FEDERAL COURT OF AUSTRALIA

Sullivan v Trilogy Funds Management Ltd as the responsible entity of the Pacific

First Mortgage Fund [2017] FCAFC 153

Appeal from:

File number:

Judges:

Date of judgment:

Catchwords:

Legislation:

Trilogy Funds Management Limited v Sullivan (No 2) [2015] FCA 1452

NSD 379 of 2016

ALLSOP CJ, FARRELL AND GLEESON JJ

25 September 2017

APPEAL AND NEW TRIAL —procedural fairness — whether miscarriage of justice has occurred — whether findings made against appellants that they did not have an opportunity to address — where findings made against appellants that went beyond the pleaded case — where ultimate findings can be supported without reference to findings involving procedural unfairness — no miscarriage of justice — whether trial judge failed to address appellants' case theory — where aspects of appellants' case theory complained about did not respond to the pleaded case of the plaintiff below — no error shown — whether delay between cross-examination and judgment contributed to any error by trial judge in credit findings — no error found — whether findings within trial judgment inconsistent — no inconsistency shown — whether trial judge's reliance on contemporaneous documents misplaced in circumstances where certain other documents were shown to be backdated and contain forgeries — no error shown — appeal dismissed

PRACTICE AND PROCEDURE — whether leave should be granted to amend notice of appeal in the course of the hearing of the appeal — where additional contention lacks merit — leave refused

CORPORATIONS — breaches of duties of directors of a responsible entity under s 601FD of the Corporations Act 2001 (Cth)

Corporations Act 2001 (Cth) ss 601EB, 601FC, 601FD 601GA, 601HA, 1317S, 1318, Ch 5C, Pt 7.9 Evidence Act 1995 (Cth) s 27 Federal Court of Australia Act 1976 (Cth) ss 28, 24

Cases cited: All v The Queen [2005] RCA 8; 79 ALJR 662 Australian and Overseas Telecommunications Corporation Ltd v McAuslan [1993] FCA 958; 47 FCR 492 Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2010) 75 ACSR 1 Banque Commerciale SA (En Liquidation) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 Betfair Pty Ltd v New South Wales [2010] FCAFC 133; 189 FCR 356

Branir Ply Ltd v Owston Nominees (No 2) Ply Ltd [2001] FCA 1833; 117 FCR 424 Browne v Dunn (1893) 6 R 67 Clampett v Attorney-General (Cth) [2009] FCAFC 151; 181 FCR 473

Conway v The Queen [2002] HCA 2; 209 CLR 203 Crampton v The Queen [2000] HCA 60; 206 CLR 161 Expectation Pty Ltd v PRD Realty Ply Ltd [2004] FCAFC 189; 140 FCR 17 Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80

Gould v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490

GPI Leisure Corporation Ltd v Herdsman Investments Ply Ltd (No 3) (1990) 20 NSWLR 15 Lego Australia Ply Ltd v Paraggio [1993] FCA 575; 44 FCR 151 Macquarie Bank Ltd v Sixty-Fourth Throne Ply Ltd (1998) 3 VR 133 Monie v Commonwealth [2005] NSWCA 25; 63 NSWLR 729 Moore v Wilson [2006] FCA 79 Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; 53 NSWLR 116 NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98 Nudd v The Queen [2006] HCA 9; 80 ALJR 614 Patel v The Queen [2012] HCA 29; 247 CLR 531

R v Birks (1990) 19 NSWLR 677 Rondel v Worsley (1969) 1 AC 191 Stead v State Government Insurance Commission [1986] HCA 54; 161 CLR 14 Suresh v The Queen [1998] HCA 23; 102 A Crim R 18

Tully v The Queen [2006] HCA 56; 230 CLR 234

Vale v Sutherland [2009] RCA 26; 237 CLR 638

White v Overland [2001] FCA 1333 Wilde v The Queen [1988] HCA 6; 164 CLR 365 Windoval Ply Ltd v Donnelly [2014] FCAFC 127; 226 FCR 89

Quartermaine v The Queen [1980] HCA 29; 143 CLR 595

Heydon JD, Cross on Evidence (10 th ed, LexisNexis Butterworths Australia, 2015)

Date of hearing:

Registry:

Division:

National Practice Area:

Sub-area:

Category:

Number of paragraphs:

Counsel for the Appellants:

Solicitor for the Appellants:

Counsel for the Respondent:

Solicitor for the Respondent:

14, 15 and 16 November 2016

New South Wales

General Division

Commercial and Corporations

General and Personal Insolvency

Catchwords

513

Mr P King with Mr C Alexander

Bransgroves Lawyers

Mr AS Martin SC with Mr SM Nixon SC

Maurice Blackburn Lawyers

ORDERS

NSD 379 of 2016

BETWEEN: PHILIP KEITH SULLIVAN First Appellant

THOMAS WILLIAM SWAN Second Appellant

IAN WILLIAM DONALDSON Third Appellant

AND: TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383

679) AS THE RESPONSIBLE ENTITY OF THE PACIFIC FIRST MORTGAGE FUND (ACN 088 139 477) Respondent

JUDGES: ALLSOP CJ, FARRELL AND GLEESON JJ

DATE OF ORDER: 25 SEPTEMBER 2017

THE COURT ORDERS THAT:

1. Leave to file the third further amended notice of appeal be refused.

2. The appeal be dismissed.

3. Within seven days of the date of this order, the parties submit draft orders to give

effect to the Court's reasons in relation to costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

The appellants are former directors of City Pacific Limited ("City Pacific"), which was the responsible entity of the fund now known as the Pacific First Mortgage Fund ("Fund"). The trial judge found the first appellant, Mr Sullivan, liable to pay compensation in the sum of $37,214,088.28 and the second and third appellants, Mr Swan and Mr Donaldson, liable to pay compensation in the sum of $6,245,974.93 in respect of their conduct as directors of City Pacific in connection with loans to Atkinson Gore Agricultural Pty Ltd ("AGA"). These amounts are the losses found to have been suffered by the Fund as a result of the appellants' contraventions of s 601FD of the Corporations Act 2001 (Cth) ("Act"). Section 601FD specifies duties of an officer of a responsible entity.

2 At the relevant times, Mr Sullivan was the managing director and chief executive officer of City Pacific and Mr Swan and Mr Donaldson were non-executive directors of City Pacific. Mr Donaldson was chairman of the board of directors. He has died since the appeal was heard.

3 The amount of $37,214,088.28 represents the total amount advanced to AGA during the period 28 April 2006 to 1 July 2007 less repayments of $5,275,000. The amount of $6,245,974.93 represents the total amount advanced to AGA during the period 11 January 2007 to 1 July 2007 less repayments of $5,275,000. These amounts were lost by the Fund after AGA defaulted on its loans in late 2008.

4 The appellants' primary complaint is that they were not afforded a fair trial. They contend that they were unfairly required to meet a case which ranged well beyond the pleadings and included unpleaded allegations of "fabricated" documents made without notice in cross-examination. The appellants also contend that the trial judge unfairly made findings against them, particularly against Mr Sullivan, that they were not given an opportunity to answer.

5 The appellants' complaints are made in the context of facts which emerged before, during and since the trial, about the dishonest conduct of City Pacific's lending manager, Mr McCormick, in connection with the AGA facility. Mr McCormick was self-represented at the trial and was not a party to the appeal. An important premise of the appellants' argument on the appeal is that the trial judge unfairly found that Mr Sullivan (and perhaps Mr Swan and Mr Donaldson) either colluded in or was knowingly involved in Mr McCormick's frauds.

- 2 -

Another important premise is that the trial judge failed to engage with the appellants' "case

theory" that Mr McCormick had deceived them and that they were ignorant of

Mr McCormick's fraud at the time.

6 Whether or not it is accurate to say that the trial judge made findings of fraud and collusion

against the appellants (which is an issue discussed below), his Honour undoubtedly made

serious adverse findings concerning all of them. The appellants complain that those findings

were made despite the fact that Trilogy Funds Management Limited ("Trilogy"), the

responsible entity of the Fund since 2009, did not plead any case of fraud, collusion or wilful

blindness. However, the appellants themselves raised the issue of their honesty: they pleaded

that they should be relieved from any liability for any contravention of s 601FD because they

acted honestly in all the circumstances of the case. By this pleading, the appellants exposed

themselves to scrutiny about the honesty of their actions, and to the possibility (which

eventuated) that the trial judge would reject their case that they had acted honestly in all the

circumstances of the case. The appellants must have appreciated that this was a significant

risk where they had each executed a backdated loan approval document (the "9 August" loan

approval) and Mr Sullivan had executed other backdated documents. The "9 August" loan

approval recorded the appellants' approval of an increase in the AGA loan facility from

$26 million to $44.87 million, an increase of almost $20 million. The appellants signed it

between late December 2006 and early January 2007, but dated 9 August 2006 next to each

of their signatures (and, in the case of Mr Swan, with the additional handwritten words

"ratified 11/01/07").

7 The appellants' complaint that they were denied a fair trial must also be understood in the

context of the trial judge's extensive and unchallenged findings about the appellants' non-

compliance with the obligations imposed upon them and designed to protect the Fund and its

members. The appellants complain that they did not appreciate the extent to which they were

deceived by Mr McCormick, but any such deception occurred in circumstances where, on the

trial judge's findings, the basal facts showed that the appellants failed glaringly to take steps

that a reasonable person would have taken in their respective positions to discharge their

respective statutory obligations and failed to take steps that a reasonable person would have

taken to ensure that City Pacific complied with its regulatory obligations.

8 Mr Sullivan and Mr Swan now seek a re-trial. In the case of Mr Donaldson, it was argued that

the proceeding should be dismissed because he was too ill to participate in a re-trial.

-3-

9 In order for the appellants to obtain the orders they sought, they were required to satisfy the Court that any errors made by the trial judge gave rise to a substantial miscarriage of justice: s 28(1)(f) of the Federal Court of Australia Act 1976 (Cth) and Windoval Ply Ltd v Donnelly [2014] FCAFC 127; 226 FCR 89. Accordingly, an issue on the appeal is whether the trial judge may not have found that the appellants are liable to compensate the Fund (either because they did not contravene s 601FD or because they should be exonerated because they acted honestly in all the circumstances of the case) if his Honour had fully appreciated the extent of Mr McCormick's deceit, or if his Honour had not made the findings said to involve procedural unfairness.

10 For the reasons that follow, we are satisfied that the trial judge's findings that the appellants contravened the Act were inevitable, as were his Honour's conclusions that the appellants should not be exonerated from those contraventions in the circumstances of the case.

11 We also conclude that there was no procedural unfairness in the conduct of the trial.

12 Further, there was no procedural unfairness in the findings made by the trial judge against Mr Donaldson and Mr Swan.

Findings which should not have been made against Mr Sullivan

13 We accept, however, the submission made on behalf of Mr Sullivan that the trial judge made findings against Mr Sullivan which he did not have an opportunity to address in his evidence and that this involved procedural unfairness. The particular findings which should not have been made appear at [407], [432], [483], [521], [551], [620], [639], [642] and [690] of the trial judge's reasons. It would be counter-productive to reiterate them at this point in the judgment. The findings went further than was necessary in order to address the case put by Trilogy.

14 However, those findings do not affect the trial judge's reasons for his Honour's conclusions that Mr Sullivan contravened s 601FD. As his Honour found, Mr Sullivan's contraventions arose from his failure to ensure compliance with the regulatory framework that existed to protect the Fund. Most graphically, the contraventions were based upon Mr Sullivan's failure to ensure that the land provided as security for the AGA facility ("Saddleback land") was adequate security for the increases to that facility. The trial judge found that valuations obtained in March 2006 and December 2006 were "not worth the paper they were written on". That finding was not challenged on the appeal.

- 4 -

TRILOGY'S CASE AGAINST THE APPELLANTS

15 Trilogy has been the responsible entity of the Fund since July 2009. By an originating

application filed in April 2012, Trilogy claimed orders that each of the appellants and

Mr McCormick compensate the Fund for damage suffered by the Fund by reason of their

contraventions of sub-sections 601FD(1)(b), (d) and (f) of the Act.

16 Section 601FD relevantly provides:

(1) An officer of the responsible entity of a registered scheme must:

(a) act honestly; and

(b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position; and

(c) act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests; and ...

(0 take all steps that a reasonable person would take, if they were in the officer's position, to ensure that the responsible entity complies with:

(i) this Act; and

(ii) any conditions imposed on the responsible entity's Australian financial services licence; and

(iii) the scheme's constitution; and

(iv) the scheme's compliance plan.

(2) A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1.

(3) A person who contravenes, or is involved in a contravention of, subsection (1) contravenes this subsection.

17 On the appeal, Trilogy emphasised that fraud was no part of its case against the appellants. At

all relevant times, Trilogy's case was put primarily on the basis that the appellants had

breached their respective duties to take reasonable steps to ensure that City Pacific complied

with the Fund's constitution ("Constitution") and its compliance plan ("Compliance Plan"),

and to exercise reasonable care and diligence. There was no allegation of contravention of

s 601FD(1)(a).

18 The alleged contraventions concern the approval or purported approval of increases to the

AGA loan facility in August 2006 and December 2006 or January 2007, and the failure to

- 5 -

take appropriate steps to prevent the making of advances beyond facility limits from late April 2006 to 1 July 2007.

19 One of the appellants' complaints is that the trial judge denied them procedural fairness by finding that a letter from City Pacific to the Australian Securities and Investments Commission ("ASIC"), signed by Mr Sullivan and dated 8 February 2006, was misleading in relation to the AGA facility and that Mr Sullivan knowingly or recklessly misled ASIC in this

letter. Trilogy did not plead a case of breach of duty in connection with this letter.

20 At [224] of the trial judge's reasons, his Honour identified eight key issues for resolution.

The following five issues were directed to questions of contravention:

(1) Did Mr Sullivan and Mr McCormick contravene s 601FD(1)(b), (c) or (0 of the Act

in purporting to approve an "interim" increase to the AGA facility limit to $26 million

in July or August 2006?

(2) Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in

failing to prevent advances being made to AGA that were above the approved facility

limit in the period 28 April to 23 August 2006?

(3) Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in

failing to prevent advances being made to AGA that were above the approved facility

limit in the period 24 August 2006 to 10 January 2007?

(4) Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b), (c) or

(f) in approving an increase to the AGA facility limit to $44.87 million or $55 million in December 2006 or January 2007?

(5) Did each or any of the appellants or Mr McCormick contravene s 601FD(1)(b) in

failing to prevent advances being made to AGA that were above the approved facility

limit in the period 11 January 2007 to 1 July 2007?

21 The remaining three issues concerned causation and loss, mitigation of loss and whether the

appellants or Mr McCormick should be exonerated in respect of any proven contraventions pursuant to ss 1317S or 1318 of the Act.

- 6 -

CONTRAVENTIONS FOUND BY TRIAL JUDGE

Increase of AGA facility limit to $26 million (Issue 1)

22 The trial judge found (at [459], [460] and [462]) that Mr Sullivan and Mr McCormick

contravened s 601FD(1)(b), (c) and (f) of the Act in purporting to approve an increase of the

AGA facility to $26 million and in offering that facility to AGA on or about 23 August 2006

by a backdated letter referred to as the "28 April" letter of offer. However, at [683] his

Honour found that no loss directly resulted from those contraventions because advances up to

just under $26 million had been made prior to 23 August 2006 (which largely explained his

Honour's finding, at [425], that issue 1 was "somewhat of a red herring").

23 At [459], the trial judge identified the following compliance failures by Mr Sullivan and

Mr McCormick in connection with issue 1:

(1) they failed to ensure that the purported approval of the increase in the AGA facility

was supported by an acceptable "as is" valuation based on current zoning;

(2) they failed to ensure that the facility limit met the requirement of an 80 per cent loan

to valuation ratio ("LVR") (or the requirement of a "prudent lending ratio");

(3) they failed to ensure that the Saddleback land provided adequate security for the

increased facility; and

(4) they failed to ensure that a proposal for the increase in the AGA facility limit was put

to and approved by the credit committee of City Pacific ("Credit Committee") as

required by the Compliance Plan and City Pacific's mortgage lending manual

("Lending Manual").

24 At [460], his Honour found that Mr Sullivan and Mr McCormick failed to exercise the

required degree of care and diligence, as demonstrated by the following matters:

(a) their purporting to approve the increase to the AGA facility limit in

circumstances where they knew that advances up to that limit had already been

made in the absence of any reference to or approval by the Credit Committee;

(b) their purporting to approve the increase to the AGA facility limit in the

absence of any acceptable valuation and in circumstances where, on the

existing valuation, the balance of the loan was outside an LVR of 80 per cent;

(c) their purporting to approve the increase to the AGA facility limit in

circumstances where both Mr Sullivan and Mr McCormick knew that SV

- 7 -

Partners Pty Limited ("SVP"), an external expert, had recommended that the

AGA facility be repaid or refinanced by 31 December 2005 if it had not been

confirmed that the Saddleback land had been included in the Urban Footprint

of the South East Queensland Regional Plan, and that another valuation be

obtained from a different valuer to assess the analysis of land values in the

Canungra area based on permitted uses (which recommendation, we

interpolate, had not been implemented);

(d) their creation of false and misleading documents to suggest that AGA had

been formally offered, and had accepted, the loan facility of $26 million on

28 April 2006; and

(e) their failure to take any steps to ensure that the procedures in the Compliance

Plan and the Lending Manual were followed in relation to the offer of the

$26 million facility, including all the failures referred to earlier in the context

of the contravention of s 601FD(1)(f) of the Act.

25 Trilogy did not allege any contravention by Mr Swan or Mr Donaldson in relation to issue 1.

Advances to AGA above approved facility limit in the period 28 April to 23 August 2006 (Issue 2)

26 The significance of 28 April 2006 is manifold. It is the date of the backdated "28 April" letter

of offer mentioned above. It is also the date of a backdated file note (referred to as the

"28 April" file note) signed by Mr Sullivan and Mr McCormick. The trial judge found that all

advances made after 28 April 2006 exceeded the AGA facility limit of $17.89 million, which

was agreed at trial to have been approved by the appellants (as members of the Credit

Committee) in October 2005. As will appear below, on the appeal the appellants sought to

resile from their previous agreement that the $17.89 million facility limit was approved in

October 2005. His Honour also found, at [424], that at all times from 28 April 2006 onwards

the balance owing by AGA to the Fund exceeded the value of the land which secured the

AGA loan facility.

27 The significance of 23 August 2006 is that this was the date on which Mr Sullivan and

Mr McCormick purported to offer to increase AGA' s loan facility to $26 million (by the

"28 April" letter of offer).

28 At [494], the trial judge found that Mr Sullivan and Mr McCormick contravened

s 601FD(1)(b) of the Act in failing to prevent advances being made to AGA that were above

- 8 -

the approved facility limit in the period 28 April 2006 to 23 August 2006. At [495], his

Honour considered that this contravention was demonstrated by the same matters which gave

rise to the contravention of 601FD(1)(b), in connection with the approval and offer of the

$26 million facility to AGA. His Honour referred to the following matters in particular:

(1) They permitted advances to be made to AGA during this period in circumstances

where the AGA facility limit had been exceeded and no proposal had been put to the

Credit Committee.

(2) They also knew that SVP had raised issues concerning the AGA facility and that SVP

had made recommendations concerning the AGA facility that had not been complied

with; and

(3) "[P]erhaps most importantly", they knew that City Pacific did not hold an acceptable

"as is" valuation for the Saddleback land that would support any increase to the

existing facility limit.

29 It is implicit in these findings that the advances made during this period did not comply with

the Constitution, the Compliance Plan or the Lending Manual.

30 The trial judge found no contravention by Mr Swan or Mr Donaldson in relation to the

advances in the period 28 April to 23 August 2006.

Advances to AGA above approved facility limit in the period 24 August 2006 to 10 January 2007 (Issue 3)

31 For the same reasons (recorded at [526]), at [525] the trial judge found that Mr Sullivan and

Mr McCormick contravened s 601FD(1)(b) of the Act in failing to prevent advances being

made to AGA that were above the approved facility limit in the period 23 August 2006 to

10 January 2007.

32 The trial judge found no contravention by Mr Swan or Mr Donaldson in relation to the

advances in the period 23 August 2006 to 10 January 2007.

Increase of AGA facility limit to S44.87 million in December 2006 or January 2007 (Issue 4)

33 At [611], [616] and [625], the trial judge found that each of the appellants and

Mr McCormick contravened s 601FD(1)(b),(c) and (f) of the Act in relation to approving the

increase of the facility limit to $44.87 million (or $55 million) in December 2006.

