cases. The Crown, instead of acquiring land, was effectively acquiring money in exchange for shares. But, the disclosure of the original support structure raised a very real question as to whether the Crown could take title to the money free of prior equitable claims. Mr Ratner was retained, effectively, to investigate title, resolve the difficulty and certify that all was in order. In the course of the discharge of those duties he learned that BWL's stance put the Crown's title to the money in such jeopardy that on his own evidence, the Crown should have been advised not to proceed. That was knowledge that Mr Ratner still had when he received a copy of Mr Small's letter of 11 March 1988 and thereafter engaged in preparing the Deed of Assignment of Deposits and arranging for Ms Shreves to oversee the settlement.
I should mention also in regard to constructive knowledge that both Knox and Millett JJ have discussed the application of it to commercial, as opposed to conveyancing, cases. Knox J in Cowan de Groot (supra), where a sale at a bargain price was relied upon to trigger knowledge said that the line should be drawn:
"... at the point where the figure in question, regard being had not only to the open market value but also to the terms and mode of sale, is indicative of dishonesty on the part of the directors of the vendor company." [page 761, line c]
It was shortly after that that he opined that "commercially unacceptable conduct" might be the underlying broad principle in respect of commercial transactions. That formulation, in the context of the particular case, suggests dishonesty. But that does not necessarily mean that to rely upon constructive notice in this case would be unjust.
Millett J addressed the topic in Macmillan Inc v Bishopsgate Trust (No 3) [1995] 1 WLR 978 at page 1000, between lines C and G where he said:
"In English law notice in the present context includes not only actual notice (including 'wilful blindness' or 'contrived ignorance,' where the purchaser deliberately abstains from an inquiry in order to avoid learning the truth) but also constructive notice, that is to say notice of such facts as he would have discovered if he had taken proper measures to investigate them. The doctrine of constructive notice has developed in relation to land, where there is a recognised procedure for investigating the title of the transferor. There is no room for the doctrine of notice in the strict conveyancing sense in a situation in which it is not the custom and practice to investigate the transferor's title. But in the wider sense it is not so limited. In Barclay's Bank plc v O'Brien [1993] UKHL 6; [1994] 1 A.C. 180 (a case concerned with land, but in which the defect in title - the presence of undue influence - could not be discovered by the routine investigation of title) Lord Browne-Wilkinson said, at pp. 195-196:
'The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it.'
In this formulation the doctrine is in my judgment of general application." [Emphasis added]
The Judge also added towards the bottom of the page at line H:
"The relevance of constructive notice in this wider meaning cannot depend on whether the transaction is 'commercial:' ..."
It was Mr Mathieson's submission that in the absence of a recognised procedure for investigating title, constructive notice, in this wider sense cannot apply. But the circumstances in Macmillan are far removed from those in this case and the words underlined in the passage above do not support counsel's contention.
In Westpac Banking Corp v Savin (supra), page 53 at lines 14 to 19 Richardson J, recognising that commercial cases require extra care, nonetheless, made no mention of the necessity for an established or recognised procedure when he said:
"Clearly Courts would not readily import a duty to inquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life."
The above authorities suggest that there may be room for the view that Baden (iv) and
(v) knowledge would be sufficient to hold the Crown liable on the knowing receipt claims in this case. The claims are personal and even if they were proprietary, since there is no prospect of the Crown's insolvency, there could be no adverse effects for possible innocent third parties. But there are wider considerations.
Such a conclusion would be going against the recent trend in England. By way of example I mention the unreported case of Jonathan v Tilley (CA (Civil Division), Judgment 30 June 1995). The Court consisted of Peter Gibson and Otton LJJ. The first judgment was delivered by Peter Gibson LJ and towards the end of his judgment the following paragraph is found:
"The Judge appears to have based his decision on type (v) knowledge in the Baden classification, knowledge of circumstances which would put an honest and reasonable man on enquiry, and initially Mr Boggis was inclined to accept that as posing the applicable test. However when it was pointed out from the Bench that the applicability of such knowledge to a 'knowing receipt or dealing' type of case is controversial (see for example,
the Polly Peck case, supra, at 777F, where Scott LJ expressed doubt as to its sufficiency), Mr Boggis submitted that it was only if Mr Tilley was wilful and reckless that the failure to make enquiry could lead to the court imposing a constructive trust on him. For my part I do not find it necessary or desirable to decide whether type (v) knowledge would suffice in this case. I shall assume without deciding that mere carelessness is not enough and that it is necessary for there to be some dishonesty on the part of the person receiving the trust money such that his conscience is affected (re Montagu's Settlement [1987] 1 Ch 264, [1987] 2 WLR 1192, at page 285 of the former report). In other words, I shall assume that knowledge within type (i), (ii) or (iii) is required."
While this section was still in draft, I obtained a copy of Lord Browne-Wilkinson's paper "Equity in a Fast Changing World" delivered at the NZLS Triennial Conference at Dunedin in April 1996. At page 12 and following, under the subheading "Equitable rights and commercial dealings" the presentation contains some robust warnings about the dangers of applying such rights without careful thought, eg:
"The legitimate aim of making the wrongful recipient personally accountable has created a loose cannon careering around striking third parties who are wholly innocent and in relation to whom it is far from clear that they are acting unconscionably." (pp 13, 14)
Re Goldcorp Exchange Limited [1994] 3 NZLR 385 and Westdeutsche Bank v Islington LBC (since reported[1996] UKHL 12; , [1996] 2 WLR 802) are referred to. Furthermore, the passage from the paper at pages 20 and 21 set out hereunder indicates unmistakably that the author is out of sympathy with the notion that for recipient liability knowledge within the Baden categories (iv) and (v) will suffice. It reads:
"The chief difficulty in developing the rules of equity in the modern world arise at the points where there are rights which equity should recognize as between wrongdoer and wronged but those equitable rights, being property rights, impinge on the commercial field. The root difficulty is that by using trusts and fiduciary duties as vehicles to produce justice, the court does not only adjust personal liability but at the same time recognizes the existence of property rights. It is those property rights, existing not as a matter of discretion but as a matter of right, which can and do operate to the detriment of third parties who are in real terms without blame. In seeking to do justice between wrongdoer and wronged
the court is creating injustice as against third parties who have become embroiled.
Recent decisions in England have gone some way towards protecting the position of third parties in a commercial context. As long ago as Manchester v Furness (1894) 2 Q.B. 539 Lindley L.J. insisted that the doctrine of constructive notice, whereby a third party is deemed to have notice of rights which by enquiry he should have discovered, had no place in commercial dealings. For a time this approach was lost sight of. Happily, I hope the law has now been restored to a proper footing: in a commercial transaction the recipient of money is not to be taken to have notice of any equitable rights in such money or property unless he has actual knowledge or wilfully shuts his eyes to the obvious or wilfully and recklessly fails to make such enquiries as an honest and reasonable commercial man would make: Eagle Trust plc v S.B.C. Securities Ltd [1992] 4 All E.R. 488 and Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All E.R. 700."
Later still, when this section was thought to be in final form, the decision of the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] 2 WLR 802, became available. I gave counsel the opportunity to make submissions on its relevance at the callback on 21 June 1996. The warnings given by Lord Browne-Wilkinson in his paper reappear in the judgments of himself and Lord Lloyd at pages 828 and 862 respectively. Lord Browne-Wilkinson said:
"My Lords, wise judges have often warned against the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs: see Barnes v Addy [1874] UKLawRpCh 20; (1874) LR 9 Ch. App. 244,
251 and 255; Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 965, [1983] 2 All ER 763, pp 703-704 of the former report. If the bank's arguments are correct, a businessman who has entered into transactions relating to or dependent upon property rights could find that assets which apparently belong to one person in fact belong to another; that there are 'off-balance-sheet' liabilities of which he cannot be aware; that these property rights and liabilities arise from circumstances unknown not only to himself but also to anyone else who has been involved in the transactions. A new area of unmanageable risk will be introduced into commercial dealings. If the due application of equitable principles forced a conclusion leading to these results, your Lordships would be presented with a formidable task in reconciling legal principle with commercial common sense."
While Lord Lloyd of Berwick, acknowledging something of a change of heart said:
"As one who has in the past attempted to keep open the availability of equitable remedies in commercial disputes, I am now conscious of the strength of the arguments the other way: see Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 965, [1983] 2 All ER 763, disapproving dicta of Lloyd J in Afovos Shipping Co SA v R Pagnan & Tratelli [1980] 2 Lloyd's Rep 469."
Although logically one is tempted to the view that a person who has intermeddled by assisting in the breach should be less exposed to liability than one who, with knowledge of the breach, has actually received the trust property to his or her benefit, nonetheless, this is obviously an area in which one should move cautiously. As earlier recorded, I have found that the Crown either wilfully shut its eyes to the obvious and, if not that, then certainly wilfully and recklessly failed to make the inquiries that a reasonable and honest commercial party would (should) have made in all the circumstances. In this case, therefore, the necessity to reach a decision about the availability of Baden (iv) and
(v) knowledge does not arise. Upon reflection the prudent course is to leave that issue to be decided on some future occasion when it is squarely before the Court.
In addition to emphasising the dangers of applying equitable remedies to commercial transactions, the Crown also sought to draw support from Westdeutsche for the proposition that the remedy for knowing receipt is equitable compensation. The argument was tied back into submissions to that effect that were made during closing. For the reasons set out earlier in this section, however, I am not persuaded that that is the law.
My holding in respect of knowledge and its applicability in this case is not in accord with the arguments advanced by counsel for the Plaintiffs. Mr Farmer contended that in Tan (supra), at page 104 under the heading "strict liability", there is a clear indication that for knowing receipt cases that is how the law should develop. The learned editor
of Bowstead & Reynolds, (16th ed 1996) hints at the same possibility - paragraph 9- 129 at page 653. In that regard, Mr Farmer also advanced the arguments that Professor Peter Birks developed in his text An Introduction to the Law of Restitution where he argues powerfully for strict liability in knowing receipt cases leaving the balance to be maintained by the defences of purchaser for value without notice and change of position. That proposition now has the support of the learned author of the 4th edition of Goff & Jones (page 672) and Sir Peter Millett writing extra-judicially in (1991) 107 LQR 71 "Tracing the Proceedings of Fraud". Mr Mathieson, on the other hand, contended that Tan shows that from now on the touchstone for liability in both accessory and recipient cases should be dishonesty, objectively assessed, as discussed in those sections of the judgment under the headings "Dishonesty" and "Taking Risks".
But again, the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] 2 WLR 802 are against the view urged by Mr Farmer. In his judgment (with the concurrence of Lords Slynn and Lloyd) Lord Browne- Wilkinson rejected the strict liability proposition. At pages 828-829 he said:
"Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, ie until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience." [Emphasis added]
Therefore while the strict liability proposition perhaps has an attractive logic about it, in that it would remove much confusion and bring the requirements for the common law and equitable causes of action more or less into line with each other, I see no warrant to depart so radically from precedent.
There are four other matters to be mentioned briefly. First, I refer to the fact that under cross-examination all the Crown witnesses, including the Ministers to a greater or lesser extent, justified their lack of inquiry or concern as to who would buy the shares and suffer the loss and how the purchase would be financed, by reference to the Crown's existing contract with BWL. But a binding contract does not help if it is to be performed with illegally obtained money, and that possibility, always in the background, as acknowledged by Mr Ratner and some, at least, of the Crown officials, became much more substantial once the Small letter of 11 March 1988 arrived and AI4 was nominated. In my judgment, it was commercially unacceptable conduct on the part of the Crown to ignore the possibility which had now become a probability, simply because the officials either did not care or did not regard the source of the moneys as any of their business. In that regard the words of Millett J in Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 294-295, [1992] 4 All ER 385 at 407 are relevant although, of course, expressed in the context of the particular facts confronting him:
"I am led to the conclusion that Mr Jackson and Mr Griffin were at best indifferent to the possibility of fraud. They made no inquiries of the plaintiffs because they thought that was none of their business. That is not honest behaviour."
And there is substance in the submission made by Mr Farmer in closing that the Crown's emphasis, in respect of breach of s 62, was all in the wrong place. The only question addressed seems to have been "will we get paid?". Whereas commercially acceptable conduct would require the Crown to look beyond its own interests and consider how a funding with Equiticorp money in breach of s 62 would affect the company, its shareholders and creditors.
Related to that point is the second matter which is, that the Plaintiffs have not shown the Crown knew the precise identity of the Equiticorp companies advancing the money. It is not necessary for the recipient or assister to know all the details of the trust. It is
sufficient if s/he knows the property is subject to a trust. This point was made by Millett J in Agip (Africa) Ltd v Jackson (supra at 404) where he stated:
"He is liable to account as a constructive trustee if he received the trust property knowing it to be such, though he will not necessarily be required in all the circumstances to have known the exact terms of the trust."
And again at 406:
"It is not necessary that he should have been aware of the precise nature of the fraud or even of the identity of its victim. A man who consciously assists others by making arrangements which he knows are calculated to conceal what is happening from a third party takes the risk that they are part of a fraud practised on that party."
Thirdly, I should mention Mr Mathieson's argument that because the Crown had given value (ie, exchanged shares for cash) the bona fide purchaser for value without notice defence was available and should provide a complete answer. But as counsel recognised, the crucial issue is what is meant by notice. Terminology is a problem in this area of the law. In all circumstances, other than actual or Nelsonian knowledge, the process really involves three stages, namely, notice, followed by knowledge, followed by the drawing of an inference or inferences by the court. The Crown here had notice of certain facts. By virtue of which it can be said that it had a certain level of knowledge. On that basis the court can either draw, or decline to draw, inferences of dishonesty or lack of probity on the part of the Crown for failing to make adequate inquiry. Once Baden (iii) knowledge is established, as is the case here, there is no longer room for the defence of bona fide purchaser for value without notice.
Fourthly, Mr Mathieson advanced what he called his hierarchy of knowledge argument. The central plank of this proposition was that as the Crown believed (ie, had actual knowledge) that the support structure had been unwound, it could not at the same time have constructive or imputed knowledge that BWL had not only refused to co-operate
but had, in fact, signed the Takeout Deed with EHL. That argument has merit when applied to the situation that pertained as at October 1987. Although, even at that stage, as none of the Crown officials had bothered to inspect the letters themselves and their solicitors and financial advisers and agents had knowledge that qualified or directly contradicted the written advice, for the Crown to remain quarantined from the truth has an air of unreality about it. But, of course, the point of time at which the knowledge matters is when the property is handed over, ie, settlement, 17-22 March 1988. By then a sea-change had occurred. The shares had lost almost three-quarters of their value and the prospect of BWL obtaining a buyer, let alone raising finance internationally to purchase itself, had diminished to such an extent that whether or not the Crown would get paid was highly speculative. Also although because of their blinkered "need not inquire" attitude the officials had failed to appreciate it, Equiticorp, by virtue of the provisions of the Supplemental Agreement, had become the only other entity, apart from BWL, with a strong incentive to see settlement accomplished. Finally, there was the arrival of Mr Small's letter on 11 March 1988 which, as I have held elsewhere, necessitated further inquiry. The hierarchy of knowledge argument, in my judgment, by the time settlement date arrived, had lost its potency. Furthermore, at that stage, Mr Ratner did not give any misleading advice and, as I have held elsewhere, was again under a duty to disclose the true position so that his knowledge of that true position, imputed to the Crown, added to the sum of notice/knowledge it had at that time. As earlier recorded the Plaintiffs have met those requirements.
I turn now to consider briefly the accessory liability. Tan has, of course, cleared the ground here. There is no longer room for argument. Dishonesty, assessed objectively, "is a necessary ingredient for accessory liability". In practical terms, although the judgment strongly discourages further reference to the Baden scale, it means that only if the Plaintiffs establish Baden categories (i), (ii) or (iii) will their dishonest accessory causes of action succeed.
2.15 Summary of why the recipient and accessory causes of action prima facie
The reference to "prima facie" success in the above heading is because there is a substantial issue, not yet addressed, viz: whether the Plaintiffs are obliged to provide restitutio in integrum: the appropriate English for which, according to Professor Birks, is "counter-restitution" (I shall use that expression from now on) and, if so, whether they are able to do so. Where the remedy of restitution is available, both at common law or in equity, the rule of thumb is that each side gives back what it received. At common law, a rescinding party's inability to provide counter-restitution may be fatal to its claim. In this case, AI4 cannot provide counter-restitution in specie because at the end of August 1988, along with all the other shareholders in EHL, it accepted a takeover bid from EIplc and parted with the shares which it had received in exchange for the $327 million. This topic will be returned to later in this section.
I have held in 2.2 that AI4, EHL and EIGL all have standing to sue. I also held that there were unauthorised illegal acts and breaches of fiduciary duty by their respective directors which resulted in their money, or money they held as constructive trustees, finding its way into the hands of the Crown. In subsequent sections, 2.3 to 2.11, I made findings of fact as to what the officials and agents of the Crown actually knew and have held that that knowledge - of the unauthorised and illegal acts of the Plaintiffs' directors
- is in law to be regarded as the knowledge of the Crown. I have also held in 2.14 that dishonesty, judged objectively, is required for the accessory cause of action, and that knowledge as defined in Baden categories (i), (ii) and (iii), is required for recipient liability.
The consequence of the findings of fact and holdings of law summarised above is that, subject to the issue of counter-restitution and certain specific defences raised by the Crown and to be discussed later in this judgment, both the accessory and recipient
causes of action succeed. The knowledge the Crown had, it will be recalled, was that the transaction was grossly improvident for AI4 and that the probability was that the purchase of the NZS/EHL Parcel was to be effected with Equiticorp moneys. That placed the Crown in the position where, in my judgment, it either wilfully shut its eyes to the obvious (Baden (ii)) or, most certainly, wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make (Baden (iii)). Judged objectively, that was dishonest - both accessory and recipient liability are therefore established.
The same knowledge would also satisfy Baden categories (iv) and (v). Particularly (v); in other words the Crown had knowledge of circumstances that would have put a reasonable and honest person on inquiry and it failed to make those inquiries. As earlier recorded however, I have not found it necessary in this case to decide whether the fourth and fifth categories of Baden suffice for recipient liability.
2.16 Remedies available
Again, the discussion here is subject to the counter-restitution issue and the Crown's specific defences. The Crown argued strenuously that the remedies for both recipient and accessory liability should be the same. The submission was that both are fault- based, neither are proprietary and the remedy (if any) should be equitable compensation.
I have held, however, in 2.14 that the knowing receipt causes of action are restitution- based. The consequence is that subject to certain deductions and the availability of counter-restitution (which I shall discuss when I deal with the individual claims), the Crown must restore the purchase moneys to the Plaintiffs. Thus subsequent events which might have resulted in the Plaintiffs mitigating their losses are not relevant. This is because restitution is based on the principle of restoring to the plaintiff what was
taken or received from him/her without justification, and not on the principle of compensating the plaintiff for loss or damage.
Hobhouse J made this clear in Kleinwort Benson Ltd v South Tyneside Metropolitan Borough Council [1994] 4 All ER 972 (as applied by Clarke J in South Tyneside MBC Svenska International plc [1995] 1 All ER 545 at 558). The issue before the Judge was, in his own words: (supra at 977-978)
"whether the fact that the plaintiffs hedged their supposed liabilities under KB1 and KB2 and recouped, either in whole or in part, their losses invalidates the plaintiffs' claim to restitution on the basis that the plaintiffs cannot show that the defendants have been unjustly enriched at the expense of the plaintiffs. This argument of the defendants raises a fundamental question whether, and to what extent and under what circumstances, it is an answer to a claim based upon the principle of unjust enrichment that the plaintiff has not at the end of the day suffered the loss."
That issue is addressed at pages 984-987 of the report. The Judge said:
"In Lipkin Gorman [1992] 4 All ER 512 at 432, [1991] 2 AC 548 at 578 Lord Goff said:
'The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and, even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle.'
What is the legal principle which the defendants invoke? It can only be some unspecific principle which derives not from the law of restitution but from some concept of compensation. The essential feature in what the defendants are asking the court to do ... is to make an assessment of the loss suffered by the relevant plaintiff as if one were investigating a right to compensation. The argument involves problems of remoteness [which he then outlined and continued ...]
But the primary answer is that such considerations may be relevant to compensation but are not relevant to restitution. Here there is no problem about recognising a restitutionary remedy in personam against the defendants in favour of the plaintiffs. What contracts or other transactions or engagements the plaintiffs may have entered into with third parties have nothing to do with the principle of restitution. Therefore it suffices in the present case for the plaintiffs to show that they were the payers of the
relevant money, that the defendants were unjustly enriched by the payments and that there is no obstacle to restitution." [Emphasis added]
In so holding Hobhouse J rejected the approach of the majority of the Supreme Court of Canada in Air Canada v British Columbia (1989) 59 DLR (4th) 161 who held that while a taxing authority which retains a payment it is not entitled to is unjustly enriched, that is not at the taxpayers' expense if the tax payer has shifted the economic burden of the tax to others. That Hobhouse J regarded as introducing compensatory notions to a restitution-based claim.
In Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division), Evans, Saville, Morritt LJJ, 9 May 1996 as yet unreported) Hobhouse J's earlier decision in South Tyneside discussed above was challenged. The City Council argued that hedging contracts entered into by Kleinwort should operate as a restriction on the Bank's right to restitution. That proposition was rejected unanimously. Saville LJ, agreeing with the other Judges, said at pages 10 and 11:
"The basis for this kind of unjust enrichment claim lies in the fact that the only right the payee can assert to the money he has received is that created by the contract under which it was paid. If that contract is void, then it inexorably follows that this right does not exist, and the payee has no right to that money. The payee is thus unjustly enriched, since there is no justification for the retention of money to which he has no right. that
injustice can only be corrected by returning the money to the payer, whose performed obligation to pay only arose under the same contract. That obligation to pay is correlative to the payee's right to receive and retain the payment; and likewise does not in fact exist if the contract is void. In short the payer was under no obligation to part with his money, nor the payee any correlative right to receive or retain it. Justice is done by imposing an obligation on the payee to repay the payer.
Looked at this way, which is the way Lord Wright analysed the matter in Fibrosa Spolka Akcyna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4; [1943] AC 32 at 65, whether the payer is out of pocket or has recouped his outlay from other sources is entirely irrelevant. The payee has been unjustly enriched by receiving and retaining money he has received from the payer and to which he has no right. He does not cease to be unjustly enriched because the payer for one reason or another is not out of pocket. His obligation to return the money is not based on any loss the payer may have sustained, but on the simple ground that it is unjust that he should
keep something to which he has no right and which he only received through the payer's performance of an obligation which did not in fact exist."
The same point is made by Mason CJ in Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd [1994] HCA 61; (1994) 182 CLR 51 at 69-79. The Chief Justice has a section in his judgment, from which I propose to quote at length, entitled "Is passing on a good defence to a restitutionary claim?" At page 71 the report reads:
"The argument that a plaintiff who passes on a tax or charge will receive a windfall or will unjustly be enriched if recovery from a public authority is permitted rests at bottom upon the economic view that the plaintiff should not recover if the burden of the imposition of the tax or charge has been shifted to third parties. In the context of the law of restitution, this economic view encounters major difficulties."
Mason CJ then identifies four such difficulties, being:
1. The plaintiff who suffers loss despite passing on the tax or charge will not have a remedy;
2. Therefore the proposition must be that the plaintiff's recovery should be limited to compensation for loss or damage sustained;
3. Such an inquiry is very complex; and
4. The basis of restitutionary relief is not compensation for loss or damage sustained but restoration to the plaintiff of what has been taken or received from the plaintiff without justification.
After giving instances of each, he continues at page 73:
"Indeed, the difficulties are so great that, in my view, the defence should not succeed unless it is established that the defendant's enrichment is not at the expense of the plaintiff but at the expense of some other
person or persons. In that event the plaintiff fails, not because it has passed on the tax or charge, but because the defendant has been enriched by receiving moneys which belonged to or proceeded from someone other than the plaintiff ...
Historically, as I have already noted, the basis of restitutionary relief in English law was not compensation for loss or damage but restoration of what had been taken or received. The requirement that the defendant be unjustly enriched 'at the expense of' the plaintiff can mean that the enrichment is 'by doing wrong to' or 'by subtraction from' the plaintiff. Hence, a plaintiff can succeed by showing that he or she was the victim of a wrong which enriched the defendant ... or that the defendant was enriched by receiving the plaintiff's money or property.
When the plaintiff succeeds in a restitutionary claim, the court awards the plaintiff the monetary equivalent of what the defendant has taken or received, except in those cases in which the plaintiff is entitled to specific proprietary relief. Because the object of restitutionary relief is to divest the defendant of what the defendant is not entitled to retain, the court does not assess the amount of its award by reference to the actual loss which the plaintiff has sustained."
The Chief Justice further emphasises that restitution is aimed at restoration and not compensation on page 75 where he said:
"Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. As in the action for money had and received, the defendant comes under an obligation to account to the plaintiff for money which the defendant has received for the use of the plaintiff. The subtraction from the plaintiff's wealth enables one to say that the defendant's unjust enrichment has been 'at the expense of the plaintiff', notwithstanding that the plaintiff may recoup the outgoing by means of transactions with third parties."
It follows also that Day v Mead [1987] NZCA 74; [1987] 2 NZLR 443 does not apply in such circumstances. Where the claim is restitution-based there can be no room for the application of considerations analogous to contributory negligence.
Counsel were agreed that for accessory liability the remedy is equitable compensation. That remedy is quite distinct from restitution and no issue of counter-restitution arises. There was, however, a "sharp divide" between them as to how the compensation should
be assessed. The Crown submits that by analogy with the common law, notions of causation and remoteness should apply. The Plaintiffs argue that making good the loss should be the approach, using hindsight and commonsense to assess whether it was caused by the breach.
The "sharp divide" reference comes from the decision of the Supreme Court of Canada in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129. There, land was purchased in ignorance of a breach of fiduciary duty which would have stopped the sale. The purchaser erected a warehouse which collapsed because of faulty design and construction. It then sought to recover all its losses relying only upon the original breach. A unanimous eight-member Court rejected the claim. The majority applied remoteness and intervening causation by analogy with tort. The minority, led by McLachlin J, rejected the tortious approach in favour of one which ensured that the losses made good were only those which "on a commonsense view" were caused by the breach.
A similar division of view appears to have emerged in Day v Mead (supra) where Cooke P's view was consistent with the majority in Canson and Casey and Hillyer JJ were nearer to the McLachlin J approach. Then in Mouat v Clark Boyce [1992] 2 NZLR 559 Cooke P endorsed the majority view but said that the difference between it and the minority view "seems quite fine" (568) and went on to say "what seems more important is their emphasis on commonsense, policy and fairness in restricting the fiduciary's liability".
During the hearing of this case, however, the decision of the House of Lords in Target Holdings Ltd v Redferns [1995] UKHL 10; [1995] 3 All ER 785 was delivered (20 July 1995). This was another case in which the plaintiff relied upon a breach of fiduciary duty for the recovery of compensation which had not been caused by it. The leading judgment, delivered by Lord Browne-Wilkinson, while recognising that the common law and
equity have different approaches to the assessment of damages/compensation, said nonetheless: "But, the principles underlying both systems are the same". [page 792, line g]
The judgment discusses first the approach to compensation in "traditional" trust situations where the common law rules of remoteness of damage and causation do not apply, but states that:
"...there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable
..." [page 794, line d]
and further holds that outside those traditional situations:
"The measure of such compensation is the same, ie the difference between what the beneficiary has in fact received and the amount he would have received but for the breach of trust". [page 794, line j]
Then, later in the judgment, after the opposing arguments of counsel have been summarised, Lord Browne-Wilkinson cites Canson and says of the judgment of McLachlin J that it:
"contains an illuminating exposition of the rules applicable to equitable compensation for breach of trust." [page 797, line g]
He quotes the following passage from it:
"While foreseeability of loss does not enter into the calculation of compensation for breach of fiduciary duty, liability is not unlimited. Just as restitution in specie is limited to the property under the trustee's control, so equitable compensation must be limited to loss flowing from the trustee's acts in relation to the interest he undertook to protect. Thus, Davidson [in 'The Equitable Remedy of Compensation' (1982) 3 Melb ULR 349 at 354] states "It is imperative to ascertain the loss resulting from breach of the relevant equitable duty." [McLachlin J's emphasis]...
A related question which must be addressed is the time of assessment of the loss. In this area tort and contract law are of little help.
... The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result, the losses are to be assessed as at the time of trial, using the full benefit of hindsight...
In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, i.e., the plaintiff's lost opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach.' (See 85 DLR (4th) 129 at 160, 162, 163; my emphasis.)"
And Lord Browne-Wilkinson adds:
"In my view this is good law. Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach." [page 798, line c]
When I come to assess the equitable compensation in respect of the accessory causes of action I shall follow the approach of McLachlin J as endorsed by Lord Browne- Wilkinson.
2.17 The results on the knowing receipt causes of action
I deal with the knowing receipt causes of action first because the Plaintiffs rely principally upon them. I start with AI4 since the Plaintiffs present it as the front runner, with EHL and EIGL's claims being pressed in the alternative. The results as earlier indicated, however, are subject to the specific defences raised by the Crown which are dealt with later and counter-restitution, which I will come to shortly.
As earlier mentioned, the AI4 claim is advanced on two bases. First, in its own right as legal owner of the bank deposits transferred to the Crown. Secondly, as constructive
trustee for the original funders. Neither approach is spelt out specifically in the pleadings, (J.3.1A), but the Sixth Amended Statement of Claim is wide enough to accommodate both and the potential for AI4 to recover as a constructive trustee has been apparent and adverted to from an early stage of the trial. In the end, recovery by either route will have similar results, because AI4 will then be called to account as trustee or on a debtor/creditor basis by the original funders.
Suing as legal owner of the deposits AI4 can rely upon the Crown's knowledge of both the gross improvidence of the transaction and the probability that Equiticorp money, to the extent of $222 million, was being used to fund the purchase.
The recovery, prima facie, should be for $327 million. The Crown, however, argues that it should have counter-restitution for the value of the NZS/EHL Parcel at the date of settlement and credit for the dividend of $3.7 million, which AI4 received while it held the shares. In somewhat similar circumstances in Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, a credit for the dividends paid was allowed. Justice requires that this should be the case here also. This can be seen as an elementary taking of accounts between the parties - a procedure available in equity to ensure neither is advantaged unfairly at the expense of the other.
So far as counter-restitution is concerned, it is common ground that the shares are now worthless. The Plaintiffs are not able to return the original shares because they went into the possession of EIplc some five months after settlement as a result of a takeover offer which AI4 accepted. (That development will be discussed in greater detail when addressing equitable compensation on the accessory claims.) But the Statutory Managers have subsequently acquired an identical number of EHL shares which could be transferred to the Crown. Mr Farmer argues that one share is like another and there are cases in which, in circumstances such as those here, the return of the exact shares originally transferred was not required. But as in Coleman v Myers [1977] 2 NZLR
298 (CA) I consider too much water has now passed under the bridge for there to be counter-restitution in specie. The return of a substitute parcel of now worthless shares would not be a just result.
Counter-restitution in specie is a requirement which appears to have its origin in the common law remedy of restitution consequent upon rescission of voidable contracts. As Lord Blackburn said in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278:
"It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo ... It is a doctrine which has often been acted upon both at law and in equity."
Commenting upon that statement, Goff & Jones, The Law of Restitution (4th ed 1993) states at page 198-199:
"But the application of the doctrine was once much more strict at common law. For whereas equity could order an account of profits and make any necessary allowances for deterioration of property transferred under the contract, the courts of common law had no machinery at their command for this purpose. At law, if precise restitution was impossible, the defrauded party had to fall back on his action for damages for deceit."
In this case, however, the Crown is held liable, not on any contractual basis but because, with knowledge of the breaches of fiduciary duty, it wrongly received the Plaintiffs' money. In those circumstances, as we have seen, the Crown holds as a constructive trustee. That this makes a difference is perhaps self-evident, but the Plaintiffs put it this way, at paragraph 51.7 of their closing submissions:
"51.7 In respect of claims based on knowing receipt, equity merely requires that the plaintiff either return property received under the transaction or account for the monetary value of this, irrespective of whether there was a total failure of consideration. It is submitted that any requirement of counter-restitution today is simply grounded on the need to prevent the plaintiff from being
unjustly enriched at the expense of the defendant rather than on any requirement of restoring the defendant's original property in specie."
That approach has the general support of Goff & Jones (supra) at pages 670-673 under the heading "The Liability of a Stranger who Receives Trust Property Transferred to Him in Breach of Trust".
Thus, counter-restitution in specie is not relevant here. Even if it was, I would not follow the common law rule. It has been roundly criticised as too rough and ready. The standard texts are Goff & Jones (supra), Burrows The Law of Restitution (1993) and Birks An Introduction to the Law of Restitution (reprinted with endnotes in 1989). All disapprove of the seemingly rigid requirement that counter-restitution in specie is essential and that its absence is a complete bar to a claim. Burrows (supra) at 134 says:
"What is more difficult to rationalise is why recognition of the need for counter-restitution should have been transformed into a bar. It is, strictly speaking, a nonsense to talk of restitution being impossible given that, assuming solvency, it is always possible for the plaintiff to pay the defendant a sum of money for the value of the benefit received."
After observing that the bar applies where the plaintiff has consumed or disposed of the property he suggests:
"... the explanation for the bar is that, where valuing the plaintiff's non- money benefits would be required, so that precision is impossible, the courts prefer to abide by the rough-and-ready justice of leaving matters as they stand and hence deny rescission. ... In principle neither restriction seems necessary nor desirable. The courts should not favour rough-and- ready justice over the finely tuned justice attainable by valuing non-money benefits."
Burrows then discusses the decision of the House of Lords in Erlanger v New Sombrero Phosphate Co (supra) as an example of the Courts not requiring precise
counter-restitution but instead ordering the return of the value of the benefit received. In that case Lord Blackburn said: (supra at 1278)
"But a Court of Equity could not give damages, and, unless it can rescind the contract, can give no relief. And, on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract."
The author continues at the bottom of page 134:
"Despite that lead over a century ago, the courts cannot yet be said to have abandoned the bar. It is submitted that they should do so. All that should be required (and there is no need to regard this as a bar) is counter- restitution by a monetary equivalent."
Yet, more positively, he states latter at page 192 of his text, after outlining the facts of the comparatively recent decision of the Court of Appeal in O'Sullivan v Management Agency & Music Ltd [1985] QB 428, that:
"... one can strongly argue that, by its willingness to award complex mutual restitution, the Court of Appeal has effectively emptied the traditional "restitutio in integrum must be possible" bar of any content. What is required is that the rescinding plaintiff makes counter-restitution, whether specifically or by a monetary equivalent: counter-restitution may be difficult to assess but is never impossible."
Professor Birks is of the same opinion, describing the situation of the defendant having a complete defence if the plaintiff is unable to make counter-restitution of any benefit the defendant conferred upon him or her, as "overkill". He puts forward a similar solution to Burrows, (Restitution - The Future (1992)) stating at 129:
"However, this overkill is much reduced if, when exact counter-restitution is not possible, the law will accept that the return can be made by means of money allowances instead."
Goff & Jones likewise state at pages 199-200:
"But it is, we suggest, consistent with principle that it should be sufficient for the party who has received a benefit under the contract to compensate the other party by paying him the value of that benefit, unless the benefit consists of a chattel which is non-fungible in nature (in which event it must be restored subject to compensation for depreciation), or he was unable to restore the benefit at the time when he learned of the facts giving rise to his right to rescind and did not do so."
An aspect of the common law's requirement for counter-restitution in specie is that if there is a fall in the value of the asset transferred because of circumstances unrelated to the conduct of the parties that is irrelevant. The consequence of that approach, if applied in this case, would be that the Plaintiffs would either return worthless shares or succeed on their alternative proposition that there should be a nil counter-restitutionary monetary equivalent. This feature of the common law rule can be seen in the comparatively recent case of Cheese v Thomas [1994] 1 WLR 129. There Sir Donald Nicholls VC (as he then was) said at page 135, between lines D and F, when discussing restoring the parties to their original positions:
"I approach the matter in this way. Restitution has to be made, not damages paid. Damages look at the plaintiff's loss, whereas restitution is concerned with the recovery back from the defendant of what he received under the transaction. If the transaction is set aside, the plaintiff also must return what he received. Each party must hand back what he obtained under the contract. There has to be a giving back and a taking back on both sides, as Bowen LJ observed in Newbigging v Adam [1886] UKLawRpCh 247; (1886) 34 Ch.D. 582, 595. If, for this purpose, the transaction in this case is analysed simply as a payment of £43,000 by Mr Cheese to Mr Thomas in return for the right to live in Mr Thomas's house, there is a strong case for ordering repayment of £43,000, the benefit received by Mr Thomas, regardless of the subsequent fall in the value of the house. In the ordinary way, if a plaintiff is able to return to the defendant the property received from him under the impugned transaction, it matters not that the property has meanwhile fallen in value. This is not surprising. A defendant cannot be heard to protest that such an outcome is unfair when he is receiving back the very thing he persuaded the plaintiff, by undue influence or misrepresentation, to buy from him."
A similar approach can be seen in the earlier case of Armstrong v Jackson [1917] 2 KB 822. That was a case in which a broker breached his fiduciary duty and rescission was subsequently ordered, notwithstanding that the value of the shares sold had decreased between the date of sale and the date of the action for rescission. At page 828, McCardie J said:
"I turn now to the second contention of Mr Disturnal with respect to the claim for rescission. He argued that no decree should be granted inasmuch as the circumstances had changed through the lapse of time and that the plaintiff could not restore in 1917 that which he had received from the defendant in 1910. The shares in 1910 stood at nearly £3 for each 5s share. They are now worth 5s only, or slightly less, and at such a price they have been standing at and since the issue of the writ. But in my view this second contention fails also, although, of course, it is clear law that restitutio in integrum is essential to a claim for rescission. The plaintiff still holds the shares he bought in 1910. He can hand them back to the defendant. The company is the same as in 1910. Its name only has been changed. The objects of the company have not changed though the assets of the company may have varied. The market valuation of the shares has greatly dropped, but the shares are the same shares."
Despite Mr Farmer's submissions to the contrary, and the fact that it is common ground that the shares are now worthless, I do not consider that the rule as to fall in value, exemplified by the two decisions just referred to, applies in this case. First, as explained above, the counter-restitution in specie rule was not developed to deal with constructive trust cases and, secondly, AI4 no longer has the shares because of the takeover offer which it accepted in August 1988. In any event, even when dealing with cases where counter-restitution in specie was appropriate, the Courts have tended, where the shares have been sold, to assess counter-restitution, not on the basis of their value at the time of the order but, taking account of what they were actually sold for.
In the case of Erlanger (supra) there was an application by the New Sombrero Phosphate Company to rescind a contract of purchase made between the company and
an agent of the syndicate which promoted it, whereby the company purchased a lease of Sombrero Island, together with all buildings and plant necessary to conduct mining operations, for the sum of £110,000. Consideration was paid in cash of £80,000 and the remaining £30,000 by allotting to the syndicate shares in the company. When the company demonstrated that it was entitled to rescission and sought restitution it was found that some of the shares that had been allotted to the syndicate had been sold. So restitution in specie was not possible in respect of those shares. The order finally made by the Court of Appeal was, as appears in the judgment of Jessel MR [1877] UKLawRpCh 58; (1872) 5 Ch.D. 73 at page 125, inter alia:
"to direct the return of those shares which have not been parted with, and to take an account of those shares which have been sold or parted with and of the proceeds of such sales ..."
The order of the Court of Appeal was subsequently affirmed by the House of Lords.
Another case in which shares featured and could not be returned when restitution was ordered was Spence v Crawford [1939] 3 All ER 271. The shares were worth £2 when sold, but significantly more when counter-restitution had to be made. The parties put a compromise situation before the House of Lords whereby credit was to be given for the difference and their Lordships felt able to approve it.
A more modern example is Securities and Investment Board v Pantell SA (No 2) [1993] Ch 256. At page 283, lines D to F, Steyn LJ (as he then was), referring to the provisions of the Financial Services Act 1986 said:
"It seems to me that the purpose of an order under section 6(2) is to restore the parties to the financial position in which they were before the transaction was entered into. The mere fact, for example, that the investor had sold on the shares would not by itself render the statutory remedy of rescission inapplicable. In such a case the counter-restitution could be achieved by a financial adjustment based on the value of the shares. Rescission will only be impossible when financial adjustment is
obstructed by circumstances going beyond the difficulty of valuation of investments which have been sold on: see Birks, An Introduction to the Law of Restitution (1985), page 423."
When making his final submissions, and having referred to this case, Mr Farmer said at T/14482, between lines 15 and 27:
"So the point that I want to really make from the case is not that it deals at all with the subject of deterioration in value, because it doesn't, but just to make the point that counter-restitution can be provided by the court ordering a monetary payment in lieu of an order requiring shares to be returned and it will do that, for example, where as in that case, the shares happened to have been sold on so the investor didn't have any shares at all to return.
In the present case, we say we do have shares to return, but we say that even if we did not, the court could order or effect counter-restitution by ordering us to pay the monetary equivalent, ..."
It can be seen therefore that where shares that otherwise would have been returned as counter-restitution in specie have been sold, there is some authority to support the proposition that monetary restitution based upon the actual sale price can be substituted. Additionally, as the quote from Mr Farmer's submissions shows, the Plaintiffs accept that if the worthless shares they have subsequently acquired for the purpose of counter-restitution are not acceptable, then counter-restitution can still be effected by placing the appropriate monetary value upon them. In fact, as I point out in
The end result of the matters considered above however, is that the Plaintiffs' argument that counter-restitution should be effected either in the form of worthless shares or a nil award of money is rejected.
Having arrived at the conclusion just expressed, obviously a monetary allowance for the value of the shares is the only solution. I pause to interpolate that the Plaintiffs
have taken the point that the Crown has not sought any restitutionary order in respect of the shares. But the issue was but faintly pressed as is shown by the comment made by Mr Farmer in closing which is at T/14493, between lines 10 and 25 where he said:
"I did made a point of saying yesterday that the Crown here haven't brought any restitutionary action of their own seeking the shares back, even as an alternative backup position, and that is no doubt because of a very good practical reason, that the shares are worthless. I also said that in theory they do have that counter-restitutionary cross-claim they could have brought, but it is really an academic point because courts have tended in recent times to take a more practical approach by saying: if we are going to order the defendant to give restitution even under a void contract, let's short-circuit this process and require the plaintiff also to give counter-restitution so as to put the parties back, so far as it can be done, where they started out from."
Mr Mathieson's view on the other hand was that the Crown was not obliged to formally cross-claim and could wait until sued for restitution and then raise counter-restitution. In the circumstances I see no difficulty about allowing the Crown to pursue that course.
Indeed, both parties seem to recognise that not only should there be counter-restitution but that it could be in monetary form. Thus, Mr Farmer, in closing at T/14493 line 25 through to T/14494, line 25 said:
"... the important point is that just as with restitution, the court has a discretion as to whether it orders a return of property in specie or whether, in lieu of that, it orders payment of the equivalent value of the property, in other words, equitable compensation. Just as it can do that for the plaintiff, so too when one turns to counter-restitution, it is submitted that the requirement or the powers of the court are the same.
So that the court can, as part of the restitutio in integrum process, make whatever order seems appropriate in the circumstances, so that it may order counter-restitution of the property in specie that was transferred to the plaintiff, if that is appropriate, but if it is not appropriate for any reason, it can order an in personam compensatory-type order in lieu of return of the property in specie, and that must be right because if it weren't, ... the wrongfully acting defendant would be ironically placed in a different and better position than the plaintiff so far as its counter- restitutionary rights are concerned. That, in our submission, is a result that is neither sensible nor just.
That is really directed at this situation about the shares again, that the Crown is saying, as I understand it, counter-restitution is impossible because AI4 cannot get back the precise shares. What I am submitting is that with counter-restitution, it is never an absolute requirement that the specific property be given back anyway, the court can grant the defendant counter-restitution in some other form."
Mr Mathieson took the same view when exercising his right of reply at T/15490, between lines 4 and 24:
"The governing consideration is practical justice and, in a case where a fall in value of the subject matter is not properly attributable to the plaintiffs' conduct but the defendant will suffer an injustice, the court certainly does not say, 'Let the defendant suffer the injustice because things have happened to the subject matter outside the plaintiffs' control'.
That must be so in a case where neither the plaintiff nor the defendant is in any measure responsible for the decline in value where, for instance, it is a reflection of stock market factors over which neither plaintiff nor defendant has any meaningful control. Where neither of them is responsible, but you have a gross discrepancy between the value of the property when it was passed over and its value at the time of judgment, the court, it is submitted, must provide monetary compensation for the discrepancy, because otherwise the result is not practically just."
In the result, then, the Plaintiffs have accepted that, if their substitute worthless shares are not acceptable and a nil value monetary allowance is rejected, then a value must be placed on the shares. The question then becomes at what point the shares are to be valued. Is it to be at the time of sale (March 1988) or at the time of takeover (August 1988)?
There was a debate as to the value of the shares as at March 1988. The Plaintiffs pleaded throughout, and up to their Sixth Amended Statement of Claim, that the shares were worth not more than $90 million at settlement. That figure, which is calculated on what the market was paying about that time, I take as my starting point. What the market did not know, however, was that Equiticorp was running a thorough-going illegal share support scheme which was artificially propping up the price of its shares. Mr Mathieson suggested that this should not be taken into account because to do so
would be to enable AI4 to take advantage of its own wrong. It is true that AI4 was the vehicle for buying in the shares but it was being manipulated by its directors (especially Hawkins, using Equiticorp money) in an obviously unauthorised and illegal way. Thus, it was just as much a victim in this as in the purchase of the NZS/EHL Parcel.
The evidence of Mr Garth Ireland, called by the Plaintiffs as an expert investment analyst, was that between 5 January 1988 and 17 March 1988, 91% (ie, $31.263 million of a total of $34.272 million) of the EHL shares traded were financed by Equiticorp. This was confirmed by Mr Paton, whose evidence was that the total cost was approximately $30 million.
There were other factors which, if known, may also have affected the astute investor - eg, a discount for such a large parcel that represented almost 20% of the total capital - but the illegal share support scheme was quite the most important.
The Plaintiffs argued for a 33.33% discount in value. My decision in this area must inevitably be arbitrary and a matter of impression. 33.33% in my view is too high. I am comfortable with a figure of between 20% and 25% and fix it at 22½%.
The allowance in respect of the NZS/EHL Parcel is:
$90,000,000
22½% - 20,250,000
$69,750,000
======
That figure of $69,750,000, the value of the shares as at settlement on 22 March 1988, compares with the figure mentioned above of $65,702,954 at the point of takeover on
30 August 1988. Which figure should be selected? As earlier mentioned, the decline in value at the expense of the wrongdoer is part and parcel of the common law counter- restitution in specie approach. As also is the fixing of the value of the monetary set-off by reference to the actual price at which the shares were sold (or, in this case, subject to a takeover offer). So, a selection of the lower August 1988 figure is perhaps dictated by the common law's rough-and-ready approach which I have already rejected as inappropriate.
A sounder approach in my view is to ask the fundamental question which is at the heart of equity: "What is required to restore the parties to their former positions, and in the process do practical justice between them?" Lord Wright expressed the proposition rather more eloquently in Spence v Crawford (supra) at 288, line H when he said:
"Restoration, however, is essential to the idea of restitution. To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him, it would be inequitable if he did not also restore what he had got under the contract from the defendant. Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante ..."
For a modern example, see, Nicholls VC in Cheese v Thomas (supra) at 136, line B:
"It is well established that a court of equity grants this type of relief even when it cannot restore the parties precisely to the state they were in before the contract. The court will grant relief whenever, by directing accounts and making allowances, it can do what is practically just: see Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas 1278-1279, per Lord Blackburn. Here justice requires that each party should be returned as near to his original position as is now possible."
I see no reason why the Plaintiffs, as beneficiaries, should make a profit at the expense of the Crown as constructive trustee. When AI4 received the NZS/EHL Parcel it was
worth $69,750,000. To allow recovery of the full purchase price of $327,224,013 plus the value of the shares (a total of $396,974,013) would clearly benefit AI4 unjustly. It would be as unfair to the Crown as accepting a nil valuation. The decrease in the value of the shares between settlement on 22 March 1988 and takeover on 30 August 1988 seems to me only to have relevance in the context of the common law counter- restitution in specie approach. Had an order for restitution been made on 30 August 1988, then the figure attaching to it, if the shares themselves were not handed over, would have been $65,702,954. But what AI4 received at the time it paid over the moneys on 22 March 1988 was in fact shares worth $69,750,000. It follows that if that amount is not deducted from the full purchase price of the NZS/EHL Parcel, AI4 will receive an unjust advantage. The recovery therefore on the knowing receipt cause of action will be as follows:
Purchase price $327,224,013
Less Allowance for shares 69,750,000
Dividend 3,700,000 73,450,000
$253,774,013
Less Recovery from other defendants
as per Settlement Deed 64,000,000
$189,774,013
======
There are three ancillary reasons why allowing the value of the shares at the time of the transfer in March 1988 can be seen as satisfactory. The first is that the same result would have been achieved had the Crown's defence of change of position been made out. That defence, however, would probably have failed first, because as Burrows (supra) points out at 429, the defence should only be available subsequent to settlement. But, secondly and more fundamentally, as was made clear in Lipkin Gorman (a firm)
v Karpnale Ltd [1991] 2 AC 548 by Lord Goff delivering the leading judgment at page 580, lines C to D:
"It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer."
The Crown was a wrongdoer here because it received the moneys with the knowledge of the breaches of fiduciary duty. The other two reasons relate to the end result on the illegality causes of action and the money had and received causes of action. Because there, in due course, I will show that again, for different reasons, the allowance to be made for the value of the NZS/EHL Parcel is the assessed value of the shares at the time of settlement on 22 March 1988.
It is convenient at this stage also to deal with another issue raised by the Crown which affects all of AI4's causes of action. What I have to say here on the matter therefore can be regarded as of general application throughout the rest of the judgment in relation to AI4's claims. The Crown contended that, because it released the mortgage over the NZS shares, (which it acquired as a result of the Supplemental Agreement), when settlement took place, it should receive a change of position or other allowance on that account also. That proposition was addressed by me in Judgment 38 and rejected. My conclusion in that regard was not challenged when the judgment was taken on appeal. Nevertheless, I allowed the Crown to make submissions in closing on the issue because, at that stage, the Court of Appeal's judgment was not available. I have reconsidered the opposing arguments and, if anything, am now even more firmly of the persuasion that both the guarantee and mortgage breached s 62 and were therefore void and unenforceable.
Mr Tompkins argued that the Supplemental Agreement was not entered into to provide financial assistance but to delay settlement. I reject that submission, the Crown was very anxious by December 1987 about whether it would get paid and all the officials acknowledged candidly that when the request for delay in settlement was made they took the opportunity to acquire further security. I discussed all this in some detail in
2.7 "What did Galt know". Clearly there was a measure of satisfaction and relief upon the Crown getting itself into a position where, if BWL defaulted, it would still have a mortgage over the NZS shares.
That aside, however, it is inescapable that Shoeshine 70, a subsidiary of EHL, took legal title to the shares as trustee from Equiticorp International Ltd (EInt), another subsidiary, and the beneficiary of the Trust. Shoeshine 70 then guaranteed BWL's performance as underwriter and mortgaged the shares in support. So both the trustee and the beneficiary provided directly and indirectly financial assistance in respect of the sale of their parent company's shares. Mr Tompkins' argued that it was the Trust, not Shoeshine 70, which provided the assistance but that cannot be right when a purposive construction of s 62 is applied and the word "indirect" given proper weight. It follows that there will be no reduction on account of the discharge of the mortgage over the NZS shares acquired by EHL in the share swap contract.
I turn now to consider the position of AI4 suing as constructive trustee for the original funders. The discussion here, of course, will only become relevant if the award of
$189,774,013 already found for AI4 is successfully challenged on appeal. As earlier explained, AI4's status as a constructive trustee derives from the fact that its directors, Hawkins and Darvell, who were its mind and will in this, knew all the details of the unauthorised and illegal breaches which had resulted in the original funders' money finding its way into AI4's hands in the form of the thirteen bank deposits. AI4's duty, in the circumstances, was to pay the moneys back to the original funders but, instead, it paid them on to the Crown. It now sues, as it may, (see Young v Murphy discussed in
2.2) as a trustee in breach to recover the trust funds on behalf of the beneficiaries, the original funders.
Although the original funders, other than Elders, provided $247 million of the purchase moneys, the specific notice the Crown had as a result of the schedule attached to the Small letter of 11 March 1988 (Image Number 425022, page 106, Volume II) was that of the $327 million Elders was providing $105 million. Mr Andrews made the deduction in handwriting on Image Number 425022 shortly after he received it, so the Crown's knowledge in that regard was specific. The explanation for the difference in the figures is that it was a requirement of the Elders' Loan of $105 million that $25 million be deposited as security and EIGL put that sum up. So $247 million was provided "in connection with" the funding, but only $222,224,013 was paid over to the Crown on settlement. In fact, the Elders' Loan was also fed through two EHL subsidiaries before it reached AI4, so technically, once recovered it too could be seen as subject to a constructive trust. But the Crown had no way of knowing that. Its knowledge, as I say, was limited to the $222 million odd.