-9-

34 In relation to Mr Sullivan, the trial judge referred to the following matters in support of his Honour's finding concerning s 601FD(1)(b) (at [612]):

(1) He well knew that the proposal was not supported by any remotely acceptable "as is" valuation and was only really being pushed through the Credit Committee to cover up the fact that advances well beyond the AGA facility limit had already been made. He knew that, putting aside valuations which the trial judge found were "not worth the

paper they were written on", the "as is" valuation based on the actual zoning and current permitted uses of the Saddleback land was $24.975 million, which was well

less than the new loan limit the subject of the proposal.

(2) It could not possibly be suggested on the basis of the information known to

Mr Sullivan that the Saddleback land provided adequate security for the proposed

loan or that the proposed loan maintained a prudent lending ratio.

(3) Mr Sullivan well knew that the proposed increase to the AGA facility flew in the face of the SVP report recommendations concerning the AGA loan and was, on almost any

view, highly imprudent if not reckless in all the circumstances.

35 In relation to Mr Swan and Mr Donaldson, the trial judge referred to their "almost complete failure" to conduct any independent analysis or scrutiny of the proposal (at [613] and [614]). He identified the following things that a reasonable person would have done, but which were

not done by Mr Swan and Mr Donaldson:

(1) They would have conducted at least some analysis and scrutiny of the proposal. Had

Mr Swan and Mr Donaldson conducted even the most cursory analysis or scrutiny of the proposal, the inconsistencies and deficiencies would have been readily apparent,

as would the fact that the proposed facility increase was, to say the very least, most imprudent.

(2) They would have read, analysed and cast a critical eye over the detail of the proposal.

That alone would have put the reasonable person on notice of a number of significant discrepancies and inconsistencies in the proposal itself.

(3) They would have inquired as to the current balance of the loan.

(4) They would have refrained from approving the proposal until the lending manager

gave the required certification in relation to the valuation as required by the Lending

Manual (and as recommended by SVP).

(5)

- 10 -

Even if that certification was forthcoming, a reasonable person, in all the

circumstances, would have asked to see the valuation or valuations referred to in the

proposal and questioned the lending manager in relation to that valuation or those

valuations. That is particularly so having regard to the very large increase in the

valuation of the property reflected in the figures in the proposal.

They would have ensured that the valuations were based on the current zoning and

permitted uses of the Saddleback land.

They would have questioned the lending manager about why the proposal was

backdated.

36 For similar reasons, the trial judge found that the appellants contravened s 601FD(1)(c) and

(f).

Advances to AGA above the approved facility limit in the period 11 January 2007 to 1 July 2007 (issue 5)

37 At [644], the trial judge found that Mr Sullivan contravened s 601FD(1)(b) of the Act in

failing to prevent advances being made to AGA that were above the approved facility limit in

the period 11 January 2007 to 1 July 2007.

38 At [643], the trial judge gave the following reasons:

Even if Mr Sullivan's evidence on this issue was to be believed, and it is accepted that he did not read the board papers or take any other step to ascertain the balance of the AGA facility during 2007, it almost goes without saying that his failure to take such steps in all the circumstances amounted to gross negligence. In all the circumstances, no reasonable person in Mr Sullivan's position would have failed to take steps to keep track of the balance of the AGA facility to ensure that no advances beyond the facility limit were made. Mr Sullivan was plainly on notice of serious issues in relation to the AGA facility and serious issues in relation to Mr McCormick's activities in relation to it. Given Mr McCormick's past history in relation to the AGA facility, that Mr Sullivan was well aware of, Mr Sullivan had no basis for relying on or trusting Mr McCormick in relation to the AGA facility. A reasonable person in his position, acting with even a modicum of care and diligence, would have closely monitored the balance of the AGA facility throughout 2007 to ensure that no further advances were made and the approved balance was not exceeded. On Mr Sullivan's version of events, he did nothing.

39 At [652], his Honour found that Mr Swan and Mr Donaldson also contravened s 601FD(1)(b)

of the Act in failing to prevent advances being made to AGA that were above the approved

facility limit in the period 11 January 2007 to 1 July 2007.

- 11-

40 Concerning Mr Donaldson and Mr Swan's contraventions, the trial judge made the following

findings:

[646] ... by reason of the events of late December 2006 and early January 2007, both Mr Swan and Mr Donaldson had good reason to more carefully scrutinise the board papers generally and the AGA loan balance specifically. In short, they were on clear notice that they could no longer trust or rely on Mr Sullivan, Mr McCormick and others in the lending department, such as Mr Gillam, in relation to the AGA facility.

[647] Mr Donaldson and Mr Swan had, in December 2006, been presented with and asked to sign a backdated loan proposal in relation to AGA, with the only explanation for the backdating being that the proposal had "slipped between the cracks". Even putting aside the backdating, the proposal itself was not only fairly extraordinary, but contained obvious signposts or "red flags" in relation to serious issues and problems with the AGA facility. The increase to the facility was in excess of $20 million. The supposed increase in the valuation of the Saddleback land which purportedly supported the increase to the loan facility was, on one view, about $40 million and, on another, almost $80 million. There were obvious discrepancies and deficiencies in the information in the proposal, including information about the approved limit, the present position and the basis of the supposed valuation. The AGA facility had earlier been specifically identified in the SVP report as a potentially problematic loan. All of those matters would, or should, have put Mr Swan and Mr Donaldson on notice that they needed to keep a very close eye on the AGA facility throughout 2007. In all the circumstances, they could not simply rely on Mr Sullivan or Mr McCormick to bring any issues concerning the AGA facility to their attention.

[648] Within a matter of weeks of signing-off on the backdated proposal, Mr Swan and Mr Donaldson, both men with extensive qualifications and experience in accounting, commerce and corporate governance, received board papers that revealed that the AGA facility was already $2 million over the limit they had just approved. Within two to three months, they had received board papers that revealed that the AGA facility was between $9 million and then $10 million over the facility limit they had so recently approved. That information was not in any sense difficult to identify or decipher from within the board papers. Any suggestions to the contrary by either Mr Swan or Mr Donaldson are rejected as implausible and not credible. It would not have been in any sense onerous for them to have analysed the loan schedule, particularly given their qualifications and experience. If they had looked at the list of loan balances, and the AGA loan balance specifically, it could not seriously be suggested that the information would not have "register[ed] any concern", as may have been the case before December 2006.

[649] In all the circumstances, there are only two alternative factual findings available. The first is that, contrary to their evidence, both Mr Swan and Mr Donaldson did read the board papers, and the list of the Fund's loans specifically, and did see and appreciate that the AGA facility was operating outside its limit, but for whatever reason did nothing about it. In that scenario, the failure by Mr Swan and Mr Donaldson to take any step to prevent further advances being made to AGA was a failure to exercise the care and diligence that would be expected of them given their positions. In their positions as directors and members of the Credit Committee, plainly

- 12 -

Mr Swan and Mr Donaldson were in a position to prevent further advances being made to AGA above the facility limit.

[650] The second and alternative finding is that Mr Swan and Mr Donaldson either did not read the list of the Fund's loans in the board papers or did not see or appreciate that the AGA facility was operating well outside its limit. As a result, they failed to ascertain that further advances were being made to AGA that took the facility beyond its approved limit, and as a result failed to take any steps to ensure that did not occur. In that scenario, given the events of December 2006 and the features of the AGA facility that must have been apparent to both Mr Swan and Mr Donaldson by this time, the failure by Mr Swan and Mr Donaldson to read and analyse the AGA loan balance in the board papers was a failure to exercise the care and diligence that would have been expected of them given their positions.

[651] Both Mr Swan and Mr Donaldson called in aid the fact that they were non-executive directors, the fact that they relied on management and the fact that City Pacific's activities were also the subject of scrutiny by a compliance committee and external auditors. In all the circumstances, and particularly given that they had been party to the backdating of the December 2006 proposal, they were not entitled to call in aid reliance on management or external persons or bodies, such as the auditors. For the reasons already given, the explanations given by both Mr Swan and Mr Donaldson in their evidence concerning the backdating of the December 2006 proposal were most unsatisfactory. At the very least, they had every reason to suspect, if not believe, that the backdating of the proposal was intended to paper over a problem in the AGA loan file that would otherwise be apparent to anyone, including external parties, who inspected the AGA loan file.

[652] Those factual findings support the conclusion that, in failing to prevent the further advances to AGA during the period 11 January 2007 to 1 July 2007, both Mr Swan and Mr Donaldson contravened s 601FD(1)(b) of the Corporations Act. They failed to exercise the degree of care and diligence that a reasonable person in their positions would have exercised. In all the circumstances, a reasonable person in the position of Mr Swan and Mr Donaldson, exercising care and diligence, would have ascertained that the AGA facility had exceeded its approved limit and thereafter done everything in their power to ensure that no further advances to AGA beyond the approved limit were made. Whilst they were non-executive directors, they were members of the Credit Committee and, in any event, would have been in a position to stop the making of advances in the circumstances.

TRIAL JUDGE'S REJECTION OF CLAIMS FOR EXONERATION

41 At the trial, the appellants argued that any contravention or contraventions should be excused

under either or both of ss 1317S or 1318 of the Act because the contraventions were not

serious, were mere errors of judgment, and because in all the circumstances it would be

unjust and oppressive to order them to pay the amount of compensation sought by Trilogy.

Exercise of the powers in either of these provisions requires findings that the person seeking

the benefit of the provision had acted honestly and that, having regard to all the

circumstances of the case, the person ought fairly to be excused for the contravention.

-13-

42 The trial judge's reasons for rejecting the appellants' claims for exoneration did not require consideration of the extent of Mr McCormick's deception. They appear at [875]-[879]

(Mr Sullivan), [884]-[8921 (Mr Donaldson) and [893]48971 (Mr Swan) of the trial judge's reasons. The trial judge gave further reasons at [898]-[905]. His Honour observed that the contraventions of s 601FD were serious. His Honour referred to the prescriptive requirements of Chapter 5C of the Act and observed that "[Ole tightly regulated and highly prescriptive statutory scheme all amounts to nought...if officers of responsible entities do not comply

with their duties under s 601FD". His Honour concluded:

[900] There is, for example, little point in having a comprehensive constitution and compliance plan if the officers of the responsible entity effectively ignore their provisions, or do not take reasonable steps or act with care or diligence to ensure that they are complied with.

[901] That is effectively what happened here. The actions of Mr Sullivan and Mr McCormick, in particular, but also Mr Swan and Mr Donaldson, made a mockery of the statutory scheme.

[902] Mr Sullivan and Mr McCormick thumbed their noses at the Constitution and the Compliance Plan and other policies and procedures put in place under them. They ignored them and dealt with the Fund's assets as they saw fit.

[903] Mr Swan and Mr Donaldson turned a blind eye to Mr Sullivan's and Mr McCormick's disregard of the constituent documents. Even on their own evidence, they did not attentively read important parts of board papers that were provided to them for the purposes of board meetings. More significantly, they simply signed and thereby approved major loan proposals without giving them any independent scrutiny or analysis. If their evidence concerning their scrutiny of loan proposals was to be accepted, it is difficult to see the point of them sitting on the Credit Committee. Indeed, it is difficult to see the point in them being directors.

[904] Significantly, all this occurred in circumstances where the Fund's assets, held on trust for its members, were valued at around $1 billion. Messrs Sullivan, Swan, Donaldson and McCormick seemed to have forgotten or ignored the fact that they were making decisions about other people's money. It is doubtful that they would have acted in the same way if it was their money that was being advanced to AGA.

]905] In all these circumstances, the seriousness of the respondents' contraventions can be readily appreciated. Relief under either s 1317S or s 1318 of the Corporations Act would be wholly inappropriate in the case of any of the respondents.

43 None of these reasons were challenged on the appeal.

- 4 -

COMPLAINT THAT TRIAL JUDGE FAILED TO ENGAGE WITH APPELLANTS' CASE THEORY

44 When the basal facts that underpin the trial judge's findings of contravention are recognised,

it becomes obvious that those findings are unaffected by questions of whether the appellants

were deceived by Mr McCormick and the extent of any such deception. Put another way,

even if the trial judge had fully appreciated the extent of Mr McCormick's deceit as claimed

by the appellants, his Honour would nevertheless had made the same findings of

contravention. Further, a full appreciation of the extent of Mr McCormick's deceit as claimed

by the appellants could not gainsay the trial judge's reasons for concluding that they should

not be exonerated for those contraventions.

45 Put simply, the appellants' case theory missed the point of Trilogy's case. Equally, the

complaint that the trial judge failed to engage with that case theory misses the point of his

Honour's conclusions. As articulated on the appeal, the case theory was expressed at a high

level of generality: for example, the appellants submitted that it was "far more plausible" that

"Mr McCormick was acting alone and had simply deceived the others and kept them in the

dark". The trial judge was only required to address the appellants' case theory to the extent

that it engaged meaningfully with the case propounded by Trilogy. Accordingly, and contrary

to the appellants' submissions, the question of delay is not relevant to the extent of the

reasons that the trial judge was required to give in addressing the appellants' case theory.

UNCONTESTED FACTS AND FINDINGS

Regulatory framework for assessing the appellants' conduct

46 The following detailed and uncontested facts and findings underpinned the trial judge's

conclusions.

Roles of the appellants and Mr McCormick

47 Mr Sullivan was the managing director and chief executive officer of City Pacific from

August 1997 to November 2008.

48 Mr Swan was a non-executive director of City Pacific from 8 August 1997.

49 Mr Donaldson was a non-executive director of City Pacific, and chairman of the board of

directors, from 25 May 1998 to 16 December 2008.

- 15 -

50 Each of the appellants was also a member of the Credit Committee of City Pacific at all relevant times from April 2006 to December 2007.

51 Mr McCormick was at all material times a senior manager of City Pacific. From around March 2005 to around 30 June 2006, he occupied the position of lending manager. Thereafter, and until 31 July 2009, he occupied the position of Group Executive — Property Development. In both these roles, he was essentially in charge of the lending department at City Pacific. He was a member of the Credit Committee at all relevant times from April 2006 to December 2007.

Fund and its constituent documents

52 The Fund is a unit trust established by a trust deed made on 23 June 1998, as amended from time to time, which serves as the constitution of the Fund ("Constitution"). The Fund is, and has been since 13 July 1999, a managed investment scheme registered under s 601EB of the Act.

53 At [283], the trial judge noted:

A managed investment scheme cannot be registered under the Corporations Act if it does not have a constitution and compliance plan which comply with the detailed requirements in ss 60IGA and 60111A of the Corporations Act respectively. Relevantly, the constitution must make adequate provision for the powers of the responsible entity in relation to the making of investments of, or otherwise dealing with, scheme property. The compliance plan must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Corporations Act and the scheme's constitution. Plainly the contents of both documents are fundamentally important to the proper operation of the statutory scheme and the protection the statutory scheme is intended to afford to members of managed investment schemes.

54 City Pacific was the responsible entity of the Fund from 23 June 1998 until about 7 July 2009. As the responsible entity of the Fund, City Pacific was required to operate the Fund as a managed investment scheme and perform the functions conferred on it by the Constitution and the Act. During the time it was the responsible entity, City Pacific was the manager of the Fund under the Constitution.

55 Relevant provisions of the Constitution are set out [28] to [39] of the trial judge's reasons. As his Honour noted, and as required by s 601GA(1)(b) of the Act, the Constitution contained a number of provisions dealing with the powers of City Pacific, as the responsible entity, in relation to making investments of, or otherwise dealing with, the Fund's property.

- 16 -

Product disclosure statements

56 At [40] of the trial judge's reasons, his Honour referred to Product Disclosure Statements

("PDS") issued by City Pacific in respect of the Fund as required by Pt 7.9 of the Act. The

PDS which were current in the period April 2006 to August 2007 included statements that:

(1) City Pacific had determined and documented lending guidelines for the approval and

management of all loans;

(2) City Pacific would limit the investments of the Fund to first mortgages and cash

investments;

(3) City Pacific only made investments that provided adequate security for the Fund;

(4) prudent lending ratios were maintained for lending by the Fund;

(5) the Constitution allowed advances up to 80 per cent of security property values as

determined by an independent valuer; and

(6) all loan applications were carefully considered by the Credit Committee whose

members have substantial credit and property development experience.

Compliance Plan

57 The trial judge noted that the Fund was required to have a compliance plan that met the

requirements of s 601HA of the Act. Section 601HA provides that the compliance plan must

set out adequate measures that the responsible entity is to apply in operating the scheme to

ensure compliance with the Act and the scheme's constitution. The responsible entity was

required to comply with the scheme's compliance plan: s 601FC(1)(h) of the Act.

58 At [41] to [45] of the trial judge's reasons, his Honour set out matters concerning the

Compliance Plan.

59 At [43], the trial judge noted that the Compliance Plan set out procedures that were required

to be followed in the period 11 August 2005 to 19 July 2007 in respect of all investments

made by the Fund. The mandated procedures included that:

(1) all investments of the Fund had to be invested in accordance with the Constitution and

the PDS;

(2) the lending manager of City Pacific was responsible for supervising the investment

strategy of the Fund and undertaking the initial assessment of each "Mortgage

Investment";

- 17 -

(3) investments must only be made in "Authorised Investments";

(4) before any "Mortgage Investment" was made, a valuation had to be obtained;

(5) the Credit Committee was responsible for approving all "Mortgage Investments"; and

(6) a "Mortgage Investment" should be made in accordance with the "Manager's"

mortgage lending guidelines.

Lending Manual

60 At [46] to [48] the trial judge set out details concerning the City Pacific Lending Manual.

Credit Committee

61 At [49] to [52], the trial judge made the following findings concerning the Credit Committee, of which the appellants and Mr McCormick were members:

[491 As indicated earlier, under the Compliance Plan, the Credit Committee was responsible for approving all mortgage investments. The PDS also stated that all loan applications were carefully considered by the Credit Committee and represented that the members of the Credit Committee had "substantial credit and property development experience". The Lending Manual provided that all loan proposals, together with supporting information, including the valuation report, were to be given to the Credit Committee, and that it was the role of the Credit Committee to determine whether a loan proposal should be approved or declined. Each of the respondents was a member of City Pacific's Credit Committee.

[50] The role of the Credit Committee was further explained in City Pacific's Credit Committee Charter. The Credit Committee Charter was lodged with ASIC as part of City Pacific's compliance material. The Credit Committee Charter contained the following statements:

1. INTRODUCTION

The Credit Committee of the Company ("Committee") has the ultimate responsibility to the investors in the Schemes for which City Pacific Limited acts as Responsible Entity and Manager.

The Committee is dedicated to fulfilling these duties in a lawful and professional manner, and with the utmost integrity and objectivity.

Good credit assessment policies and procedures are critical for ensuring that the Committee carries out its duties effectively and efficiently to the benefit of the Company and the investors as a whole.

This document outlines the Company's credit assessment policy, which is a written policy document that defines the respective roles, responsibilities and authorities of the Committee, both individually and collectively. As such, it establishes the guidelines within which

- 18 -

the Committee members are to operate as they carry out their respective roles. ...

3. THE ROLE OF THE COMMITTEE

The Committee is ultimately responsible for all matters relating to the credit assessment procedures of the Company.

The Committee has responsibility for ensuring that the Company's lending practices are consistent and that all loans and transactions are correctly processed.

The Committee meets as and when required to review loan proposals together with the supporting information. Loan proposals to be considered must be given to the Committee for review. The decision to approve or decline a loan rests with the members of the Committee in accordance with the Credit Committee Approval Policy (refer Appendix 3). Loan applications are carefully considered by the Committee whose members have substantial credit and property development experience.

(Emphasis added.)

[51] The central importance of the Credit Committee could not be doubted.

[52] On or around 11 November 2005, the board of City Pacific resolved to adopt a Credit Committee Approval Policy, which provided that the following delegated authorities would apply to all new loans:

(a) Less than $5 million: any two members of the Credit Committee;

(b) From $5 million to $20 million: any three members of the Credit Committee;

(c) From $20 million to $50 million: all members of the Credit Committee;

(d) More than $50 million: all members of the Credit Committee plus the board members of City Pacific.

Relevant loan criteria

80 per cent LVR requirement

62 For reasons set out at [290] to [296] of his Honour's reasons, the trial judge accepted

Trilogy's contention, based upon the Constitution read with the PDS, that the Fund could

only invest its funds in "Mortgage Investments" where the total of the money advanced did

not exceed 80 per cent of the value of the security property as valued by an approved valuer.

Valuation requirement

63 Trilogy contended before the trial judge that, by reference to the Compliance Plan, read

together with the PDS and the Lending Manual, that loans were required to be approved by

the Credit Committee and that, before approving a loan proposal, the Credit Committee was

- 19 -

required to receive and consider a valuation of the security property from an approved valuer which was no more than three months old.

64 At [297], the trial judge recorded the appellants' apparent acceptance that all investments, including extensions or increases to existing investments, had to be approved by the Credit Committee; and that the process of approval involved the provision of a loan proposal to the Credit Committee, together with supporting information.

65 His Honour did not make an express finding about the requirement to provide a valuation to the Credit Committee, but concluded (at [300]):

In any event, in the particular circumstances of this matter, the duty of care and diligence owed by each member of the Credit Committee would almost certainly have required them to take at least some steps to check or verify, if not carefully consider, the valuation or valuations that were said to support the proposal to increase the AGA facility limit that was put to the Credit Committee in December 2006. ... It is sufficient to note at this stage that this plainly did not happen.

66 This finding of breach of duty, which affects all of the appellants, was not challenged on the appeal.

Uncontested chronological facts and findings

67 The following section sets out both findings made by the trial judge that were not contested on the appeal, as well as other uncontested matters relevant to an assessment of the appellants' case on the appeal.

Prior to 28 April 2006

68 In early March 2004, AGA obtained a valuation from PRP Valuers and Consultants Gold Coast Pty Ltd ("PRP") in relation to approximately 394 hectares of land in the area known as "Saddleback" in the Gold Coast hinterland near the township of Canungra. The valuation of $5.9 million was based on the fact that the highest and best use of the land was for "rural pursuits as a holding proposition pending future subdivision approval".

69 AGA first applied for a loan from the Fund on 30 June 2004.

70 On 14 July 2004, City Pacific, as responsible entity of the Fund, wrote to AGA and offered a total facility of $3.25 million to AGA secured by a first registered mortgage over land that was to be acquired at "Saddleback". That offer was accepted by AGA on 9 September 2004.

- 20 -

71 In December 2004 and February and April 2005, the initial loan facility was increased to

enable AGA to purchase additional parcels of land in the Saddleback area.

72 On 9 December 2004, City Pacific, as the responsible entity of the Fund, offered to provide a

facility to AGA (apparently in an amount of $9.29 million) secured by registered mortgages

over the existing lots owned by AGA and 15 additional parcels of land to be acquired. The

offer was accepted, the funds were advanced and the additional parcels were subsequently

purchased by AGA on 21 December 2004.

73 On 18 February 2005, ASIC wrote to the directors of City Pacific expressing concerns about

the liquidity of the Fund. The letter enclosed a written notice issued under s 912C(1) of the

Act that required City Pacific to give ASIC information about its financial services to assist

ASIC in forming a view about the liquidity of the Fund.

74 On about 24 February 2005 City Pacific, as the responsible entity of the Fund, offered to

provide a total facility to AGA of $8.8 million secured by registered mortgages over the

Saddleback land already owned by AGA, and also over a further property, which was to be

acquired by AGA. The offer was accepted by AGA on 25 February 2005 and the additional

property was subsequently acquired.

75 On about 28 April 2005, PRP, under instructions from City Pacific, provided a valuation of

the Saddleback land that had been acquired by AGA on a current market value basis. PRP

expressed the opinion that the current market value of the land (comprising approximately

694 hectares) was $19.075 million, on the basis that its highest and best use was for "rural

pursuits as a holding proposition pending future subdivision approval".

76 In May 2005, following correspondence between ASIC and City Pacific, ASIC advised City

Pacific in May 2005 that it had two options available to it. It could either immediately follow

the "Non-Liquid Scheme redemption process", or it could engage external experts to review

"firstly the loan book and underlying mortgages in the scheme and secondly the liquidity of

the scheme".

77 Also in May 2005, the AGA facility was increased to $10.6 million and in June 2005, the

facility was increased to $13.35 million. Based on the April 2005 valuation, these facility

limits represented an LVR of 52.8% in May 2005 and 61.1% in June 2005.

78 On 20 June 2005, City Pacific engaged SVP to conduct the review required by ASIC,

including a review of the Fund's loan book. The review of the loan book was to involve, for

- 21 -

every mortgage loan made by the Fund, an assessment of whether City Pacific had complied

with the valuation and security requirements of the Constitution, the Compliance Plan and the

Lending Manual. The directors of City Pacific approved the terms of SVP's engagement.

79 On 21 June 2005, ASIC notified City Pacific that its Australian Financial Services Licence

("AFSL") had been varied to add a condition that City Pacific must engage an external

expert, approved by ASIC, to, amongst other things, "comprehensively review the assets of

[the Fund]" and provide a report that included "any specific or general recommendations or

comments that the [e]xpert may have in relation to the findings of the review". At [73], the

trial judge found:

That development was undoubtedly a most serious issue for City Pacific. City Pacific was required by s 912A(1)(b) of the Corporations Act to comply with the conditions of its AFSL. ASIC had the power under s 915C(1)(a) of the Corporations Act to suspend or cancel City Pacific's AFSL if it did not comply with its obligations under s 912A. The holding of an AFSL was a prerequisite under s 601FA of the Corporations Act for City Pacific to be the responsible entity of the Fund.

80 On 28 September 2005, SVP furnished its report ("SVP report") to both City Pacific and

ASIC. Each of the appellants was provided with, or saw, a copy of the SVP report on or

shortly after 28 September 2005. At [76], the trial judge found:

The report contained a number of general recommendations, but only one loan-specific recommendation which related to a loan that did not comply with the Constitution and the Compliance Plan. That loan was the AGA facility. The SVP report included the following findings and recommendations concerning the AGA facility:

SVP has identified a loan where [City Pacific] has approved lending to 60% of the valuation but where SVP considers the loan is outside all current policy areas.

i. SVP's analysis is again based on use of the loan funds, this time for rural land banking at Canungra prior to rezoning of lands from Rural — Regional Landscape & Rural Protection to (the attempted) inclusion in the urban footprint of the recently released South East Queensland Regional Plan. Under asset / non-conforming loans rural properties of not more than 10 hectares are considered acceptable as security. The properties (the [Fund's] security) now total 832.5 hectares.

The loan is to Atkinson Gore Agricultural Pty Ltd (Craig Gore / John Atkinson) and approved to $13.35 million (with interest capitalised from date of initial draw down).

Recommendation

The loan be repaid (refinanced) if it is not confirmed in writing from the relevant government planning authority that the land can be included

- 22 -

under the urban footprint of the recently released South East Queensland Regional Plan by 31 December 2005. At the December review SVP also recommends obtaining another valuation from a different valuer to check the analysis of land values in the Can ungra area based on permitted uses. This valuation must also be satisfactory for the loan to remain as part of the portfolio.

(Emphasis in original.)

81 SVP also noted that the Compliance Plan provided that the lending manager must certify to

the Credit Committee that the valuation is acceptable before approval. SVP found, in effect,

that this requirement was not being complied with. The SVP report stated:

As the lending manager signed off each lending proposal, SVP is advised that the members of the lending committee considered this to indicate the valuation was acceptable; but SVP sighted no specific evidence on file of separate certification.

SVP are advised that new processes being introduced will incorporate a specific certification.

82 At [80], the trial judge found that the "new processes" that SVP was advised were being

introduced were in fact later implemented by City Pacific. On 27 October 2005, each of the

appellants and Mr McCormick were advised that City Pacific had adopted and implemented a

new practice note in relation to valuations. That practice note included a new form of credit

proposal that was to be completed by the Lending Manager. The new proposal was required

to include the following:

VALUATION CERTIFICATION

In recommending this proposal, the Lending Manager certifies that the accompanying valuation is acceptable, subject to any qualification listed above.

83 On 30 September 2005, PRP provided a valuation of approximately 832 hectares of land,

apparently comprising the land the subject of the April 2005 valuation and six additional lots

("September 2005 Saddleback Land"). The valuation valued the September 2005 Saddleback

Land at $24.975 million, again on the basis that the highest and best use was for rural pursuits

as a holding proposition pending future subdivision approval.

84 On 6 October 2005, City Pacific wrote to AGA with an offer to increase the facility to

$17.89 million. The offer, signed by Mr Sullivan and Mr McCormick, specified that the loan

facility of $17.89 million was to be secured by registered mortgages over the September 2005

Saddleback Land, together with Lot 2 RP 78799 and a Deed of Cross-Collateralisation. AGA

accepted that offer on the same day.

- 23 -

85 The trial judge found that the offer to increase the facility to $17.89 million was supported by

an approval of the Credit Committee. That proposition was uncontested at the trial but the

appellants sought to challenge it on the appeal.

86 On 5 October 2005, Mr Sullivan and Mr McCormick were sent a draft "matrix", prepared by

City Pacific's lawyers, which summarised SVP's recommendations. The draft matrix

included SVP's specific recommendation in relation to the AGA facility. The draft matrix

also included a column into which was to be inserted the action City Pacific proposed to take

in relation to each recommendation and the person or persons at City Pacific who bore the

responsibility for taking that action ("the action plan").

87 The draft matrix, including the action plan, was reviewed by Mr Sullivan and others. It was

finalised and sent to ASIC on 11 October 2005. Copies of the final version of the matrix and

action plan were sent to Mr Swan and Mr Donaldson on 11 October 2005.

88 At [82], the trial judge found, in effect, that each of the appellants was well aware of the SVP

recommendations concerning the AGA facility and City Pacific's action plan in relation to

those recommendations from at least that time.

89 Between about September 2005 and January 2006, AGA made unsuccessful efforts to

achieve the rezoning of the Saddleback land.

90 As at 31 December 2005, nothing had been done to implement SVP's recommendations

concerning the AGA facility. As at 31 December 2005, City Pacific had not obtained written

confirmation that Saddleback had been included in the Urban Footprint area under the South

East Queensland Regional Plan. Nor had it required the AGA facility to be repaid, or

obtained a fresh valuation from a different valuer based on permitted uses.

91 On 27 January 2006, ASIC wrote to Mr Sullivan to request a report on the progress of City

Pacific's implementation of the SVP recommendations.

92 On 8 February 2006, Mr Sullivan sent ASIC a letter enclosing a "full progress report". The

letter had two attachments, a schedule (numbered at the trial "ITB213") and a table described

as a "matrix" (numbered "ITB214"). The letter and attachments were subsequently sent to

Mr Swan and Mr Donaldson.

93 In his Honour's reasons, the trial judge referred to the two attachments as a single "report".

The trial judge made the following findings about the report (at [93] to [95]):

- 24 -

[93] In relation to the AGA facility, a table in the enclosed report stated that "[o]n receipt of zoning gazettal and finalised valuation, both imminent, we will review [the] facility". The basis of the statement that a zoning gazettal and finalised valuation were "imminent" is, at best, unclear. Given that the Council had refused AGA's application to have the 1989 or 1992 rezoning applications gazetted, there would appear to have been no basis for the statement that gazettal was "imminent".

[94] Perhaps more significantly, the progress report stated as follows in relation to the AGA facility:

A Draft valuation prepared by a different valuer (on panel), has been sighted at a substantially higher value. Legal opinion is held from an eminent QC that the 1989 rezoning to 'Special Facilities' is valid for this property. On receipt of zoning gazettal and finalised valuation we will review the facility. Advice that we have received is that the gazettal is now a formality and is imminent.

[95] That statement was unquestionably misleading, if not completely false. No valuation by a different valuer had been commissioned, let alone sighted by City Pacific. City Pacific did not hold an opinion from an eminent QC that the 1989 rezoning was "valid". Nor did it hold any advice that gazettal was "a formality and ... imminent". Indeed, as already indicated, the Council had already refused AGA's request relating to the approval and gazettal of the 1989 and 1992 rezoning approvals.

94 On the appeal, the appellants complained about the trial judge's findings that Mr Sullivan

misled ASIC in this letter. The issue was whether Mr Sullivan had acted dishonestly or

otherwise wrongfully in sending the letter to ASIC: it was not suggested that the trial judge

erred in finding that the letter itself was misleading in the manner that his Honour identified.

95 On 15 February 2006, AGA sent a report to Mr Sullivan and Mr McCormick which

summarised the steps AGA had taken to pursue development approvals in relation to the

Saddleback land. The report noted that the Council had refused AGA's request to recommend

to the Minister that rezoning approvals in 1989 and 1992 be gazetted and that the refusal was

the subject of an appeal in the Planning and Environment Court of Queensland.

96 On 7 March 2006, City Pacific as the responsible entity of the Fund instructed PRP to prepare

a valuation of the land valued in September 2005 together with an additional lot. It instructed

PRP to value the land on the following basis:

Site Value AS IS (with current development approval if applicable). The valuation is to reflect the 1989/1992 'Special Facilities' rezoning approval over the Original Saddleback lands. It is to also take into consideration the Canungra Development Control Plan which exists over part of the subject lands.

97 At [101], the trial judge noted that the instructions required an assumption that the 1989/1992

rezoning approval by the Council had been gazetted and was legally effective, despite the fact

-25 -

that the rezoning approval had never been gazetted, was legally ineffective and the Council

had made it plain to AGA that it refused to revisit or gazette the earlier approvals.

98 On 20 March 2006, PRP provided a valuation report for the relevant land, together with two

additional lots, totalling approximately 887 hectares. The report expressed the opinion that

the current market value of the land was $64.1 million. There was no real dispute that this

valuation report was provided to Mr Sullivan. The trial judge found ([at [547]) that this

valuation was not worth the paper it was written on.

28 April to 23 August 2006

99 At [424], the trial judge found that from 28 April 2006 onwards the balance owing by AGA

to the Fund exceeded the value of the Saddleback land. On this basis, his Honour concluded:

On any view the advances made to AGA after 28 April 2006, the purported approval of the "interim" increase to the facility limit to $26 million, and the approval of the increase to the facility limit to $44.87 million (or $55 million) were objectively imprudent and not in the best interests of the members of the Fund. They did not comply with the Constitution or the Compliance Plan. The only real question is whether the respondents knew that to be the case, or whether they would have known that had they exercised the required standard of care and diligence

100 As at 28 April 2006, the balance outstanding on the AGA loan facility was $17,744,965.64.

101 On 1 May 2006, capitalised interest of $318,801.68 was added to the principal outstanding

under the facility, increasing the balance outstanding to $18,063,767.32.

102 On 10 May 2006, AGA requested a drawdown of $1 million. That request was made to

Mr McCormick. A Funds Transfer Request form in respect of that drawdown was prepared

arid in due course signed by Mr Sullivan and Mr McCormick. That was despite the fact that

the drawdown resulted in the AGA facility exceeding its approved limit (which the trial judge

took to be $17.89 million). There was no Credit Committee resolution to increase the limit of

the AGA facility to permit the making of that further advance. The further advance was made

on 11 May 2006.

103 On 29 May 2006, PRP sent Mr McCormick an updated March 2006 valuation expressing the

opinion that the current market value of the land the subject of the March 2006 valuation was:

(a) $64.1 million on an 'as is' basis "which reflects the 1989/1992 "Special

Facilities" rezoning approval";

- 26 -

(b) $102.4 million on the assumption that the land had been declared as State

Significant; and

(c) $102.4 million on the assumption that the land had been included in the Urban

Footprint area under the South East Queensland Regional Plan.

104 None of the assumptions on which these valuations were based reflected reality. As for the

March 2006 valuation, the trial judge found ([at [547]) that the updated March 2006 valuation

was not worth the paper it was written on.

105 Further significant advances were made of $592,000, $350,000 and $500,000 on 17, 25 and

26 May 2006 respectively. The latter two Funds Transfer Request forms were signed by

Mr McCormick.

106 On 20 June 2006, each of the appellants was sent board papers in advance of a meeting of the

board of directors on 22 June 2006. The board papers included a balance sheet for the Fund

which recorded, under the heading "Significant advances — May", that $2.4 million had been

advanced to AGA in May 2006. The board papers also included a schedule of all loans made

by the Fund. That schedule recorded that the balance of the AGA facility was

$20.506 million. Similarly, the board papers for the July 2006 meeting of the board of

directors included a schedule which recorded the balance of the AGA facility as being

$20.691 million as at 30 June 2006, and the board papers for the August 2006 board meeting

recorded that the balance of the AGA facility was $22,822,885.

107 On 11 July 2006, the Fund's compliance auditors, KPMG, wrote to Mr McCormick

requesting information in relation to the Fund's mortgage loans. The letter included the

following request:

We noted five instances (... Atkinson Gore Agricultural ...) where the loan drawn at 31 May exceeds the facility limit per the LOO [letter of offer].

Please review the loan files and provide details of the current situation.

108 The next day, Mr Sullivan and Mr McCormick signed a further Funds Transfer Request form

in relation to the AGA facility that authorised a further advance of $475,000 under the

facility. That was followed by further Funds Transfer Requests on 17 July 2006 for $750,000

(signed by both Mr Sullivan and Mr McCormick) and on 25 July 2006 for $500,000 and

$19,820.75 (signed by Mr McCormick). Those advances were not the subject of any

documented approval by the Credit Committee.

- 27 -

The backdated "28 April" file note

109 Trilogy's case, as pleaded in its second further amended statement of claim ("statement of claim") at para 84, was that Mr Sullivan and Mr McCormick gave approval for the AGA facility to be increased to $26 million on 28 April 2006. Separately, at para 121C of the statement of claim, Trilogy alleged that the advances made to AGA in the period 28 April to 23 August 2006 were made in circumstances where no letter of offer relating to the $26 million facility had been executed by AGA and City Pacific, and the approval of the Credit Committee had not been obtained in relation to the $26 million facility.

110 The particulars to para 84 referred to both the "28 April" letter of offer and the "28 April" file note. The file note included the following:

Following a meeting between the writer, CEO and Craig Gore provisional approval was given to increasing the facility to $50m once 1 or 2 above had been received, in the interim the facility would be increased to $36m, an LVR of 56.16%.

111 At [126], the trial judge found that there was no meeting on 28 April 2006, and no provisional or interim approval was given to a proposal to increase the AGA facility on 28 April 2006.

112 The trial judge noted (at [1221) that one version of the file note also included a handwritten note in the following terms:

Please prepare a short acknowledgment letter informing we will allow facility to go to $26m as an interim measure until formal LOO is issued.

113 In contrast with the position concerning the "28 April" letter of offer, the pleading did not allege that the "28 April" file note was backdated.

114 During cross-examination of Mr Sullivan, Mr Martin SC, senior counsel for Trilogy at the trial and on the appeal, asked (by reference to metadata for the "28 April" file note) whether the file note was created on 24 July 2006. Mr Sullivan denied that proposition but noted that he had not previously seen the metadata. The following day, Mr Sullivan conceded the accuracy of the metadata.

115 Subsequently, Trilogy tendered, without any objection by the appellants, metadata evidence which showed that the file note was created on 24 July 2006. At [121], the trial judge found that the file note, bearing the date 28 April 2006, was created by Mr McCormick on 24 July 2006.

- 28 -

116 The trial judge noted (at [426]) that Trilogy's pleaded case hinged on the allegation that

Mr Sullivan and Mr McCormick gave approval for the AGA facility to be increased to

$26 million on 28 April 2006. However, his Honour observed, whilst Mr Sullivan and

Mr McCormick initially claimed that the approval did in fact occur on 28 April 2006, the

evidence clearly demonstrated that no such approval was given on 28 April 2006.

117

At [127], the trial judge found that the file note was "manifestly misleading". His Honour

inferred that:

it was prepared and signed to attempt to mollify the auditors and provide some justification for the fact that the AGA facility had been permitted to be drawn down well over its approved limit. It gave the false or misleading impression that an interim increase to the AGA facility had been approved and documented before the AGA facility had been permitted to exceed its limit.

118 The appellants contend that they were denied procedural fairness in connection with adverse

findings made by the trial judge concerning Mr Sullivan's role in the creation of the

"28 April" file note.

119 Mr McCormick created a second file note on 24 July 2006, which was correctly dated. The

24 July 2006 file note referred to the "28 April" file note which noted, among other things:

Facility has been allowed to run on with additional draws approved as and when they are submitted. We are still awaiting the updated individual project costings which will enable a formal approval and Letter of Offer to be produced.

This is now expected by end of July.

120 On 25 July 2006, Mr McCormick wrote to KPMG in response to KPMG's 11 July 2006

letter. The letter included the following:

Facility Drawn exceeds Facility Limit

Sickle Avenue Pty Ltd, Romsey Street Waitara Ply Ltd,

Atkinson Gore Agricultural Pry Ltd — These facilities fall within the exposure known as the 'Gore Group'. These facilities are currently being restructured and all securities are cross-collateralised between facilities. Recent drawdowns on each facility reflect the cross collateralised position. In support, we have provisionally approved a restructure of the Atkinson Gore Group facilities that will bring all loans within the Group back into line with their respective Cost to Complete. This is expected to occur pre- 31 July 2006. As part of the restructure, Atkinson Gore Agricultural Pty Ltd will be increased to $50M to facilitate the necessary adjustments across the Group. Refer Diary Note on Atkinson Gore Agricultural.

- 29 -

121 At [130], the trial judge made the following findings concerning this letter:

(1) There was no evidence that the Gore Group facilities, including the AGA facility,

were being restructured. No proposal to restructure the facilities had been put to and

approved by the Credit Committee;

(2) No proposal to increase the AGA facility had been put to and approved by the Credit

Committee,

(3) By referring KPMG to the diary note, Mr McCormick misled KPMG. The false

impression was conveyed that provisional approval to increase the AGA facility to

$50 million had been given on 28 April 2006.