The question then becomes, however, whether any further deduction should be made. The shares and dividends were received by AI4 in its own right. The original funders, therefore, have no claim on those amounts and it would not be just if any recovery by AI4, which it would hold in trust for them, were to be subject to reduction on that account. Mr Farmer's argument to that effect seems to be supported by the case of Richardson v Stormont, Todd & Co [1900] UKLawRpKQB 38; [1900] 1 QB 701. There, at first instance and on appeal, the Official Assignee of a defaulting stockbroker was held entitled to full recovery from the stockbroker's former client on a transaction that had not been finalised. The client was not permitted to set-off a private debt. The balance in the defaulter's account was trust property and the Official Assignee sued as constructive trustee for all those in respect of whom the stockbroker had defaulted.
In all the circumstances, then, the recovery by AI4 on this alternative basis is
$222,224,013 less the $64,000,000 recovered on the settlement, ie, $158,224,013.
Before leaving AI4's claims, I should mention the evidence of Professor van Zijl, called as an expert by the Crown. He expressed the opinion, on economic rather than legal or accounting grounds, that the moneys made available to AI4 should, in reality, be regarded as a grant to that company and as a consequence it could not, in reality, be said to have lost anything as a result of paying the money on to the Crown. I am satisfied, however, that no practising accountant would have dealt with the matter in that way and equally confident that no Court would have upheld such a treatment. In law, I cannot ignore what actually happened however sound the "grant" proposition may be in the science of economics. As Robert Goff LJ (as he then was) said in Bank of Tokyo Ltd v Karoon [1986] 3 All ER 468 at 486:
"But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged."
The consideration which follows of EHL's and EIGL's knowing receipt claims is on the basis earlier recorded that I will rule on each claim by each Plaintiff. But, of course, in terms of recovery the Plaintiffs will obviously seek recovery on the highest award and there will be no double recovery against the Crown.
Turning to EHL's knowing receipt claim, which is at J.2.1A of the Sixth Amended Statement of Claim. It is simply a claim for the $32.5 million EHL provided towards the settlement moneys in the form of a fee. It was received by AI4 in cash. It was clearly intended by both EHL and AI4 to be used to help fund the purchase of the NZS/EHL Parcel. It therefore falls clearly within section 62 because it is "financial assistance" "otherwise" given for "the purpose of or in connection with a purchase" of
EHL's own shares. The Crown acknowledged all this at paragraph 3.1 of its opening when discussing breaches of s 62. There it was said:
"It is agreed that the payment by EHL of $32.536 million as a 'placement' or 'underwriting' fee was a gift by EHL to AI4 via WIL and that it was provided as part of the overall funding scheme of AI4's purchase."
As all the required ingredients of a successful knowing receipt claim have been proved against the Crown, there is no reason why EHL should not have judgment for the full amount of $32.5 million. On this claim, as with subsequent recoveries by EHL and EIGL, there is a problem as to how the settlement deduction of $64 million is to be applied. Counsel did not address the point. The appropriate course is to reserve leave to apply should the necessity arise. I shall indicate this where necessary from now on by the words: "leave reserved re settlement deductions".
Finally, there are the knowing receipt claims of EIGL to consider. These are complicated by the subrogation issue. As earlier indicated, however, I am dealing with these constructive trust claims on the basis that EIGL did repay the advances made by EAL and ET and others, and is entitled to be subrogated to their rights.
EIGL's knowing receipt claims are at J.1.1B, J.1.1C and J.1.2 of the Sixth Amended Statement of Claim.
The first claim (J.1.1B) is for $77.3 million which EIGL claims to have contributed for the purpose of or in connection with the purchase of the NZS/EHL Parcel.
It is made up of the following amounts:
|
contribution to purchase price on 9 March 1988
|
$19,000,000
|
|
contribution to purchase price on 10 March 1988 deposit to Hong Kong
Shanghai Bank as
security for that Bank's contribution to the
$105 million loan from Elders
|
$21,000,000
$25,000,000
|
|
further contribution 16 March 1988
|
$12,300,000
|
The $19 million, $20 million and $12.3 million were direct contributions. The
$25 million security deposit, which was not recovered, was clearly provided "in connection" "with the purchase" but, as recorded in greater detail elsewhere (see, 3.10), the Plaintiffs have not proved that this sum reached the Crown and, in any event, if it did it was as part of the Elders' Loan of $105 million.
Accordingly, EIGL only has a good claim for $52.3 million (ie, $77.3 million less
$25 million equals $52.3 million). Leave is reserved re settlement deductions.
The claim in J.1.1C is straight forward. $40 million was contributed from EFGL and EFSL as part of the settlement moneys for the purchase of the NZS/EHL Parcel and those two companies then assigned their rights to EIGL. The fact of the assignments and EIGL's right to pursue any claims as a consequence is acknowledged by the Crown.
As the requirements for establishment of a knowing receipt recovery have been proved EIGL is entitled to recover $40 million on this claim, with leave reserved re settlement deductions.
The claim under J.1.2 is the subrogation claim. The amounts which EIGL claims to be subrogated to derive from the original contributions of the following subsidiaries:
|
EAL
|
$90,532,823
|
|
EFGL/EFSL
|
$40,000,000
|
|
ET
|
$8,179,245
|
The EFGL/EFSL claim for $40,000,000 will be ignored. It is advanced as an alternative to the claim at J.1.1C above, which I have upheld. I interpolate to say that
J.1.2 includes a number of other causes of action as well, so I shall have to return to it more than once.
There were some repayments and adjustments before EIGL refinanced and became subrogated to the claims of the original contributors so that the amount claimed is less than the total of the two remaining amounts set out above. Specifically the amounts claimed are:
EAL $86,232,522
EIGL's refinancing of ET's initial
funding 9,958,832
Total $96,191,354
======
The original funders did not, of course, receive either the shares or the dividends so no deduction is required on that account.
Again, assuming that EIGL is subrogated to the rights of the original funders mentioned the necessary ingredients for recovery on a knowing receipt claim have been established. As the Plaintiffs claim a reduced amount in respect of EAL, that is all they can recover. The difference between ET's original contribution and the amount claimed is explained by a shift in the exchange rate adverse to the New Zealand dollar between March 1988 and refinancing later in the year. No satisfactory reasoning was advanced as to why on a claim to be subrogated to ET's rights as at March 1988, the Plaintiffs should recover the larger amount put forward. Any recovery by EIGL on the basis of subrogation would therefore be for the total of the lower figures:
EAL $86,232,522
ET 8,179,245
$94,411,767
======
With leave reserved re settlement deductions. The result is that the recovery by AI4 in the sum of $189,774,613 effectively incorporates all the other claims which can be regarded as alternative to it.
2.18 Results on the dishonest assistance causes of action
I again deal with AI4 first. The claim under J.3.1 relies upon both the gross improvidence and unauthorised and illegal breaches.
Suing in its own right as legal owner of the deposits transferred to the Crown, AI4 claims the full purchase price of $327,224,013.
But, as earlier explained, the losses which the Crown must make good are only those which, using hindsight and commonsense, can be seen to have been caused by the breaches. Also, as with knowing receipt claims, any awards are subject to the Crown's specific defences which are dealt with later in the judgment.
Hindsight and commonsense tell us immediately that the full purchase price was not the measure of the loss. From it there must be deducted the value of the shares and the dividend they produced. The Crown also argues for a deduction on account of contributory negligence or, more correctly, by analogy, as was done in Day v Mead (supra). Leave to seek such contribution was obtained without opposition on 4 December 1995 when the trial had less than three weeks to run.
In the preceding section (2.17) I established that the value of the shares at settlement on 22 March 1988 was $69,750,000. The further evidence is that on 29 August 1988, a little over five months after the purchase of the NZS/EHL Parcel, AI4 accepted a takeover offer for all its EHL shares made by EIplc. It was a straight share swap in which AI4 was to receive two ordinary fully paid EIplc shares plus one EIplc option for every two ordinary fully paid EHL shares. Shortly thereafter the EIplc shares were trading in Australia and New Zealand, and possibly Hong Kong, for between 60c to 70c and the options at 10c. The NZS/EHL Parcel converted to 92,961,364 EIplc shares and 46,480,682 EIplc options. On one view of the matter, therefore, the approximate value of the NZS/EHL Parcel at the time of the takeover was 92,961,364 multiplied by (say) 65c ($60,424,886) and 46,480,682 multiplied by 10c ($4,658,068) [$60,424,886 plus
$4,648,068 equals $65,720,954] or $65,702,954.
Shortly before the takeover, two employee Unit Trusts were set up by EIplc, one in New Zealand and the other in Hong Kong. Why this was done is not entirely clear, but all the indications are that it was another move by Hawkins and those now controlling the Equiticorp Group through EIplc to avoid the strictures of s 62 or its equivalent in other jurisdictions.
Be that as it may, however, within a day or so of the takeover AI4 sold the bulk of its EIplc shares and options (88 million shares and 44 million options) to the trustees of the NZEUT (New Zealand Employee Unit Trust) for a consideration which was subsequently varied downwards to the sum of $135,520,000. The balance, 4,961,364 shares and 2,480,682 options, were sold also at the same time to the HKEUT (Hong Kong Employee Unit Trust), again for a consideration which was subsequently varied downwards to $7,442,046.
It follows that, by accepting the EIplc takeover offer, AI4 was immediately able to recover by the on sale of the shares to the EUTs $142,962,046 of the original purchase price of $327,222,013.
The question arises - which figure should be used to reduce the equitable compensation recoverable? The apparent value of the EIplc shares and options at the time of the takeover or the actual figure obtained by selling them on the EUTs. The latter figure being more than twice the former.
If there was any room for attributing the dramatic shift in apparent value to the performance of EIplc as a company, I would not consider the higher figure. But the on sale to the EUTs was immediate and fully and correctly documented. Formal agreements of sale and purchase of the shares and formal variations were entered into in each case. The payments were effected by journal entries and one result was that AI4 was relieved of its liability to Elders for the original advance of $105,000,000 because that debt was taken over as part of the consideration for the EIplc shares. So, although the transactions were all inter-company, and most unusual, there is no basis for saying that they were shams, (the Crown did not so submit) and I must give them their full effect, see NZI Bank Ltd v Euro-National Corporation Ltd [1992] 3 NZLR 528 at 539.
Since the NZS/EHL Parcel was the vehicle by which AI4 was able to effectively reduce its loss by $142,962,046 within five months of the purchase in March 1988, my conclusion is that hindsight and commonsense dictate that the loss resulting from the Crown's fault as an accessory should be reduced by that sum. To this stage, then, the loss stands at:
|
Purchase price
less Dividend
|
$3,700,000
|
$327,224,013
|
|
less Recovery on shares
|
142,962,046
|
146,662,046
|
|
Loss
|
|
$180,561,967
====== |
Turning to the issue of a reduction on account of AI4's contribution to its own loss. Headnote 2 of Day v Mead (supra) appears to accurately reflect the aspect of the judgment there dealt with. It reads as follows:
"2 (per totam curiam) With the mingling or interacting of law and equity there is no solid reason why, in assessing compensation for breach of fiduciary duty, the assessment should not take into account a plaintiff's share of responsibility for the loss. The assessment is that which the justice of the case requires according to considerations of conscience, fairness, and hardship and other equitable features such as laches and acquiescence. In this case Day bore no responsibility for the loss of the first investment of $20,000 and he was entitled to recover that amount from Mead. As to the second investment of $80,000, Day was partly the author of his own loss and a lesser sum than the full amount invested would fairly compensate him. The trial Judge's apportionment of $40,000 was accepted, entitling Day to recover the total amount of $60,000 awarded him in the High Court."
The particulars of AI4's alleged contribution to its own loss are contained in paragraphs
79.1 to 79.11 and 97.1 to 97.10 of the Crown's Third Amended Statement of Defence. The paragraph 79 particulars are primarily directed to the clean hands and ex turpi causa defences which I have already rejected in 1.5 of this judgment. As AI4's constructive trust causes of action have their foundation in the unauthorised acts of its directors it would be illogical to reduce its equitable compensation on account of their delinquency. In the wider sense, addressed by the paragraph 97 particulars, however, there is room for the view that the shareholders of AI4 should have taken care to ensure that they knew what Messrs Hawkins and Darvell were up to. In 1.6 of this judgment, for the reasons set out there, I held that AI4 was a subsidiary of EHL and it is inescapable that it was used as a pawn in a wider game in which Hawkins dictated the
moves with little or no reference to, or control by, the directors of EHL. On the other hand, however, AI4 was not nominated until the eleventh hour and the evidence, which is sketchy, suggests that there would have been little time, (a matter of days, perhaps) for the shareholder companies of AI4 to ascertain the state of play and intervene. I assess the degree of responsibility which was very limited, in all the circumstances, at 2½% (ie, $4,514,049) so that the loss, after deduction of dividend and sale of shares recorded above, reduces to $176,047,918. That recovery would then be further reduced by the settlement figure of $64,000,000 to $112,047,918.
AI4's alternative approach to the claim is as a constructive trustee for the original funders. The starting point here, as in the recipient causes of action, is the amount contributed which is $222,224,013. On this basis of claim, however, the original funders did not reap any of the benefits of either the dividends paid or the on sale of the shares, so there can be no reductions on account of those matters.
In respect of the original funders, however, the grounds are more substantial for a reduction on the basis of their contribution to their own loss. The same particulars are relied upon, but the shareholders and independent directors of the original funders who were not party to the unauthorised and illegal acts of the delinquent directors have something to answer for.
The allegations against them, which in my judgment have substance on the basis of the evidence adduced, were summarised by the Crown in closing generally at paragraph 28.20(1), (2) and (3) and specifically in relation to AI4 at paragraph 28.20(13), (14) and (15). Those allegations are set out hereunder:
"General
.....
Effectively, the Crown's submission was that the original funders' recovery should be very substantially reduced, even eliminated, by these and other unclean hands/ex turpi causa allegations. Here again, however, the latter are eliminated for the reasons given in 1.5. The other shortcomings, however, are not so much a lack of care or responsibility in respect of what actually happened but, rather more, a failure to put in place, at a much earlier stage, (or having put them in place a failure to ensure compliance with), procedures which would have provided a mechanism for control of a Managing Director such as Hawkins, whose conduct was arrogant and arbitrary in October 1987 and became more so as the financial health of the Group deteriorated. But again, it was a relatively short time span between mid-January 1988 to settlement in mid-March 1988 and, as we have seen, Hawkins was secretive and devious, keeping
the true position from the full board until it was a fait accompli and only making a clean breast of it in July 1988 at the "stunned faces" board meeting.
Mr Mathieson warned me about the dangers of hindsight when assessing the Crown's position. The same applies to the Plaintiffs on this issue of contribution to their own loss. It is easy to see now what was required then and to postulate safeguards that would have provided some protection. But things were rather less controlled in the boom and immediate aftermath of the crash in 1987/88. In my judgment, an appropriate reduction is 18%. Thus the damages reduce by $40,000,322 to
$182,223,779, which again would be reduced by the settlement recovery of
$64,000,000 to $118,223,779. The last mentioned sum is the amount that AI4 can recover suing as a constructive trustee.
For the sake of completeness, and on the basis earlier indicated, I now consider the other Plaintiffs' dishonest assistance claims.
EIGL's dishonest assistance claims are to be found in J.1.1, J.1.1A and J.1.2, which is the subrogation pleading.
In respect of the claim under J.1.1, the breaches proved are again that the advances were unauthorised and illegal. The Crown is said to have participated by receiving the money and permitting the sale to proceed. I have already found that the Crown had knowledge of the breaches and that, objectively judged, it dishonestly assisted in that way. But the Plaintiffs' claim is advanced on a much broader basis. I shall have to refer to it several times and to identify it I shall call it the "wider fraudulent design theory". The proposition is that although neither the Plaintiffs nor the Crown had any knowledge of what was going to happen after settlement because nothing had been decided by the Plaintiffs at that time, nonetheless the Crown should have foreseen
refinancing and the payment of interest and accordingly should be held liable for losses arising in that regard.
There is no way, in my judgment, that the Crown could have foreseen that EIGL would refinance. Far less, that the NZS/EHL Parcel would be swapped for EIplc shares resulting in the Elders' Loan all being repaid six to nine months after settlement.
My view of the evidence is that the scheme or design of which the Crown had knowledge stopped at settlement and was no more complex than the funding of part of the purchase price for the NZS/EHL Parcel with Equiticorp Group money. Indeed, I find as a fact that there was no scheme or design beyond that. What happened after settlement simply evolved as Hawkins and those assisting him manipulated diminishing Group assets in an endeavour to keep it afloat.
J.1.1 (advancing the wider fraudulent design theory), is pleaded at paragraphs 172, 172A, 172B and 173 of the Sixth Amended Statement of Claim. It is not easy to follow, even when reference is made back to earlier paragraphs. Nonetheless, to set out the paragraphs just mentioned provides a convenient basis for recording my conclusions.
"172. AS a consequence of the dishonest and fraudulent, and/or illegal design in which the Crown participated EIGL suffered loss as follows:
|
172.1.1 As pleaded in paragraph 60D.1
|
$12,300,000
|
|
172.1.2 As pleaded in paragraphs 60D.2,
60D.3 and 60D.4
|
$40,000,000
|
|
172.1.3 As pleaded in paragraphs 60.1A
and 60A.3
|
$25,000,000
|
as pleaded in paragraph 68 $165,134,346
|
172.3 EIGL's funding of the repayment of the Elders' Loan (as pleaded in
paragraph 89A)
|
$105,000,000
|
|
172.4 Interest paid by EIGL on loans advanced by EAL, EFGL/EFSL and Elders
(as pleaded in paragraph 65)
|
$11,328,482
|
172A OF the amounts particularised in paragraphs 172.1, all but
$19,000,000 are alternative to the claims for loss pleaded in paragraphs
172.2 and 172.3. The payments described in paragraphs 172.2 and 172.3 include partial refinancing of EIGL's contribution to the original funding as follows:
172A.1 $12,200,000 of EIGL's original funding was repaid by AI4 with funding provided by EAL as described in paragraph 67A. Subsequently EIGL refinanced EAL's funding to AI4 as described at paragraph 68;
172A.2 Of EIGL's original funding of AI4 in the sum of
$40,000,000, $21,000,000 was repaid by AI4 with funding provided by EAL as described at paragraph 67A. Subsequently EIGL refinanced EAL's funding to AI4 as described at paragraph 68;
172A.3 EIGL provided $25,000,000 to the original funding which funded either $25,000,000 paid to the Crown or
$25,000,000 retained by HKSB as a security deposit as described in paragraph 60A. Subsequently the HKSB security deposit was redeemed and used to repay that portion of the Elders' Loan.
....
172B ON 30 September 1988 EFSL repaid $30 million of the financing provided by EIGL to the NZEUT as pleaded in paragraphs 87 and 89A above.
173. IN the premises the Crown is liable as a constructive trustee to compensate EIGL for the loss it has suffered in the sum of $270,462,828, calculated as follows:
Original funding $19,000,000
Refinancing of Equiticorp Companies $165,134,346
Repayment of Elders $105,000,000
Less EFSL refinancing of EIGL ($30,000,000)
Interest $11,328,482
$270,462,828"
As can be seen, the pleading addresses three different forms of financing or refinancing. First, there is the original funding, next the refinancing of the original Equiticorp companies, followed by the repayment of Elders and a claim for interest. All but the original funding took place after settlement. There are various adjustments made along the way, leading to the total at the end of paragraph 173.
I refer first to the claim of $25,000,000, itemised in paragraph 172.1.3. As already explained, when dealing with EIGL's recipient claim, the Plaintiffs are unable to say whether this amount was in fact ever paid to the Crown. That is effectively acknowledged in paragraph 172A.3 above. As the Crown had no knowledge of it there is no basis for liability in respect of it.
The claim for $165,134,346 referred to in paragraphs 172.2 and 173 is not recoverable on EIGL's dishonest assistance claim. This is because, as already explained, the Crown did not know about or in any way participate or assist in the refinancing that occurred after the settlement. Similarly, on the Elders' refinancing of $105 million and the interest payment of $11,328,482, the Crown had no knowledge and did not assist in any way. There is thus no basis upon which it can be said that in that regard the Crown acted dishonestly.
The result is that on this claim only the remnant of the original financing of $19 million would be recoverable with leave reserved re settlement reductions.
EIGL's alternative dishonest assistance claim in J.1.1A is for the $40,000,000 contributed in the first instance by EFGL and EFSL which was subsequently assigned to EIGL. Here the money was advanced and reached into the Crown's hands at settlement as a consequence of the illegal and unauthorised breaches by EIGL's directors. The Crown had knowledge of that in circumstances where, as I have held, it was objectively dishonest of it to receive the money. Accordingly, the recovery here is for the full amount, less the deduction of 18% for EIGL's own contribution to its loss on the basis set out above. The net recovery, therefore, is reduced by $7,200,000 to
$32,800,000 with leave reserved re settlement reductions.
The final dishonest assistance claim by EIGL is within the subrogation claim at J.1.2. When dealing with EIGL's recipient subrogation claim I explained why the maximum amount recoverable was $94,411,767 less reductions. That also is the upper limit of any right to recovery on an accessory basis. There is a difference, however, since on the accessory basis equitable compensation is being assessed, the contribution by EIGL to its own loss has to be taken into account. The figure of $94,411,767 therefore reduces by 18%, which is $16,994,118, so that the net recovery before any further reductions on account of the settlement would be $77,417,649.
Finally, I return to EHL's accessory claim. The basis for recovery here is the same as that discussed for recovery by EHL for the same amount on a recipient basis. As mentioned earlier, the Crown accepts that the provision of this sum was in breach of s 62 in that the sum itself was provided as part of the overall funding scheme of AI4's purchase.
It follows that the sum is recoverable as equitable compensation, but it is, of course, subject to reduction on account of EHL's contribution to its own loss. On the basis discussed earlier the level of contribution is 18% and accordingly this sum of
$32,500,000 is reduced by $5,850,000 down to $26,650,000 with leave reserved re settlement reductions.
2.19 Glenbrook's dishonest assistance claim
Glenbrook Steel Holdings Ltd (Glenbrook), formerly Equiticorp International Ltd (E.Int) in CP 111/l94, claims against the Crown for dishonest assistance in respect of the payment by EIGL of a fee to BWL for underwriting and of fees to RCL and AHL for sub-underwriting. The claim is for $5,785,480 being the total of underwriting fees paid for which amount Glenbrook assumed liability to EIGL, by way of book entry. The individual fees paid were to BWL $4,967,420 and to AHL and RCL $409,030 each. The Crown had been advised that Equiticorp proposed to pay BWL an underwriting fee, but no figure was mentioned. So far as AHL and RCL were concerned, however, the Crown was not informed and did not know that they were to receive sub-underwriting fees.
At paragraphs 166 and 167 of its Second Amended Statement of Claim Glenbrook alleges inter alia against the Crown:
"166. THE sale of the NZS/EHL Parcel from the Crown to AI4 and the funding of the sale, including the funding by E.Int of the 'underwriting fee' and 'sub-underwriting fees' paid to BWL, AHL and RCL, constituted the implementation of a design which was unauthorised, in breach of duty, dishonest and fraudulent and/or illegal ...
167. THE Crown participated in the design which was unauthorised, in breach of duty, dishonest and fraudulent and/or illegal in that:
167.1 ...
167.2 the Crown knowingly allowed or permitted the sale of the NZS/EHL Parcel to proceed to settlement, and the payment of an 'underwriting fee' to be made to BWL, and the payment of the 'sub-underwriting fees' to be made to RCL and AHL, and it thereby knowingly and/or dishonestly assisted in the design."
Particulars relating to the assistance alleged to have been rendered by the Crown are set out in the following two paragraphs. In summary it is alleged that the Crown assisted because first the RCL and AHL sub-underwriting fees were paid in connection with the settlement of the sale of the NZS/EHL Parcel, and in fact would not have been paid and could not have been claimed if the Crown had not settled. Secondly the sub- underwriting fees constituted part of the unauthorised and illegal design and the Crown assisted that design by allowing or permitting the sale to proceed, and by receiving the settlement money. Thirdly, as the Crown through its solicitor and agent, Mr Ratner, acquiesced in and/or approved payment by members of the Equiticorp Group of the underwriting fee to BWL, it thereby implied its acquiescence in or approval of similar payments, such as the sub-underwriting fees to RCL and AHL. Finally, the Crown took no steps (other than initially objecting to the BWL underwriting fee) to require that any fees for underwriting or sub-underwriting the sale of the NZS/EHL Parcel should not be paid by Equiticorp.
In question No 7 of Minute 90 for the callback of 1 May 1996, I asked Mr Woodhouse what precisely were the facts relied upon to show dishonest assistance. Counsel, in a written memorandum, responded:
"The essence of the submission, combining the element of knowledge with the element of assistance, is that the Crown, knowing that an Equiticorp company would pay the BWL fee if the Crown proceeded with settlement of the sale to AI4, did proceed with such settlement. Settlement was an essential step in the chain leading to BWL's claiming the fee and Glenbrook's paying it. The Crown thereby assisted."
In order to establish dishonest assistance four elements must be proven:
1. The existence of a trust or fiduciary relationship;
2. The breach of that trust or fiduciary duty by the trustee;
3. Assistance by the stranger, involving;
4. Dishonest conduct on the part of the stranger.
See Glasson "Constructive Trusteeship in the Privy Council" (1995) 4 J Int P 112, 112- 113 and Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 3 All ER 97.
The existence of a fiduciary relationship between Glenbrook and its directors is not in issue. Similarly Glenbrook and the Crown are agreed that the payment of the underwriting fees by EIGL on behalf of Glenbrook was illegal and without authority. The third and fourth requirements are the crucial issues in respect of Glenbrook's claim. At paragraphs 29.60 and 61 of the Crown's closing it was submitted:
"All the Crown did was, first, to identify a potential problem arising out of the statements made in the BWL letters to the Crown of 6 and 7 October 1987. It was not necessary for it to involve itself in this issue, as it was not being asked to pay the fee itself, nor was there ever any suggestion that the fees were to pass through the Crown's bank account, or anything of that sort. It simply noticed a potential problem, and then resolved, reasonably, that in fact and in law no such problem existed. That was all it did. It was not essential to any part of the payment of the fees that the Crown do anything. It was not asked for its approval or consent, nor were the payment of the fees conditional in any way on its approval or consent.
Later, of course, when Glenbrook voluntarily assumed an obligation to EIGL in respect of EIGL's payment of the fees, the Crown had absolutely no involvement at all."
Glenbrook, as set out above rely on the fact the Crown proceeded with the transaction, knowing this would result in the payment of an underwriting fee to BWL, and thereby acquiesced in the payment of any sub-underwriting fees. As Mr Woodhouse made clear during the callback, it is the fact that the Crown settled the share transaction which is the essential step relied upon by Glenbrook to show that the Crown assisted in the illegal and unauthorised payment of the underwriting fees. Put another way settlement was the trigger or essential pre-condition to the breach of fiduciary duty.
Assuming the pre-condition argument is valid, then it would seem that the share transaction would have triggered the payment of the fees irrespective of whether or not it was illegal. Thus the illegality of the initial transaction does not, in my view, affect the question of whether the Crown assisted in the breach of trust owed by Glenbrook's directors to the company.
Furthermore, the two transactions (the settlement of the NZS/EHL Parcel and the payment of the underwriting fees) were quite separate. They were entered into by different parties, at different times and while the fee arrangements would not have been entered into without the share purchase agreement, settlement of the transaction with AI4 was not dependant upon the Underwriting Agreements, or payment pursuant to them. So by settling the Crown did not actively participate in the breach by Glenbrook's directors of their duties owed to the company. It did not pay or receive the fees. It had no standing to interfere in the Underwriting Agreements. The most the Crown can be said to have done was to acquiesce. That is not assistance in my view. In reality, what Glenbrook is complaining of, is that the Crown did not interfere. That it did not prevent the breaches in some way.
Whether or not there has been assistance is a question of fact, which, in the majority of cases is not difficult to decide. As a consequence, little attention has been paid to the question of what constitutes assistance in the cases or by the commentators. Peter Gibson J (as he then was) addressed the question briefly at paragraph 246 of Baden which I set out as follows:
"As to the third element it seems to me to be a simple question of fact whether or not there has been assistance. The payment by a bank on the instructions of fraudulent directors of a company of moneys of the company to another person may be such assistance, as in the Selangor and Karak cases. Mr Leckie submitted that there cannot be assistance for the purposes of constructive trusteeship unless that which is done by the
stranger inevitably has the consequence that a loss is suffered and that a mere payment which in itself does not have that consequence is not sufficient. I accept that the assistance must be an act which is part of the fraudulent and dishonest design [I interpolate that the Privy Council in Tan held a fraudulent and dishonest design is not necessary, a simple breach on the part of the trustee will suffice.] and must not be of minimal importance but I am not aware of any reasons of principle or by way of authority why Lord Selbourne LC's test should bear the further gloss which Mr Leckie would put on it."
Thus Peter Gibson J was of the view that while the assistance must be of more than minimal importance it did not have to inevitably result in a loss. His opinion that it must be part of a fraudulent and dishonest design can be translated post-Tan as requiring that it must assist the breach of trust or fiduciary duty. So, while relevant, Baden does not directly discuss whether acquiescence can amount to assistance.
The question of what amounts to assistance was also considered by Heron J in Donnelly v Gibson Sheat Nominees Ltd (High Court Wellington, CP 435/92, 13 December 1993). The issue in that case was whether a person can be said to be assisting when the trustees were already in breach of their fiduciary duties before the act alleged to constitute the assistance occurred. Heron J held such a person could be involved so long as it was "assistance which is material assistance in the sense that it contributes to the loss." (p 5) On the next page of his judgment Heron J adopts as "the only possible test to be applied" a submission of Mr Mathieson (who was counsel in that case also) that:
"If the action assists the constitution of the cause of action by helping the primary equitable wrongdoer in any of the latter's acts or omissions which constitutes the ingredients of that cause of action, liability attaches." [Emphasis added]
In Tan, Lord Nicholls' approach was to focus upon the underlying reason why a third party who has not received trust property should be made liable. At page 103 of the judgment he said:
"If, for his own purposes, a third party deliberately interferes in that relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee, the beneficiary should be able to look for recompense to the third party as well as the trustee."
In the next paragraph he continues:
"The rationale is not far to seek. Beneficiaries are entitled to expect that those who become trustees will fulfil their obligations. They are also entitled to expect, and this is only a short step further, that those who become trustees will be permitted to fulfil their obligations without deliberate intervention from third parties. They are entitled to expect that third parties will refrain from intentionally intruding in the trustee- beneficiary relationship and thereby hindering a beneficiary from receiving his entitlement in accordance with the terms of the trust instrument. There is here a close analogy with breach of contract. A person who knowingly procures a breach of contract, or knowingly interferes with the due performance of a contract, is liable to the innocent party. The underlying rationale is the same."
When considering and rejecting the notion of strict liability for a third party dealing with a trustee Lord Nicholls said of the third party: (104)
"His only sin is that he interfered with the due performance by the trustee of the fiduciary obligations undertaken by the trustee."
Discussing the concept of dishonesty his Lordship said: (106)
"Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries." [The emphasis throughout the above quotes is mine.]
Guided by the statements in Tan set out above, it is my view that it cannot be said in this case that by settling one transaction knowing this would result in the payment of an underwriting fee by an Equiticorp company, the Crown assisted Glenbrook's directors to misapply company funds. The Crown did not deliberately intrude in the fiduciary
relationship between Glenbrook and its directors. Nor did it interfere with the performance by the directors of their fiduciary obligations to the company. Nor did it participate in a transaction involving the misapplication of Glenbrook's funds.
I do not go so far as to hold that acquiescence can never amount to assistance. There may be circumstances where it will, although they are difficult to envisage. But, in this case, the Crown's actions in settling the sale of the NZS/EHL Parcel are far removed from the breaches of duty by the Glenbrook directors. In my view, settlement of the share transaction did not assist in, or form part of, the breach of trust which is the foundation of Glenbrook's cause of action.
I will briefly consider the dishonesty element, although my conclusion on assistance means it is not strictly necessary. In relation to the payments made on behalf of Glenbrook to AHL and RCL it is clear, on any reading of the situation, that the Crown did not act dishonestly. It had no idea that RCL and AHL were to be paid the fee. Mr Woodhouse sought to argue that by acquiescing in the payment to BWL the Crown had:
"thereby implied its acquiescence in or approval of the funding of payment by one or more members of the Equiticorp Group of fees having the same or similar characteristics to the BWL 'underwriting fee', which characteristics the RCL and AHL 'sub-underwriting fees' had."
In my judgment acquiescing in one transaction does not signify approval of another. And, in any event, the fact that the Crown did not know the AHL and RCL sub- underwrite agreements had been entered into is a complete answer to that part of the claim.
The Crown did know, however, of the BWL fee agreement. Mr Ratner, having early on the day of 13 October 1987 expressed reservations about EHL paying the
underwriting fee because he felt it breached s 62, finally resolved his doubts (albeit incorrectly) and concluded that the payment was within the provisions of s 61(1). In such circumstances, can it be said the conduct of the Crown in settling the transaction, knowing it would result in the payment to BWL of an underwriting fee by an Equiticorp company, was dishonest? Lord Nicholls, discussing what constitutes dishonest conduct observed that while it is an objective standard it: (supra, at pages 105-106)
"does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated."
While the Crown knew the payment was being made it relied on the advice of its solicitor, Mr Ratner. With the exception of Mr Kwok none of the officials were legally trained. Even though Mr Ratner was negligent in failing to research the issue, the Crown officials reasonably relied upon him. In those circumstances it cannot be said that they acted dishonestly in relation to the BWL fee.
In the result, Glenbrook's claims fail because the Crown neither assisted nor acted dishonestly.
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP No. 2455/89
BETWEEN EQUITICORP INDUSTRIES GROUP
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
First Plaintiff
AND EQUITICORP HOLDINGS LIMITED (In
Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
Second Plaintiff
AND ARARIMU INVESTMENTS FOUR
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland
Eighth Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Twelfth Defendant
AND EQUITICORP AUSTRALIA LIMITED
(In Liquidation) a duly incorporated company under the laws of New South Wales, Australia and having its registered office in Sydney
Fourteenth Defendant
Counsel: Plaintiffs: J A Farmer QC, S S Elias QC (until 18 August 1995),
S B W Grieve, W G Manning, H D Winkelmann,
A F Cook and L N D Way (from 23 February 1996)
12th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
14th Defendant: P F A Woodhouse, N Manousaridis, A C Challis and J L Hubble (from 13 November 1995)
CP No 111/94
BETWEEN GLENBROOK STEEL HOLDINGS
LIMITED a duly incorporated company having its registered office at Auckland, Holding Company
Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Eleventh Defendant
Counsel: Plaintiff: P F A Woodhouse, N Manousaridis, A C Challis and
J L Hubble (from 13 November 1995)
11th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
Consolidated Hearing: 198 days between 21 November 1994 and 21 December
1995, plus 7 additional days, 23 February, 22 March,
19 April, 1, 2 and 16 May and 21 June 1996
Judgment: 12 July 1996
JUDGMENT No 47 OF SMELLIE J
re Liability and Quantum: Volume I(B), Sections 3 to 9
Solicitors:
CP 2455/89 Phillips Fox for Plaintiffs
Crown Law Office for 12th Defendant Hesketh Henry for 14th Defendant
CP 111/94 Hesketh Henry for Plaintiff
Crown Law Office for 11th Defendant
INDEX OF SCHEME OF JUDGMENT
Section 1: Preliminary and stand alone matters 1
Overlap with EIGL's subrogation claims 31
Section 2: Claims based on recipient and accessory
liability
(Knowing receipt: dishonest assistance) 72
respect of either recipient or accessory liability 230
of action prima facie succeed 249
Section 3: The Plaintiffs' claims based on illegality 298
|
298
|
|
|
3.2 Factual background and related legal matters
|
302
|
|
3.3 The effect of any breach of s 40
|
307
|
|
3.4 The rule in Trevor v Whitworth
|
310
|
|
3.5 Tainting of the contract transferring the
|
Page
|
NZS/EHL Parcel 312
of s 62 Companies Act 1955 and/or s 129
Companies (NSW) Code)? 318
refinancing and interest payments 336
$40 million assigned from EFGL/EFSL 343
Section 4: The Plaintiffs' claims for money had and received 348
had and received 357
and received 360
$40 million assigned from EFGL/EFSL 363
Section 5: The statutory trust causes of action (s 154
Corporations
(Investigation and Management) Act 1989) 365
Section 6:
EIGL's claims based upon unjust enrichment at J.1.2B 374
Section 7: The
Crown's defences 377
|
377
|
|
|
7.2 Clean hands
|
377
|
|
7.3 Validation
|
378
|
|
7.4 Estoppel
|
385
|
|
7.5 Section 18C Companies Act 1955
|
391
|
|
7.6 Ratification
|
406
|
|
7.7 Other defences
|
411
Page
|
Section 8: Is subrogation available to EIGL re EAL v the Crown 414
issues between EAL/ET and EIGL 414
and what brought them about 417
payment/discharge of EAL? 424
amount to discharge and payment? 439
what is the result? 440
expense of EIGL? 445
enrichment: subrogation 467
Section 9: Results on the Plaintiffs' causes of action 469
VOLUME II
This volume contains the charts and exhibits referred to during the course of the judgment, arranged where possible in date order.
VOLUME III
This volume contains a summary which is part of the judgment.
GLOSSARY OF ABBREVIATIONS
AF&I Ararimu Farms & Investments Limited
AHL Ararimu Holdings Limited
AI One Ararimu Investments One Limited
AI4 Ararimu Investments Four Limited
AI4 Directors Hawkins and Darvell
Adams Grant Adams
Allan Christopher John Allan
Aurora Aurora Group Limited
Avant-Garde Avant-Garde Finance Limited
Aylesford Aylesford Securities
Aylesford A Shares 265 million A Class Preference Shares in the capital
of Aylesford, held by EIL and redeemed on 30 June 1988
Aylesford B Shares 265 million B Class Preference Shares in the capital
of Aylesford, held by EAL and then subsequently (as to 80 million) by EFL
BWL Buttle Wilson Limited
BWL Takeout Deed The Deed dated 19 October 1987 between BWL,
RCL, AHL and EHL in which EHL agreed that if necessary the Equiticorp Group would lend the funds to enable RCL and/or AHL to complete the purchase of the NZS/EHL Parcel from the Crown
BWL Underwriting Agreement The Agreement dated 19 October 1987 between BWL
and the Crown, in which BWL agreed to purchase or procure a nominee to purchase the NZS/EHL Parcel from the Crown on 20 March 1988
CHL(NZ) Capitalcorp Holdings Limited
Concorde Concorde Limited
Coney Miles Heathcote Coney
Darvell Robert Paul Darvell
Denton Hall Denton Hall Burgin & Warrens
Directors The directors of both EHL and EIGL - Hawkins, Adams, Coney, Gunthorp, Saunders, Stanes, Taylor, Walsh, Marcus Clark and Wilson
E.Int Equiticorp International Limited
EAL Equiticorp Australia Limited
EAL Takeout The "Subscription and Purchase Agreement Regarding Class B Preference Shares" between EIGL, Aylesford and EAL dated 30 June 1988, by which EIGL agreed that it would acquire 265 million Aylesford B Shares from EAL if required to do so on or before 30 June 1989
EFGL Equiticorp Finance Group Limited
EFHL Equiticorp Financial Holdings Limited (formerly Associated Midland Limited)
EFL Equiticorp Finance Limited
EFL Takeout The agreements dated 22 August, 20 September, and 27 September 1988 between EIGL, Aylesford and EFL, by which EIGL agreed that it would acquire 80 million Aylesford B Shares from EFL if required to do so on or before 30 June 1989
EFSL Equiticorp Financial Services Ltd
EHL Equiticorp Holdings Limited
EHL Directors "The Directors" in their capacity as directors of EHL
EHL Takeover Offer The written offer to the shareholders of EHL dated
28 May 1988 by which EIplc made a conditional takeover offer for all of the issued share capital of EHL
EIGL Equiticorp Industries Group Limited
EIGL Directors "The Directors" in their capacity as directors of EIGL
EIL Equiticorp Industries Limited
EIplc Equiticorp International plc
Elders Elderbank Limited, previously Elders Merchant Finance Limited
Elders' Loan The $105 million loan advanced on 18 March 1988 to AI4 through Setar 72 and Shoeshine 59 as intermediaries
ET Equiticorp Tasman Limited
EUT Chain Those companies through which the funding for the NZEUT passed, being CHL(NZ), Watstone 82 and Watstone 74
Ewoch Chain A term used by Equiticorp executives to refer to the companies Avant-Garde, Capitalcorp Investments (UK), Capitalcorp Europe, CHL - Hong Kong Branch and CHL(NZ)
FIL Feltrax International Limited
F&P Fisher and Paykel Industries Limited
FSL Feltrax Steel Limited
Gunthorp Ian Lindsay Gunthorp
Harford Graham Bramwell Harford
Hawkins Allan Robert Hawkins
HK Trustees Messrs P J Lawrence and M R Boyte
HKEUT The Hong Kong Employee Unit Trust
HKEUT Purchase Agreement The Sale and Purchase Agreement dated 30 August
1988 by which the HKEUT agreed to buy from AI4 88 million EIplc shares and 44 million EIplc options
HKEUT Parcel The EIplc shares and options sold by AI4 to the HKEUT
HKSB Hong Kong and Shanghai Banking Corporation
Mackay Paul Robert Mackay
Marcus Clark Timothy Marcus Clark
NZEUT The New Zealand Employee Unit Trust
NZS New Zealand Steel Limited
NZS/EHL Parcel The 92,961,364 ordinary shares in the capital of EHL
issued by EHL to the Crown pursuant to the NZS Purchase Agreement
NZS Purchase Agreement An agreement in writing dated 19 October between
the Minister and EHL by which the Minister agreed to sell to EHL its shareholding in NZS in consideration for shares in the capital of EHL which EHL agreed to issue to the Crown
Ratner Peter Edward Ratner
RCL Richardson Camway Limited
RWS Rudd Watts & Stone
Saunders Peter William Saunders
Setar 72 Setar Seventy Two Limited
Shoeshine 59 Shoeshine Fifty-Nine Limited
Shoeshine 70 Shoeshine Seventy Limited
Stanes Peter James Dale Stanes
Taylor Maxwell Colin Taylor
Vega Vega Limited
W73 Watstone Seventy Three Limited
W74 Watstone Seventy Four Limited
Watstone 82 Watstone Eighty Two Limited
WIL Wellesley Investments Limited
Walsh Brian Vincent Walsh
Windmeyer Joseph Windmeyer
Wilson William Wilson
SECTION 3: PLAINTIFFS' CLAIMS BASED ON ILLEGALITY
All of the Plaintiffs have claims based on illegality, which will be dealt with in this section. There is a degree of overlap between the illegality claims of the Plaintiffs and their claims for money had and received which will be dealt with in Section 4.
During its closing, the Crown helpfully, at the commencement of section 19 of the synopsis dealing with illegality recognised the overlap and itemised the claims having an illegality content as follows:
"19.1 The plaintiffs base six of their causes of action solely on the illegality of the transactions and it forms one of the bases for the four money had and received causes of action together with the allegation that the transactions were unauthorised.
19.2 These causes of action are:
|
Claimant
|
Section 5th SOC
|
Heading and Paragraph Nos
|
Amount Claimed
|
|
EIGL
|
J.1.3B
|
Original Financing 179F-179J
|
$77,300,000
|
|
EIGL
|
J.1.4
|
Refinancing and Interest Payments
180-184
|
$251,462,828
|
|
EIGL
|
J.1.4A
|
EFGL/EFSL 184A-184F
|
$40,000,000
|
|
EIGL
|
J.1.5
|
Action for Money Had and Received/Common Law Tracing
184G-184I
|
$77,300,000
|
|
EIGL
|
J.1.5A
|
Action for Money Had and Received/Common Law Tracing
(EFGL/EFSL) 184J-184M
|
$40,000,000
|
|
EHL
|
J.2.3
|
Illegal Contracts Act 192-196
|
$32,500,000
|
|
EHL
|
J.2.4
|
Action for Money Had and Received/Common Law Tracing
196A-196C
|
$32,500,000
|
|
EHL
|
J.2.6
|
Illegal Contracts Act (Reduction
of Capital) 196H-196L
|
$327,224,013
|
|
AI4
|
J.3.3
|
Illegal Contracts Act 204-208
|
$327,224,013
|
|
AI4
|
J.3.5
|
Money Had and Received/ Common Law Tracing 217-219"
|
$327,224,013
|
In the pleading advancing each of the six causes of action which rely solely upon illegality there is a reference back to paragraphs 95 to 95D of the Sixth Amended Statement of Claim, which paragraphs appear in Section E under the general heading "Legality of Transactions". The five paragraphs of the Statement of Claim are set out hereunder and from them it is possible to discern most of the factual and legal issues that require discussion.
"E. LEGALITY OF TRANSACTIONS
95. THE transactions and payments referred to in paragraphs 48-49, 55-57, 58 and 60-65 above were void and/or of no effect and were illegal.
[Particulars incorporated into paragraphs 95A-95D]
95A. THE Deed of Nomination, under which AI4 agreed with BWL to accept nomination as purchaser of the NZS/EHL Parcel and BWL agreed to nominate AI4 to perform its obligations as purchaser of the BWL Underwriting Agreement was illegal and/or was of no effect and/or is subject to section 6 of the Illegal Contracts Act 1970 in that:
95A.1 The contract was void and/or illegal under and by virtue of section 40 of the Companies Act 1955; and/or
95A.2 To the knowledge of the parties the contract was to be performed in contravention of section 62 of the Companies Act 1955; and/or
95A.3 The contract breached the common law rules as to maintenance of capital (hereafter "the rule in Trevor v Whitworth") in that AI4 was acting as the subsidiary and/or nominee of EHL in purchasing the NZS/EHL Parcel.
95B. THE funding of AI4's purchase of the NZS/EHL Parcel by members of the Equiticorp Group, (including the payment of "underwriting fees" in relation to the purchase, the provision of the AI One security deposit, and the servicing of interest on loans made to AI4 for the purchase), constituted the provision of financial assistance by EHL and its subsidiaries to AI4, for the purpose of or in connection with the purchase of shares in EHL. In the premises, the transactions and payments breached the provisions of section 62 of the Companies Act 1955 and/or section 129 of the Companies (New South Wales) Code and are subject to section 6 of the Illegal Contracts Act 1970.
95C. THE contract for the sale of the NZS/EHL Parcel was void and/or illegal in that:
95C.1 The purchase by AI4 breached section 40 of the Companies Act 1955 as AI4 was the subsidiary of EHL; and /or
95C.2 The purchase by AI4 breached the rule in Trevor v Whitworth as AI4 was the subsidiary of EHL and/or held the NZS/EHL Parcel as EHL's nominee; and/or
95C.3 The purchase by AI4 of the NZS/EHL Parcel was funded substantially by EHL and its subsidiaries in breach of
section 62 of the Companies Act 1955 and/or section 129 of the Companies (New South Wales) Code; and/or
95C.4 It was tainted by the illegality of the financial assistance provided by EHL and its subsidiaries as aforesaid.
95D. THE transfer of the NZS/EHL Parcel to AI4 was void and/or illegal in that:
95D.1 The transfer breached section 40 of the Companies Act 1955 as AI4 was the subsidiary of EHL; and/or
95D.2 The transfer breached the rule in Trevor v Whitworth as AI4 was the subsidiary of EHL and/or held the NZS/EHL Parcel as EHL's nominee."
The series of related but separate legal issues that arise from the above pleading may be identified as follows:
(i) What is the effect of any breach of s 40 of the Companies Act 1955 on the sale of the NZS/EHL Parcel?
(ii) Is there a "rule in Trevor v Whitworth" and was it breached by the sale of the NZS/EHL Parcel?
(iii) Was the contract transferring the NZS/EHL Parcel tainted by illegal funding of AI4?
(iv) Was the funding of AI4 illegal and in breach of s 62 of the Companies Act 1955, and/or s 129 of the Companies (New South Wales) Code?
(v) If there were no contracts, so that s 6 of the Illegal Contracts Act 1970 does not apply, can the Plaintiffs rely upon the in pari delicto principle?
All five of the above issues will be addressed before the separate claims of the Plaintiffs are considered. Before embarking on that, however, further consideration of the factual background and allied legal matters is called for.
3.2 Factual background and related legal matters
Although dealt with elsewhere it is desirable to record again how the total of
$327,224,013, which was paid to the Crown for the NZS/EHL Parcel, was provided. The details are as follows:
|
1) Elders, made up of loan from Elders of $80 million and HKSB of $25
million
|
$105,000,000
|
|
2) By way of advances from EHL subsidiaries:
EAL $90,532,832
EFGL/EFSL 40,000,000
EIGL 52,300,000
ET 8,179,245
Less certain adjustments ($1,288,064)
|
189,724,013
|
|
3) Payment of underwriting or placement fee by EAL
|
32,500,000
|
|
|
$327,224,013
====== |
The Crown concedes that the moneys made available to AI4 to enable it to settle with the Crown were provided in breach of s 62 and therefore illegally. The Crown disputes, however, that the contributions were made pursuant to contracts. The Crown says that because there were no contracts, the provisions of ss 6 and 7 of the Illegal Contracts Act 1970 do not apply. Initially, Mr Mathieson QC submitted that there was a total absence of necessary documentation to establish the existence of contracts. At T/12268 and T/12269, however, he clarified that submission saying:
"If the advances are to be regarded as advances by the initial funders to AI4, despite the intermediaries, then there is a total absence of
documentation of any contract between initial funders and AI4. The Crown relies upon that absence of documentation in support of its submission that there is no proved contract of loan between the initial funders and AI4.
If, on the other hand, one takes the intermediaries very seriously, and analyses the relationships between initial funders and the first intermediary and the second intermediary and so on, then some documentation exists between initial funders and some first intermediaries. but that leaves untouched the more general submission,
which is that all these initial funds were intended to be and were ultimately conveyed to AI4 for a purpose which was present from the beginning, namely, to enable AI4 to use those funds to purchase EHL shares, and there is an absence of documentation to support any contract between initial funders and AI4. The onus of proof of such a contract, if it is important, is on the plaintiffs and has not been discharged.
They have, of course, proved payments to AI4 in general terms. I say 'in general terms' because that is subject to the qualifications listed in Mr Tompkins' schedule. In that list he has indicated the respects in which the information apparently conveyed by the charts is not accepted."
In response, the Plaintiffs say first, that in respect of the initial advances by the original funders to intermediaries and the movement thereafter through other intermediaries to AI4, specific documentary evidence of written contracts is not required. This is because the law presumes a contract, ie, a loan of money, and not a gift in the circumstances such as those pertaining in this case. Counsel for the Plaintiffs cited Seldon v Davidson [1968] 1 WLR 1083 at 1088 and 1090; re A Company, ex parte Shooter (No 2) [1991]
BCLC 267 at 283 to 284 and re Matthews [1993] 2 NZLR 91 at 94. Those authorities appear to support the submission, which is also endorsed by 32 Halsbury's Laws of England (4th ed) "Money", paragraph 115, where it is stated inter alia:
"The mere payment of a sum of money or a cheque is not evidence of the creation of a loan; nevertheless there is a prima facie obligation to repay in the absence of circumstances giving rise to a presumption of advancement."
There was, of course, no question of gift or advancement here and, in the absence of evidence to the contrary, I would have presumed an obligation to repay amounting to a contract of loan.
In fact, however, my view of the evidence is that there is sufficient to establish contracts. That evidence includes formal loan documentation, documentation of investment in redeemable preference shares, book entries by AI4 recording its borrowings, the payment by AI4 of interest in some instances and acts of repayment by AI4 as part of the later refinancing by EIGL. Despite the qualification placed by Mr Mathieson on the proof available to show payments to AI4, I am satisfied by all the evidence and the overall circumstances of the case that each initial funder intended that those funds were to be made available to AI4 for the purpose of purchasing the NZS/EHL Parcel; and in all cases, except for an amount of $40 million initially, provided by EIGL, AI4 recorded indebtedness in favour of each of the initial funders in its books. The $32.5 million provided by EHL was recorded by AI4 as an underwriting fee, so that was a contract, not of loan but for services. It was illegal but, nonetheless, a contract.
In closing, the Plaintiffs, to meet the Crown's submission that there was no evidence of contracts, provided an appendix to section 49, detailing where the evidence can be found. A consideration of that evidence satisfies me that it generally supports the summary also provided in the appendix which reads as follows:
"Summary of Evidence:
In respect of the EAL advances, EAL was in the business of corporate lending, loan files were prepared in the normal manner with the usual documentation (including the signed approval of directors and senior executives), interest was paid, and the loans were repaid. AI4 recorded EAL as a creditor in its accounts.
In respect of the EFGL/EFSL advances, EFGL/EFSL were in the business of corporate lending, loan files were prepared in the normal manner with the usual documentation (including the signed approval of directors and senior executives), interest was paid, and the loans were partially repaid. AI4 recorded EFGL/EFSL as a creditor in its accounts.
In respect of the EIGL original advances, they were recorded as loans (except for the $12.3m advance) and were repaid (the $40m advance only as to $21m).
In respect of the ET original advance, this was recorded as an investment (ET being an investment company). The investment was an issue of redeemable preference shares by WIL. AI4 recorded ET as a creditor in its accounts. The advance was repaid and the shares redeemed.
In respect of the EHL contribution to the funding of AI4, this was recorded as an underwriting fee, and was treated as such in the books of EHL and AI4."
My conclusion therefore on this matter is that the original funders have established contracts between themselves and the intermediaries and AI4. Since the money provided pursuant to all those contracts amounted to financial assistance for the purchase of shares in EHL, s 62 was breached and they were all illegal. It follows that pursuant to s 6 of the Illegal Contracts Act, the original funders never lost ownership of the money and the ultimate recipient, the Crown, never obtained title.
Having dealt above with the source of the moneys and the contracts by which they moved through to AI4 it is now appropriate to look at the circumstances under which they moved from AI4 to the Crown in return for the NZS/EHL Parcel.
As explained in 1.2 of this judgment, contemporaneously with the share swap contract of 19 October 1987 between the Crown and EHL a further contract was entered into between the Crown and BWL. This second contract, described as the BWL Underwriting Agreement, is Image Number 278181 and is to be found at page 58 of Volume II of this judgment. In it, BWL underwrites the sale by the Crown of its NZS/EHL Parcel by 20 March 1988. The contract contemplates that BWL will find and nominate a buyer, but provides nonetheless in clause 7 that BWL will remain primarily liable to pay the agreed purchase price.
As earlier recorded, BWL nominated AI4, whose nomination was accepted, all of which is recorded in the Deed of Nomination which is Image Number 430038, executed on 16 March 1988 and to be found at page 110 of Volume II of this judgment.
The following day, 17 March 1988, the Deed of Assignment between AI4 and the Crown was entered into. That Deed is 431027 through to 431039 inclusive, and will be found at pages 113 to 125 of Volume II. It provides specifically for the assignment of the bank deposits identified in Schedule 1 to the Deed to be in satisfaction of the transfer by the Crown to AI4 of the NZS/EHL Parcel.
The Crown contends that the moneys it received from AI4 were received under the BWL Underwriting Agreement and that because that contract was made before the illegal funding arrangements were put in place it is a case of an illegal means of performance, rather than an illegal contract. The Plaintiffs, as I understand it, do not suggest the original Underwriting Agreement was illegal. Alternatively, the Crown says that the moneys came to it as a consequence of the Deed of Nomination, which again in itself was not illegal.
The Plaintiffs, on the other hand, as recorded earlier in this judgment, contend that the Deed of Assignment of Deposits was a contract separate from the BWL Underwriting Agreement and that that Deed was illegal either per se or by tainting.
In relation to the Deed of Assignment of Deposits, the Crown says that if it was illegal, the illegality related only to performance and reference is made to s 5 of the Illegal Contracts Act 1970. The Plaintiffs, however, say that the critical distinction is between a contract where illegality is in contemplation at the time of its formation, and a contract where an illegal means of performance is not so contemplated. The first kind of contract is illegal at formation. The second is not. In relation to the Deed of Assignment of Deposits, say the Plaintiffs, illegality was clearly in contemplation because funds gathered in breach of s 62 were to be paid over, also in breach of s 62, for the purchase by AI4 of EHL shares with Equiticorp money. In support of that submission, the Plaintiffs cite Anderson Ltd v Daniel [1924] 1 KB 138 at 149 per Atkin LJ and Cheshire & Fifoot's
Law of Contract (6th Aust. ed 1992) at pages 450 to 452. At page 450, paragraph 1009 the text reads:
"If the parties have agreed to do something that is expressly or implicitly forbidden by statute, their contract is illegal as formed: Anderson Ltd v Daniel. A contract so prohibited is void ab initio, and under it neither
party can acquire rights whether there is an intention to break the law or not."
The last portion of the quote, of course, would be subject to the provisions of the Illegal Contracts Act in New Zealand and the common law rules as to tainting also have relevance. At this stage, however, my concern is the question of whether or not the Plaintiffs' argument that the payment was pursuant to the independent contract represented by the Deed of Assignment is sound. I am of the opinion that it is. AI4 had ownership of the choses in action represented by the deposits and it was in consideration of assignment of those deposits that the Crown transferred the shares to AI4. Clearly the contract breached s 62 of the Companies Act 1955 and was illegal.
3.3 The effect of any breach of s 40
At 1.6 of this judgment, I held that AI4 was, and is, a subsidiary of EHL and provided my reasons for so concluding.
The Plaintiffs have submitted that since AI4 is a subsidiary, the sale of the NZS/EHL Parcel to it offended s 40 of the Companies Act 1955.
Section 40(1) reads as follows:
"40. Membership of holding company - (1) Except in the cases hereafter in this section mentioned, a body corporate cannot be a member of a company which is its holding company, and any allotment or transfer of shares in a company to its subsidiary shall be void."
None of the exceptions apply and the Plaintiffs' contention is that the contract between AI4 and the Crown whereby the deposits were exchanged for shares is by virtue of s 40 both void and illegal.
The Crown, on the other hand, submits that the section simply makes the transfer of the shares void, but does not render the contract illegal.
If the Plaintiffs are right, then s 6 of the Illegal Contracts Act would apply with the consequence that title to the deposits did not pass to the Crown and the Plaintiffs can seek relief pursuant to s 7 of the Act.
The Plaintiffs rely upon Anderson Ltd v Daniel [1924] 1 KB 138 at 143, 147, 149 and Burrows, Finn & Todd, Cheshire & Fifoot's Law of Contract (8th NZ ed 1992) 374-375. In the text at page 374, having mentioned that s 3 of the Illegal Contracts Act distinguishes between contracts that are illegal at inception or by performance (here we are concerned with illegality at inception), continues:
"Although relatively few statutes, even now, expressly provide that contracts in breach of the statutory provisions will be illegal or that provisions of the Illegal Contracts Act shall apply to contracts in breach of the statute, it is common for statutes to provide that such contracts are of no effect. Where the term used is 'illegal' or 'void' it seems clear that the courts will usually treat the contract as being illegal under the statute from its inception."
This topic was also addressed in the portion of the Law Commission's Report 25 entitled "Contract Statutes Review" prepared by Professor Brian Coote (NZLC R25), dealing with the Illegal Contracts Act. His approach is rather more guarded than that of Burrows, Finn and Todd. Thus in paragraph 3.11 of the Report, at page 176, it is stated:
"The standard view is that all contracts are illegal if they are prohibited by an enactment (whether expressly or impliedly), or which have as their purpose the performance of an act which is so prohibited. Contracts made void or ultra vires by statute are not on that account illegal, unless the enactment also prohibits them, whether expressly or impliedly."
A little later, however, in paragraph 3.12 it is stated:
"But there is a perception that contracts made ultra vires by statute are ipso facto impliedly prohibited."
Finally, in paragraph 3.13 it is stated:
"A standard response to this concern would be that it does not follow automatically from the fact that a contract has been made ultra vires by statute, that it has thereby also been prohibited. Whether it has been prohibited is a separate question which turns on the interpretation and construction of the relevant statute. Only if such a prohibition is found to exist will the contract, on ordinary principles, be illegal."
When s 40(1) is considered it is apparent, in my view, that the first limb, "a body corporate cannot be a member of a company which is its holding company", is a prohibition and the second, "any transfer of shares etc ..." follows through by making such transfers of shares contrary to the prohibition void.
On that basis I am of the view that the contract between the Crown and AI4 was both illegal and void.
At the callback on 16 May, Miss Winkelmann made three further points which confirm the conclusion expressed above. First, she referred to the decision of Bryson J in the Supreme Court of New South Wales in Redweaver Investments Ltd v Lawrence Field Ltd [1991] AATA 211; (1991) 9 ACLC 1,032, which was concerned principally with a reduction of capital and the rule in Trevor v Whitworth. But discussing that rule at page 1036 the Judge said,
having referred to Ashbury Railway Carriage & Iron Co Ltd v Riche [1875] UKLawRpHL 13; (1875) LR 7 HL 653:
"... but the law is now independent of its origins, and any agreement which in substance provides for a company to return share capital to a member is illegal and cannot be enforced unless some specific statutory authority for its return can be found."
Counsel's point was that those earlier cases are the ancestors of ss 40 and 62 of the Companies Act 1955 and that breaches of them have always been regarded as illegal. Her next point was that a breach of s 40, unlike a breach of s 62, necessarily involves an immediate reduction of capital. Prima facie therefore, such a breach involves a more serious wrong than a breach of s 62. Her final point was that it would be anomalous if the consequences of the breach of s 40 were less serious than for a breach of s 62.
While the rule in Trevor v Whitworth [1887] UKLawRpAC 26; (1887) 12 App Cas 409 has its origins in the interpretation of 19th Century Companies Legislation, it stands as a fundamental principle of company law today, independent of the current companies legislation (Redweaver Investments Ltd v Lawrence Field Ltd (1991) ACLC 1,032). The broad question of principle in Trevor v Whitworth was, in the words of Lord Macnaghten: (supra at 432)
"whether it is competent for a limited liability company under any circumstances to invest any portion of its capital in the purchase of a share of its own capital stock, or to return any portion of its capital to any shareholder without following the course which Parliament has prescribed."
The House of Lords unanimously rejected that proposition, Lord Herschell stating that persons dealing with a company: (supra at 415)
"have a right to rely, and were intended by the Legislature to have a right to rely, on the capital remaining undiminished by any expenditure outside these limits [carrying on the authorised business operations], or by the return of any part of it to the shareholders."
A modern statement of the principle is to be found in the decision of Harman J in Barclays Bank plc v British & Commonwealth Holdings plc [1995] BCC 19, 22 where his Honour stated:
"The principle is that a company cannot return capital to its members save by a reduction of capital sanctioned by the court."
Section 40 of the New Zealand Companies Act 1955 codified one specific aspect of this principle, namely, that subsidiaries are prohibited from owning shares in their holding company. In so far as the principle in Trevor v Whitworth expounds the same prohibition it is now superseded by s 40. That is not to say that the broad principle of capital maintenance as recognised in Trevor v Whitworth is no longer applicable, but simply that in the area of subsidiaries holding shares in their parent company, s 40 governs the situation.
This disposes of the Plaintiffs' contention that the Deed of Nomination, the contract for the sale of the NZS/EHL Parcel and the transfer of the Parcel to AI4 were void and/or illegal in that they breached the rule in Trevor v Whitworth.
In addition, the Plaintiffs also pleaded breaches of the rule in Trevor v Whitworth because AI4 was acting as EHL's nominee and held the Parcel as its nominee. While the principle enunciated in Trevor v Whitworth undoubtedly prohibits such a transaction, it is less clear whether AI4 was EHL's nominee. In 1.6 of this judgment, I held the Ararimu Trust held its shares in Setar 72 as EHL's nominee as most of the trustees' powers could only be exercised at the direction of, or with the consent of, EHL. Shoeshine 59 and Setar 72, on the other hand, were only indirectly controlled by EHL through Messrs Hawkins and
Darvell. In those circumstances, I held the Plaintiffs had failed to prove those two companies were under the control and direction of EHL as opposed to that of Mr Hawkins personally. The position of AI4, the share capital of which was held equally by Setar 72 and Shoeshine 59, is, in this respect, identical. Accordingly, the Plaintiffs have therefore failed to prove there was a breach of the principle in Trevor v Whitworth due to AI4 purchasing and holding the NZS/EHL Parcel as EHL's nominee.
On the basis of the reasoning set out above, I hold that breach of the rule in Trevor v Whitworth is not available to the Plaintiffs in this case as a ground for illegality and recovery against the Crown.
3.5 Tainting of the contract transferring the NZS/EHL Parcel
The Plaintiffs submitted that the purchase of the NZS/EHL Parcel by AI4 from the Crown was also rendered illegal by the tainting of that transaction:
"by virtue of the illegal funding of the purchase by EHL and its subsidiaries, and otherwise by its being the final stage of an illegal scheme to return capital to a shareholder."
The Crown, opposing that contention, raised several preliminary points. The first concerned the existence of contracts between EHL and EIGL and their subsidiaries. Paragraph 19.19 of the Crown's closing submissions states:
"The first point to make is that a contract can only be tainted by the illegality of another contract. There is no evidence that the financial assistance was provided by EHL and EIGL and their subsidiaries pursuant to contract."
As recorded above, I have concluded that the funding provided by the subsidiaries was not in the nature of a grant or a gift, and that both at law and in fact contracts of loan have been established.
The second issue concerned which contract governed the relationship between the Crown and AI4. I have dealt with that matter also, holding that the Deed of Assignment of Deposits was the operative contract.
Since financial assistance in breach of s 62 would not of itself render the contract illegal (Carney v Herbert [1985] 1 AC 301, 309) the Plaintiffs must establish tainting by showing that the deposits it purported to assign were obtained in breach of s 62.
There are two limbs to tainting. The first is whether the second contract had as its purpose or object the assisting or promotion of the illegal transaction (Portland Holdings v Cameo Motors [1966] NZLR 571, 577, 581 and 583). Turner J, in that case, stated the rule as follows: (supra at 581)
"As regards contracts, not between the two original parties to an illegal contract, but between one of them and a third party, the policy of the law appears to me to render unenforceable by the taint of illegality those contracts, ex facie legal, the purpose and object of which is to secure in the future some illegal or immoral end."
But assistance alone is not enough to taint the seemingly legal contract. In addition, it must be proved that the parties to this second contract knew of the illegality. This is the second limb in respect of which there is room for debate as to what degree of knowledge is required.
Returning to the facts: in my opinion it can be said that the Deed of Assignment of Deposits clearly assisted and promoted EHL and its subsidiaries to give financial assistance to AI4 for the purpose of purchasing shares in EHL. Without the purchase of
the shares by AI4, which the Deed of Assignment of Deposits achieved, the overall scheme could not have been brought to fruition. Since what was envisaged - even required - was performance with the deposits obtained from EHL and its subsidiaries there was here, in my view, a clear case of assistance in the illegal funding of the purchase.
This case, unlike Carney v Herbert (supra) where the giving of security was ancillary to the contract, displays direct involvement. Here the Deed specifically required the purchase be made with the deposits which had been obtained from EHL and its subsidiaries in breach of s 62. So the deposits go to the heart and substance of the Deed. I am satisfied in all the circumstances that the Deed assisted the illegal purpose of the funding transactions.
I turn now to consider whether the Crown had the requisite knowledge. As earlier mentioned, it is not clear what degree of knowledge is required. The Crown, relying on Spector v Ageda [1971] 3 All ER 417, 427 submitted it had to be proved it had actual knowledge or was wilfully blind. Megarry J, in that case said:
"As regards the lack of a licence, on the evidence before me I do not think that it has been brought home to Mrs Spector that she knew that her sister held no money-lender's licence. I think that she ought to have known, but I am far from satisfied that she either had actual knowledge, or that she deliberately shut her eyes to the matter. Accordingly, in my judgment her loan to the borrowers cannot be held to be illegal on this score."
The Plaintiffs, while acknowledging Spector v Ageda submitted that McCarthy J in Portland Holdings Ltd v Cameo Motors Ltd [1966] NZLR 571 appeared to accept that constructive knowledge would be sufficient. A finding in that case that the second contract did not assist or promote any illegal end meant the Court did not have to make a decision on the question of knowledge. McCarthy J nonetheless said: (supra at 579)
"Plainly, in my view, if there was no such knowledge, actual or constructive, then there can be no taint."
That suggests that all five strands of the Baden scale of knowledge would be applicable. The Judge continued:
"In the present case the law required certain action by the respondent and that law was broken by him, not by the appellant; and although the appellant did know of the circumstances which constituted the illegality, I do not think that a person in the position of the appellant must be taken to have known that what the respondent did amounted to a failure to comply with a duty cast on him by a regulation, when in truth it did not know that."
His reference to "what a person in the position of the appellant must be taken to have known" comes close to the Baden approach as we know it today.
There is a paucity of authority on this point. An examination of the authorities referred to by the learned authors of Chitty on Contract reveals only one further reference. In the case of Cannan v Bryce (1819) 3 B & Ald 179; 106 ER 628; [1814-23] All ER Rep 718 after asking the hypothetical question "if it is unlawful for one person to pay how can it be lawful for another to furnish that one with the means of payment", Abbott CJ said: (supra at 721)
"It will be recollected that I am speaking of a case wherein the means were furnished with a full knowledge of the object to which they were to be applied."
The three authorities cited were decided two decades or more ago and none dealt with circumstances approaching the complexity of this case. In modern times, the Courts' approach to knowledge has become more sophisticated. Rather than just actual and constructive knowledge it has been recognised that there are various degrees of knowledge which shade into each other. It has also been doubted whether knowledge is an apt criterion at all:
"when applied to the gradually darkening spectrum where the differences are of degree and not kind" (Royal Brunei Airlines v Tan (supra)).
Of course, it is now established that wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make can lead to liability as an accessory in a constructive trust situation. It is logical that similar conduct should be sufficient to establish the knowledge required for tainting.
Miss Winkelmann, at paragraph 49.38 of the Plaintiffs' closing, argued a not dissimilar point submitting, that on principle, constructive knowledge should suffice as that is the degree of knowledge which will expose a subsequent transferee to the consequences of illegality. She said:
"It is submitted that if a subsequent transferee of property obtained under an illegal contract can come under liability despite its not being a party to the illegality and despite its having only constructive knowledge, so too should a person who is in fact directly a party to a contract which is part of a scheme affected by illegality."
I asked her to relate that submission to the facts of this case. Her response, which appears at T/14311 and T/14312, was as follows:
"If it is said that the Crown, as the ultimate recipient of the purchase price, can be liable to an original funder, such as EHL, notwithstanding that it was not a party to the illegal funding contract, if the Crown was not a bona fide purchaser for value without notice, ... then surely the Crown should also be liable if it was a party to a tainted contract and had constructive knowledge of that illegality."
Counsel was, of course, referring to the proviso to s 6(1) of the Illegal Contracts Act. In my judgment her point is well made.
Given the recent developments referred to above, I am prepared to hold that a wilful and reckless failure to make the inquiries an honest and reasonable person would have made is sufficient to support tainting, provided the other elements of the doctrine are met.
It will be recalled that the knowledge that the Crown had was that, in all probability, the purchase of the NZS/EHL Parcel was to be effected with Equiticorp moneys. That placed the Crown in a position where, in my judgment, it either wilfully shut its eyes to the obvious or wilfully and recklessly failed to make the inquiries that the circumstances called for. On either basis, the knowledge required to establish tainting in respect of the Deed of Assignment of Deposits was present.
My conclusion is then that the contract transferring the NZS/EHL Parcel was tainted and therefore illegal.
3.6 Was the funding of AI4 illegal and in breach of s 62 of the Companies Act 1955, and/or s 129 of the Companies (New South Wales) Code?
I deal first with the fact that although EAL and ET were both subsidiaries of EHL, they were nonetheless incorporated in New South Wales. Respectively their contributions were $90,532,832 and $8,179,245 to the total settlement figure. But those contributions are alleged to have breached not s 62 of the New Zealand Act but the relevant Australian equivalent, viz, s 129 of the Companies (NSW) Code. The submissions for both the Plaintiffs and EAL/ET in this regard were advanced by Mr Manousaridis of the New South Wales Bar - admitted to the New Zealand Bar for the purposes of this case. The synopsis of those submissions is in section 38 of EAL's closing submissions.
In its closing submissions, the Crown submitted that neither EAL nor ET are companies within the meaning of the New Zealand Act and that s 62 does not prohibit foreign companies from giving financial assistance. It was also submitted that the pleading by EAL and the Plaintiffs of s 129 of the Companies (NSW) Code did not assist.
In reply, Mr Manousaridis submitted in paragraph 2 of section 38 as follows: "2. EAL submits:
(a) The contracts pursuant to which EAL and ET provided funding with respect to AI4's acquisition of the NZS/EHL Parcel ("the financing contracts") are governed by New Zealand law.
(b) It is a principle of the law of New Zealand that a contract which contemplates the performance of an act in a foreign friendly country which breaches the law of that country is illegal and therefore falls within the New Zealand Illegal Contracts Act.
(c) The financing contracts contemplated the performance of acts in a friendly foreign country - New South Wales - which were in breach of a law of that country, namely
s.129 of the Companies (New South Wales) Code.
(d) The financing contracts were therefore illegal."
Counsel recognised that the proper law of the financing contracts is New Zealand and not New South Wales but drew attention to the established rule that, unless foreign law is specifically pleaded, domestic law will be applied. It was then submitted that, as a matter of principle, contracts are regarded as illegal if they contemplate breach of the law of a friendly foreign country. Reference was made to Cheshire & Fifoot Law of Contract, (8th NZ ed 1992) at page 368, and Foster v Driscoll [1929] 1 KB 470, which was expressly approved by the House of Lords in Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. Building on those authorities, Mr Manousaridis submitted in paragraph 9 of the synopsis as follows:
"9. If a contract which contemplates the performance of an act in a foreign friendly country which will breach the law of that country is illegal under New Zealand law, such contract must necessarily come within the meaning of the words "illegal contract" as used in the Illegal Contracts Act. The significance of this conclusion is that the consequences of the contract being illegal is determined by New Zealand law, and in particular the Illegal Contracts Act, and not by the law of the country whose law has been breached. This is a perfectly logical conclusion. The principle which renders illegal a contract which contemplates an act which will breach foreign law is a principle of New Zealand law. The consequences of that illegality must therefore be determined according to the law of New Zealand."
See also the judgment of Cooke P in Controller and Auditor-General v Davison (CA 226/95, judgment 16 February 1996) where, having referred to Euro-Diam Ltd v Bathurst [1990] 1 QB 1, 39-40, the President said: (page 9)
"As Kerr L.J. pointed out in the passage just cited, one need not go beyond the House of Lords case of Regazzoni v K.C. Sethia (1944) Ltd [1958]
A.C. 501 for authority that, while local courts do not enforce foreign revenue or penal laws, it is contrary to comity and public policy to assist in their breach. There is no reason why New Zealand law should not embrace the same principle."
All this I accept as sound law and, indeed, the Crown did not argue otherwise when exercising its right of reply.
Pursuant to s 4 of the Evidence Amendment Act 1990, I can take judicial notice of the Australian Act. The provisions of s 129(1) of the New South Wales Code read as follows:
"129. (1) Except as otherwise expressly provided by this Code, a company shall not -
(a) whether directly or indirectly, give any financial assistance for the purpose of, or in connection with -(i) the acquisition by any person, whether before, or at the same time as, the giving of financial assistance, of -
- (A) shares or units of shares in the company; or
(ii) the proposed acquisition by any person of-
- (A) shares or units of shares in the company; or
- (B) shares or units of shares in a holding company of the company; or
(b) whether directly or indirectly, in any way-(i) acquire shares or units of shares in the company; or(ii) purport to acquire shares or units of shares in a holding company of the company; or
(c) whether directly or indirectly, in any way, lend money on the security of-(i) shares or units of shares in the company; or(ii) shares or units of shares in a holding company of the company."
There are some sixteen further subsections but subsection (1) immediately shows the comparability with the New Zealand provision, as one would expect. So, the New South Wales section prohibits a company giving financial assistance with respect to the acquisition of shares in its holding company. The relevant elements of the breach are direct or indirect financial assistance for the purpose of, or in connection with, the acquisition of shares in a holding company.
Accordingly, counsel submitted that the financing contracts which were entered into by EAL and ET with the Hong Kong companies necessarily contemplated the commission of a breach of s 129 because that was merely the first stage of an agreed progression over a day or two from the Australian companies to various accounts in other jurisdictions, finally resulting in deposits in the name of AI4 in New Zealand. All to be used for the purchase of the NZS/EHL Parcel.
In substance, then, the issue is the same for all of the funding subsidiaries irrespective of whether they were incorporated in New Zealand or New South Wales. At that first stage, when the subsidiary yielded up the money to the first intermediary in the chain, in each case it did so for the purpose of providing financial assistance for the purchase of shares in EHL, the holding company. As I think I have already mentioned, the Crown concedes
that the subsidiaries unlawfully provided finance. Its contention was, however, that that funding was not provided pursuant to contracts and as a consequence the Illegal Contracts Act 1970, which deals only with contracts, could have no application.
For the reasons set out above, I am satisfied that there were contracts between the original funders and those to whom they provided the funds in the first instance and because those contracts breached s 62, or s 129 of the New South Wales Code, they were illegal. It follows that the Illegal Contracts Act applies and in particular s 6(1) which provides:
"6. Illegal contracts to be of no effect - (1) Notwithstanding any rule of law or equity to the contrary, but subject to the provisions of this Act and of any other enactment, every illegal contract shall be of no effect and no person shall become entitled to any property under a disposition made by or pursuant to any such contract:
Provided that nothing in this section shall invalidate-
(a) Any disposition of property by a party to an illegal contract for valuable consideration; or
(b) Any disposition of property made by or through a person who became entitled to the property under a disposition to which paragraph (a) of this proviso applies-
if the person to whom the disposition was made was not a party to the illegal contract and had not at the time of the disposition notice that the property was the subject of, or the whole or part of the consideration for, an illegal contract and otherwise acts in good faith."
The consequence is, of course, that no property passes under an illegal contract. Which means that ownership of the funding provided by the subsidiaries remained throughout in them. So that the Crown did not get good title to the funds.
The Crown argued that it was saved by the proviso. But, irrespective of whether the disposition to the Crown could be seen as passing under s 6(1)(a) or s 6(1)(b), the Crown would have to show that at the time it received the funds it did not have notice that the property was the subject of an illegal contract and that it otherwise acted in good faith. There was a debate as to whether the onus of establishing those requirements of the proviso rested upon the Crown or the Plaintiffs. It matters not, because, on the findings
earlier made in Section 2 of this judgment, regarding the Crown's knowledge, it is beyond question that at the time the moneys were received the Crown did know, if not actually, then in the Baden (ii), (iii) and (v) senses, that the moneys had come in breach of s 62.
The Plaintiffs have therefore made out their allegation that the funding of AI4 was illegal.
3.7 In pari delicto
This is the exception to the general rule at common law that illegality, unlike mere voidness or unenforceability, prevented the recovery of the property transferred under contract. Where, however, relevant legislation has been passed for the protection of one of the parties to a transaction, such a party can bring a restitutionary claim to recover the assets transferred. Such a party is said to be not in pari delicto with the recipient, see Kiriri Cotton Co Ltd v Dewani [1960] AC 192 at 203-205.
Consequent upon the passing of the Illegal Contracts Act the in pari delicto principle only has relevance where the transaction is not an illegal contract. The Plaintiffs have argued however, and I have held, that all the transactions were contracts so that the Plaintiffs do not, in fact, need to rely upon this exception to the common law. But, of course, if my conclusion that the provision of the money was by way of contract is wrong, then the argument would still have relevance. What the Plaintiffs argue is that s 62 was passed to protect companies, their shareholders and creditors so that even if there was no contract, AI4 in respect of the purchase of the NZS/EHL Parcel was not in pari delicto with the Crown and should be able to recover.
At pages 18 and 19 of its reply at the end of the trial, the Crown submitted that it should not be held that it was more at fault than the funding subsidiaries and AI4. Referring to Kiriri (supra) Mr Mathieson submitted:
"The short and sufficient answer is that it is not true to say, on the present facts:
'as between the two of them the duty of observing the law is placed on the shoulders of the one rather than the other'."
Counsel further submitted that this is not a case where:
"the responsibility for the mistake lies more on the one rather than the other - because he has misled the other when he ought to know better ..." (Lord Denning in Kiriri Cotton Co Ltd v Dewani [1960] AC 192, 204)
That submission, however, echoes the clean hands defence and loses its validity when the subsidiaries and AI4 are seen as victims and the Crown, knowing that was their status, took the money nonetheless to the disadvantage of the companies, their shareholders and creditors.
I hold that on the facts of this case the in pari delicto exception is available to the Plaintiffs.
Before leaving the topic, I note that the decision in Dressy Frocks Pty Ltd v Bock (1951) 51 SR (NSW) 390 is an authority which holds that a contract which infringes a s 62-type provision cannot be enforced. But here, the Plaintiffs are seeking a restitutionary remedy and no authority was cited which would defeat such a claim.
3.8 Relief pursuant to s 7 of the Illegal Contracts Act 1970
I am dealing here with relief available to the Plaintiffs where illegal contracts have been established and the Crown is shown to be in possession of the Plaintiffs' property, but without title to it. The other aspect of relief under s 7, namely validation, which of course the Crown seeks if it is found liable, is dealt with in a later section.
The provisions of s 7 that are relevant are set out hereunder:
"7. Court may grant relief - (1) Notwithstanding the provisions of section 6 of this Act, but subject to the express provisions of any other enactment, the Court may in the course of any proceedings, or on application made for the purpose, grant to-
(a) Any party to an illegal contract; or(b) Any party to a contract who is disqualified from enforcing it by reason of the commission of an illegal act in the course of its performance; or
(c) Any person claiming through or under any such party-
such relief by way of restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the Court in its discretion thinks just.
(2) An application under subsection (1) of this section may be made by-
(a) Any person to whom the Court may grant relief pursuant to subsection (1) of this section; or
(b) ...
(3) In considering whether to grant relief under subsection (1) of this section the Court shall have regard to-
(a) The conduct of the parties; and
(b) In the case of a breach of an enactment, the object of the enactment and the gravity of the penalty expressly provided for any breach thereof; and
(c) Such other matters as it thinks proper,-
but shall not grant relief if it considers that to do so would not be in the public interest.
(4) ...
(5) The Court may by any order made under subsection (1) of this section vest any property that was the subject of, or the whole or part of the consideration for, an illegal contract in any party to the proceedings or may direct any such party to transfer or assign any such property to any other party to the proceedings.
(6) Any order made under subsection (1) of this section, or any provision of any such order, may be made upon and subject to such terms and conditions as the Court thinks fit.
(7) Subject to the express provisions of any other enactment, no Court shall, in respect of any illegal contract, grant relief to any person otherwise than in accordance with the provisions of this Act." [Emphasis added]
The relief the Plaintiffs seek is of course restitution or, if that is not available, compensation. The claims are made pursuant to s 7(1)(a) and (c) on the basis that the Plaintiffs were parties to illegal contracts or, alternatively, the original funders can be
seen as "claiming through or under" AI4, on the basis that it was a party to an illegal contract.
In considering whether such relief should be granted to any or all of the Plaintiffs, the provisions of subsection (3) are relevant and the form of the relief could be affected by subsection (5), while the quantum could be affected by the imposition of terms and conditions.
There will be references back to the provisions of s 7 as the claims of each of the Plaintiffs are considered in the following subsections.
3.9 AI4's illegality claim
As with the constructive trust, recipient and accessory causes of action I propose to deal with AI4 first since recovery by it would render the results on the EIGL and EHL claims of secondary interest only. Nevertheless, as indicated elsewhere, I will where appropriate give decisions on all causes of action in order that there can be found within this judgment the answer to any alternative approach which might be seen as preferable at some later stage.
AI4's illegality claim is advanced at J.3.3, in paragraphs 204 to 208 of the Sixth Amended Statement of Claim. The sum claimed is the full consideration of $327,224,013, which of course is the amount which AI4 passed over to the Crown in return for the NZS/EHL Parcel. The pleading picks up paragraphs 95A to 95D which, it will be recalled, allege that the contract of sale of the NZS/EHL Parcel and its transfer to AI4 were void and illegal. On the basis that the sale and transfer were effected by the Deed of Assignment and for the reasons given earlier in this section, (3.1 and 3.2), I am satisfied that those allegations have been made out. Besides breaches of ss 40 and 62 of the Companies Act 1955, AI4 also relies upon breach of the rule in Trevor v Whitworth, which in 3.4 above I
have held is not available, and tainting. In 3.3 above, I have held that, because AI4 was and is a subsidiary of EHL, s 40 of the Companies Act was breached by the sale of the shares which was both illegal and void.
As a consequence of the illegality discussed above, and pursuant to the provisions of s 6 of the Act, no property passed and the Crown did not obtain title to the deposits. As the Crown has retained the moneys however, the appropriate remedy is restitution and, so far as the conduct of the parties is concerned, there is nothing that AI4 did (as opposed to its delinquent directors) which would cause me to withhold relief. As was recognised in re AIC Merchant Finance Ltd [1989] NZCA 229; [1990] 2 NZLR 385, 396, the discretion under the section is a wide one which I consider properly allows me to take into account the fact that at the time that the Crown received the money it handed over the NZS/EHL Parcel and that, as a consequence of holding the parcel, AI4 earned dividends.
As earlier mentioned, s 6 reverses the common law in respect of illegal contracts. Once illegality is established "... no person shall be entitled to any property under a disposition made by or pursuant to any such contract." Also, for the reasons already set out, the proviso to s 6 does not avail the Crown because it did have notice and did not act in good faith.
The end result therefore is identical with the situation applying in respect of a void contract. The Crown did not get title to the purchase moneys and AI4 did not get title to the NZS/EHL Parcel. On the face of it, neither can resist a claim for restitution.
The next section (Section 4) will address the Plaintiffs' causes of action based upon money had and received. Since the position there, (once the cause of action is established), is the same as the end result pursuant to s 6 of the Illegal Contracts Act both can be dealt with together.
In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890 Hobhouse J had to analyse the position on a claim for money had and received in respect of an interest swap agreement. His analysis was expressly approved by the Court of Appeal but both at first instance and on appeal the Judges regarded themselves as bound by the long-standing but controversial decision of Sinclair v Brougham [1914] UKLawRpAC 8; [1914] AC 398. The Islington Borough appealed from the Court of Appeal's decision on the question of compound interest only. But the awarding of interest in that form was based not upon the right to restitution which was upheld, but upon the additional or alternative ground that an equitable proprietary claim could be sustained on the basis that the moneys returnable were held pursuant to a residuary trust. It was on this last point that the House of Lords disagreed with the Judges below. That conclusion was reached in part by distinguishing (Lord Goff) or overruling (Lords Browne-Wilkinson, Slynn, Woolf and Lloyd) Sinclair v Brougham. Important as that development is, it does not, in my view, detract from the reasoning of Hobhouse J and the Court of Appeal on the issue which is relevant here, namely, the right to restitution, where the contract is void, because it would be unconscionable for money received in such circumstances to be retained. See Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] 2 WLR 802. Interest swap agreements were a popular means of local body funding until the House of Lords in Hazell v Hammersmith & Fulham LBC [1992] 2 AC 1 ruled them ultra vires. In Westdeutsche the bank had advanced £2,500,000 and Islington had repaid £1,354,474 when Hazell brought matters to a summary halt. At page 929, between lines F and H, Hobhouse J said:
"Where payments both ways have been made the correct view is to treat the later payment as, pro tanto, a repayment of the earlier sum paid by the other party. The character of the remedy, both in law and equity, is restitution, that is to say putting the parties back into the position in which they were before. Accordingly, the remedy is only available to a party on the basis that he gives credit for any benefit which he has received. He must give credit for any payments which have been made by the opposite party to him and, where the court thinks appropriate, pay a quantum meruit or quantum valebat. The same conclusion follows from the application of the principle of unjust enrichment: in so far as the recipient
has made cross-payments to the payer, the recipient has ceased to be enriched."
In the Court of Appeal, Dillon LJ at 962, lines F to G, having endorsed the above approach observed:
"It is unnecessary to explore in this case what intricacies there may be in applying the concept of 'money paid for a consideration which has wholly failed' in other cases where the consideration for a payment of money is something other than the payment of other money and is not severable."
But, in this case, that situation must be confronted. Implementing the order for restitution in Westdeutsche Hobhouse J took the view (line F in the passage quoted above) that where there were payments both ways the correct view was to treat the later payment as pro tanto a repayment of the earlier advance. Where, as here, there has been a settlement with money going one way and shares the other, I see no difficulty about placing the appropriate monetary value on the shares at the time of settlement as part of the process of implementing restoration. As explained earlier in 2.17, although the Plaintiffs have drawn attention to the absence of a formal claim for restitution by the Crown, Mr Farmer, as I understood him, was not prepared to argue that that omission should prevent the Court from doing practical justice by restoring the parties to their original positions. The Crown, on the other hand, contends that a formal pleading is not required. In the circumstances I propose to set-off the value of the shares against the Plaintiffs' restitution claim.
The true nature of the restitutionary remedy in a case such as this where title does not pass, (s 6 of the Illegal Contracts Act, s 40 of the Companies Act), was again examined in the as yet unreported case in the Court of Appeal in England of Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division), Evans, Saville, Morritt LJJ, 9 May 1996). Although I have already quoted from the judgment of Saville LJ
(pages 252-253 of this judgment) his pithy statement at page 10 of the judgment is worth repeating:
"The basis for this kind of unjust enrichment claim lies in the fact that the only right the payee can assert to the money he has received is that created by the contract under which it was paid. If that contract is void, then it inexorably follows that this right does not exist, and the payee has no right to that money. The payee is thus unjustly enriched, since there is no justification for the retention of the money to which he has no right."
Evans LJ in the same case, somewhat more expansively explaining why the City Council had failed to persuade the Court that on an ultra vires interest swap contract the Bank's (Kleinwort's) restitutionary relief should be restricted by taking into account certain hedging agreements said at page 9 of the judgment:
"I can accept [counsel's] submission that the phrase 'at the expense of' forms part of the definition of a restitutionary claim and that the central issue is whether that has to be interpreted by reference to the payer/payee relationship alone, as distinct from other parts of what he calls the overall transaction. But I have no doubt that the former interpretation is correct. This is because the payee's obligation, which is correlative to the payer's right to restitution, is to refund or repay the amount which he has received and which it is unjust that he should keep. 'At his expense', in my judgment, serves to identify the person by or on whose behalf the payment was made and to whom repayment is due (compare Chase Manhatten N.A. v Israel-British Bank (London) Ltd, [1981] Ch. 105 per Goulding, J. at p. 125E and see Birks (op.cit. at p.132). That person, having made the payment, is necessarily out of pocket to that extent, and the defendant's obligation is to replenish his pocket when the circumstances are such that the money should be returned.
If the payment was made for valuable consideration, then the payer did not suffer 'loss' even though the payment was made by him. But if it appears, as it did in the present case, that in law there was no consideration for it, then in that sense the payer has suffered loss. His pocket is emptier than it would have been if the money, or its value, was still there. But I would not give 'loss' any wider meaning than that. In particular, it seems to me that it would be inconsistent with the principle of repayment that 'loss' should be given some wider meaning equivalent to 'overall losses on the transaction', even if 'the transaction' could be sufficiently identified, or that the right to recover restitution should be limited to the amount of 'loss' in that sense, though never increased above the amount of the payment."
Earlier in this judgment at 2.17, when dealing with the knowing receipt causes of action, I set out my reasons for recognising the Crown's right to credit for the NZS/EHL Parcel and, pursuant to that, after a discount to recognise the illegal share support scheme that was in place, I allowed $69,750,000 as a reduction for the value of the shares, plus the dividend of $3,700,000 received, a total deduction of $73,450,000. In my judgment, it would not be a just or appropriate exercise of my discretion under s 7 of the Illegal Contracts Act if a similar deduction was not made when granting restitution to AI4. Of course, after that deduction is made, if the claim by AI4 is the one upon which the Plaintiffs seek recovery, it would be further reduced by the recovery from other Defendants, as per the Settlement Deed, in the sum of $64,000,000.
Accordingly, AI4's cause of action for illegality and pursuant to the Illegal Contracts Act succeeds to the extent of $189,774,013, which sum is arrived at as follows:
|
Purchase price
Less Allowance for shares on discounted basis explained in
|
|
$327,224,013
|
|
2.17
|
69,750,000
|
|
|
Dividend received
|
3,700,000
|
73,450,000
|
Recovery $253,774,013
Minus recovery effected by settlement with other defendants as per
Settlement Deed 64,000,000
Total $189,774,013
======
It is well to reiterate before leaving AI4's claim, that the Plaintiffs have made it clear throughout that:
"whether or not AI4 succeeds in its claims made as trustee or on those made in its own right, it is the Plaintiffs' submission that AI4 would hold
any recoveries from the Crown as trustee." (That undertaking was given early in the trial and is specifically expressed in paragraph 54.71 of the Plaintiffs' closing.)
In Section 2 of this judgment I recognised AI4's right to claim on the basis of a relative title and it is apparent that a recovery by AI4 can be seen either as one in which, as trustee, it must account to the original providers of the funds or, alternatively, on a debtor/creditor basis, AI4 must repay the advances made to it.
Also for the reasons explained in 2.16 of this judgment, because the remedy is restitution the Crown cannot call in aid to further reduce its liability, the subsequent sale by AI4 of its NZS/EHL Parcel to EIplc.
3.10 EIGL's illegality claims for original funding
EIGL has claims for original funding, refinancing and interest as assignee of the rights of EFGL/EFSL and by way of subrogation. At this juncture however, I am addressing the original funding illegality claims.
Those claims are pleaded at J.1.3B in paragraphs 179F to 179J. A large number of allegations are incorporated by reference back to earlier paragraphs. Many of them have fallen by the wayside and some, with respect to the pleader, appear irrelevant. The essential contention, as I see it, is that EIGL's contribution to the original financing was illegal because it breached s 62. As recorded above, the funding involved the formation of contracts. As a consequence, pursuant to s 6 of the Illegal Contracts Act, title did not pass to the Crown which, for the reasons given earlier, is not saved by the proviso. Relief is sought in the form of restitution pursuant to s 7 of the Act.
The amount claimed is $77,300,000 which is made up of four amounts as follows:
|
1. Contribution to purchase price, 9 March 1988
|
$19,000,000
|
|
2. Contribution to purchase price, 10 March 1988
3. Deposit to Hong Kong Shanghai Bank as security for the Bank's
contribution to the
$105,000,000 loan from Elders
|
21,000,000
25,000,000
|
|
4. Further contribution, 16 March 1988
|
12,300,000
|
|
|
$77,300,000
===== |
The three contributions (1, 2 and 4) were all made for the purpose of assisting in the purchase of the NZS/EHL Parcel. The $25,000,000 security deposit was clearly provided "in connection" "with the purchase" but a claim for recovery against the Crown has not been established. The Plaintiffs' pleading in relation to this sum is found in paragraphs 60.1(a), 60A.3.2 and 60A.4 of the Sixth Amended Statement of Claim. Paragraph 60A.4 reads as follows:
"60A.4 Pursuant to the Deed of Assignment of Deposits between AI4 and the Minister dated 17 March 1988, and to a written notice of assignment and instruction dated 17 March 1988 from AI4 to HKSB the $25,000,000 deposit held by HKSB on that date was assigned to the Crown. Either that deposit or the
$25,000,000 deposit funded by EIGL was paid to the Crown on or about 21 March 1988."
That pleading amounts to an admission that the Plaintiffs do not know whether or not it was EIGL's $25,000,000 security deposit which reached the Crown.
During the course of the hearing I expressly recognised Mr Paton as an expert on the money movements within the Equiticorp Group and allied transactions. As explained elsewhere he was Group Accountant prior to the collapse and thereafter was retained for some five or six years either by the Serious Fraud Office or the Statutory Managers to investigate and record exactly what had happened. He gave evidence that the Hong Kong Shanghai Bank accounting records were so confused that it was not possible to say which
amount was paid to the Crown. His evidence effectively confirmed the pleading in paragraph 60A.4 above.
During closing Ms Cook endeavoured to persuade me that it is possible to establish that it was EIGL's $25,000,000 which reached the Crown. Counsel invited me to draw that inference from certain bank records available from the imaging system. It would have been a simple matter to apply to amend the pleadings and to recall Mr Paton to confirm his agreement with counsel's proposition. Neither step was taken. In those circumstances I am not prepared to draw an inference (as counsel invites me to) which is contrary both to the Plaintiffs' pleading and the evidence of their records expert, Mr Paton.
Accordingly the claim reduces to $52.3 million.
The three contributions, $19 million, $21 million and $12.3 million, were all made within the last ten days or so before settlement, none of them, however, moved directly from EIGL to AI4. In each case there were intermediate parties who held the funds for short periods and then passed them on. The Plaintiffs submitted that these intermediaries should be seen as agents only and not contracting parties, but there is no direct evidence to that effect, and insufficient to justify drawing inferences. What is clear is that, with the exception of the $25,000,000 security deposit, each contribution started by being transferred to another allied Equiticorp company or subsidiary for the undoubted purpose of funding the purchase of the NZS/EHL Parcel.
The consequence is that, as the Crown cannot bring itself within the proviso to s 6 (see discussion above), it did not receive title to that portion of the total purchase price ($52.3 million) which is represented by EIGL's contributions under discussion here. On that basis EIGL's claim under this head succeeds.
In support of EIGL's claim for relief pursuant to s 7(1)(c), Miss Winkelmann, at paragraph 49.15 of the Plaintiffs' closing synopsis, further submitted as follows:
"49.15. On the wording of the section it is open for the Court to make an order for restitution against a subsequent recipient of funds under an illegal contract even though that recipient is not a party to the illegal contract so long as the subsequent recipient is a party to the proceedings. In essence, such an order would be a statutory tracing order parallel to the actions which arise under s 6 of the Act. Therefore, because the contracts between the initial funders and AI4 were illegal, an order for restitution against the Crown can be made under s 7 even though it was not a party to those contracts."
Elaborating viva voce, counsel submitted that EIGL was clearly a party to an illegal contract pursuant to s 7(1)(a) and that pursuant to s 7(5) the Court can simply vest the contributions back into the hands of EIGL by directing the Crown to transfer or assign them or their monetary equivalent. This, counsel submitted, is effectively what Robertson J did in Euro-National Corporation Ltd v NZI Bank [1992] 2 NZLR 739 at 768, and that procedure was not disapproved of by the Court of Appeal in NZI Bank v Euro-National Corporation Ltd [1992] 3 NZLR 528. Otherwise, however, counsel submitted that there have been no cases and no discussion in learned articles or textbooks regarding the inter-relationship between subsection (1) and subsection (5) of s 7 of the Act.
Miss Winkelmann's submissions were not responded to by the Crown when it exercised its right of reply at the end of the case but that may have been because the Crown fought the case on the basis that a factual finding that it knew of the illegality and acted otherwise than in good faith at the time of settlement could not be made. Be that as it may, I am persuaded that Miss Winkelmann's argument is correct and, on that basis, I am prepared to grant relief on an alternative basis by ordering the Crown to revest the $52.3 million in EIGL on the claim in J.1.3B.
In view of the fact that I have already held that AI4 can recover the full purchase price on the grounds of illegality, I do not propose to address the issue of reduction of the above recovery of $52.3 million pursuant to the provisions of the Settlement Deed. But, as with other claims, leave will be reserved in that regard.
3.11 EIGL's Illegal Contracts Act claims for refinancing and interest payments
A feature of this litigation as a whole was the limited extent to which I was taken to the pleadings - this despite the many volumes of written submissions placed before me and the verbatim transcript. On occasion, when I pressed counsel to relate submissions to the causes of action, the results, from my point of view, were not altogether satisfactory. That, however, may have been simply a reflection of the complexity of the case and the impossibility of grasping every aspect as the evidence poured in and the submissions rolled on.
The above claim, pleaded at J.1.4, paragraphs 180 to 184, is a case in point. It received scant attention and, even then, only in the closing synopsis of the Plaintiffs. The viva voce exposition requested did not bring the foundation of the claim home to me at the time - again perhaps my failing rather than counsel's.
As I now understand the claim, however, it is one in which EIGL claims relief under the Act in respect of its refinancing of original financiers, either through or under AI4 or through or under the original funders themselves and further claims it suffered loss in relation to the repayment of Elders ($105 million) and the payment of interest ($11.328 million).
The central paragraph in the pleadings advancing the foundation of this claim is 181A, which I now set out:
"181A. EIGL is entitled to claim relief under the Illegal Contracts Act 1970 in respect of its refinancing of the original financiers and its funding of interest payments, as pleaded in paragraphs 65, 68-71 and 89A, either in its own right as the refinancing party, through or under AI4 (as the party refinanced and the party contracting with the Crown), or through or under the original financiers (including Elders), to the extent that they were refinanced by EIGL."
The particular provision of the Act which permits this derivative-type action is s 7(1)(c) and to set it in context the whole of s 7(1) is reproduced here:
"7. Court may grant relief - (1) Notwithstanding the provisions of section 6 of this Act, but subject to the express provisions of any other enactment, the Court may in the course of any proceedings, or on application made for the purpose, grant to-
(a) Any party to an illegal contract; or(b) Any party to a contract who is disqualified from enforcing it by reason of the commission of an illegal act in the course of its performance; or
(c) Any person claiming through or under any such party-
such relief by way of restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the Court in its discretion thinks just."
As can be seen, the subsection provides jurisdiction to grant to a party to an illegal contract - s 7(1)(a) (we are not concerned with s 7(1)(b)) - or any person claiming through or under any such party - s 7(1)(c) - certain relief by way of restitution, compensation or "otherwise as the court shall think fit". Clearly, a wide discretion and not intended by the legislature to be exercised in a restricted or other than enabling and remedial way. But the pre-requisite for derivative relief pursuant to s 7(1)(c) is that the claim must be made "through or under" a party to an illegal contract. I have held above that the Deed of Assignment of Deposits, whereby the Crown took deposits worth $327 million from AI4 in exchange for the NZS/EHL Parcel was illegal, either because it was in breach of ss 40 and 62 of the Companies Act 1955, or by tainting from the earlier illegal funding contracts which provided AI4 with the deposits. So EIGL, on the face of it, may be able to claim "through or under" AI4 in respect of repayments made by it to other original
funders whereby AI4 was relieved of that original liability. I will come back to the details shortly.
The Plaintiffs were only able to find one unreported case which discusses s 7(1)(c) and neither the Crown nor EAL could further assist. The decision is one of Anderson J in Dairy Containers Ltd v First City Corp Ltd (High Court, Hamilton, CP 14/90, 8 May 1990). The case concerned an application for interlocutory relief in circumstances far removed from those which confront me in this case. But there is a passage on page 15 of the judgment where an indication is given of the kind of circumstance under which s 7(1)(c) might operate. Anderson J said:
"The plaintiff cannot be said to be claiming through or under Mr Rose. The plaintiff is not an assignee of Mr Rose in respect of the impugned contract, nor a principal of Mr Rose in respect of such contract, nor the assignee in bankruptcy of Mr Rose's estate, nor of course his executor or in any other sense standing in the shoes of Mr Rose in respect of the particular contract."
The pleading at paragraphs 180 to 184 draws heavily on earlier paragraphs in the Sixth Amended Statement of Claim in which the circumstances of the acquisition, original funding and refinancing of the NZS/EHL Parcel are recorded. Especially at paragraphs 76 to 89 the convoluted story of the repayment of the Elders' Loan is pleaded and particularised with references over to Appendices 19 and 24 which are part of the Statement of Claim.
The evidence substantially supports the pleading and I now endeavour to set out in narrative form what happened. As earlier recorded, funding for the purchase of the NZS/EHL Parcel at $327 million-odd, came inter alia from Elders $105 million, EAL
$90,532,802 and ET $8,179,245. EIGL's derivative claim in respect of the original contributions of EAL and ET is relatively straight forward. EIGL claims to have funded the repayments of those original funders and claims to be entitled to stand in their shoes
(to adopt Anderson J's turn of phrase) and recover "through or under" AI4 as a party to the original illegal contract. AI4 itself, of course, sues to recover as a constructive trustee or pursuant to its relative title as owner of the deposits into which EAL's and ET's contributions can be traced. There is, however, an area of dispute between EAL/ET and EIGL yet to be resolved. This is of course the subrogation question which comes up again in this section and in the next. It is, however, EAL/ET's contention that while AI4's liability to repay them may have been discharged they have not in fact been repaid, and therefore neither subrogation nor the derivative action should be available to EIGL.
The claim relying upon s 7(1)(c) in regard to the Elders' Loan is more complex. Although AI4 mortgaged the NZS/EHL Parcel to Elders as security for the $105 million loan it retained control and, along with other shareholders in EHL, accepted a take over offer by EIplc (an English Equiticorp company registered in Hong Kong) and became the owner of EIplc shares and options on 30 August 1988. Contemporaneously, two Equiticorp Holdings Employee Unit Trusts were set up, one in New Zealand, the other in Hong Kong (NZEUT and HKEUT respectively). The trustees of those trusts then agreed to buy AI4's EIplc shares. Part of the consideration provided by Watstone 74 (W74), an Equiticorp subsidiary and the trustee of NZEUT, was to assume the responsibility of paying off AI4's debt to Elders for the original loan of $105 million. This was accomplished by a series of transactions which were all recorded by way of journal entry with no cash passing. They are described in detail in appendices 19 and 24 of the Sixth Amended Statement of Claim and they disclose that EIGL was an intermediary within the chain of transactions. The end result was, in fact, that W74 procured Setar 72 to effect the repayment to Elders. All this is wrapped up in paragraph 89A of the Sixth Amended Statement of Claim which, with particulars, is set out hereunder:
"89A. THE repayment of the Elders' Loan by Setar 72 was effected in three instalments on 7 September 1988 ($27,000,000), 16 September 1988 ($25,000,000) and 6 October 1988 ($53,000,000), the funds being provided by EIGL by means of funding the NZEUT (which had assumed the debt for the Elders Loan as part consideration for the purchase price
of the NZEUT). The NZEUT via Setar 72 then repaid Elders. The repayment of the Elders Loan, and the funding of these payments by EIGL, is particularised in Appendix 19.