122 On 28 July 2006, Mr Sullivan and Mr McCormick signed a further Funds Transfer Request

authorising a further advance on the AGA facility in the sum of $200,223.02. That advance,

when made, took the debit balance of the AGA facility to $23.231 million.

123 The loan schedule included in the August 2006 meeting board papers recorded that the

balance of the AGA facility as at 31 July 2006 was $22.823 million.

124 Further advances of $500,000 and $202,641.91 were made on 1 August 2006.

Mr McCormick signed the Funds Transfer Request in relation to the $500,000 advance. Still

further advances of $1 million and $165,000 were made on 14 and 16 August 2006.

125 The trial judge's findings that the advances made to AGA in the period 28 April to 23 August

2006 were made in excess of the AGA facility limit (whether that was $17.89 million, or

some lesser amount as suggested by the appellants on the appeal) and in the absence of any

proposal to the Credit Committee (in breach of the Compliance Plan) are not disputed on the

appeal. Nor is the trial judge's finding that Mr Sullivan knew that advances were being made

during the period 28 April to 23 August 2006. Nor is the trial judge's finding that Mr Sullivan

permitted advances to be made during the period 28 April to 23 August 2006 in

circumstances where the AGA facility limit had been exceeded and no proposal had been put

to the Credit Committee.

126 Similarly, the appeal proceeds on the basis that the following findings are unchallenged:

(1) in the period 28 April 2006 to 23 August 2006, Mr Sullivan knew that SVP had raised

issues concerning the AGA facility and that SVP had made recommendations

concerning the AGA facility that had not been complied with;

- 30 -

(2) Mr Sullivan also knew that City Pacific did not hold an acceptable "as is" valuation

for the Saddleback land that would support any increase to the existing facility limit;

and

(3) careful and diligent officers in the position of Mr Sullivan (and Mr McCormick)

would not only have prevented any further advances being made to AGA during the

period 28 April to 23 August 2006, but would have taken steps to have the AGA

facility repaid.

127 The advances made during this period totalled $6,945,561.17, all of which were ultimately

lost to the Fund.

Increase of loan facility to $26 million

The backdated "28 April" letter of offer

128 On 23 August 2006, a company that was performing due diligence for a prospective

purchaser of the Fund's loan book requested access to a number of City Pacific's loan files,

including the AGA loan file. The trial judge found (at [134]) that the request for access to the

AGA loan file prompted Mr McCormick to create a letter of offer in relation to the supposed

interim increase.

129 On 23 August 2006, a letter dated 28 April 2006 was sent to AGA, offering to increase the

AGA facility "as an interim facility" to $26 million. This is the "28 April" letter of offer. The

offer was accepted by AGA on 24 August 2006.

130 At [453], the trial judge found, based on the unchallenged evidence concerning the metadata

of the electronic version of "28 April" letter of offer, that the letter was first created on

23 August 2006.

131 City Pacific's mandated loan approval process was not complied with in connection with the

increase of the facility limit to $26 million because, amongst other things, the approval did

not go to the Credit Committee.

132 When, in August 2006, City Pacific offered AGA an increase of its facility to $26 million:

(1) that offer was made in the absence of an acceptable "as is" valuation based on current

zoning;

(2) the proposed facility limit did not meet the 80 per cent LVR requirement;

(3) the Saddleback land did not provide adequate security for the increased facility;

-31 -

(4) a proposal for the increase of the AGA facility was not put to and approved by the

Credit Committee;

(5) Mr Sullivan knew that advances up to that limit had already been made in the absence

of any reference to or approval by the Credit Committee;

(6) Mr Sullivan knew that the increase was not supported by any acceptable valuation

and, on the existing valuation, the balance of the loan was outside an LVR of 80 per

cent;

(7) Mr Sullivan knew that SVP had recommended that the AGA facility be repaid or

refinanced by 31 December 2005 if it had not been confirmed that the Saddleback

land had been included in the Urban Footprint of the South East Queensland Regional

Plan, and that, at the December 2005 review, another valuation had been obtained

from a different valuer to assess the analysis of land values in the Canungra area

based on permitted uses; and

(8) Mr Sullivan failed to take any steps to ensure that the procedures in the Compliance

Plan and the Lending Manual were followed in relation to the offer of the $26 million

facility.

133 The appellants contend that they were denied procedural fairness in connection with adverse

findings made by the trial judge about Mr Sullivan's role in the creation of the "28 April"

letter of offer.

25 August to 20 December 2006

134 On 25 August 2006, Mr McCormick sent an email to Mr Swan and Mr Donaldson attaching a

copy of a document recording the October 2005 Credit Committee approval of the increase of

the AGA facility limit to $17.89 million. On the appeal, the appellants argued, by reference to

new evidence, that this approval was fabricated. However, it was not disputed that the

document was sent to Mr Swan and Mr Donaldson on 25 August 2006.

1 35 The email foreshadowed that Mr Swan and Mr Donaldson would be provided with a new

proposal "in the next week or so" which would be based on a new valuation. No mention was

made of the supposed interim increase of the facility limit to $26 million. The trial judge

found (at [1421) that as at the end of August 2006, therefore, Mr Swan and Mr Donaldson

"would have had fairly fresh in their mind that the approved limit of the AGA facility was

$17.89 million".

-32-

136 On 28 and 29 August 2006, Mr McCormick signed Funds Transfer Request forms authorising

advances of $650,000 (on 28 August 2006) and $350,000 (on 29 August 2006).

137 The loan schedule included in the September 2006 meeting board papers recorded that the

balance of the AGA facility as at 31 August 2006 was $25,690,527.

138 With capitalised interest of $232,107.08 added to the balance on 1 September 2006, the AGA

facility was effectively fully drawn down to its purported interim limit of $26 million.

139 Between 6 September 2006 and 19 December 2006, 25 advances were made to AGA. The

Funds Transfer Request forms for four of the advances were signed by Mr Sullivan.

140 The loan schedule included in the October 2006 meeting board papers recorded that the

balance of the AGA facility as at 30 September 2006 was $28,439,922.

141 The loan schedule included in the November 2006 meeting board papers recorded that the

balance of the AGA facility as at 31 October 2006 was $35,307,106.

142 As at 19 December 2006, the balance of the AGA facility was $44.641 million.

143 At [140], the trial judge noted that, even accepting the "interim" facility limit increase

purportedly approved by Mr Sullivan and Mr McCormick (evidenced in the "28 April" file

note and the subject of the "28 April" letter of offer), advances totalling almost $19 million

had been made beyond that limit.

144 The loan schedule included in the January 2007 meeting board papers recorded that the

balance of the AGA facility as at 31 December 2006 was $45,990,668.80.

145 The trial judge found:

(1) Even if Mr Sullivan did not know about, and did not approve, the making of the

advances to AGA during this period, had Mr Sullivan exercised the degree of care and

diligence that a reasonable person would exercise if they were in his position, he

would have become aware of the advances. He would also have taken steps that were

within his powers as chief executive officer to prevent the making of the advances.

(2) A reasonable person in Mr Sullivan's position, exercising care and diligence, would

have known and appreciated that, by late August 2006, the AGA facility was already

above its approved limit of $17.89 million and had reached the limit of the purported

increase of the facility limit of $26 million. It would therefore be obvious that, in the

- 33 -

absence of any Credit Committee approval to increase the facility limit, any advances

made after late August 2006 would put the facility beyond its limit. A reasonable

person in Mr Sullivan's position, exercising even the most basic care and diligence,

would in those circumstances have immediately realised that any Funds Transfer

Request forms that they were asked to sign in relation to the AGA facility meant that

the facility was operating above its limit. That alone would have put the reasonable

person on notice about the AGA facility, even putting aside the past history of the

AGA facility, including the SVP report and the events leading up to the purported

increase of the facility limit to $26 million in July or August 2006. A reasonable

person in Mr Sullivan's position in those circumstances would also have read the

board papers and no doubt ascertained that further advances were being made to AGA

during the period. There could be no doubt that a reasonable person in Mr Sullivan's

position exercising care and diligence would, in those circumstances, use their powers

as chief executive officer to put an immediate stop to any further advances to AGA.

146 At [698], the trial judge concluded:

If Mr Sullivan and Mr McCormick had not failed to exercise the degree of care and diligence that a reasonable person in their position would exercise, none of the 34 advances that City Pacific made to AGA on behalf of the Fund between 23 August 2006 and 10 January 2007 would have been made. Those advances totalled $24,022,552.18. They resulted in the balance of the AGA facility exceeding its approved limit. All of these advances were ultimately lost to the Fund.

Increase of AGA facility limit to $44.87 million

147 On 21 December 2006, Mr McCormick sent a letter (dated 30 November 2006) to PRP

requesting an updated valuation for the Saddleback land. The trial judge described PRP's

response (also dated 21 December 2006) as, at best, a restatement of the opinion expressed in

the updated March 2006 valuation. That opinion was that, if the Saddleback land was

declared State Significant, the value of the land would be $102.4 million. The trial judge

found (at [153]):

Any reasonable reader of this letter would appreciate from the vague and generalised statements about the supposed regulatory changes that the Saddleback land in fact had not been declared State Significant. Indeed, it was readily apparent from the letter that the process involved in having the land declared State Significant either had not even commenced, or was in its infancy.

- 34 -

The backdated "9 August" loan approval

148 The trial judge found that the proposal which became the "9 August" loan approval document

was prepared by Mr McCormick and was circulated and executed by the appellants between

21 December 2006 and 11 January 2007. The appellants acknowledged that the "bare fact"

that the proposal was executed in or about December 2006 was alleged in the statement of

claim and admitted by the appellants.

149 The trial judge found that the proposal was signed as follows:

(1) by Mr Sullivan alongside the handwritten date 9 August 2006;

(2) on 22 December 2006, by Mr Donaldson alongside the handwritten date 9 August

2006; and

(3) on 11 January 2007, by Mr Swan alongside the handwritten date 9 August 2006 with

the additional words "ratified 11/01/07".

150 At [160] to [166], the trial judge made the following observations concerning the "9 August"

loan approval:

(1) It was unquestionably misleading. It conveyed — and was plainly intended to convey —

the impression that the proposal was made and approved on 9 August 2006. That

clearly was not the case.

(2) The proposal falsely stated that the current balance of the AGA facility was

$23.525 million, being the balance of the facility as at 9 August 2006. The balance of

the facility that was reported to the board in the November 2006 board papers was

$35.307 million. As at 20 December 2006, the balance of the facility was

$44.641 million.

(3) The proposal falsely stated that the current maturity date for the loan was 9 December

2006. The maturity date for the loan was 9 December 2005. It had not been formally

extended.

(4) The proposal did not include any certification by Mr McCormick, as Lending

Manager, that an acceptable valuation of the security property had been obtained.

There plainly was no acceptable valuation that could possibly support the proposal.

(5) The proposal stated that the current valuation was $102.4 million but it was readily

apparent from the background information contained in the proposal itself, that the

valuation of $102.4 million was premised on the land being declared State Significant.

- 35 -

That had not occurred and the proposal did not state that it had occurred. Even the

most cursory reading of PRP's letter dated 21 December 2006, or any other valuation

held by City Pacific, would have made it plain that there had been no declaration of

State Significance, or even a proper basis to believe that one was likely.

(6) The stated purpose of the extension and increase of the facility was to assist with

other loans "in the Gore Group". Consideration of the proposed extension to the AGA

facility therefore required some consideration to be given to those other loans. The

proposal referred to an attached schedule setting out "Group Exposure". No such

schedule was attached.

151 The appellants contend that they were denied procedural fairness in connection with the trial

judge's adverse findings concerning each of them in connection with the backdating of the

"9 August" loan approval.

152 A letter from City Pacific to AGA offering to increase the AGA facility was sent to AGA for

signature on 9 January 2007. The trial judge made the following findings concerning this

letter (at [166]):

The letter bore the date 9 August 2006, again giving the entirely misleading impression that the facility increase had been offered and accepted on or about that date. Like the proposal, the letter of offer included a statement that the "[p]resent position" of the loan was $23.525 million, which was the facility balance as at 9 August 2006, not 9 January 2007 when the offer was made. It stated that the offer would remain open until 18 August 2006 — a date that had well passed. It offered a total loan facility of $55 million "[s]ubject to a satisfactory valuation as certified by an approved CPL [City Pacific Limited) panel valuer". It also included the following "special condition":

The total drawndown on this facility will be limited to $44,870,000 until confirmation is received that the security property is:

1. declared a 'State Significant Project', or

2. included in the 'Urban Footprint' area under the SEQ Regional Plan.

153

The limit of $44.87 million had already been exceeded by the time the letter was sent to AGA

on 9 January 2007.

154 Mr Sullivan conceded in cross-examination that, at the time he signed the "9 August" loan

proposal, he should have made an inquiry about whether the $26 million balance that he

expected was the current balance in August 2006 had increased from August to December

2006.

- 36 -

155 In relation to the context in which the "9 August" loan proposal was approved, at [549], the

trial judge found:

... anyone who had taken the time to carefully and diligently read the financial information provided to the directors in the board papers compiled for the purposes of meetings of the board of directors could have ascertained that significant advances were being made to AGA throughout 2006 and that the balance of the loan was well beyond $17.89 million. Each of Messrs Sullivan, Swan and Donaldson maintained that they did not read the fine detail of the financial information that was put before the board. Mr Donaldson and Mr Swan maintained that they relied on management.

156 As to Mr Sullivan's evidence about the "9 August" loan proposal, the trial judge said (at

[582]):

If Mr Sullivan's evidence concerning his consideration of this proposal is accepted, the lack of any proper scrutiny of the proposal is remarkable. The proposal involved the increase of a loan facility by almost $20 million. This was in respect of a loan facility that had already been singled out by SVP as potentially problematic. Yet if Mr Sullivan's evidence is to be believed, he read only the first page of the proposal, neglected to read the "detail", did not ask to see, but nonetheless relied on, an earlier "hypothetical valuation" (the March 2006 Valuation) and took "comfort" from Mr Kogler's letter of 21 December 2006 which, on its face, was manifestly deficient and could not seriously have been regarded as a valuation at all.

157 As to Mr Donaldson's evidence, his Honour said (at [591]):

Overall, the impression gained from Mr Donaldson's evidence was that he gave the proposal no independent scrutiny at all. On his own evidence he did not read the entire document. He made no attempt to analyse the information contained in the proposal, made no inquiries in relation to any of the information, asked to see no supporting documents such as valuations, and asked no questions of anyone. He did not notice or appreciate the obvious discrepancies between this proposal and the loan that he had approved as a member of the Credit Committee in October 2005, and either did not notice or did not appreciate any of the other discrepancies and inconsistencies within the proposal itself. Given the nature of the proposal, and given that the AGA facility had earlier been singled out by SVP as a problematic facility, that lack of scrutiny was nothing short of extraordinary.

158 At [600], the trial judge recorded the following evidence given by Mr Swan:

In relation to the valuation figures on the proposal, Mr Swan's evidence was that he never saw a valuation in relation to the Saddleback land, did not know upon what basis the valuation of $64.1 million referred to in the proposal had been prepared, including the zoning of the land upon which the valuation was based, and did not make any inquiries about the basis of the valuation or the zoning of the land. That was despite the fact that he had "in the back of [his] mind" the concerns expressed by SVP and its recommendations about the valuation of the Saddleback land. Mr Swan was aware that the valuation of the land in October 2005 was $26.775 million. The dramatic increase in the valuation to either $64.1 million or $102.4 million apparently did not concern him or give him cause to initiate any inquiries about the basis of the valuation.

- 37 -

159 In granting the $44.87 million increase to the AGA facility, City Pacific breached both the

Constitution and the Compliance Plan.

160 At [704], the trial judge found that, but for the approval of the "9 August" loan proposal and

the resulting offer of a $44.87 million facility to AGA, it is highly unlikely that any further

advances would have been made to AGA after 10 January 2007. Those advances were all lost

to the Fund.

21 December 2006 to 1 July 2007

161 Between 21 December 2006 and 1 July 2007, City Pacific, as the responsible entity of the

Fund made 29 advances to AGA.

162 Each of those advances was made in circumstances where the approval of the Credit

Committee had not been sought or obtained for any increase in the limit of $44.87 million

that had been approved in late December 2006. Each of those advances resulted in the

balance of the AGA facility exceeding that limit. Mr McCormick admitted that he expressly

authorised or approved the making of the bulk of these advances.

163 As had occurred throughout 2006, board papers were prepared and sent to each of Messrs

Sullivan, Swan and Donaldson in advance of the monthly board meetings that occurred in the

period January to July 2007. The board papers included a schedule that included details

concerning the balance of the Fund's loans, including the balance of the AGA facility.

164 The trial judge made the following findings concerning board papers sent to the appellants in

the first half of 2007:

[171] The January 2007 board papers reported that the balance of the AGA facility as at 31 December 2006 was $45.991 million. That was over $1 million above the limit approved by each of Messrs Sullivan, Swan, Donaldson and McCormick in late December and early January 2007. The January 2007 board papers were sent to the directors within a fortnight of them approving the facility increase,

[172] Board papers for the 14 February 2007 board meeting, which were sent to Messrs Sullivan, Swan and Donaldson on around 10 February 2007, reported that the balance of the AGA facility as at 31 January 2007 was $54,180,344.34 (more than $9 million above the facility limit).

[173] Board papers for the 15 March 2007 board meeting, which were sent to Messrs Sullivan, Swan and Donaldson on around 11 March 2007, reported that the balance of the AGA facility as at 28 February 2007 was $55,400,447.75 (more than $10 million above the facility limit).

[174] Board papers for the 26 April 2007 board meeting, which were sent to

- 38 -

Messrs Sullivan, Swan and Donaldson on around 24 April 2007, reported that the balance of the AGA facility as at 31 March 2007 was $50,887,223.70 (more than $6 million above the facility limit).

[1751 Board papers for the 17 May 2007 board meeting, which were sent to Messrs Sullivan, Swan and Donaldson on around 12 May 2007, reported that the balance of the AGA facility as at 30 April 2007 was $51,418,903.02 (more than $6.5 million above the facility limit).

[176] Board papers for the 19 July 2007 board meeting, which were sent to Messrs Sullivan, Swan and Donaldson on around 16 July 2007, reported that the balance of the AGA facility as at 30 June 2007 was $54,720,906.81 (more than $9.5 million above the facility limit).

165 At [638], the trial judge rejected Mr Sullivan's claim that he was not aware of the advances

made to the AGA facility during this period and was not aware that the AGA facility was

operating above its approved limit during this period.

166 At [640], his Honour recorded:

if Mr Sullivan was to be believed, he did not read the board papers prepared for board meetings during the first half of 2007 which clearly disclosed that further advances were being made to AGA. Nor did he inquire of Mr McCormick or anyone else in the lending department about the balance of the AGA facility. For a chief executive officer with Mr Sullivan's experience and knowledge, that scenario is utterly implausible.

167 At [706], his Honour found, relevantly:

If Messrs Sullivan, Donaldson, Swan and McCormick had not failed to exercise the degree of care and diligence that a reasonable person in their position would exercise, none of the 23 advances that City Pacific made to AGA on behalf of the Fund between 11 January 2007 and 1 July 2007 would have been made. Those advances totalled $11,520,974.93. Those advances resulted in the balance of the AGA facility exceeding its approved limit of $44.87 million.

Uncontested standards against which trial judge measured appellants' conduct

168 The trial judge set out the relevant principles concerning the statutory scheme and the duties

owed by the appellants at [186] to [223] of his Honour's reasons. The relevant principles

concerning the duty of care and diligence owed by an officer of a responsible entity under

s 601FD(1) are set out at [199] to [217] of his Honour's reasons. The relevant principles

concerning the duty to take steps to ensure compliance with the Act, any conditions imposed

on the responsible entity's AFSL, the scheme's constitution and the scheme's compliance

plan are set out at [218] to [223] of his Honour's reasons.

169 The appellants did not challenge any aspect of his Honour's articulation of the relevant

principles.

- 39 -

CHRONOLOGY OF THE LITIGATION

170 It is necessary to consider the chronology of the litigation in some detail, in order to address

the appellants' contentions that the trial judge denied them procedural fairness.

171 The proceeding was commenced in April 2012 by an originating application which remained

in its original form throughout the litigation. It claimed orders under s 1317H(1) and/or

s 1325(2) of the Act that each of the appellants and Mr McCormick compensate the Fund for

damages suffered by the Fund by reason of their contraventions of s 601FD of the Act.