FURTHER PARTICULARS
89A.1 The only agreement upon which the plaintiffs rely in support of the allegation that the funds for repayment in instalments of the Elders Loan were provided by EIGL, is the Syndicated Bill Acceptance and Discounting Facility dated 17 March 1988.
The account records upon which the allegation is based consist of journal entries, cheque requisitions, paid cheques, and bank statements, in the books of EIGL, CHL(NZ), W.82 and W.74.
89A.2 The method of repayment of the Elders Loan by Setar 72 is fully particularised in Appendix 19 hereof.
89A.3 In effecting the repayments, no cash was paid to or by Setar 72. The accounting treatment insofar as Setar 72 was concerned, was recorded by way of journal entry."
That EIGL provided the means by which the Elders' Loan was repaid and paid the interest claimed is alleged within the pleading of this claim at J.1.4 in paragraphs 183.2 and 183.3 as follows:
"183. BY reason of the illegal sale of the NZS/EHL Parcel to AI4 and the series of dealings consequent upon it, EIGL has suffered loss as follows:
183.1 ...
paragraph 89A $105,000,000
EFGL/EFSL and Elders as
pleaded in paragraph 6 $11,328,482" [Emphasis added]
It will be seen from the pleading in paragraph 183 that the illegal contract relied upon is still the sale of the NZS/EHL Parcel to AI4. So AI4 is the party to the illegal contract (s 7(1)(a)) "through or under" which EIGL must claim (s 7(1)(c)). But, in reality it is "the series of dealings consequent upon it" that are relied upon as the nexus. Those subsequent dealings, which involve W74 and Setar 72, were not shown, however, to be illegal. Even if they had been, since EIGL was not in an immediate contractual relationship with them, it is difficult to see how it could claim "through or under" them. In my opinion, the legislature, even on the most liberal interpretation of s 7(1) did not intend to open the door to the kind of multifarious claim advanced here, based as it is on circumstances that the Crown could not possibly have known of or anticipated and all of which occurred five months or more after settlement. So the claims for Elders' contribution and for interest paid fail.
That still leaves, however, the claim in respect of the original funders and a little more detail regarding it is required.
In paragraph 68 of the Sixth Amended Statement of Claim, which is gathered up in paragraph 181A set out above, the Plaintiffs refer to the total sums provided by EAL (not all of which were used to fund the NZS/EHL Parcel) and claim the cost of refinancing the ET loan which, because the exchange rate had shifted adversely to the New Zealand dollar, was higher than the original contribution. Neither approach is legitimate in my view. If EIGL is to recover either on a derivative claim via s 7(1)(c), or on some basis through the original funders, then all it can properly be awarded is what the Crown received and not some inflated sum with add-ons about which the Crown had no knowledge and for which it could not, in my judgment, possibly be responsible. The claim also incorporates an attempt to recover $28 million of EFGL/EFSL's original contribution of $40 million. But, EIGL already has a claim for the full amount of
$40 million on the grounds of illegality, as the assignee of EFGL/EFSL's rights in that regard in J.1.4A (paragraphs 184A to 184F). The Crown does not challenge the validity
of the assignment, and EIGL's rights if any to all or part of the EFGL/EFSL original funding are best dealt with there. So, if EIGL were to recover on J.1.4, it would only be to the extent of the original funding as follows:
|
EAL
|
$90,532,832
|
|
ET
|
8,179,245
|
|
Total
|
$98,712,077
====== |
Recovery of that sum would, of course, be subject to leave reserved to apply in respect of the $64 million settlement deduction.
As recognised in re AIC Merchant Finance Ltd (supra), and as is apparent from the report of the Contracts Commercial Law Reform Committee (October 1969) upon which the Illegal Contracts Act 1970 is based, s 7 introduces an extraordinarily wide and relatively unfettered discretion. Although I am persuaded that EIGL did refinance and can make a claim against the Crown for the original contributions of EAL and ET "through or under" AI4 pursuant to s 7(1) of the Act, the issue of whether or not I should exercise my discretion remains.
I see similarities between this claim and EIGL's subrogation claim. A central question in the latter claim is whether or not EAL and ET would be unjustly enriched at the expense of EIGL if their claims against the Crown succeeded and they were permitted to recover. If unjust enrichment is not established in one form or another that might influence my decision on the exercise of the discretion. Both this claim pursuant to s 7(1), and the so- called subrogation claim, say in effect that because EIGL relieved AI4 of liability by providing funds to repay the EAL and ET contributions, it should now be the party to receive the benefit of any recovery from the Crown. In those circumstances it might not
be a satisfactory result if EIGL were held entitled to recover under one head but not under the other.
I therefore delayed a final decision on this reduced claim under J.1.4 until I had resolved the competing claims between EIGL and EAL/ET as to which of them ultimately is to receive the benefit of any recovery from the Crown.
Reference to 8.6 of this judgment commencing at page 445 under the heading, "Would EAL/ET be unjustly enriched if they recovered against the Crown: and if so would such unjust enrichment be at the expense of EIGL?", will show that in due course I concluded that EAL/ET would be unjustly enriched at EIGL's expense and that EIGL should be the ultimate beneficiary.
In the light of that conclusion I am prepared to exercise my discretion and hold that EIGL can recover on this claim for $98,712,077 subject to reduction in respect of the
$64 million settlement moneys in which regard leave is reserved.
3.12 EIGL's Illegal Contract Act claim for $40 million assigned from EFGL/EFSL
This claim concerns the original advance of $40 million by EFGL and EFSL made for the purpose of providing funds to purchase the NZS/EHL Parcel which claims were subsequently assigned to EIGL.
The claim made pursuant to the Illegal Contracts Act is again on the basis that the original advance by way of contract was illegal because it breached s 62. Therefore no title passed to the Crown and it is not able to avail itself of the proviso to s 6(1) of the Illegal Contracts Act because it knew at the time the moneys were paid to it that they were supplied illegally by EHL or its subsidiaries. Thus, the Crown did not receive in good faith. EIGL therefore recovers on this claim for $40 million as an alternative, of
course, to the other recoveries I have already upheld. Again, as I have held that AI4 can recover, I do not propose to address the issue of reductions to the above amount, but leave is reserved in that regard.
3.13 EIGL's illegality claim within the subrogation claim
The subrogation claim is at J.1.2 and, as mentioned above, is very similar to the claim at
J.1.4. In the subrogation pleading, however, at paragraph 174 the amounts claimed are correctly only those which subsequently reached the Crown. They are:
|
EAL
|
$90,532,832
|
|
EFGL/EFSL
|
$40,000,000
|
|
ET
|
$8,179,245
|
I have already held that EIGL can recover as assignee of EFGL/EFSL's $40 million contribution to AI4's funding, so we are not concerned with that figure. As explained in
2.17 of this judgment, when dealing with EIGL's constructive trust: recipient claim, because of certain deductions the recovery sought in respect of EAL is not the original contribution but the lesser sum of $86,232,522 as pleaded in paragraph 176.1. As with the earlier subrogation-based claims I am dealing with the matter on the basis that the remedy will be available to EIGL without deciding that issue at this juncture. It follows that if EIGL is successful the recovery will be, subject to leave reserved re settlement deductions, the sum of $94,411,776 ($86,232,522 plus $8,179,254 equals $94,411,776).
I observe finally that in the event that EIGL makes out its subrogation claim and recovers against the Crown there would appear to be no reason why EAL, in its own right, should not recover the difference between $90,532,832 and $86,232,522 namely $4,300,310. It is unlikely, however, that EAL will have the opportunity to make that recovery because the probability is, I surmise, that recovery will be sought by AI4. In those circumstances,
counter-restitution and settlement deductions aside, recovery on behalf of EIGL of the higher sum of $90,532,832 will have been made.
3.14 EHL's Illegality Claims
EHL has two claims under the Illegal Contracts Act, at J.2.3 and J.2.6.
The essence of the claim at J.2.3 is that EHL paid a fee of $32.5 million to AI4 nominally for undertaking the role of underwriter but in reality, as both the Crown and Plaintiffs accept, as a gift or contribution towards the funding by AI4 for the purchase of the NZS/EHL Parcel. At paragraph 60.3 of the Sixth Amended Statement of Claim, the pleading referring to the fee is as follows:
"60.3 By way of a payment of $32,536,477 described as an 'underwriting fee' or a 'placement fee', paid by EHL on 14 March 1988. of that fee $32.5 million was paid to the Crown."
The contract pursuant to which the fee was paid by EHL was illegal because its purpose was to "indirectly" provide "financial assistance for the purpose of or in connection with a purchase to be made" by EAL of its own shares. Clearly a breach of s 62 of the Companies Act.
As a consequence, pursuant to s 6(1) of the Illegal Contracts Act, no title, legal or equitable, passed to AI4 and hence to the Crown. The Crown cannot avail itself of s 6(1)(a) because, as earlier explained, it was not a bona fide purchaser for value without notice.
The appropriate remedy is restitution pursuant to s 7(1) of the Illegal Contracts Act either on the basis that the Crown did not obtain title to the moneys or, alternatively, that EHL can claim "through or under" AI4 as provided in s 7(1)(c).
EHL's remaining claim is under J.2.6. The thrust of this claim, based on the Illegal Contracts Act, is that the capital of EHL was illegally reduced because of the payment of
$327,224,013 made to the Crown.
The Plaintiffs did not, in their submissions, spell out how EHL could make such a claim. A company and its shareholders are quite separate - Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 NZLR 513. And each company in a group is a distinct legal entity and must be recognised as such - Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1. Just as shareholders are not liable for a company's debts or defaults it follows that neither are they able, as distinct from the company itself, to recover losses suffered by the company. If authority is needed for this proposition it is to be found in Robert Walker J's decision in Re Polly Peck International plc (in administration) [1996] 2 All ER 433, 444 where his Honour said:
"Although the shareholders do not own their company's assets, a wrong to the company (if uncompensated) may cause them economic loss. But in general the shareholders will have no direct right of action in respect of such loss (see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354 at 367, [1982] Ch 204 at 223).
Yet, this is what the Plaintiffs seek to do in the cause of action advanced under J.2.6. EHL, the majority shareholder in all the subsidiaries, says in effect, it can recover for itself, independent of the companies in which it holds shares, the moneys that those companies have lost as a result of any one or more of the half dozen causes of action each subsidiary advances. Analysed in this way, it is apparent that the J.2.6 claim based on illegality must fail. Contrary to counsel's submission, the recent decision of the Court of Appeal in Christensen v Scott [1996] 1 NZLR 273 does not bear upon this issue because there the indication was that a cause of action may be available to shareholders to whom the professional adviser owed fiduciary duties independent of obligations owed to the company itself.
In the result, then, EHL recovers on its claim pleaded under J.1.3 subject however to reduction on account of the $64 million settlement moneys in which regard leave is reserved. In respect of the other claim under J.2.6 for loss of capital however, EHL fails.
SECTION 4: THE PLAINTIFFS' CLAIMS FOR MONEY HAD AND RECEIVED
4.1 Introduction
As explained in 2.17 of this judgment when dealing with the constructive trust claims, the allegation of breach of fiduciary duty by the directors is two-fold, namely, lack of authority and illegality. This was spelt out at paragraph 7.8 of the opening synopsis for the Plaintiffs as follows:
"7.8 The action for money had and received is principally advanced upon the bases:
(a) The financing contracts and the contract between the Crown and AI4 were vitiated because they were made by directors who were acting without authority. It is said that the directors had no authority to enter into contracts which were not for the legitimate business purposes of the company in question, and which were part of a dishonest, fraudulent and illegal scheme.
In the result, the contract was a nullity. (Guinness plc v Saunders [1989] UKHL 2; [1990] 2 AC 663; Craven-Ellis v Canons Ltd [1937] 2 KB 403). A transfer of money effected in such circumstances will support both an action for money had and received (A L Underwood Limited v Bank of Liverpool and Martins [1924] 1 KB 775, 795; Rickett v Barnett, Pembroke & Slater Limited [1929] AC 176) and a constructive trust (Guinness plc v Saunders [1989] UKHL 2; [1990] 2 AC 663).
(b) Alternatively, the action for money had and received is based on the illegality of the transaction. Two grounds of illegality are relied upon:
(i) That the contract for the purchase of the NZS/EHL Parcel by AI4 was in breach of section 40 of the Companies Act 1955.
(ii) That the financing contracts were illegal by reason of being in breach of section 62 of the Companies Act and that the contract between the Crown and AI4 was illegal by reason of being tainted by that illegality."
The Crown did not argue with the legal bases advanced but challenged the factual allegation that the directors lacked authority and acted illegally and, in particular, argued that the Plaintiffs could not satisfy the requirements of common law tracing.
I have already held that in arranging the funding by the subsidiaries and permitting AI4 to purchase the NZS/EHL Parcel the respective directors were acting without authority. Also I have held that the advances from EHL and its subsidiaries were made contractually and breached s 62 and the contract (Deed of Assignment of Deposits), between the Crown and AI4 breached s 40, making the purchase of the shares both void and illegal.
Of the two bases outlined in the Plaintiffs' opening the illegal and void ground is the stronger, in my view, because s 6 of the Illegal Contracts Act and s 40 of the Companies Act prevent title passing, either from the original funder or AI4, to the Crown. As a consequence, there is a total absence of consideration for the money paid over and that is a well-recognised situation for the application of the money had and received cause of action - see Goff & Jones at page 3. See, also, the judgment of Evans LJ in Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division) Evans, Saville, Morritt LJJ, 9 May 1996, as yet unreported) at page 3 where, under the heading "The law
- General" the Lord Justice said:
"The principle of unjust enrichment is recognised in English as in other systems of law. It requires the recipient of money to repay it when the circumstances are such that it is contrary to 'the ties of natural justice and equity' for him to retain it; cf. Lord Mansfield's celebrated dictum in Moses v Macferlan [1760] EngR 713; (1760) 2 Burr. 1005 at 1012. How those circumstances may be identified has been the subject of countless judicial decisions over the centuries. A number of recognisable forms of action emerged from the mists of legal history. These entitled the plaintiff to recover, not damages but a quantified sum from a defendant who was not necessarily a wrongdoer and who was not bound by any contract or express undertaking to pay the sum claimed by the plaintiff. The circumstances in which such a non-contractual obligation can arise are various; the recovery of money paid under a mistake of fact (though not,
historically and so far as English law is concerned, under a mistake of law), or where the consideration in return for which the money was paid has failed, are well-established examples. Now, the mists have cleared still further. It is recognised that these different forms spring from a single underlying principle, which is described as the right to recover on grounds of unjust enrichment; that is to say, the defendant has been unjustly enriched by the payment made to him and which the plaintiff seeks to recover."
The issue of tracing at common law, which goes hand-in-hand with the cause of action, however, requires careful consideration.
4.2 Tracing at common law
The Crown submitted in opening that the Plaintiff companies must show:
"that there was no interruption in the identification of their money, or the product of its exchange, at any stage of the funding transactions and through into the hands of the Crown."
In support of that submission, the Crown cited Clarke v Shee and Johnstone [1774] EngR 107; (1774) 1 Cowp 197; 98 ER 1041 per Lord Mansfield at 200; 1043:
"... the money and notes which [the clerk] paid to the defendants [were] the identical notes and money of the plaintiff."
Also Agip (Africa) Ltd v Jackson [1992] 4 All ER 451 at 463-464 (CA) where over two centuries later, Fox LJ said:
"Identification in the defendant's hands of the plaintiff's asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds."
The Crown submits that the common law has developed and maintained strict rules regarding the tracing of money and that "there must be, in a strictly materialistic sense,
clear evidence of a continuity of existence or of direct and identifiable substitution." Thus, it was submitted that the right to trace is lost once the money in question is mixed with other money or mixed in the purchase of another asset. In support, counsel referred to the classic statement of Lord Ellenborough in Taylor v Plumer [1815] EngR 551; (1815) 3 M & S 562 at 575; 105 ER 721 at 726:
"...the right [to trace] only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description. The difficulty which arises in such a case is a difficulty of fact and not of law, and the dictum that money has no ear-mark must be understood in the same way; ie as predicated only of an undivided and undistinguishable mass of current money."
The Crown submits further that once use is made of electronic transfers in the banking system tracing is no longer possible. Mr Paton, the Equiticorp Group accountant, who gave evidence regarding the movement of Equiticorp funds to the Crown, explained electronic transfers during his cross-examination and the Crown summarised that explanation at paragraph 13.64 of its opening in the following terms:
"13.64 In essence, when money is transferred by electronic transfer, no money changes hands, or at least in respect of that particular transfer, no money changes hands. The two banks involved operate a kind of daily running balance for transactions between themselves, and at the end of each day there is a reconciliation of all that day's transactions, and some form of wash-up transaction occurs. It is completely impossible to ascribe to any individual transaction any part of that wash-up transaction."
The most detailed exposition of the proposition that the common law will not trace past an electronic transfer of funds is to be found in the decision of Millett J in Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 285 where he said at lines C to E, and page 286 at lines A and C:
"Tracing at common law, unlike its counterpart in equity, is neither a cause of action nor a remedy but serves an evidential purpose. The
cause of action is for money had and received. Tracing at common law enables the defendant to be identified as the recipient of the plaintiff's money and the measure of his liability to be determined by the amount of the plaintiff's money he is shown to have received.
The common law has always been able to follow a physical asset from one recipient to another. Its ability to follow an asset in the same hands into a changed form was established in Taylor v Plumer, 3 M & S
562. In following the plaintiff's money into an asset purchased exclusively with it, no distinction is drawn between a chose in action such as the debt of a bank to its customer and any other asset: In re Diplock [1948] Ch. 466, 519. But it can only follow a physical asset, such as a cheque or its proceeds, from one person to another. It can follow money but not a chose in action. Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Banque Belge pour L'Etranger v Hambrouck [1921] 1 K.B. 321. ...
In my judgment, however, the former objection is insuperable. The money cannot be followed by treating it as the proceeds of a cheque presented by the collecting bank in exchange for payment by the paying bank. The money was transmitted by telegraphic transfer. There was no cheque or any equivalent. The payment order was not a cheque or its equivalent. Nothing passed between Tunisia and London but a stream of
electrons. It is not possible to treat the money received by Lloyds Bank in London or its correspondent bank in New York as representing the proceeds of the payment order or of any other physical asset previously in its hands and delivered by it in exchange for the money."
In a later case, but in less detail, Millett J again made the same point, see El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 at 733 where the Judge said at line J and on to the top of page 734:
"This makes it necessary to consider separately the common law and equitable tracing rules. In the present case, it is manifestly impossible to follow the money at common law. The international transfers of money were made electronically; the plaintiff's money was mixed, not merely with the money of other victims or of the fraudsters themselves, but with the money of innocent third parties "
That line of authority was applied by Blanchard J in Nimmo v Westpac Banking Corporation [1993] 3 NZLR 218 at 238:
"An insurmountable difficulty faced by the plaintiff in relation to the money which came into the sterling account is that the common law action [for money had and received] is dependent upon the ability to trace a physical asset from one recipient to another. This can be done even where the asset changes its form: Taylor v Plumer [1815] EngR 551; (1815) 3 M & S 562. But
the common law action is thwarted when tracing of a physical asset becomes impossible, as may be the case where cheques pass through a clearing house operation and the accounting between banks at the end of each day is on the basis of the overall accounts between those banks. It
is also said that common law tracing is defeated by a transmission of funds electronically, by a stream of electrons rather than by transfer of a physical asset: Agip (Africa) Ltd v Jackson at 286."
A very recent example of the application of this approach is the decision of Tuckey J in Bank Tejarat v Hong Kong and Shanghai Banking Corp [1995] 1 Lloyd's LR 239 at 246 where the Judge said:
"The simple answer to this submission is that the drafts were not the means by which Tejarat paid their money to CAK. The payment out of Tejarat's account with BV was probably made by telex instructions to Dresdner (a stream of electrons). It was certainly not made by the drafts, so there is nothing from which Tejarat can trace."
The Crown further contends that tracing is defeated if payments are made by way of journal or other book entry. This topic was also addressed by Blanchard J in Nimmo (supra). Following on from the discussion of common law tracing set out above, the Judge said that there was an additional problem facing the plaintiff in that inter-company book entries had been used to effect a part of the chain of transactions: (supra at 238-239)
"So New Zealand Equities Ltd's London bank credited Westpac's London account and that credit was then transferred to the international services account in Wellington and on to Kinetic's account at the Downtown branch by a series of corresponding debits and credits between each account. There was certainly no transfer of any physical asset. Equity could, of course, trace such transactions but at common law they cannot be traced. The money coming into Kinetic's sterling account is not in the eyes of the common law proved to be Mr Nimmo's."
The Plaintiffs recognised that these authorities hold that the common law will not trace through a mixed fund nor will it recognise payments through a clearing house or otherwise by electronic settlement, but it was argued that the authorities relied on by the Crown which insist upon a distinction between equitable and common law tracing should no longer be followed. Reliance was placed upon the earlier English Court of Appeal case of Banque Belge v Hambrouck [1921] 1 KB 321 and references made to that case by Lord Templeman in Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 566. In addition, the Plaintiffs call in aid a substantial body of academic writing which urges reform of the common law tracing rules to bring them into conformity with equitable rules and modern banking practices. The Plaintiffs' submission is perhaps encapsulated in paragraph 53.41 of the synopsis and Mr Farmer's viva voce exposition at T/14659 and T/14660. The synopsis paragraph reads:
"53.41 Modern developments in the law of restitution, particularly the revival of the change of position defence, have been said in a number of cases to justify a re-examination of many decisions of the past. Logically, at a time when the elements of the common law action for money had and received and equity's equivalent knowing receipt cause of action are being regarded as being alike in all material respects, the rules of tracing that common law and equity deploy should also be similar."
I interpolate to say that Mr Farmer has not persuaded me to the view that the two causes of action referred to in the above paragraph are "alike in all material respects".
The viva voce exposition between lines 10 and 3 on the consecutive pages referred to above reads as follows:
"I suppose that is probably a convenient summary to make, Your Honour, that here what the Crown have argued is that because payments have gone through the banking system, and in particular by way of telegraphic transfer, that there has been a mixing of funds, and so far as the telegraphic transfer is concerned, there has also been this idea of Millett J's of the physical asset not passing, cheques being presented, but rather just a transfer of electrons. Those submissions, we say, clearly
cannot stand, first, because the analysis here that transfers through the banking system are not regarded as the mixing of funds at all for the purposes of the common law, these cases simply do not regard it that way, and because what the courts concentrate on are the change into the chose in action, when the money is paid into the bank, a chose in action is created as between the depositor and the bank.
Of course, it doesn't then matter whether the collection is done or the chose in action is then assigned by way of electronic transfer or not, because it is the chose in action that is being transferred, that is the important point. That is a bundle of legal rights, it is not something tangible like a cheque anyway or bank notes."
Mr Farmer may be right. Perhaps a change is coming. But as a first instance Judge who has not had occasion previously to consider common law tracing other than superficially, I am not persuaded that I should lead the charge here. Like Blanchard J, I find Millett J's exposition in Agip persuasive and I propose to follow it. As a matter of principle, it seems not inappropriate that the common law cause of action for money had and received which can have quite drastic (some have said draconian) results should require strict proof that the money in the defendant's hands is specifically that which came from the plaintiff. I am strengthened in this conclusion by the fact that the House of Lords in Westdeutsche Landesbank Girozentrale v Council of the London Borough of Islington [1996] UKHL 12; [1996] 2 WLR 802 referred to the distinction between equitable and common law tracing without re-examining those rules or past tracing cases. See, in particular, Lord Browne- Wilkinson's discussion of the stolen bag of coins at pages 838-839 of the decision.
There is a further passage in Agip (supra) which is relevant to a defence raised by the Crown to the effect that, in any event, the money had and received cause of action cannot succeed because that money has now been mixed in the Crown's General Account and used. At page 285 of the judgment, between lines G and H dealing with a similar objection Millett J said:
"The latter objection is easily disposed of. The cause of action for money had and received is complete when the plaintiff's money is received by the defendant. It does not depend on the continued retention of the money by the defendant. Save in strictly limited circumstances it is no defence that
he has parted with it. A fortiori it can be no defence for him to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim, for it will prevent proof that the money received by the defendant was the money paid by the plaintiff."
In the light of the legal issues discussed above, I now examine the Plaintiffs' individual claims.
4.3 AI4's claim for money had and received
AI4's claim for money had and received is to be found at J.3.5, paragraphs 217 and 218 of the Sixth Amended Statement of Claim.
Here the pleading is straight forward. In paragraph 217, the settlement by AI4 with the Crown is alleged to have been both illegal and unauthorised.
I have dealt with the illegality allegation above and found for AI4. Since I have held that AI4 is a subsidiary of EHL, the transfer of the NZS/EHL Parcel to it breaches s 40 of the Companies Act 1955 and is without question void, even if my conclusion as to illegality is challenged. AI4 also succeeds on the allegation that the sale was unauthorised not only on account of the illegality but also on the gross improvidence point. I have covered the latter question in detail elsewhere but in short, the borrowing of the whole purchase price by AI4 to pay $327,000,000 odd for shares known at the time to be worth significantly less than $90,000,000 was so grossly improvident that the directors could not possibly have regarded themselves as authorised to so transact. AI4 became instantly and irretrievably insolvent as a result.
The inevitable consequence again is that the Crown did not get title to the deposits assigned and it would be unconscionable for it to retain them. The moneys, therefore, are clearly money had and received to the benefit of AI4 and must be returned.
The Crown, however, is entitled to have set-off against AI4's claim its own right to restitution in respect of the value of the NZS/EHL Parcel at the time of settlement which, as set out in 2.17, I have found to be $69,750,000. I dealt with this whole issue in some detail in Section 3, page 327, indicating that the reasoning there would apply here because s 6 of the Illegal Contracts Act reverses the common law and creates a situation identical to a void contract, which of course is the foundation of these money had and received claims. In addition, on an equitable accounting basis, the Crown is entitled to a credit for the dividend of $3,700,000 which AI4 received while it held the shares. So the total deduction is $73,450,000.
The result on the money had and received cause of action advanced by AI4 is therefore identical with the illegality claim and the Plaintiffs recover the net figure of
$253,774,013, less the adjustment arising as a result of the Settlement Agreement of
$64,000,000 reducing the recovery to $189,774,013.
4.4 EIGL's original funding money had and received claims
EIGL claims $77,300,000 on the basis of money had and received. The pleading is at J.1.5, paragraphs 184G and 184H. The figures are as follows:
Contribution to purchase price on
9 March 1988 $19,000,000
Contribution to purchase price on
10 March 1988 $21,000,000
Deposit to Hong Kong & Shanghai Bank as security for that Bank's contribution to
the $105 million loan from Elders $25,000,000 Further contribution on 16 March 1988 $12,300,000
The problem earlier discussed when dealing with illegality in respect of the $25,000,000 deposited as security with the Hong Kong Shanghai Bank reduces the claim to
$52,300,000.
The Crown's first point, as with all other money had and received claims by the original funders, is that a plaintiff advancing the common law cause of action must establish that the money in question belonged to it in the first place. For the reasons given in Section 2, when discussing the constructive trust causes of action, I am satisfied that that is not a problem for the Plaintiffs.
The money had and received claims are alternatives to all the illegality claims made by the Plaintiffs. For EIGL and EHL there is the additional element of tracing which does not affect AI4 because it assigned direct to the Crown. By contrast, the other Plaintiffs' contributions followed tortuous routes on their way to AI4 and thence to the Crown. Many of the paths followed defy commercial explanation save as a means of circumventing s 62 and a device to disguise the source of the moneys.
In the claim being considered the two amounts of $19,000,000 and $21,000,000 were advanced by EIGL on 9 and 10 March respectively. Each went through three steps to reach Concorde (the Vanuatu company) at its bank account with the Bank of New Zealand, Sydney, which used the Bank of New Zealand, Wellington, to carry out the transactions. All those steps occurred on the same day and both amounts were then paid into a single account in the name of AI4 at the Bank of New Zealand where they became
completely mixed. From the total of $40,000,000 four deposits were established; one with the ANZ on 9 March for $10,000,000; two with NZI on 10 March for $10,000,000 and $9,000,000; whilst the remaining $11,000,000 was paid on 10 March into a term deposit account with the BNZ for AI4. There was already $40,000,000 in that account and another $8,475,000 was added on 16 March, followed by $12,300,000 also on 16 March. The majority of that money was then paid out to AI4's Bank of New Zealand account at Auckland on 21 March when, for some reason, there was a further division and two amounts were assigned to the Crown, one for $66,099,000 on 21 March, and the other for $3,200,000 also on 21 March. All this can be seen in diagrammatic form on charts 7 and 8 of Exhibit C which may be found at pages 145 and 146 of Volume II.
The Plaintiffs were unable to cite any authority which holds that in such circumstances the mixing that occurred did not matter because all the deposits had come from AI4 which had received them originally by a series of steps from EIGL. That, on the face of it, is factually correct in respect of the three deposits for $10,000,000 with the ANZ;
$10,000,000 with NZI; and $9,000,000 with NZI. There is a problem with the deposit that was with the Bank of New Zealand because the $12,300,000, which was added in there, came by a most complicated route from EAL to AI4 and from AI4 to a term deposit with the Bank of New Zealand, Sydney and got to EIGL by means of journal or other book entries. None of the tracing authorities which I have read, or been referred to, disclose the complexity that applies in this case. The only firm ground I have is the clearly established rule that once funds are mixed they can no longer be traced. On that ground alone, the claim for money had and received made by EIGL in J.1.5 fails. Additionally, however, there is the interposition of the bank deposits (choses in action) before the moneys reached the Crown and the use of book entries in respect of the
$12,300,000 referred to above. For those reasons also the claim fails.
4.5 EIGL's subrogation claim for money had and received
I now consider EIGL's claim for money had and received in respect of refinancing by way of subrogation - J.1.2, paragraphs 174 to 176. I am dealing with this matter on the same provisional basis as earlier subrogation claims, namely, that the assumption is (without any decision having been made), that EIGL can be subrogated to the rights of those parties it refinanced. The claim here is on the basis that EIGL refinanced the original contributions of EAL, EFGL/EFSL and ET. The total of the advances made by those three parties was $138,712,077. As is set out in the pleadings, however, particularly at paragraph 176 of the Sixth Amended Statement of Claim, there were certain adjustments and the result is that the subrogation claim is for the lesser amount of
$124,191,359. Of that total sum $86,232,522 is EAL's contribution; $28,000,000 is EFGL/EFSL's portion of the original funding; and the balance of $9,958,837 is ET's initial funding.
As with its original funding, money had and received claim, EIGL faces a problem associated with common law tracing. All the moneys provided by EAL in the first instance were sent to the Hong Kong solicitors, Denton Hall. They went in three tranches of $A60,000,000, $A30,000,000 and $A32,000,000. The moneys were received by the solicitors at their bank account with the Hong Kong Shanghai Bank, Hong Kong, which used the Hong Kong Shanghai Bank, Melbourne to carry out the transactions.
It appears that the Plaintiffs have assumed that the moneys were going into a solicitor's trust account in a British jurisdiction and that the amounts would be kept separate and would not be mixed with other moneys. No evidence of any kind was called to this effect and in substance it seems I am being invited by the Plaintiffs to take judicial notice of the fact that the moneys would have been kept separate in such a trust account. The Crown, however, made it clear during the course of the hearing that that proposition was not accepted and no attempt was made by the Plaintiffs to provide evidence to the Court. I
should have thought it would have been a simple matter to have obtained affidavits from the President of the Law Society of Hong Kong, attaching a copy of any Regulations controlling trust accounts or otherwise explaining the position and from Denton Hall as to compliance. Such affidavits might well have been received under the documentary hearsay provisions of the Evidence Amendment Act 1980. In a case where the Plaintiffs, in other respects, have gone to so much trouble to put every helpful, (or possibly helpful), piece of evidence before the Court, I am not prepared to infer from the circumstances that inevitably the moneys were kept separate. The consequence is that I must regard those moneys as mixed in the Hong Kong Shanghai Bank accounts which, of course, prevents tracing from that point on. Additionally, it is a long involved route from Hong Kong back to AI4. Even if the tracing trail had not petered out in Hong Kong it might well have been lost at a later stage either by payment of the money into overdrawn accounts, as happened in respect of $27,025,000 of the first tranche, or payment out by Concorde to AI4 before receiving the moneys coming to it from the Turks and Caicos companies as appears to have happened in another case.
The $40,000,000 that was originally made available by EFGL/EFSL (from which the figure of $28,000,000 above derives) suffers a similar fate because it also was paid into Denton Hall's account before going on to the Turks and Caicos companies and from there to Concorde in Vanuatu. Although, in respect of this claim there were not the difficulties further along the line, nonetheless the apparent mixing of the money in the account of Denton Hall, solicitors in Hong Kong is fatal to the common law tracing claim.
That leaves the contribution by ET which was originally $A7,500,000 but which converted to the claim for $NZ8,179,245. Of that advance, Mr Paton said, at paragraph 330 of his evidence, on page 116, paragraph 330 of his brief under the heading "ET Funding of $A7.5m (Chart 8)":
"330. Between 3 and 4 March 1988, ET provided $A7.5m of funding for AI4. The monies were paid by EAL on behalf of ET for the benefit of WIL. From there, the funds were paid to Concorde and then on to AI4. AI4 placed the money on deposit with BNZ until 15 March 1988 at which time the funds were drawn back to AI4. AI4 then placed the monies with EFGL on deposit overnight. On 16 March 1988, the funds were repaid to AI4 and then combined with other monies AI4 had borrowed from the Equiticorp Finance Group in Australia and New Zealand and from EIGL to be placed on deposit with BNZ. Ultimately the monies were paid to the Crown as part of the settlement for the purchase of the NZS/EHL Parcel. The funding provided by ET is depicted on Chart 8 of the Chart Book. The combination of those monies with the funds from other Equiticorp sources and the payment to the Crown are depicted on Chart 10. Those transactions will be dealt with shortly.
In its final submissions, the Crown argued at section 25, paragraph 25.144:
"With reference to the transactions shown on Chart 8, and to transaction C on that Chart, and transaction D on Chart 8: The funds involved here ($A7.5 million) were mixed with about $142 million of unrelated funds in the one direct credit form used by Elders to make other payments unrelated to the funding of AI4: transcript 1951/27 to 1953/9; 1953/19 to 1954/4 on 14 February 1995."
The Plaintiffs in their final submissions, section 53, paragraph 53.10 acknowledged that the funds had been mixed. That mixing brings to an end the tracing, and therefore the money had and received common law claim in respect of that amount must fail also. The whole money had and received claim for $124,191,359 made pursuant to subrogation therefore fails.
4.6 EIGL's money had and received claim for $40,000,000 assigned from EFGL/EFSL
I can deal expeditiously with this stand-alone money had and received claim for
$40 million in J.1.5A. That is the same $40 million that I have already dealt with above in the refinancing claim by way of subrogation. I held there, as I hold here, that the payment of those funds into the Hong Kong solicitor's account with the HKSB resulted in mixing which is fatal to common law tracing so the claim fails.
4.7 EHL's Money Had and Received Claim
I turn now to consider EHL's money had and received claim at J.2.4.
This claim can be quickly disposed of. Under cross-examination Mr Paton conceded that the $32.5 million involved here originated with Elders and was advanced to EIGL. EIGL then advanced on to AI4 in two tranches, one of $26 million and the other of $6.5 million on 1 and 3 March 1988 respectively. The moneys remained on deposit until they were assigned to the Crown on 21 March. It was only after that, on 23 or 24 March by journal entry, that EHL assumed responsibility for the advances so that thereafter it became the party entitled to recover. As earlier explained however, the strict tracing rules in respect of the common law action for money had and received require that the Plaintiff is able to show that its money without interruption has reached the Crown. Whereas here, EHL is quite unable to do that because it did not in fact acquire the right to recover until after the assignment to the Crown and the moneys in question were never, prior to that, in its physical possession.
Belatedly, the Plaintiffs recognised this difficulty and sought to amend the Sixth Amended Statement of Claim to claim the $32.5 million in the alternative on behalf of EIGL. The application was opposed and eventually abandoned by the Plaintiffs when it was realised that it was out of time and would inevitably be defeated by the Statute of Limitations.
SECTION 5: THE STATUTORY TRUST CAUSES OF ACTION
s 154 Corporations (Investigation and Management) Act 1989
All three Plaintiffs having been placed in Statutory Management in April of 1989 have claims under this head. EIGL at J.1.3 and 3A; EHL at J.2.2 and AI4 at J.3.2.
The nature of the cause of action and the opposing arguments in respect of it are matters of general application to all claims and will be discussed first.
The Corporations (Investigation and Management) Act 1989 repealed and replaced the Companies Special Investigation Act 1958. By s 3 of the 1989 Act the Crown is bound. Section 4 provides that the Act is to apply inter alia:
"(iii) For ... any other reason in the public interest, - if those members or creditors or beneficiaries or the public interest cannot be adequately protected under the Companies Act 1955 or in any other lawful way." (s 4(b)(iii))
The general objects of the Act are set out in s 5(1), paragraphs (c) and (d) of which read as follows:
"(1) The general objects of this Act are-
...
(c) In the case of a corporation referred to in section 4(b) of this Act, to preserve the interests of its members or creditors or beneficiaries or the public interest:
(d) To provide for the affairs of corporations to which this Act applies to be dealt with in a more orderly and expeditious way."
The Act is divided into five parts. Part III deals with Statutory Management, within that part s 54 provides as follows:
"54. Power to trace property improperly disposed of -
(1) In any case where, whether before or after the passing of this Act,-
(a) Any property has been acquired by a person in circumstances which cause it to be just and equitable that that person should hold it upon trust for any corporation that has been declared to be subject to statutory management; or
(b) Any property has been improperly disposed of, whether or not the property has become subject to a trust,-
the Court may, if it thinks fit, make an order-
(c) That the property be transferred or delivered to the statutory manager:
(d) That any person who acquired or received the property, or his or her administrator, shall pay to the statutory manager a sum not exceeding the value of that property.
(2) For the purpose of giving effect to any such order, the Court may make such further order as it thinks fit.
(3) No order made pursuant to this section shall deprive any other person of any estate or interest in the property if the estate or interest was acquired in good faith and for valuable consideration.
(4) Nothing in this section shall restrict the operation of the Companies Act 1955."
Counsel advised that there had been no cases on s 54 although in the decision of Wallace J in Macdonald v Australian Guarantee Corporation (NZ) Ltd [1990] 1 NZLR 227 at 238 there is a passing reference to the Act "taking over where the ordinary law cannot cope and stronger measures are needed".
This, in my judgment, is a case in which it is legitimate to make reference to the passage of the Bill through the House. See New Zealand Maori Council v Attorney-General [1987] 1 NZLR 641, at 658, line 45, per Cooke P. The Rt Hon Geoffrey Palmer, Minister of Justice, when introducing the Bill said it had two broad purposes:
"The first is to enable action to be taken earlier in instances when a company is, or may be, operating fraudulently or recklessly. The second is to enable companies to be given a decent burial when ordinary remedies are inadequate. Clause 4 provides that the Bill is to apply to companies that are, or may be, operating fraudulently or recklessly; and is to apply when it is desirable to preserve the interests of shareholders, creditors, beneficiaries, or the public interest, and when ordinary remedies are
inadequate to preserve those interests." [Rt Hon G Palmer (1988) 492 NZPD 6494]
Later on the same day, towards the end of the debate following the introduction, the Minister again said:
"The Corporations (Investigation and Management) Bill is very important, because it will fill a gap in the law. That gap was demonstrated by recent events when companies collapsed. The Government has investigated precisely what powers exist for finding out about those companies and investigating them, what the Registrar of Companies could do, and the circumstances in which a statutory manager could be appointed. The purpose of the amendments is to streamline the procedures - to make them more efficient and effective so that the Government can ensure that the Companies Act is properly followed, that offences committed against it can be detected, and that people who abuse their positions in companies can be brought to justice." [Rt Hon G Palmer (1988) 492 NZPD 6513]
It is also interesting to note that during the debate there was specific reference to the Equiticorp collapse.
The Crown argues that the section is wholly inapplicable. I set out hereunder paragraphs
"12.4 The section is wholly inapplicable. It applies only to 'property'. That does not include money obtained on a settlement. 'Property' is not defined. Having regard to s 54(3) it must be real or personal property. There can be no estate or interest in funds, only in notes or coins. Further, s 54 implies that the same property continues to exist in the same form. But here the money has been applied to fund numerous governmental activities and the funds received no longer constitute an identifiable sum: the Court cannot gloss s 54 by tracing on the foundation of a statutory, as opposed to an ordinary, private trust.
The Crown further argued that if it be held that the settlement moneys constituted property then they had not "been improperly disposed of" (s 54(1)(b)). Furthermore, that as the Crown had "acquired in good faith and for valuable consideration" (s 54(3)) no order could be made.
The Plaintiffs argued that s 54 does apply and they made three points. First, it was said it was inconceivable that the legislature would not have intended money to be covered by s 54 since, in many if not most cases of corporate wrongdoing, it is the money of the company which is misapplied. The decision of the Court of Appeal in MacMillan Builders Ltd (In Liq) v Morningside Industries Ltd [1986] NZCA 81; [1986] 2 NZLR 12 was relied upon. In that case the Court had to consider s 311A(7) of the Companies Act 1955 which contained the words "recovery by the liquidator of any property or the value thereof". In the course of his judgment, Somers J considered whether property included money paid by the company. In his opinion it did for two reasons. The first being that one paragraph of the section referred to the "transfer or payment" of the property. His second reason was that it made sense for property in that context to include money. At page 16 of the report the judgment reads:
"There is no apparent reason why Parliament should have intended that relief may be accorded in respect of all forms of property save that most commonly used in commerce and most likely to be involved in cases under s 309 to which the earlier parts of s 311A certainly reach."
Secondly, the Plaintiffs submit that money is property. They rely upon the definition of personal property from Blacks Law Dictionary which supports the contention that, in its wider sense, property appears to include money. Thirdly, however, the Plaintiffs go on to point out that on settlement what the Crown received from AI4 was an assignment of bank deposits. The submission was made that such deposits are choses in action and clearly property.
On the facts of this case, the third point is unanswerable. That aside, however, giving the provision a "fair, large, and liberal construction and interpretation" as required by s 5(j) of the Acts Interpretation Act 1924, I uphold the Plaintiffs on the other two propositions as well. In particular, in company with Somers J in the MacMillan case, I consider Parliament cannot have intended to cover all forms of property "save that most commonly used in commerce and most likely to be involved" in cases under s 54, namely money.
Having reached the conclusion that s 54 of the Act has application to the circumstances before me, the issue then becomes whether or not it would be appropriate for me to exercise my jurisdiction pursuant to it.
Section 4(b)(iii) set out above on page 365 refers to "creditors and beneficiaries ... (who)
... cannot be adequately protected under the Companies Act 1955 or in any other lawful way" (emphasis added). As can be seen from my conclusions in Sections 2, 3 and 4 of this judgment, the Plaintiffs are in fact, in my judgment, adequately protected both by statute and the general law. In one sense, therefore, the necessity for the exercise of my discretion pursuant to s 54 does not arise. I have, however, adopted the general approach, with certain exceptions, of ruling on every claim made. I have so proceeded in order that should any conclusion reached be subsequently set aside the answers on the alternative or lesser claims would be available. Accordingly, and treating the statutory causes of action as alternatives to the primary claims, (particularly those advanced by AI4), in the sections of the judgment mentioned above it seems not inappropriate to rule on this claim.
I refer first to the provisions of s 54(3). Although, when receiving payment of
$327 million for the NZS/EHL Parcel the Crown clearly gave valuable consideration, nonetheless, on the view I take of the facts, the money was not "acquired in good faith". This is, of course, because the Crown knew in the sense of Baden (iii) and (v) that the moneys it was receiving were being provided in breach of s 62 of the Companies Act 1955 and therefore illegally. It also knew, if not actually then certainly in the Baden
categories (ii) and (iii) sense, that the transaction was so grossly improvident that the directors of AI4 could not possibly have had authority to enter into it.
Considering specifically the provisions of s 54(1)(a), I am satisfied that $222 million in round figures of the total purchase price of $327 million odd was acquired by the Crown in circumstances which cause it to be just and equitable that the Crown should hold that sum upon trust for AI4. The reason why it is "just and equitable" to so hold is because, in respect of $222 million, the Crown knew, in the sense already discussed above, that the moneys were being provided by EHL and its subsidiaries in breach of s 62. The other
$105,000,000, however, so far as the Crown knew was to come quite legitimately from an advance by Elders Merchant Bank.
I set out my reasons for holding that the Crown had that knowledge in detail in Section 2 of this judgment. In brief, however, the important points are that the potential for a breach of s 62 was brought into sharp relief at the commencement of the negotiations in mid-October 1987. The need to avoid breaches of s 62 surfaced more than once between then and the run-up to settlement in March 1988. Most importantly, also, on 11 March 1988 the Crown received from Equiticorp, a letter of that date, Image Number 425021 which is to be found at page 104 of Volume II of this judgment which put it squarely on notice that Equiticorp funds were, in all probability, being used and the Crown failed to investigate.
In reaching the conclusion, however, that those moneys should be held on trust for AI4 I propose to utilise the provisions of s 54(2) and make further orders which, in my view, are necessary to do justice between the parties. At the time the Crown received the money it transferred to AI4 the NZS/EHL Parcel, the value of which I have held earlier in this judgment (2.17, Volume IA) to be $69,750,000. AI4 also enjoyed dividends of
$3,700,000 during the period it held those shares. Commonsense and fairness require that those amounts should be brought to account by way of set-off or deduction before the
trust property is accounted for. Additionally, as is also recorded elsewhere in this judgment, as a consequence of a Deed of Settlement entered into with all parties, including some sixteen parties who settled before this action got under way, the final recovery after the above reductions is to be further reduced by $64,000,000.
Set out as a simple calculation the position then is as follows:
Moneys to be held on trust by the Crown
for AI4 pursuant to s 54(1)(a) $222,224,013 Less value of shares at time of sale
|
and dividends received
|
73,450,000
|
|
Less allowance pursuant to Settlement
|
$148,774,013
|
|
Deed
|
64,000,000
|
|
Net recovery
|
$84,774,013
====== |
The matter, however, can also be looked at in terms of s 54(1)(b). In that regard, the Plaintiffs have argued that the directors of AI4 acting outside their authority in committing the company to what was a grossly improvident transaction "improperly disposed of" its property, namely, $327 million.
I have reached the conclusion, however, that I am not prepared to exercise my discretion pursuant to s 54(1)(b). Were I to do so, the Plaintiffs' recovery on the gross improvidence ground would, of necessity, be $105 million higher than recovery under s 54(1)(a). But, as mentioned above, $105 million of the purchase moneys were, so far as the Crown was aware, coming from Elders.
It would not be just and equitable, in my judgment, for the gross improvidence aspect of the matter to result in a higher recovery than the breach of s 62 illegality. As explained
above, the s 62 issue was on the table right from the start and remained in the picture throughout. The improvidence aspect of the matter, however, did not crystallise until AI4 was nominated by BWL to complete the transaction. Up until that nomination there was no question of the transaction being described as grossly improvident. On the contrary, at the time that the Underwrite Agreement between BWL and the Crown was entered into, the price which BWL agreed to pay on the repurchase of the NZS/EHL Parcel was completely reasonable and only ceased to be so after the crash. It was only when informal advice was given on or about 11 March 1988 that AI4 would be the nominee purchaser that the Crown was alerted to the fact that a new company was about to commit itself to a purchase which was by then, for it, demonstrably grossly improvident. Furthermore, the informal notification was not confirmed by a formal nomination until 17 March 1988, which left barely twenty-four hours or less before settlement was due to take place. So the Crown's failure to react in respect of the unauthorised conduct by the delinquent directors of AI4 was significantly less culpable in respect of improvidence than it was in relation to the breaches of s 62 and the consequent illegality. So far as the money had and received claims are concerned, they, of course, rest upon a breach of s 40, but the Crown had no way of knowing that. Furthermore, as the cause of action itself does not require proof of fault, exercise of the discretion in respect of it would be inappropriate.
My conclusion, therefore, so far as AI4 is concerned, is that, in addition to the other causes of action upon which I have held it succeeds, it succeeds also on the claim made pursuant to s 54(1)(a) of the Corporations (Investigation and Management) Act 1989 to the extent of $84,774,013, as set out above.
EHL also has a statutory trust claim at J.2.2. The claim is in two parts. In the first part, EHL claims the full purchase price of $327,224,013 on the basis that it suffered that loss by its own contribution and those made through its subsidiaries, including AI4. As explained in 3.12, when dealing with EHL's illegality claims, however, a holding
company cannot claim direct against a defendant the losses which have been suffered by its wholly or partly-owned subsidiaries. The first claim by EHL therefore fails.
The second claim is for EHL's direct contribution in the form of the fee of $32.5 million. In respect of this claim, and the two claims by EIGL at J.1.3 and J.1.3A, however, I decline to exercise my discretion. As can be seen from my treatment of AI4's claim, I consider that relief pursuant to s 54 of the Corporations (Investigation and Management) Act in the circumstances of this case requires that the value of the NZS/EHL Parcel, which the Crown parted with when receiving payment, and the dividend earned on those shares, should be taken into account. That is not possible on the individual claims of EHL and EIGL for their original contributions or EIGL's refinancing. For that reason, relief is refused on all claims save that of AI4 as recorded above.
SECTION 6: EIGL'S CLAIMS BASED UPON UNJUST ENRICHMENT AT J.1.2B
In addition to its claims against the Crown as a knowing recipient, dishonest assister, and on the basis of illegality, money had and received and statutory trust, at J.1.2B of the Sixth Amended Statement of Claim, EIGL also pleads unjust enrichment as a cause of action against the Crown. EIGL is the only Plaintiff to base a cause of action solely on unjust enrichment, as distinct from an already established cause of action which has the principle of unjust enrichment as its underlying basis.
In paragraphs 177B and C of the Sixth Amended Statement of Claim EIGL pleads as follows:
"177B. BY reason of the matters referred to at paragraphs 174-174B above, to deny EIGL the right to assert against other parties, including the Crown, all of the rights and remedies of EAL, ET, EFGL and EFSL would unjustly enrich those companies and the Crown at the expense of EIGL.
177C. IN the premises the Crown is liable to compensate EIGL for the loss and damage which it suffered by virtue of refinancing EAL, ET, EFGL and EFSL in the sum of $124,191,359 as pleaded in paragraph 176."
Paragraphs 174-174B set out the facts relied on to establish EIGL's claim to be subrogated to EAL's, ET's, EFGL's and EFSL's rights and remedies against the Crown. Thus EIGL relies upon the same facts to establish its cause of action based on unjust enrichment as it does to be subrogated to the rights of the initial funders it refinanced. This is hardly surprising as the form of subrogation relied upon by EIGL is that which Lord Diplock described in Orakpo v Manson Investments Ltd [1976] 3 All ER 1, 7 (HL) as "an empirical remedy to prevent a particular kind of unjust enrichment".
The House of Lords emphatically recognised the principle of unjust enrichment in Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 512, 532-536. In that case Lord Goff accepted that the solicitors' claim for money had and received was "founded upon the unjust enrichment of the club, and can only succeed if, in accordance with the principles of the law of restitution, the club were indeed unjustly enriched at the expense of the solicitors". His Lordship made the point that the concept of unjust enrichment is one based on legal principle and cannot be invoked, or refused, simply because a court thinks it unfair or unjust in the circumstances. However, while Lord Goff recognised unjust enrichment as the underlying principle behind recovery in the law of restitution, he did not confer upon it the status of a cause of action.
Just over a year later Lord Browne-Wilkinson, in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70, 196-197 said:
"Although as yet there is in English law no general rule giving the plaintiff a right of recovery from a defendant who has been unjustly enriched at the plaintiff's expense, the concept of unjust enrichment lies at the heart of all the individual instances in which the law does give a right of recovery."
The High Court of Australia has similarly recognised unjust enrichment as a "unifying legal concept" (Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221, 256-7 per Deane J) without embracing it as a cause of action in its own right. Dawson J in David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353, 406 said:
"Whilst unjust enrichment does not of itself constitute a cause of action, it provides a 'unifying legal concept' and serves to mark out the defences to claims in restitution."
In the same case, Mason CJ, on behalf of himself, Deane, Toohey, Gaudron and McHugh JJ, rejected a submission which he described as proceeding "from the view that in Australian law unjust enrichment is a definitive legal principle according to its own terms and not just a concept" (supra at 378).
I have already held that AI4, suing as a constructive trustee, is entitled to recover against the Crown on the basis of knowing receipt, dishonest assistance, illegality, money had and received and statutory trust. EIGL, while not able to trace its money at common law has succeeded on its claims for knowing receipt, dishonest assistance and illegality, as has EHL, subject of course to the principle that there can be no double recovery. It follows that, whether or not EIGL is entitled to maintain a cause of action solely on the basis of unjust enrichment, the Plaintiffs will not be without a remedy. In those circumstances, given that the case law has not yet developed to a point where it can be stated that unjust enrichment is a cause of action, as opposed to the unifying principle behind restitutionary claims, it would not be appropriate for me in this case, at first instance, to take that further step. I hold that there is no cause of action upon which EIGL can advance its claims in J.1.2B.