November 2012: appellants' affidavit evidence

172 On 2 November 2012, Mr Sullivan affirmed an affidavit in the proceeding in which he said,

relevantly:

On or about 28 April 2006 I spoke with the Lending Manager Steve McCormick. I instructed him that the proposed loan be approved to $26 million only. He agreed. At page 24 of PKS-1 is a copy of my handwritten file note to this effect. I recall signing the handwritten alteration and the subsequent typed loan proposal for $26 million on or about 28 April 2006. At page 25 of PKS-1 is a copy of the signed letter to AGA dated 28 April 2006.

173 Page 24 of PKS-1 is the "28 April" file note and page 25 of PKS-1 is the "28 April" letter of

offer. At this stage of the litigation, Trilogy had not discovered that either document was

backdated.

174 Concerning the "9 August" loan proposal, Mr Sullivan affirmed the following:

At page 26 of PKS-1 is a copy of an LPR signed by me in respect of the AGA facility. I signed in [sic] or about late December 2006. I am not sure whether the date "9 August 2006" had already been written on the line where my signature appears. If the date was already there, I do not recall why I did not change the 9 August 2006 date when I signed the LPR.

175 Thus, Mr Sullivan's affidavit disclosed that the "9 August" loan approval had been

backdated.

176 Mr Donaldson's 2 November 2012 affidavit referred to the "9 August" loan approval and

stated that it was signed by him sometime after 10 January 2007. In his evidence in chief, Mr Donaldson corrected the date of signature to 22 December 2006.

177 Mr Swan's 2 November 2012 affidavit also referred to the "9 August- loan approval and

stated that he signed it on 11 January 2007.

- 40 -

March 2013: amendments to statement of claim referring to backdating

Increase of AGA facility to $26 million

178 As noted earlier, Trilogy's statement of claim alleged that, on 28 April 2006, Mr Sullivan and

Mr McCormick gave approval for the AGA facility to be increased to $26 million. By their

defence, the appellants admitted that Mr Sullivan had signed the letter by which the

$26 million facility was offered to AGA but otherwise denied this allegation.

179 At para 121C of the statement of claim, Trilogy alleged that the advances made to AGA in

the period 28 April 2006 to 23 August 2006 were made in circumstances where no letter of

offer relating to the $26 million facility had been executed by AGA and City Pacific and the

approval of the Credit Committee had not been obtained in relation to the $26 million facility.

The particulars to para 121C included the allegation that the "28 April" letter of offer was

created on or about 23 August 2006. The particulars to para 121D of the statement of claim

included the allegation that Mr Sullivan signed the "28 April" letter of offer on or around

23 August 2006.

180 The matters pleaded in paras 121C and 121D were first notified to the appellants' solicitors

by a letter dated 1 March 2013, and were included in an amended statement of claim filed by

consent on 8 March 2013.

181 Thus, Trilogy's pleaded case included an allegation that Mr Sullivan and Mr McCormick

gave approval for the AGA facility to be increased to $26 million on 28 April 2006, some

months prior to the execution of the "28 April" letter of offer on about 23 August 2006. As

particularised in the statement of claim, the case involved the proposition that both the

"28 April" file note and the "28 April" letter of offer were created around the date that they

bear. To the extent that it relied on the "28 April" letter of offer, this aspect of Trilogy's case

was inconsistent with the allegation that the "28 April" letter of offer was created in August

2006. However, having regard to the "28 April" file note, which was not known to have been

backdated until the events described below, there was a proper basis for Trilogy's pleading of

an approval by Mr Sullivan in April 2006.

182 By their defence, the appellants said that the "28 April" letter of offer was not a letter of offer

and was more appropriately described as an interim terms sheet; they admitted that it was

signed only by Mr Sullivan and Mr McCormick and otherwise did not admit para 121C.

- 41 -

"9 August" loan approval

183 Consequent upon the service of the November 2012 affidavits, by the 8 March 2013 amended

statement of claim, Trilogy alleged that the "9 August" loan approval was executed in or

about December 2006. That fact was subsequently admitted by the appellants.

April 2013: Mr Sullivan's second affidavit

184 On 30 April 2013, Mr Sullivan affirmed a second affidavit in which he gave further evidence

about his conversation with Mr McCormick on 28 April 2006 and about his execution of both

the "28 April" letter of offer and the "28 April" file note on that date. The affidavit (in the

form in which it appeared in the appeal book) included the following:

[13] When Mr McCormick met with me on 28 April 2006, we had a conversation which included words to this effect.

He said:

"I would like to increase the facility to $36M as an interim facility pending the restructure of the Gore group position."

He showed me a file note. A copy of this file note dated 28 April 2006 is at page 24 of PKS-1 in my previous affidavit.

[14] ... I said:

"I want you to keep the approval to 40% of the "as-is" value, being $26 million."

[15] Mr McCormick then sat down in front of me and wrote on the file note a handwritten direction, signed by him, addressed to "Matt" (Gillam), asking Mr Gillam to prepare a letter stating that the increase in the facility was to be limited to an amount of $26 million. I then also signed alongside Mr McCormick's handwritten note.

[16] Mr McCormick then left my office and returned shortly afterwards on the same day with a short letter to AGA approving an interim increase in the facility to $26M. It had a space allocated for my signature and I . signed it. A copy of the letter is at page 25 of PKS-1 to my first affidavit.21This letter is similar to

the letter I signed on 28 April. At the time I signed the letter neither a signature, nor a date, nor the word "Attorney" had been handwritten on the letter where the line "Atkinson Gore Agricultural Pty Ltd" appears.--> There was no provision for the

acceptance on the letter of 28 April. The correct copy of the letter appears at 226 [266] of the tender bundle

[17] As at 28 April 2006 when I signed the note and the letter of approval addressed to AGA, I expected that the lending department would have prepared a standard Loan Proposal for circulation amongst the Credit Committee. I now understand that this appears not to have been done, but I do not believe I realised this until after these proceedings were commenced.

- 42 -

185 By this affidavit, Mr Sullivan expanded his evidence concerning the events of 28 April 2006,

after Trilogy had introduced the allegation that the "28 April" letter of offer was backdated.

This was a sworn statement of a positive recollection of those events.

186 In cross-examination, Mr Sullivan gave evidence that para 16 was inaccurate in its

identification of the document that he signed on 28 April 2006, and stated that he had pointed

this fact out to his solicitor before the affidavit was signed. That evidence suggested that

Mr Sullivan deliberately affirmed a false affidavit, with his solicitor's knowledge.

July 2013: Trilogy's expert evidence of backdating

187 In July 2013, Trilogy served evidence of Nigel Carson, an expert in computer forensic

services. That evidence included metadata for the "28 April" letter of offer and concluded

that the document was not created until 23 August 2006.

188 Mr Carson's evidence did not address the date of creation of the "28 April" file note.

189 As a result of Mr Carson's evidence, Mr Sullivan was (again) confronted with the fact that

his affidavit evidence concerning the events of 28 April 2006 was in dispute.

Other preparation for trial

190 On 5 September 2013, the proceeding was listed for trial commencing 10 March 2014 with

an estimated duration of two weeks.

191 Preparation for trial included the creation of a tender bundle. On 12 February 2014, Trilogy

served the "Initial Tender Bundle" comprising 891 documents proposed to be tendered by the

various parties. The Initial Tender Bundle included the 8 February 2006 letter to ASIC.

192 On 7 February 2014, Trilogy filed the second further amended statement of claim which was

the final version of the statement of claim. The final version of the appellants' defence was a

further amended defence filed on 2 June 2014. The final version of Trilogy's reply to the

appellants' defence was filed on 25 March 2014.

193 On 4 March 2014, the "Compendium of Agreed Facts & Facts Not in Dispute" was filed. It

was tendered by consent at the trial. The document comprises 34 pages of detailed facts

which formed part of the basis of the trial judge's uncontested findings.

- 43 -

"Richardson" document

194 As part of their further evidence on the appeal, the appellants tendered a document, created

between about 18 February 2014 and 4 March 2014, entitled "Matthew Richardson views on

McCormick with responses by Phil Sullivan". Matthew Richardson was junior counsel for

the appellants at the trial. The document shows that Mr Richardson identified one of the most

important lines of defence for the appellants as the argument that "McCormick was

responsible for the lending breaches, and that he knowingly deceived each of [the appellants]

as to the approvals process and as to the amount of money actually being loaned".

195 That is, the appellants identified the case theory that they were victims of Mr McCormick's

deceit prior to the commencement of the trial. Mr Sullivan gave instructions that

Mr McCormick was "hiding the state of the facility from me" and that, had the true facts been

revealed to him, Mr Sullivan "would have pulled the plug very quickly". As Mr Bransgrove,

the appellants' solicitor at the trial and on the appeal apparently put it, "the real issue in the

case is to what extent are [the appellants] responsible for being hoodwinked ... [t]hey were

not on notice McCormick was a fraudster".

196 The "Richardson" document refers to Mr McCormick's 24 July 2006 file note, and sets out

the following instructions from Mr Sullivan:

By this Steve is recording, that additional advances have been approved outside the limits of the facility as approved by the Credit Committee. McCormick claim the total facility approved is $17.89M with provisional approval for $50M is incorrect and also inconsistent with the 18 August file note 360 which uses the $26M figure. This suggests McCormick knows he had allowed additional advances beyond the limit.

At no time did I ever know that there was, or condone, the advancing of money outside this facility's limits. At this time I thought the AGA facility was $26M because I thought the usual protocol would have been followed subsequent to the $26M April informal letter, and the $26M would by now have gone through the Credit Committee and been formalised as the new facility limits (after a signed formal letter of offer was returned).

197 On the appeal, the appellants submitted that, in preparing for the trial, they were unaware that

it would be alleged or found that Mr McCormick was a fraudster "who had created multiple

fabricated documents, designed to mislead". However, the "Richardson" document shows

that the appellants had themselves concluded that Mr McCormick was a fraudster and that he

had created documents which were incorrect and wrongly dated, in particular, the "28 April"

letter of offer and the "9 August" loan proposal. The "Richardson" document shows that the

- 44 -

appellants were actively considering putting a defence that they were victims of

Mr McCormick's deception.

198 The appellants submitted that, if they had been aware of such serious allegations, they would

have undertaken a close examination of the file and all relevant documents, rather than

accepting them at face value. The appellants did not explain why their own beliefs that they

were deceived by Mr McCormick did not cause them to examine the file more closely.

199 The appellants submitted "What fraud had occurred began to take shape in cross-

examination. It gradually became clear to the appellants during the course of the trial that

someone inside City Pacific had engaged in a brazen fraud". That submission must be

rejected in the light of the "Richardson" document. The transcript of the hearing also records

a statement from Mr Donaldson that, a couple of weeks earlier (that is, before the

commencement of the trial), he had received information from Mr McCormick's defence

papers which suggested that Mr McCormick and Mr Gillam, an officer in City Pacific's

lending department, knew about and participated in and colluded in the unauthorised

transactions.

200 Thus, prior to the commencement of the trial the appellants were considering a possible case

theory that they were victims of a fraud, which might have formed part of their defence. As

appears below, such a case theory was advanced (albeit tentatively) in the appellants' written

opening submissions for the trial.

201 The "Richardson" document refers to a version of the "28 April" letter of offer included in

the Initial Tender Bundle, and numbered ITB266. It shows that the appellants, and in

particular, Mr Sullivan, were alert to the existence of ITB266. The significance of ITB266 is

discussed below. Mr Sullivan gave instructions that this document was signed and sent on

28 April 2006, noting that the document did not contain a line for acceptance by AGA in

contrast with the "28 April" letter of offer that was accepted to have been created on

23 August 2006. However, Mr Richardson explicitly contemplated that Mr Sullivan's

instructions may have been incorrect, as appears from the following note:

This version of the 28 April 2006 letter (266) (being identical to the original) still shows the approval level as at $26M. (Note, it appears that Sullivan may have signed this letter on this day, although he says he recollects signing another back in April).

- 45 -

Trilogy's written opening submissions (3 March 2014)

202 The opening submissions relevantly:

(1) referred to the SVP report and set out in full the passage from that report quoted at

[80] above;

(2) referred to the 8 February 2006 letter to ASIC but did not suggest that it was

misleading;

(3) asserted that Mr Sullivan and Mr McCormick signed a file note dated 28 April 2006

in relation to the AGA facility, being the "28 April" file note; and

(4) in relation to the "9 August" loan approval, submitted "[Ole obvious inference as to

why the approval was being backdated was that the previous limit for the facility had

been breached sometime around or shortly after 9 August 2006, and Mr McCormick

was now seeking to obtain retrospective approval for having made advances without authority".

Discovery that "28 April" file note was backdated

203 On 6 March 2014, Trilogy's lawyer, Jason Geisker of Maurice Blackburn lawyers, received an email from the appellants' lawyer, Mr Bransgrove. Mr Bransgrove informed Mr Geisker

that he had received a USB drive ("McCormick USB") from Mr Sullivan that had been provided to Mr Sullivan by Mr McCormick "about a month" prior to a meeting between

Mr Bransgrove, Mr Sullivan and Mr McCormick on 26 February 2014. Mr Bransgrove told Mr Geisker that he would copy the McCormick USB and provide a copy to Maurice Blackburn.

204 The same day, Maurice Blackburn received a copy of the McCormick USB, which contained in excess of 15,000 electronic documents.

205 The McCormick USB contained an electronic copy of the "28 April" file note. When

examined, the metadata for this copy of the file note showed that it was created on 24 July 2006. Mr Geisker's affidavit does not state when he became aware of the metadata but there

is no evidence that Trilogy or its lawyers were aware of metadata for the "28 April" file note before 6 March 2014. Mr Geisker's evidence was that this was the first occasion Maurice Blackburn had considered the metadata for the file note, even though it would have been possible to have investigated the metadata on City Pacific's hard drive.

- 46 -

Appellants' written opening submissions (7 March 2014)

206 These submissions stated that there was "no apparent challenge" to the honesty of any of the

appellants. The submissions acknowledged that City Pacific made advances in 2007 that took

the AGA facility above its approved limit and said that it was Mr McCormick who made the

advances and who must account for them. The submissions also acknowledged that the

evidence "may even suggest that McCormick was adopting a deliberate policy of concealing

the true level of advances from the directors as much as possible". The following submissions

were made:

... The real reasons the additional money was advanced to AGA concerns defective valuations provided to City Pacific, the actions of McCormick in exceeding his authority in the making of unapproved advances and keeping the directors in the dark about the true state of the facility, and doubtless the actions of Gore in encouraging McCormick to take that course.

... At most these officers have simply been too trusting in McCormick to do his job properly in relation to the making of lending decisions, and in the valuer who they presumed had properly acquitted his duties.

207 These submissions reflect a case theory that the appellants were victims of Mr McCormick's

misconduct.

Trial stage 1: 10 March 2014 to 19 March 2014

Trilogy's case in opening

208 The trial commenced on 10 March 2014. The appellants were represented by Mr Young

SC and Mr Richardson. Trilogy was represented by Mr Martin SC and Mr Nixon.

209 In his oral opening, Mr Martin SC said that there was a significant issue about when the

"28 April" letter of offer was created. He submitted that, at the time of the supposed approval

on 28 April 2006, there was no letter of offer, and no letter of offer was submitted or

executed by AGA prior to 23 August 2006. Mr Martin SC told the trial judge that Trilogy had

metadata evidence that the "28 April" letter of offer was highly likely to have been created on

23 August 2006. Mr Martin SC said that there was a credit issue concerning Mr Sullivan's

evidence on this subject.

210 Mr Martin SC opened on the basis that the "28 April" file note was created on the date that it

bore.

- 47 -

211 In response, Mr Young SC submitted that the metadata evidence served at that point was of

"almost vanishingly small significance". That submission reflected the appellants' case that

Mr Sullivan had signed a version of the "28 April" letter of offer on 28 April 2006, a draft of

which was said to be ITB266.

Investigation of ITB266

212 According to Mr Geisker's affidavit, ITB266 was tendered by the appellants. Counsel for the

appellants on the appeal, Mr King, said that it came off the McCormick USB, a copy of

which had been provided to Trilogy on 6 March 2014. Mr King also observed that Trilogy

had admitted that a version of that document could have been located on Trilogy's hard drive.

213 On 11 March 2014 (day two of the trial), Trilogy served a notice to produce on the appellants

seeking the native Microsoft Word version of ITB266.

214 On 12 March 2014, Mr Geisker received an email from Mr Bransgrove purporting to respond

to the 11 March 2014 notice to produce and attaching the results of his search of

Bransgroves' "entire electronic file (which includes a copy of the McCormick disc)". The

searches revealed six document "hits" which were shown on the "screen dump" in

Mr Bransgrove's email.

215 On 12 March 2014, Mr Martin SC raised with the trial judge the appellants' response to the

11 March 2014 notice to produce and sought production, on a USB drive, of the documents in

answer to the notice.

216 The appellants produced a USB drive on 12 March 2014 comprising three Microsoft Word

documents. The metadata properties for these three documents record the creation date of all

three of the documents as 23 August 2006.

Oral evidence of Mr Sullivan

217 Mr Sullivan's evidence commenced on 11 March 2014 and continued on 12 and 13 March

2014. He was re-examined on 14 March 2014 (day five of the trial).

218 As noted above, Mr Sullivan's affidavit evidence was that he had signed the "28 April" letter

of offer on 28 April 2006. That evidence was contradicted by Mr Carson's evidence.

Consistent with the discussion of ITB266 in the "Richardson" document, Mr Sullivan gave

evidence in chief regarding the "28 April" letter. This evidence was that the letter which

- 48 -

Mr Sullivan signed on 28 April 2006 was not the letter found to have been created in August

2006, but was ITB266, being the version of the letter without an acceptance line.

219 Thus, Mr Sullivan re-affirmed that he had signed a letter of offer on 28 April 2006,

notwithstanding Trilogy's case that the "28 April" letter of offer was backdated.

220 On 13 March 2014, Trilogy used a bundle of documents, which were marked for

identification as MFI#4 to cross-examine Mr Sullivan. The bundle included documents

contained on the McCormick USB and documents produced to the Court pursuant to the

11 March 2014 notice to produce. The documents within MFI#4 were subsequently tendered

and admitted into evidence at the trial.

221 The MFI#4 bundle included ITB327A, being the "28 April" file note and ITB327B, being the

metadata print-out for ITB327A, which records the "created" date as being 24 July 2006.

222 Trilogy did not dispute that the allegation that the "April 2006" file note was backdated was

first raised with Mr Sullivan during his cross-examination.

223 Mr Bransgrove's evidence on the appeal was that he first realised that three file notes, being

the "28 April" file note, the 24 July 2006 file note (referred to at [115] above) and the

18 August 2006 file note (not referred to by the trial judge) were "fabrications" when the

metadata was put to Mr Sullivan during his cross-examination.

Other witnesses

224 Mr Swan gave oral evidence on 14, 17 and 18 March and Mr Donaldson gave oral evidence

on 17 and 18 March 2014.

225 On 18 March 2014, Mr McCormick was cross-examined by Mr Young SC. Mr Martin

SC cross-examined him on 18 and 19 March 2014, after which Mr McCormick was cross-

examined again by Mr Young SC.

Trial stage 2: 15-17 April and 2-3 June 2014

226 Trilogy observed that, after the oral evidence of Mr Sullivan, there was a period of

approximately four months until the commencement of closing submissions, during which

time only nine days were spent in Court. During that period, the appellants took numerous

steps to advance their defence including:

(a) issuing 19 notices to produce to Trilogy;

-49 -

(b) procuring five subpoenas to third parties;

(c) serving a further expert report; and

(d) serving five further tranches of new documents for tender or use in cross-

examination, comprising some 95 documents.

Closing submissions: 20 June to 18 July 2014

227 Trilogy made extensive written closing submissions dated 20 June 2014.

228 A 320 page written submission was made on behalf of the appellants. In these written

submissions, the appellants accepted that the "28 April" letter of offer was created on

23 August 2006 and was signed by Mr Sullivan on that date. They submitted that the reason

why the "28 April" letter of offer was backdated to that date "which was prior to the first

overdrawing of that facility on 11 May 2006" was "obviously" so as to "give the impression

to those who reviewed the file" that there was "a binding letter of offer" on that date. The

appellants also submitted that the "28 April" file note "was originally designed to explain

why the facility went overdrawn on 11 May 2006".

229 The appellants' submissions included the following:

(1) "All the critical documentary evidence was created by McCormick and/or Mr Gillam.

It is a tangled web of truths, half-truths, fabrications and retroactive constructions."

(2) "Cracking the code of the probable sequence of events was a joint effort of both legal

teams and a process that unfolded during the trial. To a large extent it depended upon

metadata that was not discovered and only brought to the witnesses' attention during

cross-examination. While this is an excellent means to throw a witness off balance, it

is of negative probative value so far as getting from a witnesses [sic] a considered

reconstruction of the available evidence."

(3) "McCormick was an audacious fraudster, prepared to create false file notes, false

notations on documents and to confound Sullivan as to dates."