SECTION 7: CROWN DEFENCES
The Crown's defences are pleaded in paragraphs 85 to 100 of its Third Amended Statement of Defence which is the pleading it went to trial on. Additionally specific defences, relating to particular causes of action, were argued as that cause of action was dealt with. By the end of the case the Crown had raised some eleven defences, namely clean hands, validation under the Illegal Contracts Act, estoppel, s 18C of the Companies Act, ratification, bona fide purchaser for value without notice, change of position, counter restitution, causation, apportionment and contributory negligence. Although some of these are technically not defences or only arise after liability has been established, they may be conveniently grouped together under the general heading "Crown Defences". I have already dealt with some of the defences raised in other portions of the judgment. In the case of those defences this section will simply refer to the appropriate place in the judgment where my reasoning will be found. The remaining defences will be dealt with in more detail.
7.2 Clean Hands
This defence was put forward by the Crown as one that would defeat all the Plaintiffs' causes of action. The essence of the defence is that EIGL and the other Plaintiff companies should be barred from obtaining any remedy against the Crown because those who come to equity must come with clean hands. The Plaintiffs, the Crown submitted, do not have clean hands because they planned and implemented the funding and knew it to be grossly improvident and likely to be illegal. In 1.5 I concluded that the clean hands defence failed primarily because it was the delinquent directors who were responsible, not the Plaintiff companies which were themselves victims of their directors' wrongdoing.
7.3 Validation
In paragraph 85 of the Third Amended Statement of Defence the Crown pleaded:
"If any part of the contract or arrangements constituting the sale of the NZS/EHL Parcel from the Crown to AI4 is held to be illegal (such illegality being denied), the Crown is entitled to and seeks validation of the whole contract, or such part as is held illegal, pursuant to section 7 of the Illegal Contracts Act 1970."
Section 7 (3) provides:
"(3) In considering whether to grant relief under subsection (1) of this section the Court shall have regard to -
(a) The conduct of the parties; and
(b) In the case of a breach of an enactment, the object of the enactment and the gravity of the penalty expressly provided for any breach thereof; and
(c) Such other matters as it thinks proper; -
but shall not grant relief if it considers that to do so would not be in the public interest."
As can be seen s 7(3) sets out the criteria to which regard must be had when considering validation. These are the conduct of the parties, the object of the enactment, gravity of any penalty provided for, such other matters as the Court thinks proper and whether it would be against the public interest to grant relief.
Conduct of the parties
The Crown and the Plaintiffs clash on the question of conduct. The Crown says the very companies which are seeking recovery are those which advanced the moneys
and knew, or had access to knowledge, showing AI4 was EHL's nominee. The Plaintiffs, on the other hand, say those companies were in the hands of wrongdoers who were acting adversely to their interests and whose acts and knowledge should not be imputed to them. The argument here is reminiscent of the Crown's clean hands submission which I rejected at 1.5 of the judgment. Where a company has been under the control of delinquent directors then that party's conduct, while under such control, should not of itself prevent recovery.
The Crown submits that AI4 delayed unduly before complaining and thereby benefited from the ownership of the NZS/EHL Parcel for some months, whereas had it lodged a claim immediately relying on illegality the issue could have been resolved while EHL shares still had some value. Given the complexities of this case, I am not prepared, on the grounds of delay, to hold AI4 should be precluded from having its property returned to it. As AI4 is a company, and can therefore only act in circumstances such as these through its Board of Directors or shareholders in general meeting, it will invariably be slower to respond to such a situation than a natural person. As Lord Blackburn observed in Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas. 1218 at 1282:
"Those who deal inequitably with a company know that it must necessarily be slow in its proceedings, and are not entitled to complain that time elapses."
In any event, counter-restitution with valuation of the shares at the time of settlement and credit for the dividend received substantially removes any prejudice occasioned by delay.
The Crown had actual knowledge in October 1987 that there was a s 62 issue. It claims to have believed then, falsely as it turned out, that this problem had been resolved, but as I have recorded earlier, within a week it had at least constructive
knowledge, through its agents Clatworthy and Holyman, that the BWL Takeout Deed had been executed. There were further strong warning signs, as the matter progressed, that the issue was still alive, culminating in the 11 March letter which raised the issue again in such circumstances that it could not be ignored. I have held that in that regard the Crown acted recklessly and wilfully.
In those circumstances I reject as untenable Mr Mathieson's submission that what occurred was no more than a technical breach. There was a deliberate choice on the part of the Crown not to inquire as to the source of the money, when the circumstances clearly called for it.
The object of the enactment
In Harding v Coburn [1976] 2 NZLR 577, 584-585 Cooke J (as he then was) said:
"In practice validation might well be out of the question if it would produce a result contrary to the object of another enactment. It is no part of the purposes of the Illegal Contracts Act to undermine the social or economic policies of other measures."
Tipping J, for the Court of Appeal, in Vujnovich v Bank of New Zealand (1993) 6 NZCLC 68,459, 466 (CA) identified the primary points with which s 62 is concerned as:
1. any unauthorised reduction of capital or like detriment to the company; and
2. potential prejudice to creditors or other shareholders.
See also NZI Bank Ltd v Euro-National Corporation Ltd [1992] 3 NZLR 528, 547 per Richardson J and Porirua Concrete Products Ltd v Reeve (1983) 3 BCR 512, 520- 521 per Eichelbaum J.
The Crown argued that the objects of s 62 would not be frustrated by validation of the contract as the Crown was neither the provider nor receiver of financial assistance in breach of s 62. Counsel submitted it did not benefit from the breach of s 62, rather it benefited from getting the funds from AI4. Furthermore, AI4 was the purchaser of the NZS/EHL Parcel and protection of purchasers is not among the objectives of s 62. Finally it was submitted no return of capital was involved.
The Plaintiffs, on the other hand, argued that validation would make sense only if the Court were prepared to condone the retention of the moneys the Crown received under the contract, despite their being sourced from the Equiticorp Group. That, it was said, would be to validate a transaction in a way directly contrary to the policies intended to be promoted. In particular, the Plaintiffs submitted, validation would sanction the return of capital, at vastly inflated values, to one shareholder, the Crown, to the prejudice of the other shareholders and creditors of EHL and its subsidiaries. That is, it would be returning capital at the rate of $3.52 per share when the market value was only 90c and even that was artificially propped up by an illegal share support scheme.
In my judgment, the contract clearly prejudiced the shareholders and creditors of EHL and its subsidiaries. It also obviously reduced the capital of EHL and its subsidiaries. Therefore to validate would be contrary to the objects of s 62.
In relation to the Crown's submission that AI4 was a purchaser, it is true that protection of purchasers is not one of the objectives of s 62 (see Porirua Concrete Products Ltd v Reeve, supra at 521). But, as was held earlier at 1.6, AI4 was also a subsidiary of EHL. As such it was intended to be protected by s 62 which prohibits a subsidiary company providing financial assistance for the purchase of shares in its holding company. Even if that were not the case, the extent to which the creditors,
shareholders and EHL itself, were prejudiced by this transaction means inevitably that validation would still be contrary to the objects of the enactment.
Expanding upon the third point, that there was no return of capital to the Crown, Mr Mathieson, in the Crown's reply, said: (p 23)
"A 'return' of capital to a shareholder necessarily requires a transaction in which capital funds are transferred in such a way that the company and that shareholder are parties to the transfer. The payment(s) may be indirect, but there must be a transaction 'between a company ... and any of its members by means of which any of the money paid to the company is returned to him.' See cases approvingly quoted by Harman J in Barclays Bank case at 23. 'There has to be a transaction between a company and a shareholder': per Lord Watson in Trevor v Whitworth 12 App Cas 409,
523. Otherwise if the company purchased an asset from a non-shareholder B, and B used the proceeds to purchase a different asset from shareholder C, this would be held to constitute a return of the company's capital to C. That would be absurd. The result of upholding the plaintiffs' submissions on the subsidiaries -> AI4 -> Crown chain, is, however, no less absurd. The funds were not returned to the Crown, they were 'advanced' to AI4."
This submission was obviously made on the assumption AI4 was not a subsidiary of EHL. My finding referred to above means there has been a return of capital to the Crown. But even if there had been no return of capital to the Crown, the shareholders and creditors of EHL were still prejudiced by the transaction.
Gravity of penalty
The modest nature of the $200 penalty for breaches of s 62 is an unreliable indicator. As Richardson J said in NZI Bank Ltd v Euro-National Corporation Ltd [1992] 3 NZLR 528, 547:
"Considered on its own a fine of $200 may suggest that offending s 62 is not a matter of great gravity. But a higher penalty payable by the company and so depleting its funds would strike at those for whose protection the prohibition was enacted. Further, the real sanction against wrongdoing and the real protection for shareholders and creditors is that
the impugned arrangement is of no effect unless the Court grants relief under the Illegal Contracts Act."
Other matters as the Court thinks proper
The Crown identified the impossibility of meaningful restitutio in integrum unless the contract was validated as being a consideration under this heading. But, as my detailed discussion of counter-restitution to be found at 2.17 shows, there is jurisdiction to direct the payment of a monetary equivalent in lieu of counter- restitution in specie. By that means the parties are restored to their original positions and practical justice is done between them. It follows that validation is not necessary, and because of the Crown's conduct would be inappropriate.
Public interest
The considerations under this head tend to merge with considerations of the object of the enactment. See Lower Hutt City Council v Martin [1987] NZHC 75; [1987] 1 NZLR 321 at 327 where Heron J said:
"in general terms to validate a contract contrary to the object of a statute must, I consider, involve matters of public interest."
Similarly, Richardson J, in NZI Bank v Euro-National Corporation Ltd seemed to treat the object of the enactment and the public interest as being substantially the same.
The Crown argued that as validation will not undermine the social or economic policies that s 62 used to serve it could not be contended relief by way of validation would not be in the public interest. At p 80 of the Crown's closing it was stated:
"Here, the effect of validation would not be to sanction an undesirable reduction in the capital of a company. The effect is rather to preclude imposing liability on the Crown for a technical illegality which would enable the losses suffered as a result of the Equiticorp collapse (itself the product of the sharemarket crash, bad managerial decisions and no doubt other factors, over none of which the Crown had any control) to be reallocated to a party who was a stranger to the illegal scheme."
I am satisfied it would not be in the public interest to validate. Not only would it be contrary to the objects of s 62 but, as already recorded, this was not a technical illegality. The Crown deliberately chose not to investigate the source of the funds. For the court to validate such a wilful breach would be to condone dishonest and commercially unacceptable conduct.
Any suggestion that the repeal of s 62 has in some way affected the public interest fails in my view. The Plaintiffs argued the social and economic policies behind s 62 are still relevant in the new companies legislation. Whether or not this is so I must apply the law as it stood when these transactions occurred. Professor Coote, in an article entitled "Validation Under the Illegal Contracts Act" in (1992) 15 NZULR 80, 99, discussing validation in cases where the relevant provision had been repealed before the matter reached the courts, commented the repeal seems not (at least overtly) to have affected the result. He said:
"Had it been otherwise, the court would have been using the validation power to achieve a retrospective repeal which the legislative body itself had chosen not to make."
Conclusion
For all the reasons set out above I am not prepared to validate in this case.
7.4 Estoppel
At paragraphs 87 - 96 of the Third Amended Statement of Defence the Crown as a further defence contended that AI4, EAL, EIGL and EAL/ET should be found to be estopped from asserting, or denying a number of critical elements of their causes of action. These are conveniently summarised at paragraph 16 of the Crown's opening submissions as follows:
"16.4 The Crown contends in each case that the plaintiff companies and EAL are estopped from:
1. Asserting that AI4 was a subsidiary of EHL.
2. Asserting that AI4 was acting for or as a nominee for the Equiticorp group.
3. Asserting that any of the EHL, EIGL or AI4 directors breached their fiduciary duties.
4. Denying the legality of the supplemental arrangements.
5. Denying the authority and bona fides of the directors of EHL, EIGL and AI4.
6. Denying the legality of the nomination of AI4.
7. Denying the legal and beneficial ownership of AI4 of the $327 m prior to assigning the deposits to the Crown.
8. Denying the authority and bona fides of the purchase by AI4 of the NZS/EHL Parcel.
9. Asserting the improvidence of the acquisition of AI4 of the NZS/EHL Parcel.
10. Denying that the Crown received good and clear title to the
$327m."
The representations relied upon are set out in detail at paragraphs 88.2 and 93.2 of the Third Amended Statement of Defence.
Although today there is less emphasis on strict criteria, there are still three elements which must be present to establish an estoppel:
(i) The creation or encouragement of an expectation or belief;
(ii) A reliance by the other party; and
(iii) Detriment as a result of that reliance.
See A-G of Hong Kong v Humphrey's Estate (Queen's Gardens) Ltd [1986] UKPC 58; [1987] 1 AC 114 at 123-4. In Goldstar Insurance Co Ltd v Gaunt (1992) 7 ANZ Insurance Cases 777,393 at 396 the Court of Appeal said:
"The judgments in Gillies v Keogh (supra) disclose a tendency to depart from strict criteria and to direct attention to overall unconscionable behaviour. It nevertheless remains clear that before judgment can be given against a defendant on the grounds of estoppel, some action, or representation, or omission to act, must have been carried out by, or on behalf of, that defendant causing the plaintiff to have acted in a manner causing loss. "
The Crown submitted "the facts and circumstances of this case fit exactly within the principles laid down in the above cases and authorities". The Plaintiffs responded first, the Crown cannot raise an estoppel because that would have the effect of validating illegal and void transactions. Secondly, that the Crown had not made out all the elements of the defence. Specifically, it had failed to establish the Plaintiffs had made unambiguous representations and that the Crown had relied upon those representations. I will consider whether the defence is made out before turning to the illegality point.
Did the Plaintiffs make the alleged representations?
Addressing this point Miss Winkelmann said: (T/14833-34)
"The plaintiffs submit the Crown has not shown that each of the plaintiffs made the alleged representations. At best, the Crown has shown only that the directors made those representations. The plaintiffs submit:
(a) that there were no representations made to the Crown by or on behalf of EIGL, the Crown simply had no dealings with EIGL; and secondly, the directors and agents of the plaintiffs had no authority to represent to the Crown that the transactions and payments were lawful, within their authority and bona fide. Those representations were all part of an overall scheme which was dishonest and was a fraud on the plaintiffs. In those circumstances, the actions of the directors and agents are not to be imputed to the plaintiffs.
That point, Your Honour, is really just another expression of the principle in Belmont Finance, which is that the acts and statements of wrongdoing agents are not to be imputed to their principals."
On the same page in response to a question from the bench Miss Winkelmann added:
"This is just another form of the dirty hands defence here. The question is whether the Crown can identify the actions of the wrongdoing directors with the plaintiffs, and we say, no, it can't."
I have already held the Plaintiffs are not prevented from bringing this action on the grounds of unclean hands. Similarly, the Plaintiffs are not bound by the directors' knowledge and actions in relation to any estoppel point. In my view, such representations as are relied upon by the Crown were made without authority by delinquent directors, and as such do not estop the Plaintiffs asserting their falsity.
Did the Crown rely upon the representations?
The Plaintiffs submitted the Crown had knowledge, actual or constructive, of the circumstances such that it could not be said to have relied on the alleged representations.
Constructive knowledge of the real circumstances, as well as actual knowledge, will prevent an estoppel. Spencer Bower and Turner in The Law Relating to Estoppel by Representation (3rd ed 1977), pp 132-135 discuss three types of constructive knowledge which may be sufficient to defeat the establishment of an estoppel: matters of general or local notoriety, the imputation to a principal of his or her agent's knowledge and the doctrine of notice. I have earlier (2.11) expressed my agreement
with the statement on imputation of knowledge found in Spencer Bower and Turner. I concluded there that the knowledge of Messrs Ratner, Clatworthy and Holyman was to be imputed to the Crown. Other relevant knowledge was, of course, held by various officials in Treasury and Trade and Industry. The Crown therefore knew that the probability was that the purchase of the NZS/EHL Parcel was to be effected with Equiticorp moneys. That knowledge prevents the Crown from relying upon any representations assumed to have been made by the Plaintiffs, and prevents the establishment of an estoppel against them.
In conclusion, then, the Crown in my judgment has failed to prove the elements necessary for an estoppel: it was the delinquent directors, and not the Plaintiffs who made the representations, and the Crown cannot be said to have relied upon them. In the circumstances it is unnecessary for me to express a view on the illegality submission but out of deference to counsels' submissions I will address it briefly.
Is Estoppel available if it will effectively validate illegal transactions?
The Plaintiffs submitted that the Crown is unable to raise the defence of estoppel, in three categories of claims, because it would validate ultra vires or illegal contracts or transactions, or the exercise of ultra vires or illegal powers. They are:
(i) The AI4 contract with the Crown and the payment of $327 million thereunder because it was ultra vires and illegal, and a reduction of capital.
(ii) The $32.5 million payment by EHL because it was ultra vires, being a corporate gift and a return of capital to shareholders.
(iii) The original funding and refinancing claims as the funding provided by the Equiticorp companies was illegal.
Reliance was placed on Spencer Bower and Turner pages 138-141 where illegality is discussed. The following passages are found on page 139:
"Just as it is a good affirmative defence to an action on a contract that it cannot be performed without directly contravening the provisions of a statute and that, by enforcing it or otherwise judicially treating it as valid, any court would be sanctioning and condoning such contravention, so also it is a good affirmative answer to a case of estoppel by representation that any closure of the representor's mouth would result in a like judicial recognition of, and connivance at, a statutory illegality. The private rights and interests of an individual must yield in such circumstances to the higher rights and interests of the State. In accordance with these paramount considerations of public policy, it has been held that no estoppel can be allowed which will preclude the representor from asserting, and bringing to the notice of the court, the statutory illegality of such acts, proceedings, and instruments as are sought to be validated by the estoppel put forward.
So no assumptions of powers which are ultra vires of any person officer or corporation can be validated by the process of raising an estoppel against him who assumes them. A contract ultra vires a statute (for example) cannot be validated by an application of an estoppel "
After giving other examples of the Courts refusing to allow the operation of an estoppel to by-pass an illegality, the learned author says: (at page 141)
". it is well established that it is impossible in law to suggest any principle
which will preclude a party from alleging the invalidity of that which a statute has, on grounds of general public policy, enacted shall be invalid."
Re Burton, Smith v Montgomery [1938] NZGazLawRp 80; [1938] NZLR 637, 643 is among the cases cited as authority for the above proposition. In that case Callen J said:
"The doctrine of estoppel cannot be successfully invoked to escape from direct statutory prohibition so as to render legal what Parliament has said is to be illegal."
See also Laws NZ Estoppel para 59 and cases cited there.
In New Zealand this rule is emphasised by s 7(7) of the Illegal Contracts Act 1970 which states:
"Subject to the express provisions of any other enactment, no Court shall, in respect of any illegal contract, grant relief to any person otherwise than in accordance with the provisions of this Act."
The Crown, in its reply, submitted the Plaintiffs failed to distinguish between the validity and lawfulness of the BWL Underwriting Agreement, and other facts, such as that in acquiring the NZS/EHL Parcel AI4 was acting as EHL's nominee.
I confess I have difficulty in discerning the difference between estopping a party from asserting that a transaction is illegal or ultra vires, and estopping a party asserting that the facts are other than represented, when the true facts are the cause of the illegality or ultra vires of the transaction. Take the AI4 contract with the Crown. The Crown does not suggest AI4 is estopped from raising the fact s 40 was breached. Rather, it is submitted AI4 is estopped from arguing it is a subsidiary of EHL. Even though the estoppel takes effect one step earlier in the chain of reasoning it still has the same effect, namely AI4 would be unable to argue the transaction breached s 40. This violates the rule that a party cannot achieve by estoppel what s/he could not otherwise legally accomplish. The Crown's argument that this is a case of preventing a subsequent illegality from being asserted and that that is different from preventing the Plaintiff asserting the illegality of the contract is, in my view, untenable.
7.5 Section 18C of the Companies Act 1955
At paragraph 99 of its Third Amended Statement of Defence the Crown pleads that s 18C of the Companies Act prevents the Plaintiffs from asserting that the
transactions surrounding AI4's purchase of the NZS/EHL Parcel were invalid or unlawful due to the directors of EIGL, EHL and AI4 breaching their fiduciary duties and acting in an unauthorised way. I note that while the Crown referred to all the Plaintiff companies in their pleadings they only put the defence forward in relation to AI4 and EHL in their opening and closing submissions.
Section 18C provides as follows:
"(1) A company or guarantor of an obligation of a company may not assert against a person dealing with the company or with any person who has acquired any property, rights, or interests from the company that -
(a) The memorandum or articles of the company have not been complied with:
(b) A person named in the particulars sent to the Registrar under section 200 of this Act as a director or secretary of the company -(i) Is not a director or secretary of the company, as the case may be; or
(ii) Has not been duly appointed; or
(iii) Does not have authority to exercise a power which a director or secretary of a company carrying on business of the kind carried on by the company customarily has authority to exercise:
(c) A person held out by the company as an officer or agent of the company -(i) Has not duly been appointed; or(ii) Does not have authority to exercise a power which an officer or agent of a company carrying on business of the kind carried on by the company customarily has authority to exercise:
(d) A person held out by the company as an officer or agent of the company with authority to exercise a power which an officer or agent of a company carrying on business of the kind carried on by the company does not customarily have authority to exercise, does not have authority to exercise that power:
(e) ... :
(f) ... -
unless that person knows or by reason of his position with or relationship to the company ought to know of the matter referred
to in paragraphs (a), (b), (c), (d), (e), or (f), as the case may be, of this subsection."
At paragraph 16.36 of its opening submissions the Crown set out those matters in relation to which it submitted the Plaintiffs could not assert that the directors lacked authority as follows:
1. The unwind letter sent by EHL;
2. The execution of the Deed of Nomination by AI4;
3. The Notices of Assignment delivered by AI4 to the various financial institutions, directing the assignment of deposits in AI4's name to the Crown; and
4. The purchase of the NZS/EHL Parcel by AI4 pursuant to the obligations contained in the BWL Underwriting Agreement.
The Crown particularly relied upon s 18C(1)(c), (which prevents a company asserting a person held out as a director lacks the customary authority of a director) and s 18C(1)(d) (which prevents a company asserting a director lacks unusual authority where that director has been held out as having authority to do an unusual act). It was submitted the annual reports of EHL and EIGL provided examples of these companies holding out their respective directors as properly authorised. AI4, the Crown argued, had held Messrs Hawkins and Darvell out as properly authorised directors by permitting them to witness the sealing of the Deed of Nomination on behalf of AI4.
Section 18C(1)(c) (Customarily authorised)
The Plaintiffs accept that the directors were held out, but argued that no estoppel operated in terms of s 18C(1)(c) as the transactions did not involve the exercise of powers directors would customarily have. At paragraph 57.14 of the Plaintiffs' closing submissions it was submitted:
"A director will not customarily have power to commit the company:
(a) (In the case of AI4 and EHL) to a void, dishonest, illegal and grossly improvident transaction.
(b) (In the case of EIGL and the other funding companies), to a dishonest, illegal and grossly improvident transaction."
Whether or not a transaction involves the exercise of a power directors customarily have, may depend upon how one defines the transaction. If, in this case, it is simply defined as the purchase by one company (AI4) of the shares in another (EHL), then, undoubtedly, this is a power directors of investment companies such as AI4 would customarily have. The answer is different, however, if one describes the transaction with more particularity; namely the purchase of shares, at approximately four times their market value (improvidence), by a subsidiary in its holding company (thereby breaching s 40), with the financial assistance of the holding company and other subsidiaries of the holding company (thereby breaching s 62).
That kind of detailed approach was espoused by Atkin LJ in AL Underwood Ltd v Bank of Liverpool [1924] 1 KB 775, 796. Underwood, the sole director of the company, fraudulently endorsed cheques belonging to the company and paid the proceeds into his personal bank account. He had authority to endorse cheques. Atkin LJ did not define the transaction simply as endorsing cheques, but rather as "using the proceeds of the cheques in question to pay his own private debts".
The directors of AI4, on the view I take of the matter, breached the Companies Act, entered into illegal contracts, and acted improvidently. In so doing, in my judgment, they were not exercising powers customarily held by directors. The correctness of applying Atkin LJ's approach is brought home when one reflects that s 18C, as a statutory form of estoppel, cannot have been intended to be used as a mechanism to circumvent the explicit prohibitions of ss 40 and 62 of the Companies Act.
For the sake of clarity it is perhaps desirable to mention that the writing of the EHL unwind letter was the exercise of a power customarily held by directors.
Section 18C(1)(d) (Not customarily authorised)
The Plaintiffs further submitted that no estoppel could operate by virtue of s 18C(1)(d) (unusual authority) as first there had not been a holding out that the directors of the Plaintiff companies had authority to exercise a power such a director would not customarily have. They also submitted that in any event, even if there had been such a holding out, a director could never have authority to commit a company to an illegal and grossly improvident transaction, as the company itself could not properly enter into such a transaction.
Unlike s 18C(1)(c), where the mere carrying on of the company's business by officers and agents is generally a sufficient representation of their authority, s 18(1)(d) envisages the company (meaning officers or agents of the company having actual or ostensible authority) making particular representations of authority. See Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146, 178, where, discussing the position at common law (which s 18C has not altered in this respect), Brennan J (as he then was) said:
"In transactions other than those engaged in for the purposes of a company's business or otherwise for the benefit of the company, and in transactions where the officer or agent had purported to exercise an authority over and beyond the authority which an officer or agent in that position would ordinarily be expected to possess, a party seeking to bind the company by estoppel must rely on particular representations of authority made by the company - that is, officers or agents of the company having actual or ostensible authority to make those representations."
Thus a representation by the officer or agent concerned will not suffice. This is made clear by the House of Lords in Armagas Ltd v Mundogas SA [1985] UKHL 11; [1986] 1 AC 717. A Vice President of Mundogas purported, on behalf of Mundogas, to enter into a three year charter party with Armagas. It was accepted he did not have actual or ostensible authority to enter into contracts of this nature. However, it was argued he had ostensible specific authority to enter into this particular contract. Lord Keith of Kinkel said: (supra at 777-778)
"Mr Mangelssen [the Vice President of Mundogas] purported to conclude the charter party in Copenhagen on 19 June 1980, and may thus be taken to have made a direct representation of his own that he was empowered to do so. But no representation by Mr Mangelssen can help Armagas. They must be in a position to found upon some relevant representation by the responsible management of Mundogas as to Mr Mangelssen's authority."
The Deed evidencing AI4's acceptance of nomination as purchaser of the NZS/EHL Parcel of shares was sealed with the company's seal and witnessed by Messrs Darvell and Hawkins. In my judgment, however, that did not amount, in all the circumstances of this case, to a representation by AI4 that Messrs Darvell and Hawkins had authority to commit the company to an improvident and illegal transaction.
The Plaintiffs' second point was that a director could never have authority to commit a company to an illegal and grossly improvident transaction, since the company itself could not enter into such a transaction. In AL Underwood Ltd v Bank of Liverpool, in answer to a submission that Underwood was the sole director and as such entrusted with all the powers of the company, and could therefore do as he wished with the company's assets, Atkin LJ said: (supra at 796)
"If this means anything it means that a board of directors acting as such have actual authority to defraud the company by using the company's assets to pay debts due to butchers or moneylenders by the individual directors. Such an act is quite outside the class of acts - management of
the company's business - authorised to be done by the board. The directors, whether collectively or singly, have not actual authority to steal the company's goods."
If a transaction is outside a company's powers, as opposed to merely being outside a director's authority, s 18C, being directed at the authority exercised by officers and agents, cannot be used to validate the transaction. Therefore, like estoppel, s 18C cannot operate to prevent illegality being raised so as to indirectly validate an illegal contract. It seems that a company, may, however, if it goes about it the right way, specifically elect to enter into an improvident transaction.
The Proviso to Section 18C(1)
Although I have already set out s 18C(1) in full, for ease of comprehension, I repeat the proviso:
"unless that person knows or by reason of his position with or relationship to the company ought to know of the matter referred to in paragraphs (a), (b), (c), (d), (e), or (f), as the case may be, of this subsection."
The Plaintiffs submitted that the proviso prevented the Crown relying on s 18C as it knew or ought to have known the directors did not have authority to commit the Plaintiff companies to the transaction. The Crown, on the other hand, submitted that the "ought to know" limitation does not apply to it, as it only applies to a person who ought to know "by reason of his position with or relationship to the company".
The proviso does not appear to have been the subject of any detailed examination by the Courts in this country. It was referred to, but on the facts not applied, in Re Stream Investments Ltd (in liquidation) [1993] MCLR 411, 420.
There are several points of interpretation to be addressed at this juncture. First, what is meant by the phrase "position with or relationship to the company". Secondly, what degree of knowledge is required by the phrase "ought to know". Thirdly, what is the relationship between these two phrases.
"Position with or Relationship to"
Three possible meanings of the above phrase present themselves, there may well be more.
First, the words limit the "ought to know" portion of the proviso to company insiders. This is the view taken by Cynthia Hawes in an article entitled "Indoor Management and the Companies Amendment Act 1985" (1985) 2 CLR 341, 348-349. After discussing AL Underwood Ltd v Bank of Liverpool as an example of an outsider not being able to rely upon the indoor management rule at common law if circumstances meant there was an obligation to inquire, she said:
"A case of this kind would be decided differently as a result of the application of section 18C, if the word 'knows' is confined to express knowledge, because the circumstances which should have put the bank on inquiry were not related to 'its position with or relation to the company'. If this interpretation is correct, and the legislature intended to distinguish between outsiders and insiders in this way, the proviso gives a greater degree of protection to the outsider than did the common law."
This also seems to have been the view of Nicholson J in Lyford v Media Portfolio Ltd (1989) 7 ACLC 271, 281. He obviously thought it significant that the plaintiff in the case before him did not have any legal or non-arms-length connection with the defendant. He said:
"He was not a director, secretary, shareholder or employee of the first defendant to which relationship it is said sec. 68A(4)(b) extends: Ford Principles of Company Law (4th ed 1986) p. 102, para. 531."
Secondly, the words "or relationship to" extend the class beyond insiders, but limits it to those with an ongoing relationship. This was the view taken by Gleeson CJ (on this issue the other two Judges agreed with his conclusions and reasoning) in Story v Advance Bank Australia Ltd (1993) 10 ACSR 699, 710 CA(NSW). The Chief Justice said:
"The inquiry is whether that connection or relationship was such as ought to have produced the relevant state of knowledge. It is impossible exhaustively to state the facts or circumstances that might give rise to or involve a relevant connection or relationship. Obvious examples would be dealings between a company and a person who is a director or shareholder or employee.... However, the provision is not limited to such cases, and while it is necessary to attend to the language of the statute, it is unlikely that parliament intended a radical narrowing of the qualification to the common law rule.
It may well be that, in certain circumstances, the connection or relationship that ought to give knowledge of the relevant irregularity can arise out of the very dealing which is putatively affected by the irregularity. Here, however, there was no anterior connection or relationship, and the only connection or relationship that resulted from the dealing was that of mortgagor and mortgagee (and creditor and surety)."
Thirdly, a relationship will be created by a transaction or deal between the company and the person seeking to raise the proviso. This was the view of Kirby P in Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 53 a decision of the New South Wales Court of Appeal. The President said:
"In my opinion, s 68A(4)(b) of the Code does not necessarily refer to a pre-existing or ongoing relationship between a person and a company. The heading to the section, 'Exception where actual knowledge', confirms what otherwise appears in its text. This is that the primary concern of s 68A(4) of the Code is to remove the applicability of the various assumptions where the requisite knowledge actually exists. The purpose of the sub-section, understood in this way, is not promoted by over- defining the way in which such knowledge is received or by insisting that the knowledge may only come through certain limited relationships. The words 'connection or relationship with the company' should not be taken to mean a 'connection or relationship' necessarily going beyond the transaction or dealings the subject of the assumptions. Just as a person
may have 'dealings with a company' when there is no history of previous transactions between the parties, such a person can have a 'connection or relationship' with a company within the confines of a single transaction or set of dealings."
The Australian cases referred to above were discussing s 68A of the Companies Code, which is the trans-Tasman equivalent of s 18C. Like s 18C, it contains an exception which provides as follows:
"(4) [Exception where actual knowledge] Notwithstanding sub- section (1), a person is not entitled to make an assumption referred to in sub-section (3) in relation to dealings with a company if-
(a) he has actual knowledge that the matter that, but for this sub- section, he would be entitled to assume is not correct; or
(b) his connection or relationship with the company is such that he ought to know that the matter that, but for this sub-section, he would be entitled to assume is not correct,
and where, by virtue of this sub-section, a person is not entitled to make a particular assumption in relation to dealings with a company, sub-section
(1) has no effect in relation to any assertion by the company in relation to the assumption."
Obviously, the wording of the Australian exception ("connection or relationship with the company") differs from the way in which s 18C is expressed ("position with or relationship to the company"). It has been argued that as the concept of "connection" is broader than that of "relationship" s 18C should be construed more narrowly than the Australian exception. (Watts "Company Contracts and the Knowledge of Persons Dealing with Companies" [1994] CSLB 50)
While it is undoubtedly correct that a "relationship" requires a greater degree of interaction between the parties than a "connection" I am not persuaded there is anything in s 18C requiring that the concept of a "relationship" be limited to an inside relationship. I prefer the approach of Gleeson CJ, in Story v Advance Bank Australia Ltd (supra).
"Ought to know"
Neither the Plaintiffs nor the Crown addressed the meaning to be given to the words "ought to know". As with the phrase "connection or relationship" there has been a judicial difference of opinion across the Tasman as to the meaning to be given to these words. I have identified three different (or purportedly different) approaches.
The first, and seemingly most accepted, view is that these words differ from the common law concept of "put upon inquiry", and require something more. The Victorian Court of Appeal in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] VicRp 68; [1992] 2 VR 279, 359 said:
"Although s. 68A was undoubtedly inspired by the rule in Turquands Case and is in a sense a codification of it, the section does not incorporate the concept of being "put upon inquiry" and we are obliged to have regard to the assumptions, as defined by the section, which the respondents were entitled to make subject to the exceptions in sub-s. (4)."
See also Story v Advance Bank Australia Ltd (supra at 709-710); Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703, 712 per Studdert J; and Lyford v Media Portfolio Ltd (supra at 281).
The second view is that of Kirby P in Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48. He was of the opinion that s 68A(4) did not alter the common law at all, and "ought to know" meant the same thing as "put on inquiry". He rejected the submission (based upon the Brick and Pipe, Lyford and Fleetwood Star cases) that suspicious circumstances are of no moment under the Code, even though they would have put the person on inquiry under the common law. He said: (at p 54)
"The question of what activates the requirement of an inquiry is, in such cases, best answered by the common law. That law has evolved in line with the policy considerations mentioned above. It has produced rules as
to the circumstances in which the nature of a transaction or relationship is such as to put the person dealing with the company on inquiry. In my opinion, the requirement that something in the 'connection or relationship with the company' should activate the inquiry does not involve a test more restrictive than that which exists under the common law. It would take language more direct and clear than s 68A of the Code to exclude the operation of such basic common law principles."
The third view was propounded by Priestley and Clarke JJA who were the other members of the Court in Fiberi. They considered that the words "ought to know" required the Court to assess what a reasonably competent and prudent official in that particular situation would have either known or found out. Priestley JA, with whom Clarke JA concurred, said: (at pp 59-60)
"It is the third possibility [that the person in question would reasonably be expected, in the particular circumstances of that person in relation to the assumption being made, to know the true position about the matter assumed] which to my mind fits best with the context in which the words appear. This is particularly so because the matter which the person ought to know is something that he ought to know because of 'his connection or relationship with the company'. This seems to me to indicate that a judge considering whether s 68A(4)(b) applies to the facts of a case is required to look at the person in question, consider the full factual circumstances of that person's connection or relationship with the company in regard to the particular matter in question and then decide whether in those circumstances that person acting reasonably would know that true position about the matter assumed.
...
This approach recognises that the words 'connection or relationship' in s 68A(4)(b) should not be considered in an abstract way; that is, the approach should not be first to characterise the connection or relationship (as for example by classifying the person involved as the company's director, or solicitor or bank manager or mortgagee) and then to ask whether a person having that connection or relationship ought to know a particular matter. It is sufficient to see what the actual facts of the relationship between the person in question and the company were at the relevant time."
This approach meant Priestley JA did not have to consider whether the words "ought to know" incorporated the concept of being "put upon inquiry". However, he commented: (at p 60)
"The meaning of 'ought to know' in par (b) to my mind requires the court to assess what the person in the particular situation acting reasonably would have known, whereas the concept of being 'put upon inquiry' involves the court in asking were there features of the particular situation which required the person in question to make further enquires."
With respect, I have difficulty in discerning the difference between the approach of Kirby P and that of Priestley and Clarke JJA. What a reasonable person in those particular circumstances would have made it their business to find out should be the same as what would have come to light once a reasonable person was put upon inquiry. The reasonable person makes it his or her business to find something out because s/he is put upon inquiry.
Having considered these differing approaches I have concluded that the first is the correct one. Had Parliament intended to codify the common law position it would have simply enacted the settled and well understood rule that the indoor management rule cannot be invoked if s/he who would invoke it is put upon his/her inquiry (per Lord Simond's classic formulation of the exception in Morris v Kanssen [1946] AC 459).
The relationship between these two phrases discussed above
It is trite law that phrases such as these should not be interpreted in a vacuum and that the provision should be considered in the context of the Act as a whole.
The wording of s 18C conveys that what the person ought to know is determined by his or her position with, or relationship to, the company. Thus facts which would put a person on inquiry at common law are irrelevant unless they can be said to form part of the relationship between the person and company.
In my judgment, the relationship is to be defined having regard to its particular characteristics. This interpretation is supported by the words of the proviso which state "his ...relationship to the company". Thus facts obviously pointing to irregularities which come to light in the course of the relationship between the person and the company would satisfy s 18C whereas information obtained through other means, ie, through conversations or transactions with other people, would not.
Application of above conclusions on s 18C to the Crown's dealings with EHL and AI4
I deal with the unwind letter from EHL first. Even though the writing of a letter can be said to be the exercise of a power customarily held by directors, and therefore within s 18C(1)(c), I have held in Section 2 that the Crown had imputed knowledge that the BWL Takeout Deed had been executed and remained in place through its agents Holyman of Samuel Montagu and Clatworthy of BWL. That was directly contrary to the unwind letter and, as a consequence, the proviso comes into play and the Crown, by virtue of its "relationship" to EHL, "ought" to have known that the writing and delivering of it was not within the directors' authority.
Turning to the Crown's relationship with AI4. I have held the relationship was contractual in that AI4 sues on the basis of its relative title to the deposits. There were, of course, no initial negotiations between them because AI4 came into the relationship by means of BWL's nomination. In advance of formal nomination, however, the Crown received the Small letter of 11 March 1988 which gave it knowledge in the Baden (iii) and (v) senses that Equiticorp funding was involved. That, in my view, was clearly part of the relationship between the parties. As indicated above, the execution of the acceptance of the Deed of Nomination (which is Image Number 430038 at page 110 of Volume II) was not, in my judgment, sufficient to invest Messrs Darvell and Hawkins with authority to enter into an illegal and
grossly improvident contract and that was something the Crown knew, or ought to have known. Preparation of the Deed of Assignment of Deposits in the form in which it was finally executed resulted in further indications that all was not well. The Deed of Assignment of Deposits saga, it could be said, in fact assumes greater importance in the matter under discussion here than it did in the constructive trust: accessory and recipient issues. All this I have discussed in detail in Section 2.
The result is, therefore, that s 18C does not, in my judgment, prevent AI4 from asserting that the three matters referred to earlier, namely execution of the Deed, notices of assignment, and purchase of the NZS/EHL Parcel all constituted unauthorised acts.
There are two further points which must be made before moving to consider ratification.
The first is that my above conclusion is contrary to Mr Tompkins' final submission on s 18C, which was directed towards the policy of the section. At paragraph 16.43 of the Crown's opening submissions Mr Tompkins said:
"[I]f AI4 were now able to resile from the lawfulness of the transactions it entered into in March 1988, then any person dealing with any company would be in a hopeless position. If that person received from that company a sealed deed, or entered into with that company a contract of any form, where the contract was to be executed or done by persons ostensibly authorised by the company, they would have to pause and do at least two things:
1. ensure that their lawyers investigated the actual authority of the directors or persons purporting to act on behalf of the company, and obtained copies of the relevant minutes or resolutions of the company; and
2. retain a small army of accountants, economists and business consultants to assess whether, not from their own point of view but from that of the company with whom they were doing
business, the transaction was provident, commercially wise and businesslike."
I reject those submissions which, with respect, overstate the position and fail to take all relevant matters into account. Section 18C provides protection from uncertainty where there has been a holding out of authority except where, by reason of a party's position with, or relationship to, the company, it knows or ought to know differently. It is because there was no holding out of the AI4 directors as having unusual authority and because the Crown knew EHL's and AI4's directors were acting without authority, that the Crown cannot avail itself of the provisions of s 18C. The result in this case will not undermine the protection given by the section to honest people bona fide relying on ostensible authority.
The second point is that s 18D cannot help the Crown as it does not operate independently of , but rather as an explanation of, the applicability of s 18C. There must be a person falling within one of the paragraphs of s 18C(1) before s 18D will be activated. See Story v Advance Bank Australia Ltd (1993) 10 ACSR 699, 707.
7.6 Ratification
At paragraph 97 of its Third Amended Statement of Defence the Crown pleads inter alia:
"if it be held that the several directors of EHL, EIGL and/or AI4 (or any of them) breached their fiduciary duties and acted in a way which was unauthorised, ... then each of the plaintiffs ratified such acts subsequent to there having occurred."
This defence, of course, would only prevent the Plaintiffs asserting that the acts, transactions or omissions are invalid or unlawful as being in breach of duty and unauthorised. Ratification of an illegal act is not possible (Bowstead & Reynolds on
Agency (16th ed 1996) 2-056). Therefore the defence does not address the Plaintiffs' allegations of illegality for breaches of ss 40 and 62.
Particulars of the alleged acts of ratification are given in the remainder of paragraph 97, which I summarise as follows:
1. The EHL Board of Directors approved and ratified execution of the BWL Takeout Deed by EHL.
2. The various Boards did not query information or seek to unwind or have declared unlawful transactions which came to their attention, and at times approved board papers containing such information as:
3. EHL, EIGL and AI4 allowed and permitted their officers and employees to propose, plan and give effect to the initial funding of AI4 and the refinancing.
4. The companies permitted their directors, officers, employees and advisers to hold office and be involved with other companies involved in the financial transactions.
5. EHL and EIGL permitted AR Hawkins to operate companies within the Group without differentiating the individual interests of each, and in ways where such interests could be subordinated to the interests of the Group as a whole.
Ratification is the process by which a principal validates an unauthorised act done by his or her agent. (Bowstead & Reynolds on Agency (16th ed 1996) 2-046) While ratification may occur by an express statement, it will also be implied whenever a person's conduct is such to show s/he adopts or recognises the act or transaction. It may also be implied from the mere acquiescence or inactivity of the principal. Bowstead & Reynolds on Agency 2-068; Harrisons and Crossfield v London and NW
Railway [1917] 2 KB 755, 758. While the formulation of rigid rules would be inappropriate, generally speaking, in order for there to be a valid ratification of an unauthorised act there must be:
See Bowstead & Reynolds on Agency (16th ed 1996) articles 15-19.
Putting to one side the question of adoption, the crucial issue in this case is which actions are to be considered the actions of AI4 and the funding companies. Could the directors ratify the purchase of the NZS/EHL Parcel, or would that have to be done by the shareholders in general meeting?
In its closing submissions the Crown relied upon the Privy Council decision in Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 as authority for the proposition that directors (as opposed to shareholders in general meeting) can ratify an unauthorised act. The facts of that case were that a mining licence had been granted to one of the two shareholders and directors in a joint venture company. The board later decided not to pursue the licence as funds could not be arranged and renounced any interest in the venture. The shareholder who had obtained the licence subsequently utilised it and made a profit, which the company sued to recover. The Privy Council held it was not entitled to recover because there was no real or sensible possibility of a conflict of interest between the shareholder/director and the board. Lord Scarman said: (supra at 403-404)
"The position [after the board decision] can be put in either of two ways. It can be said that from that date the venture based on the licences was 'outside the scope of the trust and outside the scope of the agency' created by the relationship of director and company. ... Or it can be said that on that date Queensland Mines gave their fully informed consent to pursue the matter no further and to leave Mr Hudson to do what he wished or could with the licences. In their Lordships' opinion it does not matter how it is put."
The Plaintiffs, at paragraph 44.22 in their closing described Queensland Mines v Hudson
as a difficult case. They submitted:
"It is at best an example of a limited exception to the rule that a board cannot consent to what would otherwise be a breach of duty by one of its number; that is, a board may renounce on behalf of the company a particular business opportunity, provided that it is fully informed and, semble, in the circumstances it was not an opportunity that the company could have pursued itself in any event."
Ford & Austin classify this case, not as the board consenting to what would otherwise be a breach of duty by one of its number, but as the board renouncing on behalf of the company a particular business opportunity. This meant the board, in circumstances where the company could not exploit the opportunity, had removed the conflict by putting the opportunity outside the scope of the fiduciary relationship. (Principles of Corporations Law (7th ed 1995) para 9.340) This distinction is criticised by Fridman as being a distinction without a difference. ("Ratification of Directors' Breaches" (1992) 10 Co & Sec LJ 252, 265.)
In my view, Queensland Mines v Hudson does not create any rule of universal application that a board may ratify a breach by one of its members. It was a case which in my opinion depended upon its own special facts. Fridman describes the case as setting a dangerous precedent. He observes that it is inconsistent with all earlier authority which suggest ratification is the province of the general meeting.
The Crown, exercising its right of reply, raised the recent Privy Council decision in
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR
7. At paragraph 99 of the reply the Crown stated:
"The basic question is has the company ratified. It is submitted that the technical (and so far, inconclusive) debate as to which organ of the company can ratify is sterile, and contrary to the recent Privy Council decision in Meridian."
The Judicial Committee in Meridian was considering the rules by which acts are attributed to a company, commonly referred to as the rules of attribution. Lord Hoffmann, delivering the judgment of their Lordships, divided the rules of attribution into two categories. The first he termed the primary rules of attribution. These are found in a company's constitution or, alternatively, are implied by company law. The second he termed general rules of attribution. These are also available to natural people and include such doctrines as agency, estoppel, ostensible authority and vicarious liability. Lord Hoffmann was concerned to make the point that whether these rules of attribution apply, or are excluded, is a matter of interpretation or construction of the relevant substantive rule (supra at 13). At page 16 of the judgment his Lordship said:
"It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. [His Lordship then gives examples of situations where knowledge or intention was, and was not, attributed to the company concerned and continued:] Each is an example of an attribution rule for a particular purpose, tailored as it always must be to the terms and policies of the substantive rule."
What then are the "terms and policies" behind the fiduciary duties directors owe the company? It cannot be that directors can unilaterally excuse their own failure to perform. That would frustrate the policy behind the concept of the imposition of fiduciary duties. In order to maintain that policy I consider the shareholders in general meeting alone must
be vested with the power to ratify the directors' unauthorised actions. It cannot reside in the directors themselves.
In any event, as there never was a general meeting of AI4's shareholders, there is no act of ratification which, under the rules of attribution, counts as an act of the company.
7.7 Other defences
Bona Fide purchaser for value without notice
In view of my conclusions in 2.3 to 2.9 as to what the Crown's agents and officials knew, and that the knowledge of these agents was to be imputed to the Crown (2.11), this defence has not been established.
Change of position
In 2.17 I held this defence failed first, because it is probable the defence is only available for a subsequent change of position; and, secondly, because the Crown was a wrongdoer.
Apportionment
This topic is addressed at 1.7 of the judgment. The Crown had submitted that the liability of a defendant, where all the other defendants have settled, should be confined to the proportion of total loss that represents the non-settling defendant's blameworthiness. I rejected that argument as contrary to the rule that multiple defendants are jointly and severally liable to the Plaintiffs for the whole of the loss.
Counter-restitution
The Crown submitted that the Plaintiffs could not obtain restitution of the $327 million paid over as they were unable to give counter-restitution. In other words, because AI4 accepted EIplc's takeover offer and because the shares are now worthless AI4 is unable to return the EHL shares transferred by the Crown. In 2.17 I held that, as in Coleman v Myers (supra), too much water had passed under the bridge, and the return of a substitute parcel of worthless shares would not be a just result. However, it did not follow that the Plaintiffs were unable to obtain restitution simply because they could not give counter- restitution in specie. As discussed in detail in 2.17, counter-restitution, doing practical justice between the parties can be accomplished by the provision of an equivalent monetary award, calculated at the time of settlement.
Causation
The Crown submitted any equitable wrongdoing on its part did not cause any loss or damage to the Plaintiffs. Rather the collapse of the sharemarket, the decision to fund AI4, the inability of AI4 to repay the initial funders, the refinancing and so on all caused the losses. At 2.16 I held this approach is not relevant to the restitutionary causes of action which are based on the principle of restoring to the Plaintiffs what was taken from them without justification, and not on the principle of compensating the Plaintiffs for loss or damage.
In relation to accessory liability, where the remedy is equitable compensation, at 2.16 and 2.18, I applied the approach of McLachlin J in Canson Enterprises Ltd v Broughton & Co (1991) 85 DLR (4th) 129, 160-163. This approach recognises that when assessing equitable compensation:
"it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach".
On that basis, the sale of the NZS/EHL Parcel to the EUTs for $142,962,046 was taken into account and the award reduced accordingly.
Contributory negligence
There is no room for the application of considerations analogous to contributory negligence in restitution-based claims (see 2.16). Where, however, the relief sought is compensation there is no reason why the assessment should not take into account a plaintiff's share of responsibility for the loss (Day v Mead (supra)). Where appropriate, reductions in recovery have been made on account of the Plaintiffs' contribution to their own loss.
SECTION 8: IS SUBROGATION AVAILABLE TO EIGL re EAL v THE
CROWN
I have now dealt with all the Plaintiffs' claims against the Crown. There remain for decision two broad topics under the above heading which are inter-related but separate. My decision on these topics will have repercussions for earlier portions of the judgment.
In this section, 8.1, my purpose is to introduce the above topics and set the scene for the detailed consideration of them that follows.
As at the settlement between the Crown and AI4, in March 1988, the situation was relatively straight forward. The funding of AI4 and the purchase by it from the Crown of the NZS/EHL Parcel, all of which I have held was illegal, involved contributions of
$90,532,832 and $8,179,245 by EAL and ET respectively. Had the situation thereafter remained static then clearly AI4 recovering against the Crown as a trustee would have had to account for those amounts to EAL and ET or, alternatively, they would have been able to recover against the Crown in their own right independently of AI4.
After settlement, and between the months of June and September 1988, there were further developments as a result of which EIGL claims that it discharged the debts owing by AI4 to EAL and ET in respect of their original contributions to the funding of the NZS/EHL Parcel.
EIGL, the other Plaintiffs and the Crown all say that the discharge, and in effect repayment of the EAL and ET original contributions, was accomplished by what became known during the hearing as the Aylesford transaction. This transaction involved not only moneys which EAL and ET had advanced to EIGL in connection with the NZS/EHL
Parcel purchase of $A94.4 million but also further loans owing to EAL of
$A171.6 million. The contention is that all that indebtedness was discharged by means of EAL taking instead redeemable preference shares in Aylesford plus a facility known as the EAL Takeout, whereby security was given over certain Equiticorp Group assets and EIGL guaranteed Aylesford's redemption of the preference shares, with interest, within twelve months. All this was effected by book entries at the nominal date of 30 June 1988 and no cash passed between the parties. In effect, EAL exchanged unsecured debts owed by AI4 for preference shares in Aylesford with securities and a guarantee.
In my view it is beyond question that when all this happened nobody (ie, Plaintiffs, EAL, Aylesford, the Crown) foresaw that, consequent upon the collapse of the Equiticorp Group in April 1989, proceedings would be taken against the Crown to recover the
$327 million paid over by AI4 in exchange for the NZS/EHL Parcel. So, there was no intention at that time (and EIGL does not suggest to the contrary) that EIGL should be subrogated to EAL's claims against the Crown, or that AI4 would claim against the Crown as a constructive trustee on behalf of all the original funders.
This second layer of complexity in an already perplexingly intricate case was there when the substantive hearing commenced on 21 November 1994, but on Day 18 (ie, 15 December 1994) the Plaintiffs and EAL advised that they had reached an agreement whereby all issues between them would be postponed to later proceedings and the Plaintiffs would simply pick up and present EAL/ET's cross-claims against the Crown. Unfortunately, by early March 1995 that agreement had come unstuck. The problem was that, at about that time, the Crown amended its Statement of Defence to EAL's cross- claim and pleaded for the first time that EAL had been repaid by the Aylesford transaction which meant that from then on the Crown and the Plaintiffs were at one on that topic adverse to the interests of EAL and ET. Mr Farmer QC, leading counsel for the Plaintiffs, recognised immediately that this created a conflict of interest between the Plaintiffs and EAL and, as a consequence, the Plaintiffs and EAL parted company and
Mr Woodhouse returned to present his client's case on the cross-claims independently of the Plaintiffs. The full story with the procedural ramifications and directions given as a result is set out in my Judgment 28, delivered on 9 March 1995, but I do not consider that greater detail than that already given is required here.