(4) "Sullivan was actively and passively deceived by McCormick in relation to the AGA

facility."

(5) "McCormick was deceiving Sullivan on behalf of Gore."

(6) "McCormick and Gillam colluded in the creation of false document trails and the

advancing of monies in excess of the facility limit."

- 50 -

(7) The "9 August" loan approval was "a nullity, it was an instrument of fraud, its

purpose were [sic] to cover the tracks of the fraudster [Mr McCormick]."

(8) "There is no challenge by Trilogy either in its pleadings or its written submissions to

the honesty of Sullivan, Swan or Donaldson."

(9) "The complaint against the Respondents boils down to a failure to detect the

behaviour of McCormick and Gillam and/or being unwittingly their pawns. As such

there is no possible allegation of moral turpitude on their part."

(10) "Any breach of duty on the part of Sullivan, Swan and/or Donaldson was in relation

to their failure to detect the actions and decisions of a subordinate (yet very senior

officer) Mr McCormick, who was in charge of the City Pacific Lending Department

and who the respondents had every reason to trust and no reason to suspect.

Mr McCormick was the primary wrongdoer and any contravention by the respondents

is merely in their unwitting failure to limit the effects of Mr McCormick's wrongs."

230 In written submissions in reply dated 14 July 2014, Trilogy submitted that the Court would

not be able to be satisfied that any of the appellants acted honestly having regard to their

involvement in backdating documents and the level of their carelessness and imprudence in

relation to the AGA facility. Concerning the appellants' credit, Trilogy argued that their

evidence should be treated as unreliable, except to the extent that it was either adverse to

interest or supported by contemporaneous (and not backdated) business records.

231 There were oral closing submissions between 16 and 18 July 2014.

Appellants' ease as understood by the trial judge

232 In relation to issue 2 (advances to AGA above the approved facility limit in the period

28 April to 23 August 2006), the trial judge recorded the appellants' contention as:

...in effect, that Mr McCormick was on a frolic of his own and misled or deceived them. They maintained that they exercised appropriate care and diligence, but were nevertheless kept in the dark by reason of the actions of Mr McCormick.

233 In relation to issue 3 (increase of loan facility to $26 million), the trial judge recorded (at

[243]) that the appellants maintained that they "did not know that advances were being made

to AGA above the facility limit and that they acted with an appropriate degree of care and

diligence. They essentially blamed Mr McCormick".

-51 -

234 At [455], the trial judge referred to Mr Sullivan's claim that he was misled by Mr McCormick when he signed the "28 April" letter of offer.

235 In relation to issue 4 (Contraventions relating to the increase of the AGA facility limit to $44.87 million), the trial judge noted (at [249]):

The case advanced on behalf of Messrs Sullivan, Swan and Donaldson in relation to this issue was to effectively shift the blame to Mr McCormick. They contended that there was in fact no approval because the proposal that they signed contained facts that were "deliberately and radically false" and that the proposal was "a[n] instrument of fraud" by Mr McCormick.

236 In relation to issue 5 (advances to AGA above the approved facility limit in the period 11 January 2007 to 1 July 2007), the trial judge recorded (at [257]):

Messrs Sullivan, Swan and Donaldson, on the other hand, again maintained that they did not know that advances were being made to AGA above the facility limit and that they acted with an appropriate degree of care and diligence. They claimed that Mr McCormick was responsible for making these advances and that Mr McCormick concealed the further advances from them.

FURTHER EVIDENCE ON APPEAL

237 The appellants adduced a significant volume of further evidence on the appeal, including the following affidavits:

(1) affidavit of James Finucan sworn 26 February 2016;

(2) affidavit of Stephen Mackay sworn 26 February 2016;

(3) affidavits of Christopher Anderson sworn 29 March 2016 and 9 September 2016;

(4) affidavit of Anne Mary Donaldson MOM 21 April 2006;

(5) affidavits of Robert Urquhart sworn 5 September 2016 and 9 September 2016;

(6) affidavit of Amanda Elizabeth Spencer sworn 8 September 2016; and

(7) affidavits of Matthew Bransgrove sworn 14 September 2016 and 13 October 2016.

238 In addition, the appellants tendered a bundle of documents (exhibit A on the appeal).

239 In response, Trilogy relied on the following affidavits:

(1) affidavit of Nigel Carson sworn 10 October 2016; and

(2) affidavit of Jason Geisker sworn 12 October 2016.

- 52 -

240 The appellants argued that the further evidence is the type of evidence they would have

adduced, had fraud and collusion been pleaded. The further evidence is considered below by

subject.

Evolution of the 8 February 2006 letter to ASIC

241 The trial judge found (at [391]) that Mr Sullivan either knowingly or recklessly misled ASIC

by statements made about the AGA facility in this letter. Although the appellants submitted

that this finding had adverse consequences for Mr Swan and Mr Donaldson, they did not

explain this submission and it is not self-evident.

242 The basis for the trial judge's conclusion was orthodox: Mr Sullivan signed the letter, the

letter was false or misleading in respects identified by the trial judge and Mr Sullivan failed

to provide an explanation for how the false or misleading statements came to be included in

the letter. The conclusion was reinforced by the trial judge's finding that Mr Sullivan failed to

correct the information provided to ASIC when, shortly after the letter, he became aware that

the Council had refused to proceed to have the rezoning for the Saddleback land gazetted.

243 The appellants' further evidence seeks to support an argument that the false or misleading

statements were included without Mr Sullivan's knowledge. On the appellants' case, the

further evidence supports the following conclusions:

(1) notwithstanding his evidence that he only saw an early version of the "matrix" (that

is, ITB214) and had no role that he could recall in the schedule (that is, ITB213) to

the 8 February 2006 letter to ASIC, Mr McCormick was intimately involved in the

creation of the schedule;

(2) on the day that the ASIC letter was sent, draft emails of the letter were circulated to

the appellants but without the schedule;

(3) the version of the matrix [sic — the schedule ITB213] containing the additional

changed references to a different valuer and gazettal being a formality first appeared

in an email that Mr McCormick sent to Mr Mackay (another City Pacific officer) at

5.36 pm on 8 February 2016, about 30 minutes prior to the email from Mr Mackay

being sent to ASIC;

(4) there is no evidence that Mr Sullivan received a copy of the final version of the matrix

(that is, ITB214) before the letter went out; and

- 53 -

(5) the final version of the schedule (that is, ITB213) was not sent to Mr Sullivan by

email before the letter was sent to ASIC.

244 The appellants submitted that the further evidence makes it "glaringly improbable" that Mr Sullivan intentionally misled ASIC in relation to the representations as contained in the schedule and the matrix.

245 The further evidence may lead to a conclusion that Mr Sullivan was deceived into signing the letter to ASIC, not knowing that the schedule and the matrix contained the statements found to be false or misleading. For that conclusion, more evidence would be required, including evidence about the circumstances in which Mr Sullivan signed the letter such as whether he may have signed the letter without the schedule and the matrix, or whether he may have signed with letter without reading the final forms of the schedule and the matrix.

Evidence of Mr Finucan and Mr Mackay (signatures on drawdown requests)

246 Mr Finucan was the Corporate Counsel of City Pacific from February 2006 to 3 August 2009.

247 He gave affidavit evidence about 17 drawdown requests purportedly signed by him between 15 November 2006 and 3 May 2007. Mr Finucan did not deny signing the drawdown requests.

248 Mr Mackay was the "Group Executive Administration" of City Pacific from 2005 until 25 January 2007, and the Company Secretary of City Pacific from 12 July 2001 until 1 August 2006. Mr Mackay gave affidavit evidence about 21 drawdown requests dated between 25 May 2006 and 19 January 2007. He gave evidence that his signatures on eight drawdown requests are forgeries.

October 2005 loan approval

249 The evidence of Mr Urquhart, a computer forensic examiner, was that:

(1) a 7 October 2005 email purportedly from Mr Donaldson, approving a loan proposal

sent on 5 October 2005, did not appear on the City Pacific hard drive; and

(2) a version of the October 2005 loan approval was created in its current form on 25 August 2006. On the basis of this opinion, four copies of the loan approval that were in the evidence at trial (ITB376, ITB122, ITB124 and IT13125) were created

from this version of the loan approval.

- 54 -

250 This evidence may suggest that Mr Donaldson did not approve the increase of the AGA loan

facility to $17.89 million in October 2005.

251 The evidence may also suggest that Mr Sullivan did not approve the increase of the AGA

loan facility to $17.89 million in October 2005, but would need to be considered in the

context of Mr Sullivan's execution of the 6 October 2005 letter of offer to AGA for a facility

increase to $17.89 million, referred to in the chronological facts above.

Mr McCormick's motive

252 Mr Bransgrove gave affidavit evidence that it emerged during the trial that Mr McCormick

may have been offered, and had in some instances accepted, improper gifts and inducements

from Mr Gore. He referred to the transcript of Mr Young SC's cross-examination of

Mr McCormick on 18 and 19 March 2014. The cross-examination shows that Mr Young

SC cross-examined Mr McCormick on a document recording a promise by Mr Gore to give

stock to Mr McCormick, and an offer to assist Mr McCormick with accounting services. The

issue was also raised in the appellant's written closing submissions.

253 Mr Bransgrove said that, had the appellants been aware that a fraud case would be made

against them, they would have adduced all available evidence showing that Mr McCormick

was accepting improper inducements from Mr Gore. Mr Bransgrove identified several

documents relevant to this question from his searches of the City Pacific hard drive. In

particular, the appellants argued that they could have adduced evidence from Amanda

Spencer. Ms Spencer's evidence suggests that Mr Gore may have arranged for the provision

of free legal services to Mr McCormick regarding a family law dispute with

Mr McCormick's former wife.

Further investigation of authenticity of Funds Transfer Requests

254 The evidence of Christopher Anderson, a forensic document examiner, was that the Funds

Transfer Request forms and all signatures of them could have been sent to a forensic

document analyst for examination, and may have revealed further forgeries or anomalies.

Mr Gillam

255 The appellants stated that they would have wanted an opportunity to speak with and possibly

call Mr Gillam, whose conduct they say is at least prima facie called into question by the

finding at [571] that Mr Gillam, who appeared to have prepared the "9 August" loan proposal

- 55 -

"even went to the trouble of creating a looter' to the document that contained the date 9 August 2006".

Trilogy's submissions concerning the further evidence

256 Trilogy submitted that they were not required to plead fraud or collusion. They argued that

none of the further evidence was capable of affecting the outcome of the trial. In particular,

Trilogy submitted that the evidence is incapable of leading to a reversal of the finding that the

appellants were negligent in signing the "9 August" loan approval, that increased the facility

limit to $44.87 million.

257 Trilogy argued that, at its highest, the further evidence, if accepted, would establish the

following matters:

(1) the October 2005 loan approval was not in fact approved in October 2005;

(2) Mr Sullivan was not necessarily provided with the supporting material for funds

transfer requests when asked to sign them; and

(3) Mr McCormick may have had a personal motive for assisting Mr Gore by making

unauthorised advances to him, and may have been acting alone in seeking to advance

Mr Gore's interests.

258 Trilogy also argued that the substantial period between Mr Sullivan's oral evidence (in March

2014) and closing submissions (in July 2014) gave the appellants ample opportunity to

adduce further evidence of the kind identified on the appeal, noting the extensive additional

steps (outlined above) that the appellants took to gather and tender further evidence to

support their defence during that period.

259 Nor, said Trilogy, did the appellants seek any adjournment to gather any such evidence, in

order properly to deal with any issue raised in cross-examination. That must be taken to have

been a deliberate forensic decision on their part.

GROUNDS OF APPEAL

260 At the commencement of the appeal, leave was granted for the appellants to rely upon a

second further amended notice of appeal. During the course of the appeal, the appellants

sought leave to rely upon a third further amended notice of appeal which included a

contention (in proposed ground 4A(b)) that the trial judge erred in finding that the breaches

found against the appellants caused any loss in that the trial judge overlooked that the

- 56 -

obvious person to whom the appellants would have inevitably directed any inquiries was

Mr McCormick who would inevitably had misled them as to the true state of affairs.

261 The proposed additional contention must fail and, accordingly, leave to file the third further

amended notice of appeal should be refused. The proposed amendment is based on the flawed

premise that the appellants' contraventions of the Act were comprised solely of failures to

make inquiries of Mr McCormick. As appears from the summary of the contraventions found

by the trial judge at [22] and following, those contraventions were based upon matters such as

a failure to ensure the existence of an acceptable "as is" valuation based on current zoning (in

the case of Mr Sullivan); a failure to ensure that the valuations referred to in the "9 August"

loan approval were based on current zoning and permitted uses of the Saddleback land (in the

cases of Mr Donaldson and Mr Swan); and a failure to prevent advances made in excess of

the AGA facility limit in the period 11 January 2007 to 1 July 2007. There is no evidentiary

foundation for a case that those omissions were not causative of loss by reason of

Mr McCormick's capacity or intention to deceive the appellants.

262 There are eight grounds of appeal. The appellants' written case in chief and reply was

presented by reference to seven of the grounds of appeal and the following contentions:

(1) The appellants were denied procedural fairness: grounds 3, 4 and 5 of the notice of

appeal.

(2) The denial of procedural fairness had the effect of infecting the trial judge's

observations as to the credit of the appellants: grounds 1, 2 and 7 of the notice of

appeal.

(3) The trial judge's credit findings involved error of law by reason of:

(a) denial of procedural fairness;

(b) delay in delivery of judgment;

(c) inconsistent findings within the judgment;

(d) reliance on contemporaneous documents in circumstances where there was a

finding that the relevant contemporaneous documents were themselves

unlikely to be accurate: grounds 1, 2, 6 and 7 of the notice of appeal.

263 The eighth ground (ground 4A) was introduced by the second further amended notice of

appeal. It contends that the trial judge erred in failing to engage with the appellants' case

- 57 -

theory that the appellants were victims of Mr McCormick's deceit in making particular findings.

ROLE OF THE APPEAL COURT ON RE-HEARING

264 This is an appeal under s 24(1) of the Federal Court of Australia Act 1976 (Cth). It is an appeal by way of rehearing with the underlying purpose being the correction of error: Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at [20]-[22].

Elements of a fair trial

265 The following basic principles are relevant to this appeal:

(1) A trial that departs from the pleadings is not necessarily an unfair trial. It is necessary to consider what issues were fairly fought between the parties at the trial: Gould v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490 at 517 ("Gould v Mount Oxide Mines"); Vale v Sutherland [2009] HCA 26; 237 CLR 638 at [41] ("Vale v Sutherland"); Banque Commerciale SA En Liquidation v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 ("Banque Commerciale SA"); Betfair Ply Ltd v New South Wales [2010] FCAFC 133; 189 FCR 356 at [51] ("Betfair v NSW"); NRM Corporation Ply Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98 at [26] ("NRM Corporation v ACCC').

(2) Generally, a party has a broad (but not unfettered) right to cross-examine a witness, including on un-pleaded matters: Evidence Act 1995 (Cth) s 27; Moore v Wilson [2006] FCA 79 at [76]; Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2010) 75 ACSR 1 at [183]-[194] ("ASIC v Rich"); cf. GPI Leisure Corporation Ltd v Herdsman Investments Ply Ltd (No 3) (1990) 20 NSWLR 15 at 22.

(3) A party who is exposed to a potential finding of impropriety is generally given an opportunity to explain why that conduct was not dishonest or improper. It is a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings Browne v Dunn (1893) 6 R 67;

- 58 -

Heydon JD, Cross on Evidence (10th ed, LexisNexis Butterworths Australia, 2015) pp

605-606.

(4) The cross-examiner is not obliged to give notice of lines of questioning or documents

proposed to be put in cross-examination unless ordered to do so: ASIC v Rich at

[185]-[194] .

(5) Ambush usually involves deliberate concealment: ASIC v Rich at [192]. Ambush is

discouraged for reasons of efficiency and not necessarily because it is unfair, although

it may cause procedural unfairness: cf. White v Overland [2001] FCA 1333 at [4];

Now/an v Marson Transport Ply Ltd [2001] NSWCA 346; 53 NSWLR 116 at [21]-

[32]; Glover v Australian Ultra Concrete Floors Ply Ltd [2003] NSWCA 80 at [59]-

[60];

(6) As a general rule, litigants are bound by the conduct of their counsel: Crampton v The

Queen [2000] HCA 60; 206 CLR 161 at [18] per Gleeson CJ; Rondel v Worsley

[1969] 1 AC 191 at 241; [1967] 3 All ER 993 at 1007 per Lord Morris of Borth-y-

Gest; R v Birks (1990) 19 NSWLR 677 at 683-4. It is the role of counsel of raise

objections to avoid an unfair trial.

(7) There must be exceptional circumstances to allow an appeal based on the tender of

evidence to which no objection was taken by counsel at trial: cf Patel v The Queen

[2012] HCA 29; 247 CLR 531 at [114] per French CJ, Hayne, Kiefel and Bell JJ.

Where it can be seen that a failure to object was a rational, tactical decision, the Court

is entitled to conclude that no unfairness attended the judicial process: Suresh v The

Queen [1998] HCA 23; 102 A Crim R 18 at [13], [22]-[23], [55]456]; Ali v The

Queen [2005] HCA 879; ALJR 662 at [7], [98]-[99]; Tully v The Queen [2006] HCA

56; 230 CLR 234 at [149]; Nudd v The Queen [2006] HCA 9; 80 ALJR 614 at [9].

266 In Gould v Mount Oxide Mines at 517, Isaacs and Rich JJ set out the following basic principle

concerning fairness in the conduct of a trial:

Undoubtedly, as a general rule of fair play, and one resting on the fundamental principle that no man ought to be put to loss without having a proper opportunity of meeting the case against him, pleadings should state with sufficient clearness the case of the party whose averments they are. That is their function. Their function is discharged when the case is presented with reasonable clearness. Any want of clearness can be cured by amendment or particulars. But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest.

-59-

267 Similarly, in Vale v Sutherland at [41], the High Court adopted the following statement by

Dawson J in Banque Commerciale SA . Dawson J noted:

But modern pleadings have never imposed so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties.... cases are determined on the evidence, not the pleadings.

268 In Betfair v NSW at [51], a Full Court comprising Keane CJ, Lander and Buchanan JJ said:

At trial a party is entitled to have the opposing party confined to that party's pleadings because the first party is entitled to come to trial to meet only the issues raised on the pleadings. However, if the first party does not seek to so confine the opposing party but allows the other party to raise other material facts and issues for the determination of the Court, then in our opinion the Court is permitted and possibly obliged to decide the proceeding on the further material facts and issues raised and addressed at trial: Banque Commerciale at 296-297; Gould v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 517. If it were otherwise, the party who has failed to plead all of the material facts or issues upon which the party's case relies, but has brought those material facts or issues to the attention of his or her opponent at trial, would be denied natural justice if at the end of the trial the Court decided the proceeding on the pleadings without notice to that party. The first party in those circumstances would have been denied the opportunity to apply to amend those pleadings so as to formalise what was in fact addressed at the trial.

Significance of delay in delivery of trial judge's decision

269 In this case, the trial judge's decision was reserved for 17 months, and a period of 22 months

elapsed between the decision and the appellants' oral evidence. Delay of this magnitude was

described in Expectation Pty Ltd v PRD Realty Pty Ltd [2004] FCAFC 189; 140 FCR 17

("Expectation") as "operative delay".

270 The principles applicable to delay in judicial decisions are set out in Expectation at [66]-[83].

271 Generally, delay between the taking of evidence and the making of a decision is not, of itself,

a ground of appeal: NRM Corporation v ACCC. While delay may contribute to an error, it is

the error in the decision-making process or the decision that constitutes the ground of appeal:

NRM Corporation v ACCC at [132], [134], [136].

272 However, where there is significant delay in giving judgment (as there was in this case), an

appellate court must look with special care at any finding of fact challenged on appeal

Expectation at [69].

273 In a case of "operative delay", the trial judge's reasons are expected to carry out a more

comprehensive statement of the relevant evidence than would normally be required, in order

- 60 -

to demonstrate that the delay has not affected the trial judge's decision. An appellate court

cannot assume that any failure to refer to evidence does not mean that it was overlooked.

Having rejected the appellants' evidence on grounds of lack of credit, it was incumbent upon

the trial judge to explain how, despite the delay, he was well able to recollect the oral

testimony: Expectation at [81].

274 In Monie v Commonwealth [2005] NSWCA 25; 63 NSWLR 729 at [43], Hunt AJA set out a

list of principles governing the approach to be taken on appeal in a case of delay in giving

judgment. In relation to reasons for accepting or rejecting evidence, Hunt AJA said:

If, after such delay, the trial judge has not given specific and satisfactory reasons in relation to accepting or rejecting evidence which is of importance in the appeal, and where there does not exist any indication in the transcript or the evidence which clearly explains the judge's finding, the appellate court is obliged to give careful scrutiny and consideration to those findings. Where there has been significant delay, there can be no assumptions that statements of a general assertive character made by the judge are based on a sufficient consideration of the evidence, or that evidence relevant to a particular finding not considered in the judgment has not been overlooked by the judge in making that finding where that evidence, if accepted, could have supported a different finding.