I should make it clear, for the sake of completeness, that ET's advance was also discharged according to EIGL. Not by payment of cash, but by book entries, resulting in EIGL taking over the indebtedness of ET to another Equiticorp subsidiary in return for ET's discharge of AI4. Subsequently, ET's claims against the Crown were assigned to EAL.
The scenario that I have set out above raises for consideration the following topics:
(i) the Aylesford transaction; what brought it about and how it worked out(ii) whether what occurred in the Aylesford transaction amounted to a discharge/payment of EAL's original funding contribution
(iii) whether ET's refinancing resulted in a discharge and payment of its original funding contribution
(iv) whether, assuming discharge/payment, there is any impediment to EAL/ET proceeding with their cross-claims against the Crown
(v) the outcome on EAL/ET's claims against the Crown(vi) whether EAL/ET would be unjustly enriched if, in addition to participation in the Aylesford transaction and the refinancing of ET, they are able also to recover their original contributions from the Crown
(vii) whether any such unjust enrichment would be at the expense of EIGL
(viii) whether subrogation is available to EIGL as a remedy for loss suffered as a result of unjust enrichment and is there any impediment to the Court granting the remedy.
These topics will now be discussed along with the associated issues of facts and law relevant to them.
8.2 The Aylesford and allied transactions and what brought them about
Before entering upon the major topics of this section of the judgment there are some loosely related issues which I propose to dispose of first.
EAL contends that it contributed $A113,000,000 to the funding of the purchase of the NZS/EHL Parcel from the Crown. The Plaintiffs, and in particular EIGL, dispute that figure but acknowledge $A83,000,000, which converts to $NZ90,532,832.
The difference of $A30,000,000 (ie, between the $A113 million claimed and the
$A83 million acknowledged) arises in respect of two separate amounts of $A18,500,000 and $A11,500,000.
What happened was that, initially, EAL provided $A122 million, but because of certain repayments $A9 million of that is not claimed - thus the figure reduces to $A113 million. The two amounts of $A18.5 million and $A11.5 million were not actually paid on to, and cannot be traced through to, AI4. Instead, after settlement, they were used to repay to EIGL certain amounts which it had contributed to the funding of the purchase of the shares from the Crown. Essentially, EAL contends that the two amounts in question were intended to cover EIGL's short term direct payments which, because of its serious liquidity problem at the time, EIGL would otherwise not have been able to make.
So far as the $A18.5 million figure is concerned, it was received by EIGL from EAL on 26 February 1988 and placed on deposit, in the name of AI4 at 20% interest, having been converted to $NZ20 million. It matured on 27 May 1988, by which time it had earned approximately $1 million in interest. On 10 March 1988, however, EIGL contributed
$NZ21 million to the share purchase fund. Of these circumstances EAL submitted, in its opening at paragraph 37:
"When that payment was made by EIGL it had control of the term deposit funded by EAL. On 27 May 1988 EIGL withdrew the funds from term deposit and received the principal of NZ$20m plus interest, earned on EAL's money, of NZ$986,301. The interest should have been almost exactly NZ$1,000,000, and was very close to NZ$1m anyway. The irresistible inference is, in EAL's submission, that EAL's money was dealt with in this way as part of the in-substance funding of NZ$21m which came in a technical sense only from EIGL."
The $A11.5 million figure, converted to $NZ12.3 million, which was also placed on deposit on 26 February 1988 (the same day as the $A18.5 million) on behalf of AI4. On 21 April 1988, the deposit was withdrawn and from it $NZ12.3 million was paid to EIGL. On 16 March 1988, however, EIGL contributed $12.3 million towards the share purchase fund. EAL submitted, in paragraph 42 of its opening:
"...again the inference to be drawn is that EAL's money was dealt with in this way as part of the in-substance funding of NZ$12.3m which came in a technical sense only from EIGL."
The foundation in law relied upon for drawing the inferences as urged by EAL is the decision of Ungoed-Thomas J in Selangor United Rubber Estates v Cradock [1968] 1 WLR 1555. In that case, there was a simultaneous exchange of cheques which resulted in the Plaintiff's money being used to the advantage of others. The issue was whether
£195,000 received by a third party "sufficiently represented" the Plaintiff's money. The Judge found that it did because it was:
"completely clear that it was only by this use of the plaintiff company's
£232,500 that the £190,000 payment was effected" (at 1615, line (a)).
At page 1615, line (c) he said:
"But it was or represented moneys of the plaintiff in the sense that it was the plaintiff's moneys paid into its account and out of its account into Cradock's account that alone covered and enabled the £195,000 to be paid out of Cradock's account to Contanglo."
While acknowledging that Selangor may be distinguishable on the facts, EAL submits that the underlying principle is applicable in this case. I am unable to accept that submission. In my view, Selangor is clearly distinguishable because, there, everything happened at once and the Plaintiff's funds were used directly to purchase the moneys sought to be traced. Whereas, here, the payments were sourced direct from EIGL and there is, in my view, insufficient evidence to support the contention that without the AI4 deposits, EIGL could not have, and would not have, made the payments in question. Nor can the inference be drawn that there was an intention to apply the EAL funds for EIGL's benefit once the deposits were uplifted in April and May of 1988. To the extent that AI4's cash book prepared by AR Hawkins may suggest otherwise in respect of the
$NZ12.3 million figure, I accept Mr Paton's evidence that the accounting treatment accorded that sum was incorrect.
The result is that the dispute between EAL and EIGL as to which company is entitled to make recovery against the Crown is confined to the sum of $NZ90,532,832.
Moving on to the major issue to be dealt with in this section I first give a brief description of what was involved in the Aylesford refinancing. The narrative set out hereunder is best considered in conjunction with Chart 17 of Exhibit C, a copy of which is reproduced at page 148 of Volume II. All the transactions depicted in Chart 17 were effected by way of journal entry - no money passed.
Chart 17 is put forward by the Plaintiffs and accepted by both the Crown and EAL save that EAL says that not all the transactions which occurred on 30 June 1988 are recorded in it. Furthermore, EAL contends that, although the graphical representation of
transaction H can be accepted nothing further, express or implied, should be drawn from its inclusion.
As indicated in 8.1, the transactions summarised in Chart 17 are complicated by the fact that the book entries relate to other debts besides those that were owed to EAL by the Hong Kong companies and AI4, and which were created as a result of EAL contributing moneys towards AI4's purchase of the NZS/EHL Parcel. Simply put, the Chart 17 (Aylesford) transactions involved first the elimination in EAL's books of inter-company debts totalling $A265 million which included the AI4 debt of $A83 million. Secondly, the recording of an investment in 265 million Class B redeemable preference shares in the capital of Aylesford Securities. In effect, therefore, so far as EAL's position vis a vis AI4 was concerned, the debt owed to it by AI4 was substituted for a promise by Aylesford to redeem preference shares of comparable value supported by securities and a guarantee (the EAL Takeout) which will be discussed later.
Referring to the specific steps recorded on Chart 17, I shall use the Australian dollar figures to avoid confusion. All the transactions are recorded as taking place on 30 June 1988. The first involves EIGL making an advance of $A95.4 million to AI4, which enabled AI4 to make a principal and interest repayment to EAL of the same amount. EAL recorded the repayment received as on account of the Hong Kong company loans, which in effect means a repayment by AI4. This is borne out by the submissions made by Mr Woodhouse in closing at paragraphs 4.15, when submitting that the refinancing was not on account of the Crown's liability, and at 4.31, when submitting that the proper inquiry was whether EAL's loss had been made good. Paragraph 4.15 and the first two sentences of 4.31 are set out hereunder:
"4.15 Whether EAL was paid or not, what is accepted was in consideration of its releasing AI4 from liability; that is, in consideration of releasing a company whose state of solvency was markedly different from that of the Crown."
"4.31 This proposition for EAL also does not entail any suggestion that the refinancing contracts were invalid. EAL has expressly acknowledged that there was an effective discharge of AI4's liability to it."
In respect of 4.31, Mr Woodhouse amended the second sentence to refer to the Hong Kong company's liability and AI4's liability in contract. That covers transactions A and B on Chart 17.
At the same time, EIGL, through CHL, made a repayment to EAL of $A171.6 million. That is recorded in steps C and D. As a consequence, EAL was able to invest in the 265 million Class B redeemable preference shares in Aylesford: step E. Aylesford was then in funds and able itself to redeem Class A preference shares which had been issued to EIL (Equiticorp Industries Ltd) to secure part of Aylesford's funding of the purchase of shares in a UK finance company named Guiness Peat. Equiticorp in effect had sought to acquire Guiness Peat and used Aylesford as a vehicle for that purpose. The redemption of the Class A preference shares by Aylesford is step F. That redemption enabled EIL to repay $A265 million which it had borrowed from EIGL in order to make its original investment in Aylesford. That final step is transaction G.
As explained above, as between EAL on the one hand and the Crown and EIGL on the other, EAL accepts that the refinancing of the debt owed to it (Step B, Chart 17) resulted in the Hong Kong companies', and thus AI4's, liability to it for the original advances being discharged. But, EAL submits firmly that discharge is not repayment. In fact, says EAL, what happened was that it received worthless Aylesford preference shares in exchange for an irrecoverable debt owed by AI4. That, however, is not strictly correct: because it also obtained certain other advantages as we shall see when I discuss the EAL Takeout facility.
There is also a dispute between EAL and EIGL as to why the refinancing occurred. EIGL says the transactions were driven by EAL which was concerned that its auditors would adversely comment on its 30 June 1988 end of year accounts. Inevitably, those accounts would have shown heavy investment in unsecured or poorly secured inter-group loans. Security in many cases had eroded severely because of the share market crash in 1987. In particular, the $A100 million plus advance made to help finance the purchase of the NZS/EHL Parcel was devoid of security. Elders had taken a charge on the NZS/EHL Parcel to secure its advance of $105 million. So, says EIGL, the investment in Aylesford (a UK company) with a substantial holding in Guiness Peat (an active UK finance company) in which Equiticorp had invested heavily, together with the takeout and supporting security was the solution. Apparently, this change in investments satisfied the auditors. Mr Brian Fitzgerald, the EAL Manager, reported that consequent upon the Aylesford arrangements, EAL had succeeded in having "the auditors finally sign off the EAL accounts". Mr Fitzgerald's memorandum on the signing off is Image Number 665012, a copy of which is to be found at page 127 of Volume II.
This is the appropriate point at which to elaborate on the EAL Takeout facility, transaction H in Chart 17. The evidence is that EAL was not satisfied (and I infer that its auditors would not have been either) with a simple switch of investment to Aylesford Class B preference shares. It required, in addition that, EIGL and other Equiticorp subsidiaries provide security over additional assets and guarantee Aylesford's redemption of the shares. In particular, as can be seen from Image Number 665012, charges were given over shares in Feltrax, Aurora and Fisher and Paykel, although in some instances they were second charges because the assets were already encumbered to other parties. Somewhat optimistically the securities provided were thought to be worth in the region of
$A200 million. When Aylesford defaulted, by which time both it and EAL were in liquidation, resort was had to the takeout facility and limited but significant recovery of
$34,000,000 was made.
EAL, on the other hand, says that the refinancing was promoted from New Zealand and EIGL, in particular, because without the flow of funds from Australia (essentially from EAL) the investment group of which EIGL was the flagship would have collapsed. Had that happened, the Group's capacity to continue with New Zealand Steel would have been placed in such jeopardy that inevitably the investment would have been lost. Indeed, with hindsight, we know now that the whole Group was within 9 months or less of statutory management and liquidation when the transfers were finally put in place.
In my judgment it cannot be said that one or other reason for the refinancing through Aylesford was dominant. Both played a part. The need to satisfy EAL's auditors was probably the catalyst but the long term benefits to EIGL and the Group as a whole undoubtedly played a part also. Clearly, it was all done on the basis of mutual agreement and there is no substance in the suggestion that EIGL was a volunteer far less an officious intervener.
The core issue, however, is whether in law the refinancing which discharged the debt owed by AI4 and provided EAL with the Aylesford preference shares and the EAL Takeout facility amounted to a repayment. If it did, EIGL has a prospect of being subrogated to EAL's original claims against the Crown arising out of the funding of the purchase of the NZS/EHL Parcel. If not, EAL may be able to recover against the Crown in its own right.
8.3 Did what occurred amount to payment/discharge of EAL?
At paragraph 188 of its closing submissions EAL submitted:
"EIGL cannot be subrogated to EAL's rights because, ... the alleged refinancing did not have the effect of making good the loss that EAL suffered by contributing towards the funding of AI4's purchase of the NZS/EHL parcel."
As already recorded, EAL does not dispute that the debts owed to it by the Hong Kong companies and by contract through them by AI4 were discharged. Rather, EAL says it did not get back the money it provided and therefore was neither paid nor indemnified. In EAL's words:
"[EIGL] must establish that the refinancing resulted in the restoration to EAL of the equivalent of that which it parted with when it contributed to the financing of AI4's purchase of the NZS/EHL Parcel."
The Crown and the Plaintiffs, on the other hand, contend that the Aylesford transaction did amount to payment and generally that one can pay a money obligation other than with cash if the method of performance is acceptable to the creditor.
I recorded in 8.2 above what actually happened. The parties approached this issue on two levels: by examining both accounting practice and the treatment by the law of the concept of payment. The transactions, described in 8.2, were therefore considered in detail by expert accountants on either side. After the Plaintiffs' expert, Mr Bloom, had given his evidence but before EAL's expert, Mr Fischl was called, a challenge was made by the Plaintiffs to the content of the Fischl prepared statement which had been provided in advance. The challenge concerned a paragraph in the statement in which Mr Fischl said:
"furthermore, the competent accountant, having decided that further investigation was warranted, would be concerned to investigate the substance of the transaction in order to reflect its commercial reality in the accounts rather than the simple legal form."
This he called the doctrine of "substance over form". Objection was taken on the basis that such an approach would run counter to the law, particularly as stated by Richardson J when dealing with the question of sham in NZI Bank Ltd v Euro-National Corporation
Ltd [1992] 3 NZLR 528 at 539, between lines 30 and 49. I have quoted that passage elsewhere in this judgment and it will be recalled that it emphasises that the legal arrangements actually entered into and carried out must be given their full effect and that there is no half-way house between a sham and a bona fide transaction. The Plaintiffs understandably wanted to have it quite clear before they commenced cross-examination and indeed before evidence in chief was given, whether Mr Fischl was founding himself upon a half-way house approach or was prepared to go all the way and suggest that the Aylesford transaction was a sham. I dealt with all that in Judgment 35 which cleared the air and resulted in the removal of a large number of paragraphs from Mr Fischl's statement because EAL, it transpired, was not alleging sham.
In the end, although a week or more was spent in presentation of evidence and cross- examination of the accounting expert witnesses, the difference between them came down to a fairly narrow point.
Mr Bloom, a well-qualified and highly experienced accountant from Sydney, was asked by me towards the end of his evidence to identify the differences between himself and Mr Fischl and explain why he considered Mr Fischl's views were incorrect if that was the case. He had of course had the advantage of seeing the Fischl statement in advance. His answers are to be found at T/4354 through to T/4358. Regarding the differences between them he said, at T/4354, line 27:
"Perhaps the major issue on which I differ from Mr Fischl is the philosophic question and the accounting question of when in fact payment is effected, ...
Mr Fischl quotes a definition given by Kohlers Dictionary for Accountants, ... the discharge of an obligation by disbursements of money, or by property, or services, accepted as the equivalent of money, the satisfaction by, or in the payment of a debtor to the creditor, of an amount owing in whole or in part.
... my understanding of payment confirms with that given in this definition and I emphasise that the definition refers merely to the discharge of an obligation and that nowhere in the definition does it state that the
money or property or services accepted as the equivalent in money should be of equal value.
... I believe that payment or discharge of a debt occurs when both the following criteria are satisfied. Firstly, the creditor acknowledges that it has no further claim against the debtor and, secondly, that the debtor acknowledges that it no longer owes the amount in question to the creditor.
I believe Mr Fischl is in error here in that he confuses the two issues. The first issue is whether the debt has been repaid. The second issue is whether the creditor can be said to be better or worse off as a result of that repayment."
Then at T/4357 between lines 8 and 25, I put the other part of my inquiry and that portion of the transcript including Mr Bloom's answer is now set out:
"Now, the other part of the question was, nonetheless, given the situation we have got here, because of massive outflows of cash to investments that steadily lost value, is it still appropriate to regard liabilities as having been discharged by book entries which establish either credits or debits when the reality is there are no funds there and no prospect of funds to meet them? --- I believe it is totally appropriate, Your Honour, in the sense that the replacement asset, for example the Aylesford shares, becomes the asset to which, for example, a company such as EAL looks from the moment of discharge, to, if I can coin a phrase, to have value or to create value in the company."
Mr Fischl is also highly qualified and from Sydney, although he has not been in practice as long as Mr Bloom and conceded in cross-examination that, on the particular issue in question, he had not been asked to express an opinion on any earlier occasion. Because Mr Fischl had seen Mr Bloom's prepared statement and the transcript of his evidence in chief and cross-examination and questions from me, he was able to prepare a supplementary brief dealing particularly with where he disagreed with Mr Bloom and why. I set out hereunder the heading to section M of Mr Fischl's supplementary brief, its subheading and paragraphs 113 to 116 inclusive, 119, 121 and 122:
"M. ISSUE ON WHICH MR BLOOM AND I DISAGREE: PAYMENT
M.1 Concept of payment
113. IT appears that Mr Bloom and I have differing opinions on the sense in which accountants understand the term 'payment'. Mr Bloom regards 'payment' as simply meaning a discharge of a debt (see, for example, transcript at p.4229/27). My understanding of the term is set out at paragraphs 24 and 25 of my initial brief of evidence.
114. I am of the opinion that a competent accountant would regard 'payment' as meaning something more than a mere discharge of a debt. The reason is that a debt can be discharged by various means. It is of great importance so far as an accountant is concerned to know precisely by what means a debt has been discharged, in particular if the discharge has been effected by way of journal entry.
115. FOR example it may be discharged by a creditor receiving money equal to the amount of the debt. It may be discharged by a creditor accepting a discount by receipt of money of an amount less than the nominal value of the debt. It may be discharged by a creditor simply forgiving the debt. It may be discharged by a creditor accepting an asset which may or may not be equivalent to the book value of the debt replaced.
116. A competent accountant would not regard all these methods of discharging a debt as falling within the one description of 'payment' because they have fundamentally different economic consequences for the creditor. In my opinion, the relevant meaning of 'payment' is that which I have set out in paragraphs 24 to 26 of my initial brief.
...
119. IN view of our differing opinions on the meaning of 'payment', Mr Bloom and I differ on the application of the concept of 'payment' to transactions whereby one debt is discharged by the substitution of another form of debt. Mr Bloom is of the opinion that the value of the debt that replaces the substituted debt is simply irrelevant to the issue of whether the debt has been repaid. On the other hand, I am of the opinion that the value of the substituted debt is relevant to the issue of whether the transaction evidences a payment, as distinct from the issue of whether it has been discharged.
...
121. FROM my perspective, the conclusions in my initial brief of evidence that the documents that I there examined with respect to the refinancing transactions do not evidence payment are conclusions that those documents do not evidence that EAL received assets which at the time had a realisable value equal to the nominal amount of the loans which such assets replaced.
122. IN summary, put simply, whilst I would agree that payment of a debt gives rise to discharge, I do not agree that discharge necessarily means that payment has been made."
I preferred Mr Bloom's evidence. He was an impressive witness and remained unshaken throughout cross-examination, whereas Mr Fischl was obliged to hedge the view he expressed with qualifications. Quite apart from the impression that both men made upon me, however, Mr Bloom's approach was in accord with commonsense and what I expected the law would confirm once fully researched. It would be intolerable, in my view, for the law to impose upon commerce a situation where a debt could be regarded as discharged for some purposes and not paid for others.
The kernel of EAL's argument was that EIGL had not made good EAL's loss. It sought to establish this by showing EAL had not had restored to it what was originally given up, ie a payment in cash of $90,532,832. Although EAL distinguished between the concepts of 'payment' and 'making good a loss', submitting that: (EAL opening para 70)
"To determine in this case whether EAL's loss has been made good by inquiring whether there has been a payment is to apply an imprecise concept in place of a well understood concept. It in fact involves asking the wrong question."
nonetheless, a large portion of its closing submissions concentrated on the question of whether there had been a payment. This was because EAL also submitted that even if a 'payment' was sufficient to give rise to a right of subrogation, EIGL could not be subrogated to its claim because EAL did not receive a repayment in respect of it. This issue was dealt with as the seventh proposition in EAL's closing submissions which I set out below:
"EAL submits there are three reasons why in law EAL was not paid.
(a) The refinancing involved a novation, or accord and satisfaction, or both of inter-company debt that was owed to EAL. Novation and
accord and satisfaction are modes of discharging debts which are different from payment.
(b) EAL was not paid because EAL owed no debt to any other company involved in the refinancing which was written off or set off against the debt which was discharged in the refinancing transactions.
(c) Whatever assets it received in the refinancing, EAL was not free to use or dispose of them as it wished. For there to be a payment, the payee must have an unconditional right to the immediate use of the money which the payee receives."
I will consider each of these arguments in turn.
The refinancing involved novation or accord and satisfaction
In this submission EAL sought to distinguish between payment as one method by which a debt can be discharged, and novation and accord and satisfaction as another. A statement by Lindley LJ in re Wragg Ltd [1897] UKLawRpCh 50; [1897] 1 Ch 796, 829 that debts "can be discharged in more ways than one, eg by payment, set-off, accord and satisfaction, and release" was relied upon. EAL argued these methods (payment on the one hand, and novation and accord and satisfaction on the other) are mutually exclusive. Counsel submitted that payment in this instance could only be achieved by tendering legal currency. He argued that an agreement between EAL and AI4 to accept any other means of performance would amount to novation. Alternatively (and possibly additionally), if AI4's obligations had been released in return for valuable consideration, such consideration being other than the performance of the obligation, this would amount to accord and satisfaction. Applying this to the facts of the transaction EAL submitted:
"the Aylesford transaction did not involve a performance by AI4 of its obligation to pay money to EAL. Nor did it involve AI4's tendering to EAL something in substitution for its obligation to pay money to EAL, whether by way of performance or otherwise. The only thing that AI4 did was to issue to EIGL, not EAL, fully paid redeemable preference shares."
The Plaintiffs on the other hand submitted that the distinction EAL sought to draw between payment and other acts which have the effect of discharging money obligations was misconceived. At paragraph 54.53 of the Plaintiffs' closing it was stated:
"There is no such distinction. Payment encompasses every method of discharge of a debtor's money obligation. Only money obligations can be paid, but one can pay a money obligation other than with money if the method of performance is accepted by the creditor as payment. On this basis anything accepted by the creditor as payment, even a novation or substitution of one debtor for the other, would amount to payment if accepted as such."
In support of this proposition the Plaintiffs referred to the case of In Re Charge Card Services Ltd [1989] 1 Ch 497. This is a decision of the Court of Appeal which concerned the use of a specialised credit card to purchase petrol. The cardholder made the purchase but before the garage could recover the company standing behind the card went into liquidation. The leading judgment in the Court of Appeal was given by Browne- Wilkinson VC, (as he then was), and he said at page 511 that the issue in the case was whether there is:
"a general principle of law that whenever a method of payment is adopted which involves a risk of non-payment by a third party there is a presumption that the acceptance of payment through a third party is conditional on the third party making the payment, and that if he does not pay the original obligation of the purchaser remains?"
The Vice-Chancellor then went on to consider whether there is a general presumption of conditional payment and concluded at page 512:
"In my judgment, there is no such general principle. Each method of payment has to be considered in the light of the consequences and other circumstances attending that type of payment. When, as with credit cards, a new form of payment is introduced applicable to new sets of circumstances, it is necessary to consider whether such payment should be treated as absolute or conditional in the light of the consequences and circumstances of such new type of payment, not according to any general principle."
The Plaintiffs also referred to the following definition by Professor Goode found at page 11 in Payment Obligations in Commercial and Financial Transactions (1983):
"Payment in a legal sense means a gift or loan of money or any act offered and accepted in the performance of a money obligation."
A leading authority supporting that proposition is re White Star Line Ltd [1938] 1 Ch 458 at 476, a case dealing with a payment of calls in respect of shares, where it was said:
"[A] payment is an effective payment in money's worth if the consideration given by way of payment is something which is bona fide regarded by the parties to the payment as fairly representing the sum which the payment is to discharge."
In Official Assignee of Romco Corp Ltd (in liq) v Walker [1995] 1 NZLR 652 the Court of Appeal approved that statement in re White Star Line and at pages 667-668 of the report the judgment continues:
"It is sufficient if [the consideration was] regarded by the parties as fairly representing the payment due on the unpaid shares. It would not be for the Court subsequently to question the adequacy of the consideration. Unless the agreement can be impeached for fraud or its consideration is illusory or colourable, the value at which the company is content to accept the property must be treated as its value as between itself and the shareholder whose liability is discharged by its means; Re Wragg Ltd [1897] UKLawRpCh 50; [1897] 1 Ch 796 per Lindley LJ at p. 827."
Another helpful authority is re Mataura Motors Ltd [1981] NZLR 289, 291-292. There the issue was whether or not a debenture was valid as against the liquidator of a company. In the leading judgment of the Court, Richardson J at p 292 between lines 1 and 20 discussed the question of payment as follows:
"Now the word 'payment' in itself is one which in an appropriate context may cover many ways of discharging obligations (White v Elmdene Estates Ltd [1960] 1 QB 1, 16; [1959] 2 All ER 605, 610, per Lord
Evershed MR). In the passage from the judgment of Lord Hanworth MR in Re Matthew Ellis Ltd to which I first referred, his Lordship observed that it was not suggested that the payment may not be by cheque or by a transaction the equivalent of cash among businessmen. And in Re Roper [1882] UKLawRpCh 196; (1882) 21 Ch D 543 where, although no money physically passed from mortgagee to mortgagor, the principal sum being the amount then owing by the mortgagor under an antecedent transaction, the principal sum was held to be correctly stated in the agreement to have been paid. Brett LJ said at p 551:
'That which took place in the present case would be said by any man of business, and would be held in any Court of law, to be a payment of the £2000 to the grantor, so that if it was necessary to plead payment of the £2000 in another action, the plea would be proved by that which actually took place. The transaction is described in the deed in the way in which every man of business and every lawyer would describe it, and therefore the description is true.'
So the question of whether payment has been made is not entirely dependent on the physical passing of cash or a cheque." [Emphasis added]
The references made in the above passage to the decision of the Master of the Rolls in re Matthew Ellis Ltd are set out on the preceding page of the Court of Appeal's judgment including a passage where it was said:
"One has therefore to look at the facts and see whether or not in substance there was cash paid to the company. It is not suggested that payment may not be by a cheque or by a transaction the equivalent of cash among business men."
Of the facts in this case, the Plaintiffs submitted at section 54.56 of the closing: "54.56 The plaintiffs submit that it is clear that payment by a means
which entails a risk of non-recovery can still be an unconditional payment. It is a matter of construing the agreement between the parties to determine if the payment is accepted as a conditional or unconditional payment. Here, it is submitted it was clearly agreed that the investment in Preference Shares and supporting securities was an unconditional payment:
The evidence, in my view, bears out the four points made above. Furthermore, after the Aylesford preference shares were received by EAL it sold some $80 million worth to EFL between July and September of 1988. Also it was paid a further $58 million when EIGL redeemed some of the shares between September and October of 1988. Finally, in December of 1991, as a result of recoveries against the securities available through the EHL Takeout, EAL was able to recover a further $34 million. Had it been that only the EAL advances towards the funding of the purchase of the NZS/EHL Parcel were concerned, of course, those recoveries would have amounted to full payment and more. As earlier indicated, however, the total investment was for $265 million as at 30 June 1988 and EAL made further advances that were covered by the security after 30 August 1988 in the sum of $130 million. So, at the end of the day, despite the sizeable recoveries, EAL was still out of pocket by $223 million and contends, of course, that none of the recovery went to reduce the advances made via the Hong Kong companies to AI4.
The expert evidence of Mr Bloom, which I accept, commonsense and the authorities referred to above all persuade me that by requesting and entering into the Aylesford transaction and taking the advantage of the EAL Takeout, EAL was acknowledging the discharge of the debts owed by AI4 and repayment of the amounts which it had provided to fund the NZS/EHL Parcel. At the end of the day, whether the transaction is called a payment or a discharge through accord and satisfaction is of limited significance because in substance it was clearly intended to make good and restore EAL's position in relation to its contribution to the funding of AI4's purchase of the NZS/EHL Parcel.
EAL was not repaid by book entry
The gist of EAL's submission here was that:
"the only means by which payment in law can be effected by book entry is if there is a setting off or writing off of two debts, one owing to the person said to be paid and one of equal or greater amount owing by the person said to be paid."
In making this submission EAL relied heavily upon a decision of the English Court of Appeal in Re Harmony & Montague Tin & Copper Mining Co (Spargo's Case) [1873] UKLawRpCh 12; (1873) LR 8 Ch App 407 and a line of cases following this decision. Spargo's Case concerned calls on shares. The shareholder contended that a valuable mining licence had been accepted by the company in satisfaction of the calls. The Court of Appeal held the statutory requirement of "payment in cash" would be satisfied if there was "anything which amounted to what would be in law sufficient evidence to support a plea of payment". The Court went on to hold that a debt can be paid purely by way of book entry without the necessity of the transfer of cash but only if there is one debt which can be set- off against another.
Six years later, in In re Government Security Fire Insurance Company (White's Case) [1879] UKLawRpCh 270; (1879) 12 Ch D 511 the Court of Appeal was faced with another case where the proprietor of a newspaper agreed with a company to insert for them a series of advertisements in his newspaper, and accepted payment of his account in fully paid-up shares. He inserted the advertisements and sent in his account to the company. Fully paid-up shares were issued. The contract was not registered as required by the current company legislation and when the company was wound up it was held that because there was no obligation to pay for the advertisements in cash White was liable for the calls.
In my view, both Spargo's and White's cases are distinguishable because they dealt specifically with what would satisfy the statutory requirement of "payment in cash" in relation to calls in respect of shares not fully paid up.
EAL relied further upon a series of Australian cases which counsel submitted show that the approach in Spargo's case is of general application. I am not persuaded that that is so. Of the three cases principally relied upon, the first is Federal Commissioner of Taxation v Steeves Agnew & Co (Victoria) Pty Ltd [1951] HCA 26; (1951) 82 CLR 408, where the issue was not what amounts to payment, but rather, a specific tax issue as to whether certain drawings made by a company officer should be treated as payment on account of salary. The next case was re Associated Electronic Services Pty Ltd [1965] QD R 36 (Full Court). This case concerned a particular statutory provision which prevented shareholders proving for dividends in competition with creditors on a liquidation. The third case, Land Lease Corp Ltd v Federal Commissioner of Taxes (1990) 95 ALR 427, was a case in which contributions to an employee superannuation fund were disallowed because the scheme required immediate reinvestment in the share capital of Land Lease.
In respect of all these authorities relied upon by EAL, the observations of Tompkins J in Healing Industries Ltd v Commissioner of Inland Revenue [1988] NZHC 1391; (1988) 10 NZTC 5,115, 117- 118 are pertinent. In that case the Judge was considering the meaning of the expression "premiums paid". Observing that he had been referred to a number of authorities relating to "payment" Tompkins J said:
"Although these were helpful it must be recognised that the precise meaning must in each case depend upon the context and in particular, where the issue involved the interpretation of that word in a statute, the statutory context and objective."
In my view the decisions relied on by EAL are all governed by their own particular statutory settings and are not conclusive of the question whether a transaction in another context is, or is not, a payment.
The Plaintiffs referred to the decision of the Court of Appeal in Ararimu Holdings Ltd (in statutory management) v Equiticorp Financial Services Ltd and Equiticorp Finance Group Ltd (both in statutory management) [1991] MCLR 464. In that case, the question arose as to whether AHL was indebted to EFSL and EFGL in respect of a loan of
$30 million which had been made on or about 30 November 1988. The transaction leading to the alleged loan to AHL began with an inter-company loan of $30 million from EFSL to Equiticorp Industries Group Ltd (EIGL) secured in a way that qualified it for Trust Deed ratio purposes. Then a repayment in this sum of EIGL's inter-company debt to EFGL was made. EFGL then reduced its debt to EFSL. The sum was then allegedly lent on to AHL by EFSL and EFGL as a joint lending party and AHL on-lent it to EIGL. The loan from AHL to EIGL was secured by guarantees and mortgages. That summary of the facts is taken substantially from page 464 of the report.
In the judgment of the Court delivered by Hardie-Boys J at page 472 it is recorded that counsel for the respondents acknowledged that what had taken place was an entire transaction:
"each part dependent on completion of the other, so that AHL could not be bound to EFSL and EFGL unless EIGL was in turn bound to AHL."
The appellant's case on the other hand was in part that journal entries were not sufficient to create the advance and as a consequence no consideration had been provided.
At page 474, when considering the issue of whether consideration was provided, towards the bottom of the page, the judgment reads:
"Here, there were corresponding entries in the books of the two companies. Entries in EFSL's books would not have been enough, and execution of the documents, being equivocal as to the manner of payment, would not have carried the matter any further. But the entries in AHL's books, made under the undisputed authority of Mr Mark Hawkins, are not only plain recognition and acceptance of this manner of payment, but are also plain acknowledgment that it has been effected. To put the point beyond doubt, in Mid-January 1989 Mr Mark Hawkins undertook an exchange of cheques (subsequently dishonoured) for interest on the advance."
Later, on page 475, the judgment addresses the appellant's further argument which is similar to that put forward by EAL here as follows:
"Mr Curry submitted that the failure to pass cash for the advance itself was of great practical significance to AHL; for it would have given it control over the second half of the transaction, involving EIGL. But this is counsel's hindsight. It was not a matter to which the witnesses adverted. Nor, for the reasons given in the next part of this judgment, do we think an exchange of cheques would have made any difference.
For the foregoing reasons we are satisfied that the Judge was right to hold that the evidence showed an agreement that the advance to AHL be made by book entry. It is not claimed that the entries were not duly and validly made, and accordingly, subject only to the remaining point, the advance was duly made."
The Plaintiffs submit that if, by agreement, a valid and recoverable loan can be made by way of journal entry then so can a repayment and that Spargo's case cannot stand in the face of Ararimu Holdings which is binding upon me. EAL responds that the issue before the Court of Appeal in Ararimu was not whether any particular transaction before it constituted a payment in law. I do not find that response persuasive. Provided the parties agreed, as I have found to be the case in the Aylesford transactions, I am unable to see why if a liability can be established by journal entry (as held in Ararimu) it is not equally possible for payment to be made in the same way.
EAL was not free to use or dispose of any benefits it received
Under this heading EAL submitted for there to be a payment, "the payee must have an unconditional right to the immediate use of the money which the payee receives" (para 52 EAL closing). EAL argued as the money paid, or credits made, to EAL were only paid or made on the basis EAL would immediately pay it out again, EAL did not have an unconditional right to the money.
The decision of the House of Lords in The Chikuma [1981] 1 All ER 652, 657 was relied upon. In that case it was held that an irrevocable credit transfer to a bank account on 21 January 1976 did not amount to a payment as under Italian law interest on the funds could not accrue until 26 January and as a result the funds could only be accessed by payment of the interest amount. In the circumstances the House held the transfer did not constitute a payment because it had not given the owners the unconditional right to the immediate use of the funds transferred. The facts in this case differ, however, because the payee in The Chikuma had not agreed to the condition that the money would not immediately be available. Whereas here, EAL agreed to repayment by AI4 and the investment in redeemable preference shares, supported by the securities and guarantee. Also, EAL has enforced the securities and will benefit further in the liquidation of EIGL as a result of the guarantee.
For all these reasons, I am of the view EIGL made good EAL's loss, either because it repaid EAL its initial contributions towards AI4's purchase of the NZS/EHL Parcel, or if what occurred did not amount to a repayment, it was accepted by EAL as discharging AI4's obligations to it.
8.4 Did the refinancing of ET's funding amount to discharge and payment?
The refinancing of ET's $A7.5 million was outside the Aylesford transaction and is rather more straight forward. Graphically, the refinancing is depicted on Chart 25 which is to be
found at page 149 of Volume II. All the transactions took place on 1 August 1988 and, again, they were carried out by way of journal entry. No money passed.
First, EIGL advanced $9,958,836 to AI4, that amount being the New Zealand dollar equivalent of $A7.5 million as at 1 August 1988. The exchange rate had moved adversely to the New Zealand dollar in the three month period from end of March 1988. So that although only $8,179,245 was initially provided, the higher figure was required to repay $A7.5 million. The advance was in the form of a purchase of preference shares in AI4. That is shown in step A.
Transaction B is where AI4 repaid ET the $A7.5 million. AI4 recorded in its books of account a repayment of $A7.5 million to ET, and ET similarly, in its books of account, recorded the receipt of $A7.5 million. In transaction C, ET then reduced its indebtedness to EIAL (Equiticorp Investments Australia Ltd) from $A17,236,036 to $A9,736,036 by utilising the $A7.5 million. In transaction D, EIAL made a straight advance to EIGL of
$A7.5 million which enabled EIGL to make the original advance to AI4.
This was another situation where the method of payment was agreed and accepted and the appropriate entries in the books of account for both parties were recorded. It follows, on the basis of the authorities discussed in 8.3 above, that payment of ET was effected and the debt owed by AI4 discharged.
8.5 Is there any impediment to EAL prosecuting its cross-claim against the Crown: if not, what is the result?
It will be recalled that originally the Plaintiff sued some sixteen or seventeen defendants, which in turn brought in half a dozen third parties and between all those defendants and third parties there were numerous cross-claims.
The Plaintiffs, however, as earlier recorded, effected a series of settlements, first with Elders, then with EAL and, finally, the composite settlement of September 1994 which left only the present protagonists. As earlier mentioned, however, EAL, having taken an assignment of ET's rights maintained its cross-claim on behalf of itself and ET against the Crown. It was the only cross-claim which remained after the September 1994 settlement.
EAL's claims are set out in its third amended statement of claim filed on 10 April 1995 in which, on behalf of itself and ET, causes of action against the Crown as a constructive trustee for accessory and recipient liability, illegality and money had and received are advanced. The pleading is in substantially the same form as that adopted by the Plaintiffs and the evidence adduced by the Plaintiffs is relied upon. In effect, what EIGL puts forward within its subrogation claims is what EAL and ET put forward on their own behalf in the cross-claim. EAL (and to avoid repetition that abbreviation can be taken as including ET) was, of course, fully entitled to make the cross-claims prior to the settlements and equally to exclude those claims from the settlement arrangements and maintain the right to pursue them. Neither the Plaintiffs nor the Crown suggest otherwise.
The Crown contends, however, that because the liabilities incurred by AI4 in respect of the original advances were discharged and in law the amounts have been repaid, the claims cannot succeed.
The issues surrounding that submission are discussed in detail in 2.14 and 2.16 of this judgment in so far as they relate to the knowing receipt claims. The essence of what I held there is that for knowing receipt the remedy is restitution-based and that apart from questions of counter-restitution and the $64 million Settlement Agreement, the Crown cannot look to subsequent events, (such as discharge/payment by another party), to reduce or eliminate its liability. As I said at 2.16 (last sentence, second paragraph):
"This is because restitution is based on the principle of restoring to the plaintiff what was taken or received from him/her without justification, and not on the principle of compensating the plaintiff for loss or damage."
The law supporting that holding will be found in the following pages of 2.16.
Where relief is granted pursuant to s 7(1) of the Illegal Contracts Act on the basis that a successful claimant is entitled to restitution, the same principles apply. On the other hand, the remedy for knowing assistance is equitable compensation.
The first cause of action advanced by EAL for itself exclusively is constructive trust: dishonest assistance. Prima facie that claim succeeds for the same reasons that the other original funders' claims succeeded as recorded in 2.15, 2.16 and 2.18 of this judgment. The claim made, however, is for the full amount of $A122,636,536 contributed to the build up of funds from which deposits were siphoned off into AI4's name to enable it to settle. Only $NZ90,532,832, as explained elsewhere, actually went to the Crown and recovery therefore could not exceed that amount.
Also, as explained in 2.18, because the remedy for the accessory cause of action is equitable compensation any recovery would be subject to reduction on account of EAL's contribution to its own loss, which along with the original funders I have fixed at 18%. Accordingly, the amount recoverable, (the issue of repayment aside which I shall address shortly), before deduction on account of the settlement sum of $64 million is $74,236,922 ($90,532,832 minus (18%) $16,295,910 equals $74,236,922).
ET's first claim is also constructive trust: dishonest assistance. ET claims $A7.5 million. But again, the upper limit of recovery is what reached the Crown, not what ET contributed to the pool. The sum which reached the Crown was $NZ8,179,245 and again, there is a reduction of 18% for ET's contribution to its own loss. So, prima facie, recovery is $6,706,981 ($8,179,245 minus (18%) $1,472,264 equals $6,706,981).
In respect of both EAL's and ET's dishonest assistance claims, however, the question remains as to whether their prima facie right to recovery is defeated by the repayments found to have been effected in 8.3 and 8.4 above.
In 2.15 of this judgment, I set out the approach I would take to the assessment of equitable compensation. I indicated a preference for the view of McLachlin J of the Supreme Court of Canada in the Canson Enterprises case (supra) which also has the support of Lord Browne-Wilkinson in Target (supra). She said, at page 163 of the report:
"The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight ... it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach."
While Lord Browne-Wilkinson said equitable compensation is designed: (supra at 365)
"to make good a loss in fact suffered ... which, using hindsight and common sense, can be seen to have been caused by the breach." [Emphasis added]
The application of the above approach to the situation presently under consideration is perhaps capable of more than one answer. But there is the emphasis on commonsense and hindsight together with the need for proof of an actual loss ("a loss in fact suffered"). Because of the repayments EAL and ET in fact did not suffer losses and on that basis commonsense dictates that there should be no recovery of equitable compensation. On the other hand, the losses as initially suffered, were caused by breaches of fiduciary duty.
The question I am addressing here was not specifically argued by counsel. Because EAL and ET's restitution-based claims are not affected by it, the answer is not determinative of the outcome. On balance, I think the answer is that there should be no recovery. I prefer,
however, not to make a final decision. If subsequently a finite ruling is required it can be applied for in which event I shall require the matter to be re-argued.
EAL and ET also make claims based upon constructive trust: knowing receipt. Here the original contributions are again the same: $90,532,832 and $8,179,245 respectively. Again, for the reasons set out in 2.15, 2.16 and 2.17 of this judgment these claims succeed. The remedy for knowing receipt, however, is restitution-based and for that reason, as earlier explained in 2.14 and 2.16, there is no room for reduction on account of the repayments or the Plaintiffs' contributions to their own losses. The recoveries therefore are the original contributions subject to reduction on account of the $64 million settlement figure in which regard leave is reserved.
EAL and ET also make claims based upon illegality. Again, the recovery here cannot exceed the original contributions of $90,532,832 and $8,179,245 respectively. As earlier recorded, the contracts by which these sums passed from the original funders to the first intermediaries in the chain that took them ultimately to AI4 were illegal, as were any contracts direct between the original funders and AI4. The illegality arose of course, because the funding breached s 62 of the Companies Act 1955.
The consequence is that, pursuant to s 6 of the Illegal Contracts Act, title did not pass so that the money remained the property of EAL and ET throughout. The Crown, however, received the money and EAL and ET seek restitution of it pursuant to s 7(1) of the Illegal Contracts Act. As with the other original funders there is no impediment to such recovery. Also there is no room for reduction except in respect of the $64 million settlement moneys in respect of which leave is reserved.
Finally, there are the claims for money had and received. EAL's claim fails outright because the $90,532,832 went to Denton Hall's account in Hong Kong and it has not been
established that it was not mixed with other funds. The result is that common law tracing is not possible from then on.
So far as ET's claim is concerned, it also is defeated by mixing which prevents common law tracing which is a prerequisite for the money had and received claims. The manner in which the mixing of ET's contribution occurred was explained in detail in 4.5 of this judgment when discussing EIGL's subrogation claim for money had and received.
In the result then, EAL and ET's claims based on constructive trust: knowing receipt and illegality succeed to the extent of their original contributions which reached the Crown. Their dishonest assistance claims if successful will also recover the same amount less an 18% contribution. As indicated above, however, the repayments probably defeat the accessory claims. All recoveries are subject to further reduction on account of the
$64 million of settlement moneys in respect of which leave is reserved.
8.6 Would EAL/ET be unjustly enriched if they recovered against the Crown; and if so would such unjust enrichment be at the expense of EIGL?
Less than 20 years ago Mahon J confidently asserted that "a general doctrine of unjust enrichment is not part of the law of New Zealand" (Avondale Printers & Stationers Ltd v Haggie [1979] 2 NZLR 124, 155). Today, with equal confidence, it can be said that the concept is now recognised as firmly established. As Professor Andrew Burrows writes in the introduction to his book The Law of Restitution (1993):
"Over the last 25 years or so, that traditional view has come under increasing attack and it has become widely accepted, by academics and practitioners alike, that there is a coherent and principled English law of restitution. In 1991 any argument to the contrary was authoritatively silenced by the House of Lords' momentous recognition of the principle of unjust enrichment in Lipkin Gorman v Karpnale Ltd."
The established place of unjust enrichment was further underlined by Lord Browne- Wilkinson's statement in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70, 196-197 to the effect that the concept lies at the heart of all the individual instances in which the law gives a plaintiff a right of recovery from a defendant unjustly enriched at the plaintiff's expense.
Earlier in this judgment, at pages 252, 332 and 353 I have quoted passages from the judgments in the as yet unreported decision of Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division) Evans, Saville, Morritt LJJ, 9 May 1996). As that case shows, the principle of unjust enrichment is now applied in divers situations. The obligation is often non-contractual and owed by a defendant who is not necessarily a wrongdoer. Clearly it is a developing area of the law in which the Courts should be prepared to apply the general principle when appropriate.
In Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221, 256-7 Deane J said:
"[Unjust enrichment] constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case."
The courts have been careful to emphasis unjust enrichment is a concept to be invoked and developed "on the basis of legal principle" and not simply because the court thinks it "unfair or unjust in the circumstances" (Lipkin Gorman (a firm) v Karpnale Ltd [1992] 4 All ER 512, 532 per Lord Goff). What then is the principle of unjust enrichment? Goff & Jones The Law of Restitution (4th ed 1993, at p 16) states:
"[The principle of unjust enrichment] presupposes three things. First, the defendant must have been enriched by the receipt of a benefit. Secondly,
that benefit must have been gained at the plaintiff's expense. Thirdly, it would be unjust to allow the defendant to retain that benefit."
Burrows adds a fourth component, namely whether there are any defences?
The first requirement, that the defendant must have received a benefit, appears relatively simple. Arguments based upon what Burrows calls subjective devaluation have, however, resulted in a more complex approach. In some cases, referred to by the academics as "incontrovertible benefits", there is no question but that the defendant received a benefit. The benefit is one "no reasonable person could deny". Obvious examples are monetary benefits, realised non-monetary benefits and the saving of a necessary expense. It is more difficult to state whether realisable non-monetary benefits fall within this class. (See Goff & Jones at 23 and Burrows at 10) In other cases, notably the provision of goods and services, issues such as free acceptance of the benefit arise.
Moving to the second requirement, that the benefit gained is at the plaintiff's expense. Academic writers, and latterly the courts, have recognised this signifies two ideas. The first, and natural meaning, is that the defendant's benefit was obtained through a loss to the plaintiff. In other words the defendant's benefit is a subtraction to the plaintiff's wealth. The second sense of the expression is that the defendant's gain was acquired by committing a wrong against the plaintiff (see Burrows pp 16-21, Mason & Carter Restitution Law in Australia (1995) paras 221-223 and Goff & Jones pp 38-39). We are concerned with the first sense of the expression in this portion of the case. Goff & Jones note that the loss or expense to the plaintiff is evident in cases where the plaintiff paid the money, rendered the services or delivered the goods to the defendant (supra at 35). The learned author, however, states the inquiry is more complex where the benefit was gained from a third party.
The third requirement is that it is unjust for the defendant to retain the benefit. The concept of unjustness is not without limits and the decided cases give some guidance. In this area of the law, when one refers to the concept of unjustness one is in reality referring to a group of factors which the law recognises as calling for restitution. This is not, however, to say that the absence of a precedent is conclusive. Demonstrably the law is evolutionary in nature and as social policies develop so too will the concept of unjustness which reflects those policy concerns (see Mason & Carter at para 227). Burrows suggests the following list of factors which will render a defendant's enrichment unjust: (p 21)
"Although the list should not be regarded as closed, examination of the case law reveals there are 11 main autonomous unjust factors: mistake, ignorance, duress, exploitation, legal compulsion, necessity, failure of consideration, illegality, incapacity, ultra vires demands by public authorities, and the retention of the plaintiff's property without his consent."
Of course, even though a plaintiff may have established that the defendant has been unjustly enriched at his or her expense, if the defendant can successfully raise a restitutionary defence the plaintiff's claim will fail. Burrows identifies six established defences to restitutionary claims: change of position, estoppel, limitation, incapacity, illegality and bona fide purchase. He sees the first two, namely change of position and estoppel, as being directed towards the issue of the defendant's enrichment. The last four are said to go to the unjustness of the enrichment (supra at 27-28). He also notes that defences such as election or contracting out, which are of equal application elsewhere in the law, may be invoked.
Stimulating as the academic writing is, it cannot hope at this early stage, (or indeed ever), to address other than a limited range of possibilities. While the general principles enunciated above provide useful guidelines the attempts at categorisation are less relevant to the complicated facts of this case.
I propose therefore to consider the matter applying the general principles of unjust enrichment, and in that regard I have found influential a statement at page 591 of Goff & Jones where the learned author says:
"Subrogation nips in the bud any ambition to secure a double enrichment."
Subrogation, as we shall see, is a remedy available to avoid unjust enrichment, (Goff & Jones supra at 596), so that "unjust enrichment" can be substituted for "subrogation" in the above quote without loss of validity. EAL/ET and EIGL are, in reality, competing for the right to recover against the Crown and double recovery, or enrichment, in my view, is the issue here. This was brought out in the Plaintiffs' reply at the end of the case dealing with unjust enrichment, page 23 of the synopsis, paragraphs 8.2 and 8.3 which read as follows:
"8.2 EAL also contends that EIGL has to precisely identify the value which EAL has received and prove the objective value of that receipt.
8.3 The plaintiff's primary response is that while subrogation is a remedy designed to prevent the subrogee's unjust enrichment, the relevant enrichment is simply the retention by the subrogee of its cause of action against the third party in circumstances where the subrogee has accepted a discharge by the subrogor of the liability owed by the third party. The value of that unjust enrichment is of course determined by the extent of any recovery from the Crown in respect of it." (Subrogee is EAL; subrogor is EIGL.)
The first question in the context of this case is would EAL/ET be unjustly enriched if they were permitted to recover against the Crown and retain the proceeds for themselves? The alternative being that they hold as constructive trustees for those beneficially entitled. But, Mr Woodhouse has never suggested recovery by his clients should be on that basis.
In my judgment, there can only be one answer to this first question. I have held that the debts which AI4 owed EAL/ET as a result of their contributions to the NZS/EHL Parcel purchase have been discharged and that in law they have been repaid. If those two parties were now permitted to recover from the Crown and pocket those same sums they would be paid twice - it is difficult to conceive of a clearer case of double (unjust) enrichment.
The second question is whether in those circumstances the unjust enrichment would be at the expense of EIGL.
I appreciate that the textbook writers refer to "plaintiff and defendant" and that EIGL and EAL do not precisely fit that relationship but I do not see that as an impediment in this case. As already recorded, AI4 sues as a constructive trustee and undertakes to the Court that irrespective of whether it recovers in that capacity, or in its own right, it will hold for those beneficially entitled. The Plaintiffs prefer that AI4 recover subject to a declaration that EIGL is the beneficiary which should receive the amounts recovered on account of the EAL and ET original contributions. EAL and ET also, in a more restricted way, would accept that AI4 should recover but subject to a direction that it account to them for their original funding. EAL put it this way in its opening submissions at page 2, paragraph 8:
"8. To the extent that a cause of action of AI4 contains a primary allegation not made by EAL the causes of action themselves may not conflict. An example of that is those causes of action of AI4 which plead, inter alia, breach of section 40 of the Companies Act 1955. Consequently, if the only sustainable claim against the Crown is that of AI4, and if that claim is only sustainable by proving, inter alia, that AI4 breached section 40, there is no competition between EAL and AI4, and EAL does not challenge AI4's right to claim in that regard. However, if that were the only successful claim, AI4 would remain liable as a trustee to account to the original financiers and EAL will seek a direction that AI4 account as a trustee to EAL in respect of the original funding by EAL and ET."