275 The consequences of significant delay extend beyond the risk of fading memory: Expectation

at [74] and Monie v Commonwealth at [43]. The pressure of completing a delayed decision

may affect the quality of decision-making, for example, by causing the trial judge to overlook

relevant matters.

Power to grant a re-trial

276 Section 28(1)(f) of the Federal Court of Australia Act 1976 (Cth) provides that, subject to

any other Act, the Court may, in the exercise of its appellate jurisdiction grant a new trial in

any case in which there has been a trial, either with or without a jury, on any ground upon

which it is appropriate to grant a new trial.

277 In Windoval Pty Ltd v Donnelly at [80] to [96], the Full Court considered the principles upon

which a new trial may be ordered, referring in particular to the construction of s 28(1)(f) by

the plurality in Conway v The Queen [2002] HCA 2; 209 CLR 203at [36] as follows:

... This power is expressed in wide terms and should be given a liberal construction. It is a power that must, of course, be exercised judicially. But there is nothing unjudicial, arbitrary or capricious in refusing to order a new trial when, although error has occurred, no miscarriage of justice has occurred. The common law courts applied such a rule in civil proceedings for more than a century. The King's Bench and the Court for Crown Cases Reserved applied it in criminal cases for a long period until 1887 when it was held in Gibson that the rule did not apply where evidence had

- 61 -

been wrongly admitted. The Judicial Committee applied it in criminal appeals and applications for leave to appeal against criminal convictions. And this Court applied it in appeals from the Australian Capital Territory before the enactment of the Federal Court of Australia Act.

278 Although Conway v The Queen was a criminal case, at [95], the Court noted that this

construction of s 28(1)(f) was equally applicable to civil cases heard without a jury.

279 In Stead v State Government Insurance Commission [1986] HCA 54; 161 CLR 141 at 145.

the High Court affirmed the general proposition that:

There is one thing to which everyone in this country is entitled, and that is a fair trial at which he can put his case properly before the judge. ... No cause is lost until the judge has found it so; and he cannot find it without a fair trial, nor can we affirm it.

280 The High Court then identified the following important qualification:

...an appellate court will not order a new trial if it would inevitably result in the making of the same order as that made by the primary judge at the first trial. An order for a new trial in such a case would be a futility.

281 The High Court gave, as an example, the case of a party who was denied the opportunity of

making submissions on a question of law when, in the opinion of the appellate court, the

question of law must clearly be answered unfavourably to the aggrieved party. In that case, it

would be futile to order a new trial.

282 Concerning a denial of procedural fairness affecting an issue of fact, the High Court said:

Where, however, the denial of natural justice affects the entitlement of a party to make submissions on an issue of fact, especially when the issue is whether the evidence of a particular witness should be accepted, it is more difficult for a court of appeal to conclude that compliance with the requirements of natural justice could have made no difference. True it is that an appeal to the Full Court from a judgment or order of a judge is by way of rehearing and that on hearing such an appeal the Full Court has all the powers and duties of the primary judge, including the power to draw inferences of fact ... However, when the Full Court is invited by a respondent to exercise these powers in order to arrive at a conclusion that a new trial, sought to remedy a denial of natural justice relevant to a finding of fact, could make no difference to the result already reached, it should proceed with caution. It is no easy task for a court of appeal to satisfy itself that what appears on its face to have been a denial of natural justice could have had no bearing on the outcome of the trial of an issue of fact. And this difficulty is magnified when the issue concerns the acceptance or rejection of the testimony of a witness at the trial.

283 In Windoval Pty Ltd v Donnelly, the Full Court expressed the following view (at [106]):

[T]he application of the rule in Stead turns upon similar considerations to those that informed the question of whether the ground which is relied upon is one which demonstrates that it is appropriate to grant a new trial. That is to say, the "it would have made no difference" exception is analogous to the "no miscarriage of justice" proviso which informs the exercise of the jurisdiction under s 28(1)(f).

- 62 -

284 In Australian and Overseas Telecommunications Corporation Ltd v McAuslan [1993] FCA

958; 47 FCR 492, the majority of the Full Court declined to order a new trial where the trial

judge had made use of material which was a standard reference work in the relevant field (in

that case, psychiatry), but which was not properly before the Court. The majority found that,

if the relevant material had been excluded from consideration, it would have made no

difference to that outcome of the trial. Miles J said relevantly (at 516):

The rule, although enunciated in Stead in strong terms, is not absolute. With respect, I do not take the High Court to be saying that, where there is a denial of opportunity of making submissions on a question of fact, a new trial must be ordered unless there is no possibility that a new trial would make any difference. That would be to impose an unrealistically heavy burden on a respondent, as it is difficult to imagine circumstances in which all possibility of a different result must be excluded. The concept is surely one of reasonable possibility. That is to say, unless the respondent shows that there is no reasonable possibility that a new trial would bring about a different result, the denial of natural justice must result in a new trial.

285 Foster J said (at 519):

There can be no doubt that this rule is a very strict one. However, it is not to be applied automatically. The overriding question must always remain whether the breach had any bearing on the outcome of the case. No doubt the party seeking to uphold a decision claimed to have been vitiated by such a breach must shoulder a heavy burden. He must satisfy an appellate court that the result of the trial would necessarily have been the same notwithstanding the breach.

286 In Clampett v Attorney-General (Cth) [2009] FCAFC 151; 181 FCR 473 at [51], Black CJ

observed that some errors are so fundamental that an appellate court cannot dismiss an appeal

even if it is of the opinion that without the error the appellant would inevitably be convicted,

citing Wilde v The Queen [1988] HCA 6; 164 CLR 365 and Quartermaine v The Queen

[1980] HCA 29; 143 CLR 595. The Chief Justice concluded that, in dealing with a charge of

contempt of court, particular aspects of a Federal Magistrate's failure to exercise his

discretion led to the conclusion that it could not be said that there was no substantial

miscarriage of justice in that case.

WERE THERE FINDINGS OF FRAUD OR COLLUSION?

287 The appellants submitted that the trial judge found that each of the appellants either colluded

in or was sufficiently knowingly involved in frauds found to have been perpetrated by

Mr McCormick.

288 Ultimately, Mr King provided a schedule titled "Appellant's Schedule of Findings of Fact

Complained of Regarding Collusion Findings" ("Schedule of Collusion Findings") listing 16

- 63 -

findings. Five of these findings are also included in the "Schedule of Procedural Fairness Findings", addressed below.

289 None of the findings in the Schedule of Collusion Findings concerned Mr Swan. Only one finding concerned Mr Donaldson. That finding (at [593] of the trial judge's reasons) concerned a possible explanation for Mr Donaldson's lack of scrutiny of the "9 August" loan approval which (as noted earlier) his Honour had found to contain obvious and substantial discrepancies. However, his Honour did not find that that explanation was a likely explanation. The relevant conclusion (at [595]) was that it was perhaps unnecessary to decide what was the most likely explanation but that another explanation was perhaps the most likely.

290 Accordingly, and despite Mr King's repeated assertions that the appellants collectively were found to have colluded in misconduct by Mr McCormick, there was no such finding against either Mr Swan or Mr Donaldson.

Findings against Mr Sullivan

291 The findings on the Schedule of Collusion Findings may be considered within the following categories:

(1) findings that Mr Sullivan and Mr McCormick acted together concerning the AGA facility;

(2) findings that Mr Sullivan expressly or impliedly authorised Mr McCormick's conduct affecting the AGA facility;

(3) findings that Mr Sullivan and Mr McCormick shared a common intention in relation to the AGA facility; and

(4) other findings.

Findings that Mr Sullivan and Mr McCormick acted together concerning the AGA facility 292 The relevant findings are:

( 1 )

Mr Sullivan and Mr McCormick acted together in deliberately ignoring, or taking no steps to implement, SVP's recommendations concerning the AGA facility. They decided that they would not, or could not, require AGA to repay the facility. They deliberately chose not to retain a different valuer because they well knew that a

- 64 -

valuation from a truly independent valuer would not support the size of the AGA

facility ([407]).

(2) It is open to infer that Mr Sullivan and Mr McCormick intentionally kept details in

relation to the AGA facility from Mr Swan and Mr Donaldson ([483]);

(3) The inference is perhaps supported by the fact that Mr Sullivan and Mr McCormick

made a conscious decision not to put the question of the increase of the AGA facility

limit to $26 million before the Credit Committee as they should undoubtedly have

done ([483]).

(4) Mr Sullivan was involved, with Mr McCormick, in offering to increase the AGA

facility to $26 million (without seeking approval of the Credit Committee) ([511]).

(5) In July and August 2006, Mr McCormick prepared, and Mr Sullivan in due course

signed, documents that gave the misleading impression that the AGA facility limit

had been increased to $26 million on 28 April 2006. That was done to mislead the

compliance plan auditor, in the first instance, and then the firm conducting due

diligence ([551]).

293 Trilogy sought to support these findings on the basis of the cross-examination of Mr Sullivan,

accepting that Trilogy had not pleaded a case that Mr Sullivan and Mr McCormick acted

dishonestly in concert. As to (1) to (3), however, the cross-examination referred to by Trilogy

does not show that these particular propositions were put to Mr Sullivan.

294 As to (4), this finding is not a finding of collusion, but rather a more neutral finding: that of

joint involvement in the relevant offer. Such a finding was inescapable in light of the fact that

both Mr Sullivan and Mr McCormick signed the "28 April" letter of offer. Mr Sullivan

acknowledged in cross-examination that he signed the letter. Accordingly, there was nothing

more that needed to be put to Mr Sullivan before making the finding at [511].

295 As to (5), Trilogy pointed to cross-examination in which Mr Sullivan agreed that on

23 August 2006 he signed three letters, dated 31 March, 1 May and 28 April. He said that

"that was to tidy up the files for the due diligence". Mr Sullivan was asked whether this

"would create an entirely false impression" and he disagreed. Mr Sullivan also disagreed with

the proposition that the purpose of the documents being backdated to 28 April in respect of

the AGA facility was to give the appearance that approval had been granted prior to the

facility limit being exceeded in early May 2006. Nothing more needed to be put to

- 65 -

Mr Sullivan concerning his relationship with Mr McCormick before the trial judge made the finding at [551].

Findings that Mr Sullivan expressly or impliedly authorised Mr McCormick's conduct affecting the AGA facility

296 The relevant findings are:

(1) Mr Sullivan's approval of the $26 million facility limit effectively gave

Mr McCormick the "green light" in relation to advances after 23 August 2006 ([432]);

(2) concerning advances in the period 24 August 2006 to 10 January 2007, the suggestion that Mr McCormick made advances on a frolic of his own, and without the implicit if

not express approval and authorisation of Mr Sullivan is simply not plausible ([521]);

(3) Mr Sullivan effectively aided and abetted Mr McCormick, or at least was prepared to

go along with Mr McCormick's actions in covering up the fact that the AGA facility

had been allowed to exceed its approved limit: first, by purporting to give provisional

or interim approval to the increase to the facility limit to $26 million and by signing

documents that gave the impression that the approval had been given on 28 April 2006; and second, by signing, in late December 2006, the backdated proposal to

increase the facility limit to $44.87 million ([639]);

(4) the available inference is that Mr Sullivan well knew that the advances were being

made in the first half of 2007 and gave his implicit, if not explicit, approval or

authority to Mr McCormick and others in the lending department to make the further

advances to AGA during 2007 ([642]); and

(5) Mr Sullivan impliedly, if not expressly, approved the making of further advances by

Mr McCormick to AGA between 28 April 2006 and 23 August 2006 ([690]).

297 Trilogy submitted that the first two findings are findings about Mr McCormick's conduct. They are also findings about Mr Sullivan's conduct. Mr Sullivan was not asked to address

propositions (1) to (3) and (5) in cross-examination. He was not asked to address proposition

(4) to the extent that it concerns Mr Sullivan's approval or authority given explicitly or implicitly for further advances to AGA in 2007.

- 66 -

Findings that Mr Sullivan and Mr McCormick shared a common intention or state of mind in relation to the AGA facility

298 The trial judge found:

(1) There could be no doubt that the letter of offer to AGA dated 28 April 2006 was

prepared by Mr McCormick and signed by both Mr Sullivan and Mr McCormick with

the intention of creating the misleading impression that AGA had been offered, and

had accepted, a loan of $26 million on 28 April 2006, and that the advances that had

been made from that time were therefore within the facility limit ([454]).

(2) Both Mr Sullivan and Mr McCormick realised that the compliance plan provided that

any increase of the AGA facility to $26 million was required to be approved by the

Credit Committee and the Credit Committee Charter provided that such a loan or

increase was required to be approved by all four members of the Credit Committee

([457]).

(3) The fact that both Mr Sullivan and Mr McCormick knew that the advances (between

28 April and 23 August 2006) took the facility above its approved limit explains why

they subsequently signed the misleadingly backdated letter of offer. Both Mr Sullivan

and Mr McCormick also well knew that the procedures required by the Compliance

Plan and the Lending Manual had not been complied with in relation to those

advances ([468]).

(4) Even if Mr Sullivan and Mr McCormick actually entertained the belief that further

advances to AGA were in the best interests of the Fund, it is extremely doubtful that a

reasonable person in the positions of Mr Sullivan and Mr McCormick could

reasonably have held such a belief ([498]).

(5) Mr Sullivan and Mr McCormick were prepared to approve the increase to the facility

limit no matter what. They did not give a moment's thought to the best interests of the

members of the Fund ([620]).

299 These are not findings of collusion. They are findings about the states of mind of Mr Sullivan

and Mr McCormick which may be relevant to whether a finding of collusion could have been

made.

300 As to (1), as noted above, it was put to Mr Sullivan in cross-examination that the purpose of

the documents being backdated to 28 April in respect of the AGA facility was to give the

- 67 -

appearance that approval had been granted prior to the facility limit being exceeded in early

May 2006.

301 As to (2) and (3), the propositions concerning the required procedures were not put to

Mr Sullivan in terms. However, he agreed in cross-examination that he had an expectation

that it was necessary for a formal loan proposal to be prepared and submitted to each of the

members of the Credit Committee. It was not suggested that the trial judge could not

conclude that Mr Sullivan had the knowledge found at [457] and [468] concerning the

Compliance Plan, the Credit Committee Charter and the Lending Manual.

302 Concerning his knowledge of advances above the facility limit between 28 April and

23 August 2006, in cross-examination Mr Sullivan rejected the suggestion that the "28 April"

letter was offer was backdated because he knew advances from 1 May 2006 had exceeded the

limit of the facility.

303 Proposition (4) falls within the scope of the pleaded case, and did not require any proposition

to be put to Mr Sullivan in cross-examination.

304 As to (5), these propositions are not findings of collusion. However, they are serious findings

which were not put to Mr Sullivan in cross-examination. In support of the argument that

Mr Sullivan should have been given an opportunity to address the proposition in cross-

examination, Mr King noted Mr Sullivan's unchallenged affidavit evidence that his family

had an investment of over $10 million in the Fund as at March 2008, when the Fund was

frozen.

Other .findings

305 The other findings in the schedule are:

(1) That a possible version of events would make Mr Donaldson a party to Mr Sullivan's

and Mr McCormick's deceit ([593]).

(2) If Mr Sullivan and Mr McCormick had not failed to exercise the degree of care and

diligence that a reasonable person in their position would exercise, none of the 16

advances that City Pacific made to AGA on behalf of the Fund between 28 April 2006

and 23 August 2006 would have been made. If Mr Sullivan and Mr McCormick had

acted with care and diligence, they would have ascertained that the advances were

contrary to the Constitution, the Compliance Plan and the Lending Manual and were

- 68 -

imprudent and not in the best interests of the members. They would have accordingly

prevented them from being made ([687]).

306 These are not findings of collusion. The first finding does not add to the findings made

against Mr Sullivan. The second finding is plainly within the scope of Trilogy's pleaded case

and did not require any particular proposition to be put to Mr Sullivan in cross-examination.

Wilful blindness

307 Separately, Mr King contended that the trial judge found wilful blindness, a species of fraud,

on the part of Mr Swan and Mr Donaldson in connection with their execution of the

"9 August" loan approval. Mr King argued that the findings should not have been made in the

absence of any allegation of wilful blindness by Trilogy in its statement of claim.

308 The relevant findings concerning Mr Donaldson are:

(1) That "perhaps the most likely" explanation for Mr Donaldson's lack of scrutiny of the

"9 August" loan approval was that he "simply turned a blind eye to the issues and

discrepancies" with AGA facility that were readily apparent from even a cursory

reading of the proposal (at [594] and [595]).

(2) That he knew that there were issues concerning the AGA facility and the "9 August"

loan approval in particular but was prepared to turn a blind eye to those issues without

giving the proposal any proper analysis and without even attempting to ensure that the

proposal and the extension of the AGA facility complied with City Pacific's policies

and procedures or was in the best interests of the Fund or its members (at [887]).

(3) This conduct "involved moral turpitude to the point where it cannot be accepted that

Mr Donaldson acted honestly. At the very least it involved such a serious departure

from the standards required of Mr Donaldson as a senior officer of City Pacific that it

negated the performance of his duties" (at [888]).

309 Concerning Mr Swan, the trial judge found:

(1) Mr Swan "chose to simply close his eyes to the issues and discrepancies" concerning

the AGA facility that were apparent from even a cursory reading of the "9 August"

loan approval "rather than rock the boat". He signed the proposal but wrote "ratified"

on it so as to suggest that the decision was in fact made by others (at [609]).

- 69 -

(2) That "... Mr Swan knew that there were issues with the AGA facility and this

proposal in particular. Rather than independently and carefully analysing the proposal,

and taking steps to ensure that it complied with City Pacific's policies and procedures,

he turned a blind eye to the issues and discrepancies, and simply signed the proposal.

His conduct in so doing involved significant moral turpitude. So significant was his

departure from the required standards of care and diligence that it cannot be

concluded that he acted honestly" (at [895]).

310 On behalf of Trilogy, Mr Martin SC disputed that the trial judge's findings amounted to

findings of wilful blindness, arguing that the findings were made in the course of reaching

conclusions about two issues concerning Mr Donaldson and Mr Swan, namely whether they

departed from the requisite standards of care and diligence in signing and approving the

"9 August" loan approval and whether it can be accepted that they acted honestly in doing so.

311 A state of "wilful blindness" may be dishonest: Macquarie Bank v Sixty -Fourth Throne Ply

Ltd (1998) 3 VR 133 at 143. Wilful blindness, by deliberately ignoring factual information

which a person knows may be material to a decision, is akin to fraud: Lego Australia Ply Ltd v Paraggio [1993] FCA 575; 44 FCR 151 at 171. In Macquarie Bank, at 146, Tadgell JA

described wilful blindness as:

... a form of cognisance which law and equity alike equate to subjective knowledge from which dishonesty may be inferred. I understand the expression to connote more than a failure to see or look: the adjective is to be given its due value. The compound expression connotes a concealment, deliberately and by pretence, from oneself — a dissembling or dissimulation. In other words wilful blindness connotes a form of designed or calculated ignorance...

312 On the issues presented by the parties, the trial judge was not required to decide whether

Mr Swan or Mr Donaldson was guilty of "wilful blindness". The disputed findings are not

expressed as findings of "wilful blindness". Nor was it directly suggested to Mr Swan or

Mr Donaldson in cross-examination that they were guilty of "wilful blindness".

313 As Mr Martin SC submitted, the disputed findings were made in the course of reaching

conclusions about whether Mr Donaldson and Mr Swan departed from the requisite standards

of care and diligence in signing and approving the "9 August" loan approval and whether

they acted honestly in doing so.

- 70 -

Mr Donaldson

314 In the case of Mr Donaldson, the disputed findings follow the following unchallenged

findings at [591] set out at [157] above.

315 Having made these findings, the trial judge considered three possible explanations for

Mr Donaldson's lack of scrutiny of the "9 August" proposal, each of which, his Honour

concluded (at [595]), involved a serious departure from the standards of care and diligence

required of an officer in Mr Donaldson's position. His Honour expressed the view that the

scenario described at [594] was "perhaps the most likely" although it was "perhaps

unnecessary to decide which scenario was the most likely". Mr King did not suggest that

there were other possible explanations. Nor did he suggest that the other explanations were

more likely.