As recorded at 4.3, I have held that s 40 was breached and that AI4 can recover the purchase price less reductions on a money had and received basis. Indeed, AI4 succeeds on other grounds as well, eg, constructive trustee: recipient and accessory causes of action. So, both EIGL and EAL accept that the dispute between them in which they compete for the right to sue the Crown for recovery of the original funding by EAL/ET can be resolved, not through EIGL's subrogation claim but effectively by the Court exercising its equitable jurisdiction and applying the concept of unjust enrichment which the authorities cited above show lies at the heart of all restitutionary remedies.
Clearly, if EAL/ET either retained any recovery or were paid out as the parties beneficially entitled consequent upon an AI4 recovery, that would be at the expense of EIGL. Recovery outright against the Crown would block off AI4's ability to recover that portion of the total purchase price and pass it on to EIGL because, of course, the Crown could not be subjected to double recovery. Equally, if EAL and ET obtained a direction/declaration that upon recovery by AI4 their original contributions were to be held in trust for them, AI4 could not prefer EIGL. But, as the Aylesford transaction shows, it was EIGL which put AI4 in a position to discharge its debts to EAL and ET, guaranteeing in the process the repayment of the full $A265 million investment in the preference shares. A commitment which has loaded EIGL with a huge on-going debt to EAL which with compound interest was said to be in excess of $500 million as at December of 1995. It follows that if the recovery by AI4 from the Crown goes to EAL/ET, rather than to EIGL, it will be the latter company which is denied recovery while the recipients recover twice. Thus, the double enrichment would be gained by EAL/ET at EIGL's expense.
The third issue is whether it would be unjust to allow EAL/ET to make and retain recovery or to grant to them the direction/declaration they seek in the event that AI4 recovers.
In 8.2 above, I have held that the Aylesford transaction was one that was mutually agreed, consequent upon which both EAL and EIGL were advantaged. I have also recorded the considerable recoveries made by EAL by on sale of some of the preference shares and subsequently by way of realisation of securities provided pursuant to the EHL Takeout. ET also succeeded in reducing its inter-company debt by $A7.5 million without being affected by the drop in the value of the New Zealand dollar, the currency in which its original contribution was made.
EAL and ET, having freely entered into these transactions and benefited from them, I am unable to see that it would be other than unjust for the Court now to acquiesce in or approve a second recovery by them of those already discharged debts. It was put this way by Miss Winkelmann during her reply, paragraphs 11.5 and 11.6:
"11.5 Further, the plaintiffs submit that it would not be unconscionable for the remedy to exist in these circumstances. It was intended that EIGL assume the risk on the original funding. EAL has had the benefit of the transactions by which EIGL assumed that risk. EIGL in contrast is left with a worthless and illegal investment in AI4 redeemable preference shares and a very large exposure to EAL under the EAL Takeout and securities (which leaves EAL with a right to approximately 40% of the distributions from EIGL's liquidation).
11.5 EIGL does not have an alternative remedy. The 'alternative remedy' offered by EAL is not a remedy but rather a reduction in EAL's claims in the liquidation of EIGL by any sum EAL recovers from the Crown directly. As EAL's own analysis shows (Appendix 15), this advantages EAL over other EIGL creditors by
$75.23m."
I interpolate to say that the "alternative remedy" referred to is a reference to Mr Woodhouse's indication while he was making final submissions for EAL that irrespective of the outcome of this litigation, EAL would allow as a reduction from its total debt of some $500 million any amount that it recovers from the Crown.
By taking the line that AI4 can recover provided the appropriate direction/declaration issues from the Court, both EAL/ET and EIGL have impliedly recognised the Court's jurisdiction to resolve the matter in that way. Nor is authority lacking to support that approach.
Burrows (supra) at page 28, dealing with remedies available to reverse unjust enrichment says:
"Judicial remedies reversing unjust enrichment are primarily coercive (ie court orders) but they may also be constitutive (ie altering the position of the parties)."
In a footnote related to that proposition, the learned author says:
"A declaration, eg, that the plaintiff is entitled to a restitutionary remedy or that a self-help restitutionary remedy has been validly effected can also be regarded as concerned with the reversal of unjust enrichment and, therefore, as a restitutionary remedy."
Later, at page 47, dealing with benefits conferred by third parties, and in particular whether or not there is a privity restriction, Burrows advances a second argument as follows:
"Secondly, it might be argued that it is theoretically impossible for D's gain to be at the expense of both P and X. If D's gain is £100, P and X cannot be said to have suffered separate correlating losses of £100 because that would produce an overall loss of £200 whereas D's gain is only £100. As Lionel Smith writes, '... subtraction is a "zero-sum game". The sum of losses and gains must be zero. If somebody has been enriched by subtraction in the amount of £100, then there must be one or more people who have suffered expenses which total £100; not a penny more, not a penny less.' From that starting point it would then follow that normally only X could sue D because, of the two competing claims of P and X to be the single loss-sufferer, it is self-evidently usually X, as the loss-sufferer most closely connected to D's gain, that should win.
However it seems that that approach is not an inevitable theoretical consequence of the 'at the expense of' concept. Certainly P and X, in the above example, cannot both have restitution of £100. But
there is no theoretical reason why they cannot each be regarded as suffering the same loss of £100 with any competition between them being determined if and when it arises. Most obviously there would be no conceivable restitutionary competition if only P could establish an unjust factor." [Emphasis added]
And of course, on the view I take, as recorded above, it is only EIGL in the circumstances of this case which can 'establish an unjust factor'.
Reference may also be made to the decision of the House of Lords in Lord Napier and Ettrick v Hunter [1993] AC 713. This was an orthodox case of stop loss insurers seeking subrogation in respect of damages recovered by insured Lloyd's names by way of independent action. The names' apparent refusal to recognise the insurer's rights was categorised as unconscionable, and of that Lord Templeman said at 738, lines D to G:
"It is next necessary to consider how equity copes with such unconscionable conduct. Saville J. and the Court of Appeal appear to have thought that equity can only interfere by creating a trust fund held in trust by trustees for different beneficiaries in different shares, the trustees being burdened with administrative and investment duties, the trustees being liable for all the duties imposed on trustees but being free from liability if the trust fund is lost without negligence. I agree that if this were the only method of protecting the rights of an insurer the practical disadvantages would be fearsome. Fortunately, equity is not so inflexible or powerless. In order to protect the rights of the insurer under the doctrine of subrogation equity considers that the damages payable by the wrongdoer to the insured person are subject to an equitable lien or charge in favour of the insurer. The charge is imposed by equity because the insurer, once he has paid under the policy, has an interest in the right of action against the wrongdoer and an interest in the establishment, quantification, recovery and distribution of the damages awarded against the wrongdoer. It would be unconscionable for the insured person, who has received £100,000 from the insurer, to put damages of £130,000 into his own pocket without providing for the recoupment of the insurer who only contracted to indemnify the insured person."
This is another situation where "unjust enrichment" can replace "subrogation" without doing violence to the reasoning. I see no reason why I should not declare in this case, if
need be, that AI4 on behalf of EIGL should have a lien on any recovery made by EAL/ET from the Crown.
To like effect is the case of O'Sullivan v Williams [1992] 3 All ER 385. In that case a boyfriend going on holiday had left his car in the care of his girlfriend. While parked outside her house at night it was flattened by an excavator that fell off a passing truck. Both issued proceedings, he for damage and loss of use upon return from holiday, she for loss of use, nervous shock and other distress. Boyfriend bailor however settled his action and the Court held that girlfriend bailee, could not pursue hers. Nonetheless, the Court of Appeal held (Fox LJ) at 387, line J:
"If the bailor recovers damages and the bailee has some interest in the property enforceable against the bailor, then the bailor must account appropriately to the bailee."
Again, a situation where a mechanism was found to resolve the competing claims. By analogy a recovery against the Crown by EAL/ET here would raise an obligation owed to EIGL upon which, in view of the dispute between the parties, the Court in its equitable jurisdiction can adjudicate.
Wylie J took a similar view in Bell v John Holland Properties New Zealand Ltd (High Court, Auckland, CL 121/89, 12 July 1991). His Honour declined to strike out a cause of action based on unjust enrichment saying at pages 5-6 of the judgment:
"In recent years the Courts appear to have been moving closer to the concept of relief being available on the grounds of unjust enrichment, even though it may be difficult to fit that concept into any of the conventional causes of action. Although I do not think we yet have any binding authority to constitute such a cause of action in its own right, the tendency is to give relief against unjust enrichment by way of conventional constructive trust concepts or in other ways and the Courts may yet take the final step and constitute unjust enrichment on its own as an independent cause of action." [Emphasis added]
Finally, I refer to the leading judgment of Millet LJ in the Court of Appeal decision Boscawen v Bajwa [1995] EWCA Civ 15; [1995] 4 All ER 769. At 777, between lines E and G the Lord Justice said:
"Subrogation, therefore, is a remedy, not a cause of action (see Goff and Jones Law of Restitution (4th edn, 1993) pp 589 ff, Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 104 per Lord Diplock and Re TH Knitwear (Wholesale) Ltd [1988] 1 All ER 860 at 864, [1988] Ch 275 at 284 per Slade LJ). It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant's unjust enrichment. Equity lawyers speak of a right of subrogation, or of an equity of subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other." [Emphasis added]
Since I am invited to dispose of the matter by way of declaration and/or direction related to recovery by AI4 against the Crown, and as I am satisfied that there is jurisdiction to do so, I propose to follow that course. The precise form of the judgment or judgments and the accompanying declarations or directions I leave until later in this section. I set out hereunder, however, the Plaintiffs' position, as advised during its reply at the end of the case, consequent upon such a result:
"54.71 As will appear more fully in the section of the plaintiffs' submissions on election, it is submitted that, assuming liability can be established against the Crown on at least one basis, the simplest resolution of the various claims of the plaintiffs in this case is for judgment to be entered for and enforced by AI4. Whether or not AI4 succeeds in its claims made as trustee or on those made in its own right, it is the plaintiffs' submission that AI4 would hold any recoveries from the Crown as trustee. Subject to one concern this course would be that which is preferred by the plaintiffs. The concern relates to whether EAL would remain one of the beneficiaries of that trust. The plaintiffs submit that it is open to the Court to rule that as between EIGL
and EAL, it is EIGL and not EAL which would be a beneficiary of the recoveries of AI4 in respect of the portion derived from the receipt by the Crown of the moneys provided by EAL.
So, effectively, on this result, EIGL does not press for a decision on its subrogation claims. I shall, nonetheless, discuss the subrogation claims because it maybe that at some later stage a finite ruling on them will be required.
8.7 EIGL's subrogation claim
The claim is at J.1.2 (paragraphs 174 to 176). The pleading gathers up all the preceding factual allegations and refers to the individual claims made by EAL, EFGL/EFSL and ET for constructive trust: accessory and recipient liability, money had and received and illegality claims. It then proceeds to plead, in paragraphs 174B, 174C and 175 as follows:
"174B. BY reason of the refinancing of EAL, ET, EFGL and EFSL by EIGL as described in paragraphs 68-81 above, the loss suffered by those companies was transferred to EIGL.
174C. BY virtue of the matters alleged in paragraphs 174, 174A and 174B, to deny EIGL the right to assert against other parties, including the Crown, the rights and remedies of EAL, ET, EFGL and EFSL would unjustly enrich those companies and the Crown at the expense of EIGL.
175 IN the premises EIGL is subrogated to the rights and remedies of EAL, ET, EFGL and EFSL (as contributors to the initial funding of the NZS/EHL Parcel) against the Crown."
I do not propose to address the subrogation claim in respect of EFGL/EFSL, because that claim has already been dealt with pursuant to EIGL's claim as assignee of the rights relative to that $40 million contribution by those parties jointly. The Plaintiffs, as I understand it, only advanced the subrogation claim against the possibility that the assignment was challenged, but in fact the Crown acknowledges it as valid.
So the recovery sought is in respect of EAL's original contribution of $90,532,832 and ET's contribution of $8,179,245. Because of certain repayments however, the claim made in respect of EAL's contribution reduces to $86,232,522 and although the pleading seeks recovery of the sum of $9,958,837 in respect of ET, I consider, as explained elsewhere, that recovery cannot be higher than the original contribution to the NZS/EHL Parcel funding. The higher figure claimed for ET arises simply because between the original contribution and the refinancing the exchange rate moved against the New Zealand dollar and the increased amount was required to replace ET's original advance of $A7.5 million.
The Crown, although joining forces with the Plaintiffs in contending that the refinancing amounted to a discharge of AI4's indebtedness and a repayment of EAL and ET's original contributions, contends that the subrogation claim never gets off the ground for two preliminary reasons. First, that AI4 cannot sue because it was itself a wrongdoer in paying on the purchase price of the NZS/EHL Parcel knowing that the funds had been gathered in breach of s 62. That, of course, is an aspect of the unclean hands and ex turpi causa arguments which I have already rejected for the reasons set out in 1.5. Secondly,
the Crown contends that the repayment precludes any recovery against it, but I have rejected that argument also for the reasons set out in 8.5 above.
Addressing the subrogation claim itself, the Crown contends that EIGL was a volunteer and an "officious intervener". I rejected both those suggestions in the penultimate paragraph of 8.2 above.
In a series of detailed propositions EAL argues that EIGL's subrogation must fail. It is contended that the Aylesford transaction was put through for the benefit of EIGL and that it was advantaged as a result. Also, EAL contends that the proper inquiry is whether its loss was made good and that the contractual nature of the Aylesford transaction is irrelevant. The point is encapsulated in paragraph 4.20 on page 28 of the synopsis of EAL's closing:
"4.20 In determining whether the refinancing provides a defence to the Crown the proper enquiry is not an enquiry as to the contractual nature of the refinancing transactions. It is not an enquiry as to whether there has been a repayment or any other contractual result. The proper enquiry is whether the refinancing restored to EAL the equivalent amount of money that EAL contributed towards the funding of AI4's acquisition of the NZS/EHL Parcel; that is, whether the refinancing restored to EAL what it was otherwise entitled to from the Crown. The shorthand for these related propositions, used in EAL's opening, is to enquire whether the refinancing made good EAL's loss. The term 'loss' is used in a general sense to include EAL's right of restitution."
In regard to that submission, a statement in Goff & Jones (4th ed 1993) at 596 is pertinent. There the learned author says:
"subrogation is granted to prevent another's unjust enrichment at the plaintiff's expense. A plaintiff should not, therefore, be allowed to improve his position or to make a profit by succeeding to the rights of another. Subrogation should be permitted only so far as it is necessary to enable him to recoup the loss suffered; here the loss suffered is the proper measure of the defendant's benefit, gained at the plaintiff's expense." [Emphasis added]
As can be seen from my discussion in 8.6 regarding unjust enrichment, the benefit that EAL would gain at EIGL's expense would be the double recovery of its original contribution which would effectively prevent EIGL from recovering its refinancing of that original contribution through AI4.
EAL also argues that what was involved was novation or accord and satisfaction and I have dealt with those arguments elsewhere. The contention in Spargo's case is also relied upon, but in 8.6 I distinguished that case holding that it was not relevant to the circumstances being addressed here.
Another substantial argument advanced by EAL is that subrogation is a remedy and not a cause of action. The argument is that before EIGL can be awarded the remedy it must establish the cause of action which can only be unjust enrichment. But, I have held in Section 5 that there is no independent unjust enrichment cause of action. It is at this point that what Burrows (supra) at page 93 describes as "the complexity of the relationship between subrogation and unjust enrichment" becomes apparent. On the preceding page of the same text the author says "subrogation is a difficult technique to pin down to underlying principle ...". All one can say with certainty is that it lies firmly within the law of restitution and is available as noted earlier to "nip in the bud" any attempt at double enrichment.
EAL recognises that the claim here is outside the normal run of subrogation cases. Indeed, in my view, right outside the well-established insurance situation with its requirement that the action be brought in the name of the assured. Thus in paragraph 4.66 of EAL's closing at page 42 it is submitted:
"4.66 The fact that EIGL's claim for subrogation does not fall within an established category of case should not, in principle, be an automatic bar to the Court's granting subrogation. Where,
however, subrogation is sought outside the established categories of case, it should only be granted on the basis of the principles which underlie the awarding of subrogation in the established categories of case. Those underlying principles, it is submitted, are to be found in the law of restitution. There are both judicial statements of authority, and overwhelming academic support, for the view that (1) subrogation is a remedy, not a cause of action and (2) it is a remedy which may be awarded to prevent or reverse an unjust enrichment."
A little later in the submission at 4.74 the synopsis reads:
"4.74 Although EIGL claims that EAL was unjustly enriched, EIGL does not seek any direct relief against EAL. In particular EIGL does not seek a judgment against EAL equal to the value of the enrichment that EAL unjustly received at the expense of EIGL. This should not, however, obscure the fact that EIGL's claim for subrogation is in substance a claim against EAL. "
As I have endeavoured to point out in 8.6 above, the issue here is not so much a claim by EIGL against EAL but a competition between the two as to which of them should be entitled to the benefit of any recovery from the Crown.
Looked at as a claim by EIGL against EAL, the latter says it would have four good defences as follows:
1) EAL made restitution to EIGL of the "money" which EIGL contributed to the refinancing
2) Change of position
3) Set-off under Rule 535 of the High Court Rules
4) Settlement Deed of 1991.
As to the first defence, restitution of the "money". That argument was advanced on the basis that the transactions shown in Chart 17 flowed through in sequence rather than occurring simultaneously. Mr Manousaridis, as I understood him, accepted that if the transactions were simultaneous there could be no question of restitution. I am satisfied
on the evidence that the whole complex scheme set out in Chart 17 was designed by Mr Fitzgerald, the Chief Executive of EAL, to occur simultaneously notionally on 30 June 1988. The only exception to that would be the provision of the EAL Takeout which followed later as a result of further negotiations and, in particular, EAL's insistence on improved security.
The second defence of change of position, seeks on the one hand to challenge the adequacy of the consideration which led to the discharge of EAL's debt and to rely upon subsequent advances of money to EIGL. As indicated earlier, I am satisfied that EAL entered into the Aylesford transaction because it saw distinct advantages in doing so and agreed to accept the consideration available. It is too late, under those circumstances, to suggest that by doing so it is entitled to a change of position defence. So far as the second point is concerned, it has not been established on the evidence that it was a condition of the Aylesford transaction that thereafter EAL would continue to make advances.
The third defence is the set-off under Rule 535 of the High Court Rules. The Rule itself refers both to set-off and counter-claim and it seems to be the case that if EIGL had proceeded directly against EAL the latter could have successfully raised a counter-claim. On the other hand, the moratorium section in the Corporations (Investigation and Management) Act 1989 provides as follows:
"Section 42 - Moratorium
(1) Where a corporation is declared under section 38 of this Act to be subject to statutory management, no person shall-
(a) Commence or continue any action or other proceedings, including proceedings by way of counterclaim, against that corporation:
(b) ...
(c) ...
(d) ...
(e) ...
(f) ...
(g) ...
(h) Exercise any right of set-off against that corporation." [Emphasis added]
But, pursuant to subsection (2), leave may be granted by the Statutory Manager or the Court. On balance one would expect leave would be granted by the Court so hypothetically that defence might have prevailed.
The fourth defence involves the Deed of Settlement entered into between the Plaintiffs and EAL in 1991. EAL invites me to consider the Deed, construe it and hold that, pursuant to it, EIGL cannot maintain its claim for subrogation. EIGL responds first that the interpretation of the Deed is not an issue before the Court and even it were, correctly interpreted the Deed would show that EAL had bound itself not to stand in the way of EIGL's subrogation claim against the Crown. The Deed was produced in evidence by Mr Fischl about a third of the way through the trial. On the other hand, when EAL came back into the picture I directed that both it and the Plaintiffs should file lists of issues which were to serve as pleadings between them and identify those matters in dispute. EAL did not identify the Deed and its interpretation as a matter in dispute and the Plaintiffs say that had it done so, they may well have conducted their cross-examination of Mr Fischl differently. I would not be prepared to rule on the construction of the Deed without hearing further from counsel and giving each side the opportunity to apply to call further evidence on the matter. I emphasise that I would entertain an application to call further evidence, whether it would be granted or not would of course depend upon the arguments advanced at that time.
In broad terms EIGL's answer to all these submissions is that the unique circumstances of this case dictate that its subrogation claims should not be confined by the established categories. Statements of high authority to be referred to shortly, to the effect that the categories are not closed, are relied upon. Counsel submitted, and I have already held, that EAL and ET's debts were discharged and that in law that means they were repaid.
That being the case it is argued that defences based on the proposition that although repayment has taken place, money or money's worth was not paid, cannot succeed. In that regard the Plaintiffs rely substantially on the cases that I discussed in 8.3 which persuaded me that discharge and payment had in fact and in law been effected.
As can be seen from my discussion so far, (and leaving aside for the moment the defences of counter-claim and Settlement Deed), EIGL's difficulties with the subrogation claims stem largely from uncertainty as to the parameters of subrogation and the means by which the benefits of the remedy can be captured. Goff & Jones (supra) suggest that ultimately subrogation will be recognised as the "general remedy to prevent unjust enrichment". But equally the learned author concedes at page 599 "It is difficult to predict whether, and in what direction, the boundaries of English law of subrogation will be extended." Those comments are amply borne out by the views expressed in the House of Lords in Orakpo v Manson Investments Ltd [1977] 3 All ER 1. Of course, the law has moved on since that case with unjust enrichment being recognised in Lipkin Gorman (supra). At page 7 in the leading judgment by Lord Diplock between lines D and F the following is found:
"My Lords, there is no general doctrine of unjust enrichment recognised in English law. What it does is to provide specific remedies in particular cases of what might be classified as unjust enrichment in a legal system that is based on the civil law. There are some circumstances in which the remedy takes the form of 'subrogation', but this expression embraces more than a single concept in English law. It is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances. Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company's lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment.
This makes particularly perilous any attempt to rely on analogy to justify applying to one set of circumstances which would otherwise result in unjust enrichment a remedy of subrogation which has been held to be available for that purpose in another and different set of circumstances."
While at page 12 of the report Lord Salmon said at line E:
"The test whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be."
At page 14 , Lord Edmund-Davies said at line B:
"Apart from specific agreement and certain well-established cases, it is conjectural how far the right of subrogation will be granted though in principle there is no reason why it should be confined to the hitherto- recognised categories (Goff and Jones, The Law of Restitution)."
So, clearly, there is considerable flexibility concerning the equitable nature of the doctrine of subrogation but little guidance as to how the doctrine should be applied in out-of-the-ordinary circumstances such as this case throws up.
It is because of this uncertainty and the possible need to hear further evidence and argument on the Settlement Deed that I have decided not to rule finally on whether the subrogation claims succeed or not. The firm conclusions that I have reached on the causes of action advanced by AI4 on behalf of all the Plaintiffs against the Crown and my resolution of the competition between EAL and EIGL by the application of the concept of unjust enrichment in 8.6 above mean that a definitive answer on the subrogation claim is not required to resolve the disputes between the parties.
Against the possibility that such a ruling may be required in the future, however, I reserve leave to any party to apply for it and if such application is made it can include leave to
call further evidence. Furthermore, I shall probably require the issue to be reargued concentrating on those areas of difficulty which I have endeavoured to highlight in the above discussion.
In earlier sections of this judgment I have, for convenience, dealt with the subrogation claims provisionally (ie, without deciding) on the basis that subrogation would be available. Specifically at the following places:
3.11, page 336 under the heading "EIGL's illegality claims within the subrogation claim"
4.5, page 360 under the heading "EIGL's subrogation claim for money had and received"
Having now concluded that a decision on subrogation is not required and, that if it were, I should not make it without first hearing further from the parties, all the above subrogation claims, save that at 4.5, must be regarded as having the same status. That is, to put the matter beyond doubt, the claims remain undecided but if required at a subsequent stage applications can be made and decisions will follow. Leave is reserved in that regard. EIGL's claim for money had and received is not included in that reservation because it failed in any event because the requirements of common law tracing could not be satisfied.
8.8 The end result on unjust enrichment: subrogation
In 8.5 above, I have held that EAL, on behalf of itself and as assignee of ET's rights, has established good causes of action against the Crown based on constructive trust: knowing
receipt and illegality. On that basis EAL is entitled to judgment for the two amounts of the original funding contributions, namely $90,532,832 (EAL's) and $8,179,245 (ET's). That recovery, however, would be reduced by a portion of the $64 million settlement according to the agreement reached between counsel on 16 May 1996, a copy of which is at page 140 of Volume II. I calculate the reduction at 30.2% of the $64 million.
Judgment would therefore be:
EAL's recovery $90,532,832
ET's recovery 8,179,245 $98,712,077
$98,712,077 = 30.2% of the total claim of $327,224,013 ∴ the recovery reduces
by 30.2% of $64,000,000 19,328,000
Judgment for $79,384,077
=====
I have set the above judgment out in detail because it may have a bearing on the question of costs as between EAL and the Crown.
As will be apparent from 8.6 above, however, I propose to exercise my inherent jurisdiction (see Pinson v Pinson (1991) 5 PRNZ 177) and/or that available to me under Rule 565 of the High Court Rules to order a permanent stay of execution. Such a stay is necessary, as I have earlier explained, to prevent EAL and ET from being unjustly enriched by double recovery of their original advances at EIGL's expense.
Also, pursuant to ss 2 and 10 of the Declaratory Judgments Act 1908 I order that upon recovery by AI4 from the Crown on any of its causes of action for constructive trust: knowing receipt, dishonest assistance, illegality, money had and received or statutory trust, plus interest, if any, it shall hold such portion of the judgment and interest thereon
as derives from the original funding of EAL and ET on trust for EIGL and account to the beneficiary accordingly.
Leave is reserved to all parties to apply should implementation of the orders as to stay and pursuant to the Declaratory Judgments Act present problems which I do not have the prescience at this time to discern.
SECTION 9: RESULTS ON PLAINTIFFS' CAUSES OF ACTION
At the end of this section there are four schedules or charts in which are recorded the results in respect of each Plaintiff on each cause of action advanced.
Glenbrook's and EAL's results are not included but they can be shortly stated. Glenbrook's claim failed. EAL's claims succeeded on constructive trust: knowing receipt and illegality but recovery on the judgments is permanently stayed for the reasons given in 8.6 and as specifically ordered in 8.8.
There are three important points to make about the information in the charts.
First, the Plaintiffs have run their case throughout on the basis that all claims advanced by EHL and EIGL, (whether in its own right, as refinancier or assignee of EFGL/EFSL's original claims), are alternative to AI4's claims. AI4 has succeeded, inter alia, on its constructive trust: knowing receipt, illegality and money had and received claims. On any one of those causes of action, (and possibly on all three), judgment for the top award of $189,774,013 could be entered.
Secondly, upon judgment being entered for AI4 in the sum of $189,774,013 all other claims will merge in that one judgment. AI4 will have to elect upon which cause of action it wishes to enter judgment. The High Court Rules are silent as to how a situation such as that which occurs here should be resolved. Obviously, however, there can be no double recovery. $189,774,013 is the maximum judgment the Plaintiffs can recover on any basis. The cases on election appear to establish that the Court may enter judgment on more than one cause of action leaving the Plaintiff to elect: see United Australia Ltd v Barclays Bank Ltd [1941] AC 1, 19, 21; Mahesan slo Thambiah v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] AC 374, 382 and Meng Leong Development Pte Ltd v Jip Hong Trading Co Pte Ltd [1985] 1 AC 511, 525. This
rule was affirmed by the Privy Council this year in Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1995] UKPC 54; [1996] 2 WLR 192. At page 197 of the decision it is stated:
"The basic principle governing when a plaintiff must make his choice is simple and clear. He is required to choose when, but not before, judgment is given in his favour and the judge is asked to make orders against the defendant."
Thirdly, once recovery is made by AI4, it will then hold as trustee in terms of its undertaking to the Court, for the original funding beneficiaries. There should be no difficulty about calculating the entitlements, but if the assistance of the Court is required directions can be sought along with the costs and interest applications referred to below.
Other results which flow from my conclusions may also be dealt with here. Since the Plaintiffs have substantially succeeded there can be no question of them having to pay costs. I therefore direct the immediate payment out of Court to the Statutory Managers of the $2,760,000 deposited by the Plaintiffs for security for costs. The position is not so clear, however, so far as EAL and Glenbrook are concerned, and the security of $100,000 deposited on their behalf should remain in Court pending judgment following the costs and interest hearings.
The costs and interest hearings will take place in the week commencing 22 July 1996. A conference to timetable those hearings and give any necessary directions will be arranged. The four schedules will be found on the following pages: AI4 first, then EHL and EIGL.
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP No. 2455/89
BETWEEN EQUITICORP INDUSTRIES GROUP
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
First Plaintiff
AND EQUITICORP HOLDINGS LIMITED
(In Statutory Management) a duly incorporated company having its registered office at Auckland, Investment Holding Company
Second Plaintiff
AND ARARIMU INVESTMENTS FOUR
LIMITED (In Statutory Management) a duly incorporated company having its registered office at Auckland
Eighth Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Twelfth Defendant
AND EQUITICORP AUSTRALIA LIMITED
(In Liquidation) a duly incorporated company under the laws of New South Wales, Australia and having its registered office in Sydney
Fourteenth Defendant
Counsel: Plaintiffs: J A Farmer QC, S S Elias QC (until 18 August 1995),
S B W Grieve, W G Manning, H D Winkelmann,
A F Cook and L N D Way (from 23 February 1996)
12th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
14th Defendant: P F A Woodhouse, N Manousaridis, A C Challis and J L Hubble (from 13 November 1995)
CP No 111/94
BETWEEN GLENBROOK STEEL HOLDINGS
LIMITED a duly incorporated company having its registered office at Auckland, Holding Company
Plaintiff
AND HER MAJESTY'S ATTORNEY-
GENERAL in respect of Her Government in New Zealand
Eleventh Defendant
Counsel: Plaintiff: P F A Woodhouse, N Manousaridis, A C Challis and
J L Hubble (from 13 November 1995)
11th Defendant: D L Mathieson QC, A I M Tompkins, K L Clark,
R J Sussock (until 19 October 1995), and C Deuchrass (from 19 October 1995)
Consolidated Hearing: 198 days between 21 November 1994 and 21 December
1995, plus 7 additional days, 23 February, 22 March,
19 April, 1, 2 and 16 May and 21 June 1996
Judgment: 12 July 1996
JUDGMENT No 47 OF SMELLIE J
Summary of Findings : Volume III
Solicitors:
CP 2455/89 Phillips Fox for Plaintiffs
Crown Law Office for 12th Defendant Hesketh Henry for 14th Defendant
CP 111/94 Hesketh Henry for Plaintiff
Crown Law Office for 11th Defendant
INDEX OF SCHEME OF JUDGMENT
Section 1: Preliminary and stand alone matters 1
Overlap with EIGL's subrogation claims 31
Section 2: Claims based on recipient and accessory
liability
(Knowing receipt: dishonest assistance) 72
respect of either recipient or accessory liability 230
of action prima facie succeed 249
Section 3: The Plaintiffs' claims based on illegality 298
|
298
|
|
|
3.2 Factual background and related legal matters
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302
|
|
3.3 The effect of any breach of s 40
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307
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|
3.4 The rule in Trevor v Whitworth
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310
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|
3.5 Tainting of the contract transferring the
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Page
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NZS/EHL Parcel 312
of s 62 Companies Act 1955 and/or s 129
Companies (NSW) Code)? 318
refinancing and interest payments 336
$40 million assigned from EFGL/EFSL 343
Section 4: The Plaintiffs' claims for money had and received 348
had and received 357
and received 360
$40 million assigned from EFGL/EFSL 363
Section 5: The statutory trust causes of action (s 154
Corporations
(Investigation and Management) Act 1989) 365
Section 6:
EIGL's claims based upon unjust enrichment at J.1.2B 374
Section 7: The
Crown's defences 377
|
377
|
|
|
7.2 Clean hands
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377
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|
7.3 Validation
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378
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7.4 Estoppel
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385
|
|
7.5 Section 18C Companies Act 1955
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391
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|
7.6 Ratification
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406
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7.7 Other defences
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411
Page
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Section 8: Is subrogation available to EIGL re EAL v the Crown 414
issues between EAL/ET and EIGL 414
and what brought them about 417
payment/discharge of EAL? 424
amount to discharge and payment? 439
what is the result? 440
expense of EIGL? 445
enrichment: subrogation 467
Section 9: Results on the Plaintiffs' causes of action 469
VOLUME II
This volume contains the charts and exhibits referred to during the course of the judgment, arranged where possible in date order.
VOLUME III
This volume contains a summary which is part of the judgment.
GLOSSARY OF ABBREVIATIONS
AF&I Ararimu Farms & Investments Limited
AHL Ararimu Holdings Limited
AI One Ararimu Investments One Limited
AI4 Ararimu Investments Four Limited
AI4 Directors Hawkins and Darvell
Adams Grant Adams
Allan Christopher John Allan
Aurora Aurora Group Limited
Avant-Garde Avant-Garde Finance Limited
Aylesford Aylesford Securities
Aylesford A Shares 265 million A Class Preference Shares in the capital
of Aylesford, held by EIL and redeemed on 30 June 1988
Aylesford B Shares 265 million B Class Preference Shares in the capital
of Aylesford, held by EAL and then subsequently (as to 80 million) by EFL
BWL Buttle Wilson Limited
BWL Takeout Deed The Deed dated 19 October 1987 between BWL,
RCL, AHL and EHL in which EHL agreed that if necessary the Equiticorp Group would lend the funds to enable RCL and/or AHL to complete the purchase of the NZS/EHL Parcel from the Crown
BWL Underwriting Agreement The Agreement dated 19 October 1987 between
BWL and the Crown, in which BWL agreed to purchase or procure a nominee to purchase the NZS/EHL Parcel from the Crown on 20 March 1988
CHL(NZ) Capitalcorp Holdings Limited
Concorde Concorde Limited
Coney Miles Heathcote Coney
Darvell Robert Paul Darvell
Denton Hall Denton Hall Burgin & Warrens
Directors The directors of both EHL and EIGL - Hawkins, Adams, Coney, Gunthorp, Saunders, Stanes, Taylor, Walsh, Marcus Clark and Wilson
E.Int Equiticorp International Limited
EAL Equiticorp Australia Limited
EAL Takeout The "Subscription and Purchase Agreement Regarding Class B Preference Shares" between EIGL, Aylesford and EAL dated 30 June 1988, by which EIGL agreed that it would acquire 265 million Aylesford B Shares from EAL if required to do so on or before 30 June 1989
EFGL Equiticorp Finance Group Limited
EFHL Equiticorp Financial Holdings Limited (formerly Associated Midland Limited)
EFL Equiticorp Finance Limited
EFL Takeout The agreements dated 22 August, 20 September, and 27 September 1988 between EIGL, Aylesford and EFL, by which EIGL agreed that it would acquire 80 million Aylesford B Shares from EFL if required to do so on or before 30 June 1989
EFSL Equiticorp Financial Services Ltd
EHL Equiticorp Holdings Limited
EHL Directors "The Directors" in their capacity as directors of EHL
EHL Takeover Offer The written offer to the shareholders of EHL dated
28 May 1988 by which EIplc made a conditional
takeover offer for all of the issued share capital of EHL
EIGL Equiticorp Industries Group Limited
EIGL Directors "The Directors" in their capacity as directors of EIGL
EIL Equiticorp Industries Limited
EIplc Equiticorp International plc
Elders Elderbank Limited
Elders' Loan The $105 million loan advanced on 18 March 1988 to AI4 through Setar 72 and Shoeshine 59 as intermediaries
ET Equiticorp Tasman Limited
EUT Chain Those companies through which the funding for the NZEUT passed, being CHL(NZ), Watstone 82 and Watstone 74
Ewoch Chain A term used by Equiticorp executives to refer to the companies Avant-Garde, Capitalcorp Investments (UK), Capitalcorp Europe, CHL - Hong Kong Branch and CHL(NZ)
FIL Feltrax International Limited
F&P Fisher and Paykel Industries Limited
FSL Feltrax Steel Limited
Gunthorp Ian Lindsay Gunthorp
Harford Graham Bramwell Harford
Hawkins Allan Robert Hawkins
HK Trustees Messrs P J Lawrence and M R Boyte
HKEUT The Hong Kong Employee Unit Trust
HKEUT Purchase Agreement The Sale and Purchase Agreement dated 30 August
1988 by which the HKEUT agreed to buy from AI4 88 million EIplc shares and 44 million EIplc options
HKEUT Parcel The EIplc shares and options sold by AI4 to the HKEUT
HKSB Hong Kong and Shanghai Banking Corporation
Mackay Paul Robert Mackay
Marcus Clark Timothy Marcus Clark
NZEUT The New Zealand Employee Unit Trust
NZS New Zealand Steel Limited
NZS/EHL Parcel The 92,961,364 ordinary shares in the capital of EHL
issued by EHL to the Crown pursuant to the NZS Purchase Agreement
NZS Purchase Agreement An agreement in writing dated 19 October between
the Minister and EHL by which the Minister agreed to sell to EHL its shareholding in NZS in consideration for shares in the capital of EHL which EHL agreed to issue to the Crown
Ratner Peter Edward Ratner
RCL Richardson Camway Limited
RWS Rudd Watts & Stone
Saunders Peter William Saunders
Setar 72 Setar Seventy Two Limited
Shoeshine 59 Shoeshine Fifty-Nine Limited
Shoeshine 70 Shoeshine Seventy Limited
Stanes Peter James Dale Stanes
Taylor Maxwell Colin Taylor
Vega Vega Limited
W73 Watstone Seventy Three Limited
W74 Watstone Seventy Four Limited
Watstone 82 Watstone Eighty Two Limited
WIL Wellesley Investments Limited
Walsh Brian Vincent Walsh
Windmeyer Joseph Windmeyer
Wilson William Wilson
SUMMARY
This summary is part of judgment number 47 which is the substantive judgment in these proceedings. It is intended to reflect the detailed reasoning in the earlier volumes. If, however, conflict or ambiguity is perceived, then what is found in the body of the judgment is to prevail over what is said in this summary.
Overview of facts
New Zealand Steel Ltd (NZS) was incorporated on 26 July 1965, following a Government instigated investigation into the economic and technical feasibility of a steel industry based on the iron sand deposits on the west coast of the North Island of New Zealand. Prior to incorporation, the Government undertook to assist NZS by subscribing for 25% of the equity capital, granting substantial loans and ensuring access to raw materials. It also underwrote the initial issue which was under subscribed and as a result held 46% of the initial capital.
From then on the fledgling industry required more and more Government money. Two reconstructions of the mill were undertaken to make it viable, the second of which was still under way when more than two decades later the Government of the day decided to sell its interests in the undertaking.
The Minister of Trade and Industry at the time was the Hon David Caygill who said in his evidence in chief that "like many of the so called 'Think Big' projects, the NZS expansion had the characteristics of a 'bottomless pit' into which the taxpayers were expected to, and did, pour money with little prospect of a satisfactory return". By then the New Zealand taxpayer had contributed in excess of $2.1 billion to the enterprise
and the end was not yet in sight. On the other hand, the advice the Government was receiving at the time was that the entire project would not fetch more than $150 to
$200 million on the open market. The involvement in the undertaking can only be described as a disaster from which Mr Caygill and his colleague, the Minister of Finance, Sir Roger Douglas, were determined to extricate the Government.
It was Equiticorp Holdings Ltd (EHL) which ultimately acquired New Zealand Steel from the Government by exchanging Equiticorp shares for New Zealand Steel shares. That transaction does not give rise to any claims in this litigation.
Concurrently with the exchange of shares agreement however, the Government entered into an agreement with Buttle Wilson Ltd (BWL) whereby BWL agreed to underwrite the buy-back of the Crown's Equiticorp shares some five months later. Issues arising out of that second transaction are at the heart of this litigation.
The Agreements were entered into on 19 October 1987 just before the sharemarket crash. Prior to execution however, the Crown was advised that EHL (the holding or parent company of the Equiticorp Group) was to be the financier of last resort for the sub-underwriters BWL had arranged. Recognising that that could well lead to breaches of s 62 of the Companies Act 1955, the Crown required those arrangements to be unwound. Mr Ratner of Rudd Watts and Stone, Wellington (RWS) who was acting for the Crown in the matter, certified that all was in order for execution of the documents. In fact, however, BWL had refused to relinquish EHL as its back stop and that was known to not only Ratner but also to the Crown's selling agents and financial advisers (Mr Clatworthy of BWL and Mr Holyman of Samuel Montagu, Merchant Bankers of London).
Once the crash occurred, the value of the EHL shares fell from $3.52 to less than $1. Even then the price being paid on the market was artificially supported by an illegal
share support scheme which the Equiticorp Group was funding. A day or so before final settlement on 17 March 1988, a shelf company which Hawkins and Darvell had positioned for the purpose was nominated as purchaser. Of the total purchase price of
$327 million, $105 million had been raised from Elders Merchant Bank (Elders) but the balance of $222 million was to be provided from EHL and its subsidiaries, about half of it coming across the Tasman from the Australian subsidiaries, EAL and ET.
A week before settlement on 11 March 1988, a letter was received by the Crown from Equiticorp which I have held put it on notice that in all probability all but $105 million of the $327 million settlement figure was to be funded from the Equiticorp Group. Despite this, and the Crown's appreciation that the purchase was grossly improvident from AI4's point of view, no enquiries were made as to the source of the money or the legitimacy of the payment. Settlement occurred by the assignment of some 13 bank deposits plus the Elders sum of $105 million to the Crown. Much of the money in the deposits, especially that from Australia, had followed a tortuous route via Hong Kong, the Turks and Caicos Islands in the West Indies and Vanuatu before reaching AI4. The purpose of that money laundering was either to disguise its source or attempt a circumvention of the provisions of s 62 of the Companies Act.
After settlement, the Australian companies pressed for repayment expressing concern that their auditors would not pass their 30 June 1988 annual accounts because of the high level of inter-company unsecured advances and that if that happened, funding lines available in Australia would dry up. It was in those circumstances that the New Zealand subsidiary and flagship of the investment group, EIGL, refinanced AI4 thus enabling it to repay the Australian subsidiaries.
A little over a year after the settlement on 17 March 1988, all the New Zealand based companies concerned in this litigation by Order in Council dated 3 April 1989, were placed in statutory management pursuant to the provisions of the Corporations
(Investigation and Management) Act 1989. The Australian subsidiaries were placed in liquidation at about the same time pursuant to applicable State and Commonwealth legislation. Approximately eight months later, on 14 November 1989, the Statutory Managers commenced these proceedings. Originally, there were sixteen or more defendants but, by September of 1994, all but the Crown had settled. The total recovery being $64 million.
The causes of action advanced and defences raised
Based upon the facts indicated above, the Plaintiffs advance four main causes of action which are:
1. Constructive trust: knowing receipt
2. Constructive trust: dishonest assistance
3. Illegality
4. Money had and received.
A fifth may be added, namely Statutory Trust pursuant to s 54(2) of the Corporations (Investigation and Management) Act 1989.
In respect of all of the above causes of action, AI4 (although it is not expressly spelt out in the pleadings) claims both in its own right and as a constructive trustee for the companies which provided the original funding. The first two are equitable causes of action and require inter alia proof of knowledge (actual or constructive of the Baden
(iii) type) on the part of the Crown before liability can be sheeted home. Numbers three and four are statutory/common law causes and the fifth is purely statutory.
What the Plaintiffs are saying in all five is that the Crown wrongly had become possessed of their money and in one way or another should be obliged to return it.
The Crown in its pleadings denies all liability and puts the Plaintiffs to proof of the claims made. It says further that if it is found liable, then it should have recognition for the value of the shares it handed over on settlement and there should be further deductions on account of the Plaintiffs' contribution to their own loss (by analogy with contributory negligence) and for the blameworthiness of the Defendants who settled and/or appropriate reductions on account of the agreed settlement figure of
$64 million. The Crown also claimed originally to be entitled to set off against any award the proceeds of the sale of the steel mill (over $200 million) by the Statutory Managers. I struck out that defence in judgment number 38 and the Court of Appeal upheld that ruling in a judgment now reported as Attorney-General v Equiticorp Industries Group Ltd (In Statutory Management) [1996] 1 NZLR 528.
In addition, however, the Crown raised a number of positive defences. First, it says that it did not know that any member of the Equiticorp Group was contributing to the funding of the purchase of the NZS/EHL Parcel. Secondly, the Crown says that the Plaintiffs cannot succeed in their equitable causes of action because they cannot come to equity with clean hands in that they knew all about the breaches of fiduciary duty and illegal acts because they were the perpetrators of them. Similarly, it is said that the causes of action at common law are barred by the maxim ex turpi causa non oritur non actio. Thirdly, the Crown says that because after settlement the advances by the Australian subsidiaries were repaid by EIGL, any claim they may have had ceased to exist.
The Crown also raises specific defences of validation pursuant to s 7 of the Illegal Contracts Act in respect of any contract found to be illegal and estoppel. Also ratification, statutory estoppel pursuant to ss 18C and 18D of the Companies Act 1955, apportionment, contributory negligence and change of position are pleaded.
Core findings of fact: decisive issues of law
The most significant finding of fact in the whole case is that the Crown did have knowledge, both actual and constructive in the Baden (iii) sense, at the time it received the settlement monies on the sale of the NZS/EHL Parcel, that the transactions were grossly improvident for AI4 and that $220 million of the $327 million involved was being illegally provided in breach of both s 62 and the fiduciary duties owed by the directors of the Equiticorp companies involved to those companies, their shareholders, (and most importantly), their creditors. Other important findings, (although more accurately findings of mixed fact and law), are first that the Equiticorp subsidiaries which claim to have funded were the owners of the money advanced or at least had relative title enabling them to sue. Secondly, that the advances were made contractually so that the Illegal Contracts Act applied to them. Thirdly, that the original contributions of EAL and ET, (the Australian subsidiaries), were repaid by AI4 with funding provided by EIGL. Fourthly, that with the exception of AI4 the other Plaintiffs, (treating them as original funders), were unable to satisfy the strict requirements of common law tracing to establish their money had and received claims, because the moneys could not be traced without interruption from them into the hands of the Crown.
The decisive issues of law are rather more numerous. As the case unfolded, it began to appear that apart from the core factual issues identified above, the contest was primarily about the legal consequences of circumstances in respect of which there is limited room for controversy. Now having heard all the evidence and arguments and taken time for consideration, I am satisfied that initial assessment was correct.
Rather than attempt to rank the decisive legal issues, I will record them in the order in which they arise in the judgment with some cross reference which will be further expanded when I summarise the individual sections in greater detail. In Section 1, I
hold that the Crown's cleans hand defence fails because the Plaintiffs were victims of the machinations of their delinquent directors. I also hold that AI4, the company purchasing the NZS/EHL Parcel, was itself a subsidiary of EHL with the consequence that the transaction was void and the property did not pass. And I dismiss as untenable the Crown's argument that the law requires, in a case such as this, an apportionment between the blameworthiness of the Crown on the one hand and the former defendants who have settled on the other.
In Section 2, having found the facts, a whole range of interrelated legal issues presented themselves for resolution leading to the end conclusion that the Crown did have the necessary knowledge for the constructive trust causes of action. First, there is an interpretation of the Samuel Montagu/BWL terms of engagement establishing when the relationship ceased and what obligations of disclosure rested upon Messrs Holyman and Clatworthy. Then a more extensive consideration of the extent to which the knowledge of servants and agents of the Crown can in law be imputed to it. Also the law applicable to discovery, ie, does the fact the Crown was put on notice mean that it is deemed to know if it does not enquire or is there an onus on one side or the other to establish what the result of such enquiry would have been. I have held the law to be that if you do not enquire when you should, you are deemed to know.
The next issue addressed is whether fragmented knowledge held by various servants and agents can be aggregated to establish the sum of what the Crown knew - I have held that it can. At about the point at which the last mentioned topic is reached, Section 2 moves into what might be described as another uncertain area, namely, what is the level of knowledge required for the constructive trust; knowing receipt causes of action and what is the nature of the remedy. The recent Privy Council decision of Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 3 All ER 97 which was handed down during the course of the hearing provided complete clarification regarding the constructive trust: knowing (renamed "dishonest" post Tan) assistance cause of action and significant
guidance in respect of the recipient claim. I have concluded that any one of the Baden (i), (ii) or (iii) categories of knowledge will suffice for knowing receipt and that the remedy is restitution-based. The remedy in the accessory causes of action, however, is equitable compensation and there I have followed the approach of McLachlin J in the Supreme Court of Canada in the case of Canson Enterprises Ltd v Boughton and Co (1991) 85 DLR (4th) 129 as endorsed by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1995] UKHL 10; [1995] 3 WLR 352 which is another case of high authority handed down during the course of the hearing.
I should also mention that in Section 2 I hold that a subsequent argument of the Crowns to the effect that recovery is not possible because the funds in question have been paid into the general account and used, is not tenable.
The illegality based claims are addressed in Section 3. There I have held that breaches of ss 40 and 62 of the Companies Act 1955 rendered the funding contracts illegal. Section 40 deals with the transfer of shares from a holding company to a subsidiary and renders such a transaction void also. I have held that although there is a common law rule established by the case of Trevor v Whitworth (1887) 12 App Cas 405, 409, it does not apply here because s 40 governs the position and takes precedence. I have also concluded that the NZS/EHL Parcel sale was tainted by the illegality of the funding and that so far as the Australian subsidiaries are concerned, breach of s 129 of the Companies (NSW) Code which is the Australian equivalent of s 62 renders those contracts illegal under New Zealand law as well.
Section 4 deals with the money had and received claims. There I have declined the Plaintiffs' invitation to by-pass the established common law tracing rules which defeat all of the Plaintiffs' claims dealt with in that section save that of AI4.
In Section 5, I construe the word "property" in s 54(1)(a) of the Corporations (Investigation and Management) Act 1989 to include money and then exercise my discretion pursuant to that section to hold that the $222 million that the Crown knew was coming from the Equiticorp Group less certain deductions is to be held on trust by the Crown and paid over to the Statutory Managers.
In section 6, I hold that there is as yet no independent cause of action for unjust enrichment.
The Crown's defences are addressed in Section 7. The clean hands defence I have already dealt with. Validation I declined in the exercise of my discretion pursuant to s 7 of the Illegal Contracts Act, holding that the public interest and the Crown's conduct are against it. Estoppel I rejected because the Plaintiff companies, (as opposed to their delinquent directors), were not responsible for any representations made and anyway, the Crown did not rely on them. Also, estoppel would validate an otherwise illegal contract. The defence based on s 18C of the Companies Act also fails because the delinquent directors were not exercising customary powers and clearly what they did could never have been authorised. So far as ratification is concerned, I have held there was none. This because ratification would only be valid if it was the act of a fully informed general meeting and no such meeting, fully informed or otherwise, was held. Change of position also failed, primarily because the Crown was a wrongdoer. Apportionment I have already dealt with. The inability of AI4 to provide counter restitution in specie I held was not fatal and an equivalent monetary award calculated at the time of settlement would suffice. Causation I held is not relevant for restitution- based claims and so far as equitable compensation for the accessory claims is concerned, as indicated above I adopted the "common sense view of causation" advocated by McLachlin J in the Canson case. And of course, a reduction on the Day v Mead [1987] NZCA 74; [1987] 2 NZLR 443 basis has been made where appropriate to take into account the Plaintiffs' contribution to any loss.
Subrogation: competition between EIGL and EAL
This is a complex issue. It is dealt with in Section 8 of the judgment. I shall elaborate when I address the sections in detail later in this summary. But I have not ruled on the subrogation claim for the reasons explained in subsections 8.7 and 8.8. Instead, applying the principles of unjust enrichment, I have stayed EAL's claims against the Crown and ordered AI4, upon recovery, to account to EIGL for EAL's and ET's original contributions. I have so ordered because, in my judgment, EIGL's refinancing did repay EAL and ET and they would be unjustly enriched if they were able to recover a second time against the Crown at the expense of EIGL.
I now turn to consider each section in more detail giving a précis of the reasoning and citing the authorities relied upon.
Précis of Section 1: Preliminary matters
The section starts with a summary of the facts and an outline of the causes of action, all of which I have dealt with in the preceding sections of this summary.
The Crown argued that the Plaintiff companies through their directors were parties to the breaches of trust and illegality alleged and were therefore barred from obtaining any remedy either because they could not come to equity with clean hands, or on the basis of the common law equivalent, ex turpi causa oritur non actio. Relying on Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1656;
Belmont Finance Corporation v Williams Furniture Ltd (No 1) [1979] 1 Ch 250, 261 and Brink's-Mat Ltd v Noye [1991] 1 Bank LR 68, 72-73, I held that the actions of the delinquent directors did not prevent the companies from suing to recover losses sustained as a result. (1.5)
The question of whether AI4 is a subsidiary of EHL is then dealt with. Section 40 of the Companies Act renders void any transfer of shares in a company to its subsidiary. The issue called for a construction of s 158 of the Companies Act, which contains an extended definition of subsidiary, which includes:
"that any shares held, or power exercisable by any person as a nominee of that other company ... shall be treated as held or exercisable by that company."
Fifty percent of the shares in AI4 are held by Setar 72, and Setar 72 is controlled by the Ararimu Trust, the terms of which I have held make it a nominee of EHL. By that means AI4 becomes a subsidiary of EHL. (1.6)
Finally, in Section 1, the question of apportionment and the Settlement Deed is discussed. The Crown put forward an argument based on certain North American
decisions to the effect that its liability should be apportioned between itself and the blameworthiness of the other Defendants who had settled. I held, however, that the authorities relied upon derive from Admiralty jurisdiction, which does not apply in this case. I applied the orthodox approach as exemplified in the judgment of Lord Ackner in Fitzgerald v Lane [1988] UKHL 5; [1989] 1 AC 328 at 329. In that I am supported by the view of the Law Commission in its recent publication (NZLC PP19 Apportionment of Civil Liability (1992)).
The other matter discussed was the application of the Settlement Agreement, and there I held that recoveries by the Plaintiffs would be subject to reduction on account of the
$64 million recovered from the settling Defendants. (1.7)
Précis of Section 2: Recipient and accessory claims
Relying upon the same factual matrix (referred to below), the Plaintiffs seek to recover against the Crown both as a knowing recipient and as a knowing (dishonest) assister. To succeed the Plaintiffs must first establish that there has been an unauthorised disposal of their property in breach of fiduciary duty.
The Crown submitted that the original funding companies had failed to prove that the money advanced was theirs. I held, however, that I was satisfied that it was more probable than not that the original funders did have title to the moneys they provided for the settlement.
The Crown also challenged AI4's title to sue on the basis that the contracts between AI4 and the original financiers were illegal and of no effect so that no title passed. Relying on the House of Lords decision in Lipkin Gorman (a firm) v Karpnale [1991] 2 AC 548 and the very recent, as yet unreported, decision of the Court of Appeal in England, Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division), Evans, Saville, Morritt LJJ, 9 May 1996) I have held that AI4 had relative title to the money transferred on the basis, first of its prior possession of the choses in action (ie, the thirteen deposits assigned) and, secondly, by virtue of its original title to the deposits created by the contracts with the relevant banks when the deposits were made. I also held that AI4 had standing to bring an action against the Crown as a constructive trustee which had breached the trust and was not only entitled, but obliged, to sue the Crown to recover the misapplied trust property (see, Young v Murphy (1994) 13 ACSR 722, 725-726 and 745; Brink's-Mat v Noye [1991] 1 Bank
LR 68).
Having upheld the Plaintiffs' standing to sue, the next question was whether the payment to the Crown was unauthorised and in breach of fiduciary duty. As
Equiticorp money was used to purchase Equiticorp shares, there can be no doubt s 62 was breached. That was unlawful and beyond the powers of either the directors or the company and was therefore unauthorised. The Crown did not dispute that the payment to it was in breach of s 62. Rather, it said it had no knowledge of it.
I also held that the payment by AI4 of $327 million for shares worth less than
$90 million was grossly improvident and that Messrs Hawkins and Darvell, as directors of AI4, knew it to be so.
Having found in 2.1 and 2.2 that the Plaintiffs' money was illegally and in breach of fiduciary duty transferred to the Crown, the next question addressed was whether the Crown had knowledge that that was so.
Addressing the question of knowledge, I examined the evidence concerning all the Crown's servants and agents. All except the two Ministers (because they were not informed) had some degree of knowledge. Mr Ratner of RWS, Wellington, and Mr Andrew of Treasury in particular I find knew facts which meant that they either wilfully shut their eyes to the obvious or wilfully and recklessly failed to make such enquiries as an honest and reasonable party would have made. Further, that Mr Chetwin, also of Treasury, actually knew that the purchase of the NZS/EHL Parcel by AI4 at $327 million was grossly improvident.
Mr Clatworthy, of BWL, and Mr Holyman, of Samuel Montagu, also knew that the Equiticorp Group had bound itself to fund the purchase of the shares if need be and I have held that the terms of their contract with the Crown obliged them to pass that information on. Mr Galt, of Industries and Commerce, and Mr Kwok, Assistant- Solicitor to the Treasury, also had knowledge that was of some significance. (2.2 to 2.10)
The next question that arose was whether the knowledge of Messrs Ratner, Holyman and Clatworthy should be imputed to the Crown.
The rule that a principal is treated in law as having knowledge of all facts which his or her agent acquires in circumstances where a duty exists to pass the information on is based upon three considerations: first, fairness as between the parties; secondly, public necessity and business convenience; and, thirdly, the strong probability that the presumption accords with the facts (see, Spencer, Bower and Turner, The Law Relating to Estoppel by Representation (3rd ed 1977) 133; Boursot v Savage [1866] UKLawRpEq 68; (1866) LR 2 Eq 134, 142; Bradely v Riches (1878) 9 Ch D 189, 196). A prima facie application of this rule means the knowledge Messrs Ratner, Holyman and Clatworthy had throughout is to be imputed to the Crown.
However, there is an exception to this rule in the case of fraud. The fraud exception prevents the imputation of an agent's knowledge to his or her principal where the agent is acting in fraud of the principal (see, Thompson v Cartwright [1863] EngR 864; (1863) 33 Beav 178; 55 ER 335 at 337-338; Belmont Finance Corp v Williams Furniture Ltd [1979] 1 Ch 250, 261-262). The exception has been justified on one of two bases. First, the pragmatic proposition that, because it is almost a moral certainty that a fraudulent agent is not going to inform the principal of his or her deceit, the presumption of imputation should not apply; or, secondly, that as the fraudulent activity is outside the ambit of the agency, logically it should not be imputed (see Cave v Cave [1880] UKLawRpCh 119; (1800) 15 Ch D 639 at 644; Deutsche Ruckversicherung Aktiengesellschaft v Walbrook Insurance Co Ltd [1995] 1 Lloyds Law Reports 153 at 165; Ætna Casualty & Surety Co v Local Bldg & Loans Ass'n, 162 Okl 141, 19 P.2d 612, 616, 617, 86 ALR 526). In my view, the second proposition is more soundly based and persuasive than the practical commonsense approach. Applying the underlying principle to the circumstances of this case there is no sense in which it can properly be said that Mr Ratner was not acting as agent for the Crown, even when he was providing the
misleading certificate. Furthermore, his actions in March were simply a suppression of information which does not constitute fraud (see Waldy v Gray [1875] UKLawRpEq 72; (1875) LR 20 Eq 238 at 251-252). Therefore, I held the fraud exception did not prevent the imputation of Mr Ratner's knowledge to the Crown. Messrs Clatworthy and Holyman both suppressed the knowledge they had that the support structure had been formalised in the Takeout Deed. However, as mere suppression is not fraud, the exception cannot avail the Crown in their cases either.
A further issue considered is whether the presumption of imputation may be rebutted. As Messrs Ratner and Holyman were engaged, inter alia to assist the Crown to discharge its duty to investigate the possibility of BWL or its nominee using Equiticorp money to purchase the NZS/EHL Parcel in breach of s 62, the presumption of imputation may not be rebutted. They were engaged to discover that very information. While it was not part of Mr Clatworthy's role to investigate the Crown's title to the money it would receive, he did have authority to receive and pass on information, therefore his knowledge was also imputed to the Crown as a matter of law and not as a rebuttable presumption of fact (see, El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER 685, per Hoffmann LJ at 700 and 702).
Therefore, the knowledge Messrs Ratner, Holyman and Clatworthy had throughout is properly imputed to the Crown. (2.11)
I then considered the issues of discoverability and aggregation of the Crown's knowledge.
The Crown argued that, in order to arrive at a finding of knowing receipt, it must be proved that inquiry would have lead to the truth, in other words that the knowledge was obtainable. In putting forward this argument the Crown relied on the decision of Peter Gibson J in Baden v Societe Generale (1983) [1992] 4 All ER 161 at 247. The
Plaintiffs, on the other hand, relied upon the dicta of Millett J in Agip (Africa) v Jackson (1989) [1992] 4 All ER 385 at 407 to the effect that a possibility of a false explanation is no defence to a party put on inquiry who makes none. On principle and authority I am convinced Millett J is correct. A constructive trustee's liability does not rest upon a failure to inquire but on his or her knowledge of the misapplication of trust property. Against the possibility, however, that a different view of the law may be taken elsewhere, I have considered whether, on the balance of probabilities, inquiry would have uncovered the truth. I was satisfied that if any one of Messrs Harford, Familton, Clatworthy or Holyman had been asked they would have given truthful answers. Nor was I prepared to assume Mr Ratner would have continued to default on his fiduciary duties to his client. While Hawkins no doubt would have been evasive or untruthful, and may have sought to muzzle Equiticorp directors, officials and agents, this would have led to greater suspicions on the part of the Crown. (2.12)
On the question of aggregation I have held that the sum of the knowledge of each individual agent and official can be aggregated to make up a total pool of knowledge residing in the Crown by which its position as an alleged dishonest assister or knowing recipient can be judged. Authority for this proposition is drawn from the following four cases: National Bank of Australasia v Morris [1892] UKLawRpAC 2; [1892] AC 287; Brambles Holdings Ltd v Carey (1976) 15 SASR 270; Krakowski v Eurolynx Properties Ltd (1995)
130 ALR 1; Re Chisum Services Pty Ltd (1982) 1 ACLC 292. (2.13)
Having arrived at that stage, I then addressed the question of the level of knowledge which the law should regard as sufficient to hold the Crown liable in the circumstances thrown up by this case. So far as dishonest assistance is concerned, the Privy Council in Royal Brunei Airlines v Tan [1995] UKPC 4; [1995] 3 All ER 97 unequivocally laid down the test as one of acting dishonestly. The law in relation to knowing receipt, however, is not so clear. Despite the mixed reception the Baden Delvaux five point scale of knowledge has received, I have used it as a convenient starting point. The main focus of the
debate has been whether liability should be restricted to Baden categories (i) to (iii) which are seen as requiring dishonesty, or more extensively to include Baden (iv) and
(v) which are equated with, but not necessarily identical to, negligence. This question has not yet been conclusively determined in this jurisdiction as none of the cases have involved a finding of recipient liability based on categories (iv) or (v). All the endorsements of constructive knowledge have been obiter.
Recipient and accessory liability are different, the latter invoking liability for a wrong triggering compensation not restitution, the former being imposed in order to compel the return of an unjust enrichment received (see, Royal Brunei Airlines v Tan (supra) at 105; Burrows 155-156; Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 at 404-405; Powell v Thompson (supra at 607)). As unjust enrichment is the foundation for recipient liability and the remedy is restitutionary, is there any reason why constructive knowledge should not be sufficient to attract liability in such a case?
While warnings have been issued in the past against the introduction of conveyancing rules of constructive notice into commercial transactions (see, Manchester Trust v Furness [1895] UKLawRpKQB 140; [1895] 2 QB 539 at 545), the modern approach is to place more weight on "the underlying principles that engendered those rules", Re Montagu's Settlement Trusts (1986) [1992] 4 All ER 308, 324. (See, also, Powell v Thompson (supra at 606); Barclay's Bank plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180; Royal Brunei Airlines v Tan (supra at 103).) There is a sense in which the underlying principles from the nineteenth century conveyancing cases have a direct relevance to this case as Mr Ratner's function was similar to that undertaken by the solicitors in the old conveyancing cases. Both were retained to investigate title.
The trend in England is to require knowledge to the level of Baden (i), (ii) or (iii) (see, Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 and Jonathan v Tilley (CA (Civil Division), 30 June 1995)). That more conservative approach has
received solid support recently from Lord Browne-Wilkinson in both his paper "Equity in a Fast Changing World", delivered at the NZLS Triennial Conference in Dunedin in April 1996 and his judgment in Westdeutsche Landesbank Girozentrale v Council of the London Borough of Islington [1996] UKHL 12; [1996] 2 WLR 802. Indeed, robust warnings have been issued against applying equitable principles to commercial transactions without careful thought. In his paper he says at page 21:
"... in a commercial transaction, the recipient of money is not to be taken to have notice of any equitable rights in such money or property unless he has actual knowledge or wilfully shuts his eyes to the obvious, or wilfully and recklessly fails to make such inquiries as an honest and reasonable commercial man would make."
In his judgment, at page 828, he says:
"My Lords, wise judges have often warned against the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs: see Barnes v. Addy [1874] UKLawRpCh 20; (1874) L.R. 9 Ch.App. 244, 251, 255; Scandinavian Trading Tanker Co. A.B.
v. Flota Petrolera Ecuatoriana [1983] 2 A.C. 694, 703-704. If the Bank's arguments are correct, a businessman who has entered into transactions relating to or dependent upon property rights could find that assets which apparently belong to one person in fact belong to another; that there are "off-balance-sheet" liabilities of which he cannot be aware; that these property rights and liabilities arise from circumstances unknown not only to himself but also to anyone else who has been involved in the transactions. A new area of unmanageable risk will be introduced into commercial dealings. If the due application of equitable principles forced a conclusion leading to these results, your Lordships would be presented with a formidable task in reconciling legal principle with commercial common sense."
Although, logically, one is tempted to the view that a person who has intermeddled by assisting in the breach should be less exposed to liability than one who, with knowledge of the breach, has actually received the trust property to his or her benefit, nonetheless this is obviously an area in which one should move cautiously. As earlier recorded, I have found that the Crown either wilfully shut its eyes to the obvious, and if
not that, then certainly wilfully and recklessly failed to make the inquiries that a reasonable and honest commercial party would (should) have made in all the circumstances. In this case, therefore, the necessity to reach a decision about the availability of Baden (iv) and (v) knowledge does not arise. I have elected to follow the prudent course of leaving that issue to be decided on some future occasion when it is squarely before the Court.
Mr Farmer argued for strict liability - a proposition which has wide academic support. There is an attractive logic about it because it would bring common law and equitable remedies into line with each other, but it is not supported by precedent and I reject it.
Drawing together the findings of fact and holdings of law in Section 2 to this point I have found that the Crown knew the transaction was grossly improvident for AI4 and also knew it was probable the purchase of the NZS/EHL Parcel was to be effected with Equiticorp money. Therefore, in my judgment, it either wilfully shut its eyes to the obvious, or (without doubt) wilfully and recklessly failed to make such inquiry as an honest and reasonable party would have made. Judged objectively that was dishonest conduct. Therefore, subject to the issue of counter-restitution and the other defences raised by the Crown, both the recipient and accessory causes of action succeeded. (2.14 and 2.15)
So far as the remedies available are concerned, I held that knowing receipt is restitution-based because the essence of restitution is restoring to the plaintiff what was taken or received from him or her without justification, and not on the principle of compensating the plaintiff for loss or damage. It follows that subsequent events which might have resulted in the plaintiff mitigating his or her loss are not relevant (see, Kleinwort Benson Ltd v South Tyneside Metropolitan Borough Council [1994] 4 All ER 972; Kleinwort Benson Ltd v Birmingham City Council (Court of Appeal (Civil Division), Evans, Saville, Morritt LJJ, 9 May 1996 as yet unreported); Commissioner
of State Revenue (Vict) v Royal Insurance Australia Ltd [1994] HCA 61; (1994) 182 CLR 51 at 69-79). It follows also that there can be no room for the application of considerations analogous to contributory negligence.
Counsel were agreed that the remedy for accessory liability is equitable compensation which is quite distinct from restitution so no issue of counter-restitution arises. Equitable compensation is assessed in such a way as to ensure the losses made good are only those which, according to hindsight and a commonsense view of causation, were caused by the breach (see, Canson Enterprises Ltd v Broughton & Co (1991) 85 DLR (4th) 129 at 160-163 per McLachlin J; as endorsed by Lord Browne- Wilkinson in Target Holdings Ltd v Redferns [1995] UKHL 10; [1995] 3 WLR 352 at 364-365). (2.16)
The section then turns to look at the results on the knowing receipt causes of action. While I have made findings on most of the causes of action in the judgment, I am only going to discuss AI4's claims in this summary, as, almost certainly, it will be one of those causes of action which the Plaintiffs will elect to recover on. Suing as legal owner of the deposits AI4 can rely upon the Crown's knowledge of both the gross improvidence of the transaction and the probability that Equiticorp money, to the extent of $222 million, was being used to fund the purchase. The recovery, prima facie, should be for $327 million. However, justice requires that a credit for the dividend of $3.7 million, which AI4 received while it held the shares must be allowed (see, Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393). Furthermore, the Crown has argued it should have counter-restitution for the value of the NZS/EHL Parcel at the date of settlement.
It is common ground the Plaintiffs are unable to return the original shares as a result of a takeover offer by EIplc which AI4 accepted. Mr Farmer argued the Plaintiffs were able to return another parcel of shares as restitution, however, I held that would not be
a just result. As in Coleman v Myers [1977] 2 NZLR 298 (CA) too much water has passed under the bridge for there to be counter-restitution in specie.
The requirement of counter-restitution in specie has its origins in the common law remedy of restitution consequent upon rescission of voidable contracts (Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278). However, the Crown is not held liable on a contractual basis, but because, with knowledge of breaches of fiduciary duty, it wrongly received the Plaintiffs' money. It holds as a constructive trustee and, therefore, counter-restitution in specie is not relevant here. Even if it was, I would not refuse the Plaintiffs recovery solely on the ground they could not return the property transferred to them. If the common law rule is still to that effect it is too rough and ready. Rather, the law should allow counter-restitution to be made by means of monetary allowance (see, Goff & Jones, The Law of Restitution (4th ed 1993) 199- 200; Burrows, The Law of Restitution (1993) 134, 192; Birks, Restitution - The Future (1992) 129).
Mr Farmer argued that any monetary award in lieu of, or as counter-restitution, should be nil as the shares are now worthless. However, the inapplicability of counter- restitution in specie also renders the related rule, that any fall in the value of the asset transferred is irrelevant, inappropriate. And, in any event, in cases where counter- restitution was appropriate, but the shares had been sold, the Courts have tended to assess counter-restitution on the basis of what the shares were actually sold for, rather than their value at the date of the hearing (see, Erlanger v New Sombrero Phosphate Co [1877] UKLawRpCh 58; (1872) 5 Ch D 73 at 125; Securities and Investments Board v Pantell SA (No 2) [1993] Ch 256 at 283).
Having rejected the Plaintiffs' argument that counter-restitution should be effected either in the form of worthless shares or a nil award of money, the only solution in my view is to allow a monetary allowance for the value of the shares. And I held that in
order to restore the parties to their former positions and do practical justice between them, the value of what AI4 actually received was the amount that should be deducted from the purchase price. If this was not so AI4 would receive an unjust advantage. The decrease in the value of the shares between settlement and when the Plaintiffs quit them is only relevant to common law counter-restitution in specie.
There was a debate as to the value of the shares at the time of settlement. The market was paying in the vicinity of 90c per share at that time. I took this figure as my starting point. However, Equiticorp was running a thorough-going illegal share support scheme which was artificially propping up the price of its shares. Mr Mathieson's argument to the contrary not withstanding I allowed a 22½% discount in value, which meant the value of the shares as at settlement on 22 March 1988 was $69,750,000.
The final recovery on AI4's knowing receipt cause of action was as follows:
|
Purchase price
Less Allowance for shares
|
$69,750,000
|
$327,224,013
|
|
Dividend
|
3,700,000
|
|
|
Settlement recovery
|
64,000,000
|
137,450,000
|
$189,774,013
====== (2.17)
The judgment then considers the results on the dishonest assistance causes of action. As the losses the Crown must make good are only those which, using hindsight and commonsense, were caused by the breaches the value of the shares transferred to AI4 and the dividend they produced must be deducted. This principle means subsequent events which mitigate a plaintiff's loss may be relevant when assessing equitable compensation. Such an event was the sale by AI4 of the EIplc shares it received in exchange for its EHL shares in the takeover offer. AI4 sold the EIplc shares it received (which were worth $65,702.954) to two employee unit trusts (EUTs) for $142,962,046.
Thus, by accepting the EIplc takeover offer AI4 was immediately able to recover by the on sale of the shares to the EUTs $142,962,046 of the original purchase price of
$327,222,013. Since the NZS/EHL Parcel was the vehicle by which AI4 was able to reduce its loss in this way, my conclusion is that hindsight and commonsense dictate that the loss resulting from the Crown's fault as an accessory does not include that sum.
The Crown argued that any recovery should also be reduced on account of AI4's contribution to its own loss (Day v Mead). As AI4's constructive trust causes of action have their foundation in the unauthorised acts of its directors it would be illogical to reduce its equitable compensation on account of their delinquency. However, there is room for the view that the shareholders of AI4 should have taken care to ensure they knew what Messrs Hawkins and Darvell were up to. In all the circumstances, particularly the speed with which AI4 was nominated, I assessed the degree of responsibility, which was very limited, at 2½%.
The final result on AI4's dishonest assistance cause of action is therefore:
|
Purchase price
Less Dividend
|
$3,700,000
|
$327,224,013
|
|
Recovery on shares
|
142,962,046
|
|
|
Contribution to own loss
|
4,514,049
|
|
|
Settlement recovery
|
64,000,000
|
215,176,095
|
|
|
|
$112,047,918
====== |
The above is the result when AI4 is suing other than as a constructive trustee. On that alternative approach, however, the starting point is $222 million but the dividend and on sale are not taken into account although the contributory negligence percentage is higher. Suing as a constructive trustee therefore AI4 recovers $118,223,779. (2.18)
Finally, in Section 2, I deal with claims for dishonest assistance brought by Glenbrook Steel Holdings Ltd which claimed the Crown assisted in the payment of the underwriting fees not only to BWL but also to the sub-underwriters who stood by, namely Ararimu Holdings Ltd (AHL) and Richardson Camway Limited (RCL). I held that these claims failed because the Crown neither assisted nor acted dishonestly. It did not participate in any way and did not know about the fees to the sub-underwriters. (2.19)
Précis of Section 3: Illegality
While the Crown conceded the funding of AI4 was illegal and in breach of s 62, it disputed that the contributions were made pursuant to contracts. If correct, that would have affected the applicability of the Illegal Contracts Act. However, my view of the evidence was that it established the existence of contracts; and even if that had not been so, in the absence of any evidence to the contrary, I would have presumed an obligation to repay amounting to a contract of loan, and not a gift (Seldon v Davidson [1968] 1 WLR 1083 at 1088, 1090; Re Matthews [1993] 2 NZLR 91 at 94).
Since the money provided amounted to financial assistance for the purpose of the purchase of shares in EHL, s 62 was breached and the contracts were illegal. The original funders therefore never lost ownership of the money which then moved from AI4 to the Crown in exchange for the NZS/EHL Parcel. The Crown argued the money was paid pursuant to the BWL Underwriting Agreement (which was not illegal at the time of its formation). However, I held the payment was pursuant to the Deed of Assignment of Deposits which was an independent contract. (3.1 and 3.2)
In 1.6, I held that AI4 is a subsidiary of EHL and, as a consequence, the sale of the NZS/EHL Parcel to it breached to s 40 of the Companies Act. The Plaintiffs contended that the Deed of Assignment was both void and illegal, while the Crown submitted it was simply void. I held the Deed of Assignment was both void and illegal (see, Contracts Statute Review NZLC R25, paras 3.11-13). (3.3)
I next considered the rule in Trevor v Whitworth [1887] UKLawRpAC 26; (1887) 12 App Cas 409 that a company cannot return capital to its members. Although the rule has its origins in the interpretation of 19th century legislation, it stands as a fundamental principle today, independent of the current companies legislation (Redweaver Investments Ltd v Lawrence Field Ltd [1991] AATA 211; (1991) 9 ACLC 1,032). Section 40 codified one aspect of the
principle, namely, that subsidiaries are prohibited from owning shares in their holding company and in that regard supersedes the rule. The Plaintiffs' claims based on the rule therefore fail. (3.4)
I then considered the question of tainting. The Plaintiffs submitted that the purchase of the NZS/EHL Parcel by AI4 from the Crown was rendered illegal by it being tainted by the illegal funding of the purchase. Tainting requires not only that the second contract has as its purpose or object the assisting or promotion of the illegal transaction but also that the parties to this second contract have knowledge of this (Portland Holdings Ltd v Cameo Motors Ltd [1966] NZLR 571 at 577, 581 and 583). The Deed of Assignment of Deposits clearly assisted and promoted EHL and its subsidiaries to give financial assistance to AI4 for the purpose of purchasing shares in EHL as without the purchase of the shares by AI4 (which the Deed of Assignment achieved) the overall scheme could not have been brought to fruition.
It has been suggested that actual knowledge or wilful blindness is required for tainting (Spector v Ageda [1971] 3 All ER 417 to 427). In view of the fact that wilfully and recklessly failing to make such enquiries as an honest person would make can lead to liability as a constructive trustee it is logical that similar conduct should be sufficient to establish the knowledge required for tainting. As the Crown either wilfully shut its eyes to the obvious or wilfully and recklessly failed to make inquiries that the circumstances called for, I have held that the knowledge required to establish tainting in respect of the Deed of Assignment was present. Therefore the contract transferring the NZS/EHL Parcel was tainted by the illegal funding. (3.5)
As EAL and ET were incorporated in New South Wales, their contributions are not alleged to have breached s 62 of the New Zealand Act but the Australian equivalent, viz, s 129 of the Companies (NSW) Code. While s 62 does not prohibit foreign companies from giving financial assistance, as a matter of principle, contracts are
regarded as illegal if they contemplate a breach of the law of a friendly foreign country (see, Regazzoni v KC Sethia (1944) Ltd [1958] AC 301; Controller and Auditor- General v Davison (CA 226/95, 16 February 1996) at page 9). Pursuant to s 4 of the Evidence Amendment Act 1990, I took judicial notice of s 129 of the New South Wales Act. It is comparable with the New Zealand provision. In substance, then, the issue is the same for all of the funding subsidiaries irrespective of whether they were incorporated in New Zealand or New South Wales. As the Crown has conceded the subsidiaries unlawfully provided finance, and I have held in 3.2 that the funding was provided pursuant to contracts, it follows that the Illegal Contracts Act applies, and in particular s 6 which provides that no property passes. As a consequence the Crown did not get good title to the funds. (3.6)
Where legislation making a transaction illegal has been passed for the protection of one of the parties to the illegal transaction, such a party can bring a claim to recover, despite the illegality, as it is said not to be in pari delicto with the recipient (Kiriri Cotton Co Ltd v Dewani [1960] AC 192 at 203-205). Given the provisions of the Illegal Contracts Act the in pari delicto exception is only relevant if my conclusion that the provision of the money was by way of contract is subsequently held to be wrong. As s 62 was passed to protect companies, their shareholders and creditors I am satisfied on the facts of this case that AI4 was not in pari delicto with the Crown, and accordingly may be able to bring a restitutionary claim to recover the money transferred. (3.7)
The relief the Plaintiffs seek is restitution or, if that is not available, compensation pursuant to s 7(1)(a) and (c) on the basis that the Plaintiffs were parties to illegal contracts or, alternatively, the original funders can be seen as "claiming through or under" AI4, on the basis that it was a party to an illegal contract. The other aspect of relief under s 7, namely validation, which the Crown seeks if it is found liable is dealt with in 7.3. (3.8)
As with Section 2, AI4's claim is the only one I will deal with specifically in this précis. The sum claimed is $327,224,013 being the amount AI4 passed over to the Crown in return for the NZS/EHL Parcel. While no property passed, and the Crown did not obtain title to the deposits, as it has retained the moneys the appropriate remedy is restitution. The end result is identical to the situation applying in respect of a void contract. The Crown did not get title to the purchase moneys and AI4 did not get title to the NZS/EHL Parcel. On the face of it, neither can resist a claim for restitution.
The discretion under s 7 is a wide one (re AIC Merchant Finance Ltd [1989] NZCA 229; [1990] 2 NZLR 385 at 396) which I consider allows me to take into account the fact that at the time the Crown received the money it handed over the NZS/EHL Parcel and, as a consequence of holding the Parcel, AI4 earned dividends. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890 Hobhouse J took the view that, where there were payments both ways, the later payment should be treated as pro tanto a repayment of the earlier payment. Where, as here, there had been a settlement with money going one way and shares the other, I saw no difficulty about placing a monetary value on the shares at the time of settlement as part of the restoration process. I held it would not be a just or appropriate exercise of my discretion under s 7 if the value of the shares was not set-off against the Plaintiffs' restitution claim. Therefore $69,750,000 for the value of the shares, and $3,700,000 being the dividend received, was deducted from the purchase price along with the recovery of $64,000,000 from the other Defendants pursuant to the Settlement Deed. Accordingly, AI4's cause of action for illegality pursuant to the Illegal Contracts Act succeeded to the extent of $189,774,013. (3.9)
Précis of Section 4: Money had and received
Since s 6 of the Illegal Contracts Act and s 40 of the Companies Act prevented title to the money passing, either from the original funder or AI4, to the Crown, there was a total absence of consideration for the money paid over, which is a well-recognised situation for the application of the money had and received cause of action (see, Kleinwort Benson Ltd v Birmingham Borough Council (Court of Appeal (Civil Division), Evans, Saville, Morritt LJJ, 9 May 1996, as yet unreported). The issue of tracing at common law, however, which goes hand in hand with the cause of action, required careful consideration. (4.1)
Tracing at common law requires evidence of continuous identity of the plaintiff's asset (Agip (Africa) Ltd v Jackson [1992] 4 All ER 451 at 463 (CA)). The common law will not trace through a mixed fund (Taylor v Plumer [1815] EngR 551; (1815) 3 M & S 562 at 575; 105 ER 721 at 726) nor will it recognise payments through a clearing house or otherwise by electronic settlement (Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 285; Nimmo v Westpac Banking Corporation [1993] 3 NZLR 218 at 238) and it is also defeated if payments are made by way of journal or other book entry (Nimmo v Westpac Banking Corporation (supra at 238-239)).
The Plaintiffs argued that these authorities, which insist upon a distinction between equitable and common law tracing, should no longer be followed. But I was not persuaded. As a matter of principle, it seems not inappropriate that the common law cause of action for money had and received, which does not require proof of fault and can have quite drastic results, should require strict proof. Furthermore, the House of Lords in Westdeutsche Landesbank Girozentrale v Council of the London Borough of Islington [1996] UKHL 12; [1996] 2 WLR 802 referred to the distinction between equitable and common law tracing without re-examining those rules. (4.2)
As to AI4's claim for money had and received. The Deed of Assignment of Deposits entered into between the Crown and AI4 breached s 62 of the Companies Act and was illegal. The transfer of the NZS/EHL Parcel to AI4 breached s 40 of the Companies Act 1955 and is therefore void. Furthermore, the sale was unauthorised not only on account of the illegality but also due to the gross improvidence of the transaction. The inevitable consequence of these holdings is that the Crown did not get title to the deposits assigned and therefore the moneys are clearly money had and received to the benefit of AI4 and must be returned.
My earlier references in this summary to AI4's illegality claim are applicable here because s 6 of the Illegal Contracts Act reverses the common law and creates a situation identical to a void contract, which is the foundation of these money had and received claims. The result on the money had and received cause of action advanced by AI4 is therefore identical to its illegality claim, and the recovery is $189,774,013. As with illegality, I do not propose to discuss the other Plaintiffs' claims although reference to Section 4 of the judgment will show that all but AI4 failed because the requirements of common law tracing could not be met. (4.3)
Précis of Section 5: Statutory trust causes of action
EIGL, EHL and AI4 (all of which were placed in statutory management in April 1989) applied for orders under s 54 of the Corporations (Investigation and Management) Act 1989 which gives the Court power to make orders for the transfer of property or payment of money where property has been either improperly disposed of, or acquired in circumstances which cause it to be just and equitable that it be held on trust for the corporation in statutory management.
The Crown argued the section was inapplicable because "property" does not include money. Giving the provision a "fair, large and liberal construction and interpretation" as required by s 5(j) of the Acts Interpretation Act 1924, however, I held it was inconceivable that Parliament intended to cover all forms of property "save that most commonly used in commerce and most likely to be involved" in cases under s 54, namely, money (MacMillan Builders Ltd (in liquidation) v Morningside Industries Ltd [1986] NZCA 81; [1986] 2 NZLR 12). Furthermore, on settlement the Crown received an assignment of bank deposits from AI4, which are choses in action and unquestionably property.
Having reached that conclusion, the next issue was whether or not it would be appropriate for me to exercise my discretion. In respect of s 54(1)(a), (property acquired in circumstances such that it is just and equitable it be held upon trust) I held that $222 million of the purchase money was acquired by the Crown in circumstances which caused it to be just and equitable that the Crown should hold that sum upon trust for AI4. Specifically, those circumstances were that the Crown knew the moneys were being provided by EHL and its subsidiaries in breach of s 62. Further orders were necessary to do justice, however, in particular, the value of the shares transferred to AI4 and the dividends AI4 enjoyed while it held those shares were taken into account. And, of course, the final recovery after these reductions is to be further reduced by
$64 million. Net recovery is therefore $84,774,013.
However, I decided against the exercise of my discretion pursuant to s 54(1)(b) which relates to any property improperly disposed of. The gross improvidence of the transaction meant the full purchase price was improperly disposed of, therefore the Plaintiffs' recovery would of necessity be $105 million higher under that head yet the Crown's conduct was significantly less culpable in respect of improvidence than it was in relation to the breaches of s 62. The s 62 issue was on the table from the start whereas the question of improvidence did not arise until the eleventh hour.
Précis of Section 6: Unjust enrichment
While the principle of unjust enrichment was clearly recognised by the House of Lords in Lipkin Gorman (a firm) v Karpnale [1992] 4 All ER 512 at 532-536 it does not yet have the status of a cause of action (Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70, 196-197 per Lord Browne-Wilkinson; David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353 at 406 per Dawson J). As AI4, suing as a constructive trustee, is entitled to significant recoveries against the Crown on the basis of its causes of action, the Plaintiffs will not be without a remedy if EIGL is unable to maintain a cause of action solely on the basis of unjust enrichment. In those circumstances, it would not be appropriate for me in this case, at first instance, to take that further step. I therefore hold there is no cause of action upon which EIGL can advance this claim.
Précis of Section 7: Defences
Some of the Crown's defences have been mentioned already in this summary. Of those remaining, the first is validation. Pursuant to s 7 of the Illegal Contracts Act the Crown sought validation of any contract held to be illegal. Section 7(3) sets out the criteria to which regard must be had. First is the conduct of the parties. As the Plaintiff companies were under the control of delinquent directors there was no conduct on their part which, of itself, would prevent recovery. The Crown also raised the question of the Plaintiffs' delay, however, I was not prepared to hold AI4 should be precluded from having its property returned to it on that ground. In any event, counter-restitution based on the value of the shares at the time of settlement substantially removes any prejudice occasioned by delay. I also rejected as untenable Mr Mathieson's submission that what occurred was no more than a technical breach.
The second factor is the object of the enactment. Section 62 is concerned with unauthorised reductions of capital or like detriment and potential prejudice to creditors or other shareholders (Vujnovich v Bank of New Zealand (1993) 6 NZCLC 68,459 at 466). I have held that the contract between AI4 and the Crown clearly prejudiced the shareholders and creditors of EHL so that to validate would have been contrary to the objects of s 62.
The third factor is the gravity of any penalty provided. However, the modest nature of the $200 penalty for breaches of s 62 is an unreliable indicator (NZI Bank Ltd v Euro- National Corporation Ltd [1992] 3 NZLR 528 at 547).
The next factor is such other matters as the Court thinks it proper to have regard to. The Crown argued that meaningful restitutio in integrum would be impossible without validation, however, the jurisdiction to direct the payment of a monetary equivalent in lieu of counter-restitution in specie, means validation is not necessary.
The final consideration is whether it would be against the public interest to grant relief. I have held it would be. The Crown deliberately chose not to investigate the source of the funds. To validate would be to condone dishonest and commercially unacceptable conduct. In all the circumstances I refused validation. (7.3)
The Crown next contended the Plaintiffs should be estopped from asserting or denying a number of critical elements of their causes of action. However, I held the Crown had failed to prove the elements necessary for an estoppel: in particular it was the delinquent directors and not the Plaintiffs who made the representations, and also the Crown cannot be said to have relied upon these representations because in the absence of proper investigation it must be taken to have been aware of the true state of affairs. Moreover, the Crown would in any event be unable to raise the defence of estoppel in most instances because it would validate ultra vires or illegal contracts, or the exercise of ultra vires or illegal powers (see, Spencer, Bower and Turner The Law Relating to Estoppel by Representation (3rd ed 1977) 138-141 and cases cited therein). (7.4)
The Crown also relied upon s 18C(1)(c) of the Companies Act 1955 (which prevents a company asserting a person held out as a director lacks the customary authority of a director) and s 18C(1)(d) (which prevents a company asserting a director lacks unusual authority where that director has been held out as having authority to do an unusual act) to put forward an argument that the Plaintiffs could not assert that their directors lacked authority in relation to certain critical decisions they made and actions they took.
In relation to s 18C(1)(c) I held the directors of AI4, in breaching the Companies Act, entering into illegal contracts and acting improvidently, were not exercising powers customarily held by directors. The unwind letter written by Hawkins as a director of
EHL, on the other hand, can be said to be the exercise of a power customarily held by directors.
Section s 18C(1)(d) envisages the company (meaning officers or agents of the company having actual or ostensible authority) making particular representations of authority (Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146 at 178; Armagas v Mundogas SA [1985] UKHL 11; [1986] 1 AC 717 at 777-778). While the Deed evidencing AI4's acceptance of nomination as purchaser of the NZS/EHL Parcel was sealed with the company's seal and witnessed by Hawkins and Darvell as directors, in all the circumstances of the case, I held that did not amount to a representation by AI4 that Hawkins and Darvell had authority to commit the company to a grossly improvident and illegal transaction. Furthermore, s 18C cannot operate so as to indirectly validate an illegal contract.
The proviso to s 18C(1) prevents a party relying on the section if "that person knows or by reason of his position with or relationship to the company ought to know" of the lack of authority. The proviso has not been the subject of any detailed examination in the cases in this jurisdiction so far. Several points of interpretation presented themselves. The first was the meaning to be given to the phrase "position with or relationship to". I held this phrase was not limited to an inside relationship with the company, but did require an ongoing relationship: Story v Advance Bank Australia Ltd (1993) 10 ACSR 699, 710 (CA(NSW)). The next point was the meaning of the words "ought to know" which I held differed from the common law concept of being "put upon inquiry" and required something more (Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] VicRp 68; [1992] 2 VR 279, 359). The question then became what is the relationship between these two phrases. The wording of the proviso conveys that what the person ought to know is determined by his or her position with, or relationship to, the company. Therefore information acquired is only relevant if it
forms part of the relationship between the person and company (which is to be defined having regard to its particular characteristics).
Applying these conclusions to the facts of this case I concluded that, as the Crown had imputed knowledge that the BWL Takeout Deed had been executed and remained in place, then by virtue of its relationship to EHL it ought to have known that the writing and delivering of the EHL unwind letter was not within the directors' authority. The Crown's relationship with AI4 was not as long-running as with EHL, nevertheless, I held that the 11 March Small letter, which indicated EHL or its subsidiaries were probably financing the purchase, was clearly part of this relationship. So, too, was the Deed of Assignments saga. The result therefore is that s 18C does not prevent AI4 asserting that the execution of the Deed, Notices of Assignment and purchase of the NZS/EHL Parcel all constituted unauthorised acts. (7.5)
The Crown also submitted that the Plaintiffs had ratified any acts by their directors which were unauthorised or in breach of their fiduciary duties. As ratification of an illegal act is not possible this defence does not address the Plaintiffs' allegations of illegality. It is elementary that any alleged act of ratification must be by the person in whose name or on whose behalf the act was purported to be done. The crucial issue therefore is which actions are to be considered the actions of AI4 and the funding companies. The Crown relied on Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 to show that the directors could ratify an unauthorised act. I held, however, that that case depended upon its own special facts and did not create any rule of universal application that a board may ratify a breach by one of its own members. Whether an action, or state of mind, can be attributed to a company is a matter of interpretation or construction of the terms and policies of the relevant substantive rule (Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 at 16). Directors cannot be allowed to unilaterally excuse their own failure to perform as that would frustrate the policy behind the imposition of fiduciary duties. In order to
maintain that policy I held that the shareholders in general meeting alone must be vested with the power to ratify the directors' unauthorised actions. As there was never a general meeting of AI4's shareholders, there was no act of ratification which, under the rules of attribution, could count as an act of the company. (7.6)
A series of other matters loosely but conveniently described as defences, were dealt with in other parts of the judgment. They were bona fide purchaser for value without notice; change of position; apportionment; counter-restitution; causation; and contributory negligence. As appears in the judgment, I held that the Crown could not avail itself of any of those matters save for counter-restitution and contributory negligence. (7.7)
Précis of Section 8: Subrogation
This section addresses the problems which arose as a result of EIGL funding the repayment of EAL/ET's original contributions to AI4 which I have held amounted to
$NZ90,532,832. The Crown argued that those repayments relieved it of further liability. EAL and ET responded that they were not repaid because they did not receive cash but merely exchanged one set of debts for another, and therefore they should have judgment on their cross-claim against the Crown or, alternatively, be recognised as the beneficiaries in respect of that funding when AI4 recovered as a constructive trustee .
The repayment of EAL within what was described during the trial as the "Aylesford transaction" involved EIGL advancing $A95.4 million to AI4, which AI4 paid to EAL as a principle and interest repayment (steps A and B). At the same time, EIGL, through CHL, made a repayment to EAL of $A171.6 million (steps C and D). EAL used these two payments to invest in 265 million Class B preference shares in Aylesford (step E). Aylesford in turn used the funds to redeem Class A preference shares held by EIL (step F). EIL used this money to repay EIGL $A265 million which it had borrowed in order to make its original investment to Aylesford (step G). The steps referred to are recorded in Chart 17, which will be found at page 148 of Volume
A core issue was whether the refinancing amounted to a repayment. I have found, both in fact and at law, that it did as in substance, the transactions were clearly intended to
make good and restore EAL/ET's respective positions. I held that there is no reason why a repayment cannot be made by way of book entry (Ararimu Holdings Ltd (in statutory management) v Equiticorp Financial Services Ltd (in statutory management) [1991] MCLR 464). Such a repayment, however, did not prevent EAL/ET from recovering against the Crown on their restitution-based claims because subsequent events in such cases are irrelevant. I concluded that the dishonest assistance claim, on the other hand, probably failed because the actual loss, using hindsight and commonsense, was eliminated by the repayment. I made no final decision, however, on the accessory claim, preferring to have the issue re-argued on another occasion if the necessity arises.
8.6 is the pivotal segment of Section 8. In it I address the question of whether EAL/ET would be unjustly enriched if they recovered against the Crown and, if so, whether such unjust enrichment would be at the expense of EIGL. The status of unjust enrichment as "a unifying legal concept" lying "at the heart" of equitable remedies is recognised by Lord Browne-Wilkinson in Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70, 196-197 and Deane J in Pavey and Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221 at 256-257.
I concluded that EAL/ET would be unjustly enriched if they were able to enjoy the Aylesford repayment and also recover a second time against the Crown. That would amount to EAL/ET being paid twice - clearly a double (unjust) enrichment. I also held such recovery would be at the expense of EIGL as recovery by EAL/ET against the Crown would prevent AI4 recovering that portion of the total purchase price and passing it on to EIGL. Furthermore, I was unable to see how, when EAL and ET freely entered into the repayment transactions and benefited from them, it would be other than unjust for those companies to recover the discharged debts a second time. Therefore exercising my inherent jurisdiction, I directed that although EAL/ET could proceed against the Crown, recovery should be stayed permanently so that AI4 can
recover and account, not to EAL/ET but to EIGL. I found authority for that course in Burrows (supra at page 28), Lord Napier and Ettrick v Hunter [1993] AC 713, O'Sullivan v Williams [1992] 3 All ER 385, Bell v John Holland Properties New Zealand Ltd (unreported, High Court, Auckland, CL 121/89, 12 July 1991, Wylie J) and Boscawen v Bajwa [1995] EWCA Civ 15; [1995] 4 All ER 769 at 777 per Millet LJ.
While that conclusion meant that EIGL's subrogation claims did not require an answer nonetheless I considered those claims in 8.7 pointing out that in the out-of-the-ordinary circumstances of this case there are difficulties but that since "subrogation nips in the bud any ambition to secure a double enrichment" (Goff & Jones, page 591) leave should be reserved to apply for a decision if at some later stage that should be necessary, in which event I will require the point be re-argued.
Précis of Section 9: Results on the Plaintiffs' claims
Throughout this summary I have concentrated on AI4's recoveries, it being the lead Plaintiff.
Except in those cases where I have either declined to exercise my discretion or reserved leave to apply for a decision at a later stage, I have recorded in Schedules within Section 9 the success or failure of each Plaintiff on each cause of action.
Here, however, I simply record AI4's recoveries by repeating the appropriate Schedule:
As recorded above, and can be seen from the Schedule, AI4 recovers on more than one cause of action. The High Court Rules are silent on such a situation, but obviously there can be no double recovery. The cases on election appear to establish that the Court may enter judgment on more than one cause of action, leaving the plaintiff to elect: see, United Australia Ltd v Barclays Bank Ltd [1941] AC 1, 19, 21; Mahesan slo Thambiah v Malaysia Government Officers' Co-operative Housing Society Ltd [1979] AC 374, 382 and Ming Leong Development Pte Ltd v Jip Hong Trading Company Pte Ltd [1985] 1 AC 511, 525. See, also, the recent confirmation from the Privy Council in Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1995] UKPC 54; [1996] 2 WLR 192 at 197.
Assuming that AI4 seeks recovery on one or more causes of action, all other recoveries will merge therein and the maximum recovery possible would be $189,774,013.
Observations
As stated at the beginning of the judgment, the causes of action which feature very largely in this case all come from areas of the law of equity and the common law, which have only begun to develop as a coherent body during the last three decades. Not surprisingly, therefore, this judgment has required me to confront a number of issues which are still evolving or which have presented themselves in this jurisdiction for the first time. On other occasions I have applied the law in an extended way and yet again on others declined, despite persuasive urging, to break new ground. Without being exhaustive I identify some of those issues.
In addition, it has also been necessary to construe, seemingly for the first time, the following statutory provisions, or aspects of them:
Birds-eye-view of the case
Having reached the end of the judgment, my perception is that the Crown's knowledge of the unauthorised, illegal and improvident nature of the transaction permeates every claim in one way or another. It is the foundation for the Crown's liability on the knowing receipt, dishonest assistance and statutory trust causes of action. It prevented the Crown from invoking the proviso to s 6 of the Illegal Contracts Act 1970 and made it inappropriate for me to exercise my discretion under s 7 of the Act to validate the contract. And it denied the change of position defence to the Crown because it was a wrongdoer. It also rendered inapplicable various other defences raised by the Crown, such as estoppel and s 18C of the Companies Act 1955.
There will be a further hearing to resolve issues of costs, interest, entry of judgment and ancillary matters, but, in the meantime, I have ordered an immediate payment out to the Plaintiffs of the security for costs of $2,760,000.
R P Smellie J
|
Cause of Action
|
Statement of Claim Paragraph
|
Amount Claimed
$ |
Amount Recovered
$ |
Subject to any Conditions
|
Judgment Reference
|
||
|
AI4'S CAUSES OF ACTION
|
|
|
|
|
|
|
|
|
J.3.1
|
Knowing (Dishonest) Assistance
|
197-201
|
327,224,013
|
112,047,918
or 118,223,779
|
Held as a constructive trustee for the initial funders entitled to
recover
|
2.18
2.18
|
|
|
J.3.1A
|
Knowing Receipt
|
201A-201E
|
327,224,013
|
158,224,013
or 189,774,013
|
Held as a constructive trustee for the initial funders entitled to
recover
|
2.17
2.17
|
|
|
J.3.2
|
Statutory Trust
|
202-203
|
327,224,013
|
84,774,013
|
Held as a constructive trustee for the initial funders entitled to
recover
|
5.0
|
|
|
J.3.3
|
Illegal Contracts Act
|
204-298
|
327,224,013
|
189,774,013
|
Held as constructive trustee for the initial funders entitled to
recover
|
3.7
|
|
|
J.3.5
|
Money Had and Received
|
217-219
|
327,224,013
|
189,774,013
|
Held as constructive trustee for the initial funders entitled to
recover
|
4.3
|
|
|
Statement of Claim Reference
|
Cause of Action
|
Statement of Claim Paragraph
|
Amount Claimed
$ |
Amount Recovered
$ |
Subject to any Conditions
|
Judgment Reference
|
|
|
EHL'S CAUSES OF ACTION
|
|
|
|
|
|
|
|
|
J.2.6
|
Reduction of Capital
|
196H-196L
|
327,224,013
|
Failed
|
|
3.12
|
|
|
J.2.1
|
Knowing (Dishonest) Assistance
|
185-189
|
32,500,000
|
26,650,000
|
Leave reserved re settlement reductions
|
2.18
|
|
|
J.2.1A
|
Knowing Receipt
|
189A-189E
|
32,500,000
|
32,500,000
|
Leave reserved re settlement reductions
|
2.17
|
|
|
J.2.2
|
Statutory Trust
|
190-191
|
32,500,000
|
No decision
|
|
5.0
|
|
|
J.2.3
|
Illegal Contracts Act
|
192-196
|
32,500,000
|
32,500,000
|
Leave reserved re settlement reductions
|
3.12
|
|
|
J.2.4
|
Money Had and Received
|
196A-196C
|
32,500,000
|
Failed
|
|
4.7
|
|
|
Statement of Claim Reference
|
Cause of Action
|
Statement of Claim Paragraph
|
Amount Claimed
$ |
Amount Recovered
$ |
Subject to any Conditions
|
Judgment Reference
|
|
|
EIGL'S CAUSES OF ACTION
|
|
|
|
19,000,000
52,300,000
Failed on Money Had and Received: otherwise no decision
Failed No decision
52,300,000
98,712,077
Failed
|
|
|
|
|
J.1.1
|
Knowing (Dishonest) Assistance
|
166-173
|
270,462,828
|
Leave reserved re settlement reductions
|
2.18
|
||
|
J.1.1B
|
Knowing Receipt
|
173J-173N
|
77,300,000
|
Leave reserved re settlement reductions
|
2.17
|
||
|
J.1.2
|
Subrogation
|
174-176
|
124,191,359
|
Leave reserved to apply for decision if required where appropriate
|
2.18
8.7
|
||
|
J.1.2B
|
Unjust Enrichment
|
177B-177C
|
124,191,359
|
|
6.0
|
||
|
J.1.3
|
Statutory Trust
|
178-179A
|
270,462,828
|
|
5.0
|
||
|
J.1.3B
|
Illegal Contracts Act (Original funding)
|
179F-179J
|
77,300,000
|
Leave reserved re settlement reductions
|
3.8
|
||
|
J.1.4
|
Illegal Contracts Act (Refinancing and interest)
|
180-184
|
251,462,828
|
Leave reserved re settlement reductions
|
3.9
|
||
|
J.1.5
|
Money Had and Received
|
184G-184I
|
77,300,000
|
|
4.4
|
||
|
Statement of Claim Reference
|
Cause of Action
|
Statement of Claim Paragraph
|
Amount Claimed
$ |
Amount Recovered
$ |
Subject to any Conditions
|
Judgment Reference
|
|
|
EIGL'S ASSIGNED EFGL/EFSL CAUSES OF ACTION
|
|
|
|
|
|
||
|
J.1.1A
|
Knowing (Dishonest) Assistance
|
173A-173I
|
40,000,000
|
32,800,000
|
Leave reserved re settlement reductions
|
2.18
|
|
|
J.1.C
|
Knowing Receipt
|
173O-173T
|
40,000,000
|
40,000,000
|
Leave reserved re settlement reductions
|
2.17
|
|
|
J.1.3A
|
Statutory Trust
|
179B-179E
|
40,000,000
|
No decision
|
|
5.0
|
|
|
J.1.4A
|
Illegal Contracts Act
|
184A-184F
|
40,000,000
|
40,000,000
|
Leave reserved re settlement reductions
|
3.10
|
|
|
J.1.5A
|
Money Had and Received
|
184J-184M
|
40,000,000
|
Failed
|
|
4.6
|
|
|
Cause of Action
|
Statement of Claim Paragraph
|
Amount Claimed
$ |
Amount Recovered
$ |
Subject to any Conditions
|
Judgment Reference
|
||
|
AI4'S CAUSES OF ACTION
|
|
|
|
|
|
|
|
|
J.3.1
|
Knowing (Dishonest) Assistance
|
197-201
|
327,224,013
|
112,047,918
or 118,223,779
|
Held as a constructive trustee for the initial funders entitled to
recover
|
2.18
2.18
|
|
|
J.3.1A
|
Knowing Receipt
|
201A-201E
|
327,224,013
|
158,224,013
or 189,774,013
|
Held as a constructive trustee for the initial funders entitled to
recover
|
2.17
2.17
|
|
|
J.3.2
|
Statutory Trust
|
202-203
|
327,224,013
|
84,774,013
|
Held as a constructive trustee for the initial funders entitled to
recover
|
5.0
|
|
|
J.3.3
|
Illegal Contracts Act
|
204-298
|
327,224,013
|
189,774,013
|
Held as constructive trustee for the initial funders entitled to
recover
|
3.7
|
|
|
J.3.5
|
Money Had and Received
|
217-219
|
327,224,013
|
189,774,013
|
Held as constructive trustee for the initial funders entitled to
recover
|
4.3
|
|
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