316 The trial judge's finding at [595] is not a finding on the balance of probabilities. It is a

tentative conclusion about which of three unsatisfactory explanations for Mr Donaldson's

conduct was the more likely. The finding that Mr Donaldson turned a blind eye to issues and

discrepancies is consistent with a high degree of carelessness: it does not necessarily imply

designed or calculated ignorance. On his Honour's reasoning, it was unnecessary to descend

into the question of whether Mr Donaldson turned a blind eye "wilfully" and his Honour did

not do so, at least at this point in his Honour's reasons.

317 Similarly, the finding (at [887]) that Mr Donaldson "was prepared to turn a blind eye" does

not necessarily imply designed or calculated ignorance. There are explanations for a

preparedness to turn a blind eye that are consistent with a high degree of carelessness, for

example, an inappropriate degree of trust in Mr McCormick. His Honour's observation that

Mr Donaldson was prepared to turn a blind eye "for whatever reason" indicates that the trial

judge left open the possibility that his conduct was not wilful.

318 The finding at [888] does not involve a conclusion of wilful blindness on Mr Donaldson's

part. Rather, it addresses the ultimate issue raised by Mr Donaldson's claim for exoneration

on the ground of honesty. The trial judge did not accept that Mr Donaldson acted honestly.

Mr King did not suggest that this finding was not open to be made on the evidence.

- 71 -

Mr Swan

319 At [605], the trial judge made the following findings concerning Mr Swan's evidence

concerning his consideration of the "9 August" loan proposal:

On his own evidence, beyond reading parts of the proposal, Mr Swan did not independently scrutinise any aspect of the proposal. And it would appear that even his reading of the document was at best cursory. He made no attempt to reconcile the information in relation to the approved facility limit and the outstanding balance, and made no attempt to understand the basis of the valuations referred to in the proposal. There was certainly no critical evaluation of the information. He made no attempt to ensure that the Lending Manager had certified that there was an acceptable valuation. He did not ask to see any valuation. He did not speak with anybody or ask any questions. This lack of scrutiny and analysis, if accepted, would be startling, particularly considered in light of the fact that Mr Swan was conscious of the recommendations made by SVP in relation to the AGA facility and the requirement that the Lending Manager certify the acceptability of the valuation, and the fact that he was being asked to sign a document that appeared to be backdated.

320 At [606], the trial judge found that Mr Swan's evidence in relation to his approval of the

proposal was implausible and not credible.

321 At [608] to [610], the trial judge considered other possible scenarios to explain Mr Swan's

conduct, as he had done for Mr Donaldson. His Honour's approach was relevantly identical:

there was no finding on the balance of probabilities; and the findings complained of are

expressed as findings concerning "perhaps [the] more likely scenario". There is no express

finding of wilfulness. The finding that "Mr Swan chose to simply close his eyes to the issues

and discrepancies rather than rock the boat" is more suggestive of a high degree of

carelessness rather than any dishonesty.

322 The conclusion at [610], that Mr Swan's actions involved a serious departure from the

standards of care and diligence required of a person in his position, is expressed "[o]n any

view of the evidence". Those words indicate that the trial judge did not make a finding about

Mr Swan's state of mind.

323 The findings at [895] are made in the context of the trial judge's assessment and rejection of

Mr Swan's claim for exoneration on the basis of his honesty. Rather than making a more

specific finding, the trial judge concluded that Mr Swan's conduct "involved significant

moral turpitude" and was not honest. Those findings do not entail a finding of wilful

blindness in the absence of any consideration of whether Mr Swan "turned a blind eye"

wilfully, as opposed to acting with some lesser degree of impropriety.

- 72 -

324 For these reasons, the contention that the trial judge found that Mr Donaldson and Mr Swan

were guilty of wilful blindness is rejected.

Conclusion

325 The trial judge made some findings against Mr Sullivan concerning the extent to which he

acted with Mr McCormick or authorised Mr McCormick's actions, although Mr Sullivan was

not given an opportunity to respond to them in cross-examination. Those findings went

further than necessary to address the case advanced by Trilogy and should not have been

made.

326 However, as explained above, those findings have no bearing on the trial judge's findings of

contravention, or on his rejection of the appellants' claim for exoneration, In those

circumstances, we reject the submission that the findings gave rise to a substantial

miscarriage of justice.

PARTICULAR COMPLAINTS CONCERNING THE TRIAL JUDGE'S APPROACH TO THE APPELLANTS' CASE THEORY

Grounds 7(a) to (e)

327 The appellants contended that the trial judge "failed to consider that it was glaringly

improbable that Mr Sullivan would knowingly and fraudulently collude in Mr McCormick's

fraud and advance moneys from the Fund to AGA where no motive was suggested or found

by the trial judge and in circumstances where Mr Sullivan was personally interested in the

Fund" (ground 7(a)). The trial judge was not presented with a motive for Mr Sullivan's

conduct by Trilogy, no doubt because its case was not a case of knowing and fraudulent

collusion. The absence of motive and Mr Sullivan's interest in the Fund might provide

additional reasons why the trial judge should not have made the findings identified above

concerning the extent to which he acted with Mr McCormick or authorised Mr McCormick's

actions. However, and assuming that these matters were part of the appellants "case theory",

the trial judge was not required to deal with that case theory except to the extent that it

engaged with the case propounded by Trilogy. The resolution of the issues put before the trial

judge did not require him to consider the matter identified by the appellants.

328 Similarly, the trial judge was not required to make a finding as to what motive

Mr McCormick had in committing fraud (ef ground 7(b)). Nor was his Honour required to

- 73 -

consider whether his findings of "fraud or collusion" implausibly implicated the majority of

senior management of City Pacific in Mr McCormick's fraud (cf ground 7(c)).

329

For the same reasons, there is no merit in the complaint that the trial judge failed to give

adequate reasons in rejecting the appellants' defences (grounds 7(d) and (e)).

330 A particular complaint about the adequacy of the trial judge's reasons was that it was

insufficient to "merely surmise that Mr Sullivan was lying about the dates (at [317]-[321])

and therefore must have been colluding with Mr McCormick". The appellants contended that

the trial judge's reasoning process took as its starting point the assumption that Mr Sullivan

deliberately lied about the dates on which he had signed the "28 April 2006" letter of offer.

We reject that complaint. The trial judge's reasoning process did not involve either surmise

or assumption, but rather a careful and critical analysis of Mr Sullivan's evidence which led

to a rejection of that evidence. The trial judge observed at [317] and following, that

Mr Sullivan had sworn "emphatically" to a particular version of events, namely the events of

28 April 2006, by reference to documents that he signed, but which he turned out to have

signed months later. The trial judge made a careful evaluation of Mr Sullivan's credit (at

[3161 to [330]), ultimately finding that he was not an honest or reliable witness in relation to

the key factual issues concerning the conduct of the AGA facility during 2006 and 2007.

Mr King did not suggest that this finding was not open to the trial judge on the evidence.

Ground 4A

331 Ground 4A is responsive to Trilogy's written submissions concerning the trial judge's

findings, that is, those expressed as alternative findings, on the basis that the appellants'

evidence should be accepted as to their respective states of knowledge at particular times.

Ground 4A is in the following terms (as written):

In relation to the alternative findings of negligence against each of the appellants, the trial judge failed to engage with the appellants case theory, and by necessary inference with the basis of his own alternative finding, that the appellants were victims of Mr McCormick's deceit and, in doing so further:

a. Erred in finding breach of duty on the facts as found by [the trial judge] in that he failed to properly take into account with respect of the alternative findings (at [522]-[524], [643] in relation to Sullivan; at [605], [608]1610] in relation to Swan; and at [592]-[595] in relation to Donaldson) that each of the appellants were deceived by McCormick and to consider the extent of that deceit;

b. Failed to properly consider the issue of exoneration on the alternative findings of negligence as opposed to the findings of fraud and collusion.

- 74 -

332 In substance, the "alternative findings" were:

(1) As against Mr Sullivan, in connection with the advances to AGA in the August 2006

to January 2007 period ([5221-1524]) that, even if he did not know about and did not

approve those advances, he would have become aware of those advances had he

exercised the degree of care and diligence that a reasonable person would exercise if

they were in his position.

(2) As against Mr Sullivan, in connection with the advances to AGA after 11 January

2007 ([643]), that, even if his evidence was to be believed and he did not read the

board papers or take any other steps to ascertain the balance of the AGA facility

during 2007, "it almost goes without saying that his failure to take such steps in all the

circumstances amounted to gross negligence".

(3) As against Mr Donaldson ([592]-[595]), the various explanations for his lack of

scrutiny of the proposal to increase of the AGA facility to $44.87 million. His Honour

found that each of three possible explanations involved a "serious departure from the

standards of care and diligence required of an officer in Mr Donaldson's position".

(4) As against Mr Swan ([605] and [608]-[610]), the various possibilities concerning his

actions in relation to the proposal to increase of the AGA facility to $44.87 million.

As for Mr Donaldson, the trial judge concluded that "[o]n any view of the evidence,

Mr Swan's actions in relation to this proposal involved a serious departure from the

standards of care and diligence required of a person in his position".

333 The findings concerning Mr Donaldson and Mr Swan have been examined at [314]-[324]

above. They involve a consideration of the evident failures of those appellants in their

consideration of the "9 August" loan proposal and the degree of culpability entailed in those

failures. The basal facts of lack of scrutiny required the findings of breach of duty and made

the trial judge's rejection of the appellants' claim for exoneration plainly open to his Honour.

334 As to finding (1) concerning Mr Sullivan, the appellants argued that the trial judge did not

give any reasoning about why Mr Sullivan would have become aware of the advances being

made, had he exercised due care and diligence. The trial judge had found that Mr Sullivan

signed four of the Funds Transfer Request forms for advances between 6 September 2006 and

19 December 2006 and that the balance of the AGA facility was stated in excess of

$26 million in the October and November 2006 board papers. Those findings provide a

- 75 -

substantial basis for how the exercise of due care and diligence would have caused

Mr Sullivan to become aware of the advances.

335 As to finding (2), the trial judge found (at [640]) that the fact of the advances in the period

January to July 2007 was ascertainable from the board papers. In addition, as set out at [38]

above, the trial judge found, by reason of the matters known to Mr Sullivan, he would have

"closely monitored the balance of the AGA facility throughout 2007" had he been "acting

with even a modicum of care and diligence".

336 In the light of those findings, the trial judge was not required to give any further explanation

for how the exercise of due care and diligence would have caused Mr Sullivan to become

aware of the advances. Mr McCormick's deception provides no answer to the case that was

put by Trilogy and accepted by the trial judge.

337 As explained at [42] above, the trial judge's rejection of the appellants' claims for

exoneration did not require consideration of the extent of Mr McCormick's deception.

338 Accordingly, ground 4A must fail.

PROCEDURAL UNFAIRNESS (GROUND 4)

339 Ground 4 of the notice of appeal contends that the trial judge erred by making findings of

fraud or collusion including at [407], [451], [518], [639] and [640] despite the absence of any

allegation of fraud or collusion by Trilogy. The alleged errors concern findings about four

documents being the 8 February 2006 letter to ASIC, the "28 April" file note, the "28 April"

letter of offer and the "9 August" loan approval.

340 Grounds 4(a) to (c) concern findings made against Mr Sullivan. Ground 4(d) concerns

findings against all three appellants.

341 The appellants argue that the fact that the appellants had to deal with serious allegations

concerning these documents for the first time in cross-examination seriously infected the trial

judge's view of their credit and, consequently, almost all of his Honour's ultimate critical

findings of fact.

342 In this case, the question is whether the appellants had a proper opportunity to meet the case

against them including, as it did, serious allegations which were not pleaded.

- 76 -

343 The appellants identified 26 findings of fact about which they complained in a schedule titled

"Schedule of Findings of Fact Complained Of Regarding Procedural Unfairness" ("Schedule

of Procedural Fairness Findings").

Ground 4(a): 8 February 2006 letter to ASIC

344 Ground 4(a) concerns the 8 February 2006 letter to ASIC. The complaint is that the trial

judge permitted an allegation of fraud to be raised against Mr Sullivan in closing oral

submissions despite the absence of a pleading of fraud and found that Mr Sullivan either

knowingly or recklessly misled ASIC.

345 The trial judge found (at [391]) that Mr Sullivan either knowingly or recklessly misled ASIC

by the 8 February 2006 letter to ASIC, which Mr Sullivan signed. The finding was not

necessary to sheet home liability to Mr Sullivan but it was a significant reason why the trial

judge disbelieved Mr Sullivan as a witness of credit, as appears from [327] of his Honour's

reasons. In full, para [391] reads:

The only reasonable inference is that Mr Sullivan either knew that the statements made to ASIC about the AGA facility were false and misleading, or was recklessly indifferent to whether they were accurate. The inference of mere oversight on Mr Sullivan's part is implausible. Either way, it is clear that as a result of the SVP report and the manoeuvrings involved in City Pacific's response to it, Mr Sullivan knew, at the very least, that there was a serious issue with the AGA facility. Yet rather than ensuring that SVP's recommendations were actually acted upon, which it was plainly within his power to do, Mr Sullivan chose to simply fob off ASIC by telling them what he believed it wanted to hear without any regard to the truthfulness and accuracy of the report.

346 The appellants also referred to seven other paragraphs of the trial judge's reasons, which

contain the following findings:

[327] ... it was and is indisputable that Mr Sullivan was directly responsible for implementing SVP's recommendations in relation to the AGA facility, that City Pacific did not implement those recommendations, and that City Pacific misled ASIC in relation to the implementation of SVP's recommendations relating to the AGA facility in its report provided to ASIC under cover of a letter signed by Mr Sullivan on 8 February 2006. Mr Sullivan was either unable or unwilling to provide anything that even approached a satisfactory explanation for this.

[388] Fourth, it was an incontestable fact that Mr Sullivan misled ASIC in relation to the implementation of SVP's recommendations concerning the AGA facility.

- 77 -

[389] ... Mr Sullivan was unable to provide any explanation, let alone a reasonable or plausible explanation, for how that manifestly false statement could be included in such an important report to ASIC. Given the seriousness of the issue, and Mr Sullivan's responsibility and involvement in the implementation of the recommendations concerning the AGA facility, it is extremely difficult to see how this could have been the product of mere oversight on Mr Sullivan's part.

[390] ... There was simply no basis for that statement [that City Pacific had received advice that zoning gazettal is 'a formality and is imminent'] in the report to ASIC. Mr Sullivan must have realised this when, within a very short time after sending the report to ASIC, he became aware that the Council had refused to proceed to have the rezoning gazetted. Yet he made no attempt to correct the misleading statement made in the report.

[403] [The SVP report was significant because, firstly] [i]t revealed a management team, headed by Mr Sullivan, that was prepared to mislead ASIC rather than implement SVP's recommendations concerning a large loan that did not appear to comply with a number of City Pacific's loan administration policies and procedures.

[546] ... In February 2006, Mr Sullivan misled ASIC in relation to the implementation of SVP's recommendations concerning the AGA facility in a letter that was copied to the board of directors of City Pacific.

[639] The starting point is the findings of fact that have already been made in relation to Mr Sullivan's state of knowledge and involvement in the conduct of the AGA facility throughout 2006. ... He also knew, as a result of the SVP report and his involvement in City Pacific's response to it, that there were real issues in relation to the AGA facility. He knew that SVP's recommendations in relation to the AGA facility had not been implemented. He misled ASIC about that fact.

347 The appellants submitted that, had they been on notice that it would be alleged that ASIC had

been intentionally misled, they would have taken steps that would have uncovered material

making it "glaringly improbable" that Mr Sullivan intentionally misled ASIC.

References to the 8 February 2006 letter at the trial

348 The 8 February 2006 letter and its attachments (comprising a schedule ("ITB213") and a

-matrix" ("ITB214") were included in Trilogy's initial tender bundle served on the appellants

on 13 May 2013.

349 During the cross-examination of Mr Sullivan, Mr Young SC took an objection to the

relevance of questions regarding City Pacific's response to the SVP report. The trial judge

- 78 -

overruled the objection, observing that one of the key issues in the case was the state of mind

and knowledge of the respondents including Mr Sullivan at various critical times. In their

written closing submissions at the trial, the appellants conceded the relevance of the SVP

report to their respective states of mind.

350 Mr King complained that Trilogy did not plead the 8 February 2006 letter. But Trilogy did

not seek to rely upon the letter to make out its causes of action. The trial judge noted, at

[402], that Trilogy did not allege any breach of duty on the part of the appellants and

Mr McCormick in relation to the response to the SVP report. hi those circumstances, there

was no obligation upon Trilogy to plead the 8 February 2006 letter and no procedural

unfairness resulting from the fact that the letter was not pleaded.

351 The following propositions were put to Mr Sullivan in cross-examination:

(a) Mr Sullivan reviewed the 8 February 2006 letter before it was sent to ensure

that it was accurate;

(b) that, as chief executive officer, Mr Sullivan would have done everything that

he could have done to ensure that the responses in the letter, the schedule and

the "matrix" were entirely accurate;

(c) that it would be a serious matter to provide incorrect or possibly misleading

information to ASIC in the 8 February 2006 letter; and

(d) that Mr Sullivan submitted the 8 February 2006 letter and the attached

progress report to ASIC for the purpose of telling ASIC what Mr Sullivan

believed ASIC wanted to hear in order to get ASIC off his back and that

Mr Sullivan was prepared to tell ASIC what he believed ASIC wanted to hear.

352 The trial judge also asked Mr Sullivan to give his best recollection of his actions to ensure

that the entries in the matrix were correct.

353 It was not put to Mr Sullivan in terms that he had sent the 8 February 2006 letter to ASIC

knowing that its attachments contained false representations.

354 In oral closing submissions, Mr Martin SC contended that Mr Sullivan was prepared

knowingly to make false statements to ASIC, namely that City Pacific had legal advice that

gazettal of rezoning of the Saddleback land was a formality or was imminent and that City

Pacific had a valuation by a different valuer based on permitted uses before deciding to

- 79 -

extend and increase the facility. Mr Martin SC submitted that this matter clearly damaged

Mr Sullivan's credit.

355 In his oral submissions, Mr Young SC noted that Trilogy's oral submissions went much

further than its written submissions concerning the SVP report, and noted that the references

to AGA were in the attachments to the letters rather than the letter signed by Mr Sullivan and

that the attachments referred to 31 other loans.

Consideration

356 The letter and its attachments were included in the Initial Tender Bundle. The attachments

contained false statements concerning the AGA facility, made to a regulator, as Mr Sullivan

conceded in cross-examination. There was no obligation on Trilogy to give Mr Sullivan (or

the other appellants) notice that an attack would be made on Mr Sullivan's credit by reference

to the inclusion of false statements in attachments to a letter which Mr Sullivan signed. In the

circumstances, it was predictable that Trilogy would seek to cross-examine Mr Sullivan on

the letter, and the trial judge would make findings about Mr Sullivan's conduct and credit

accordingly. Even if Mr Sullivan was surprised by the cross-examination, that was not unfair:

he was being asked to explain documents which, at least on their face, were his own

documents as attachments to a letter which he signed.

357 The findings at [327], [388] and [546] are, as the trial judge said, incontestable. They are

findings of misleading conduct, without any further consideration of whether that conduct

was intentional or involved fraud or dishonesty. There was no procedural unfairness involved

in these findings.

358 The most serious findings are made against Mr Sullivan at [391].

359 The cross-examination put Mr Sullivan and his lawyers on notice that there was an issue,

about how he came to sign the letter with the misleading attachments. The matter was not

addressed in re-examination and no leave was sought to adduce further evidence on the

matter prior to the conclusion of the trial. Re-examination was the proper occasion for

Mr Sullivan to give any satisfactory explanation that he might have been able to provide to

the Court. The trial judge was entitled to make the findings at [391] where Mr Sullivan had

placed his honesty in issue, and where Mr Sullivan was given an opportunity to explain how

he came to be the signatory of a letter addressed to a regulator accompanied by attachments

containing false statements.

- 80 -

360 Similarly, there was no unfairness in the trial judge's finding, at [327] and [389], that

Mr Sullivan was unable or unwilling to provide a satisfactory explanation. Nor was it unfair

for the trial judge to observe (at [389]) that it was "extremely difficult to see how this could

have been the product of mere oversight on Mr Sullivan's part". That was a matter relevant to

Mr Sullivan's honesty, which Mr Sullivan had placed in issue by his defence, and was raised

by the cross-examination about the importance of ensuring the accuracy of the relevant

documents where they were being sent to the regulator.

361 Mr King submitted, based on the further evidence, that Mr Sullivan had not seen either of the

attachments to the 8 February 2006 letter before it was sent to ASIC. The further evidence

does not support that submission: it supports a lesser conclusion that those attachments were

not sent to Mr Sullivan by email before the letter was sent to ASIC. Even then, the lesser

conclusion would need to account for the evidence at the trial, and upon which Mr Sullivan

was cross-examined, that Mr Sullivan received a version of the matrix on 7 February 2015

which contained the misleading comments:

New valuation by a different panel valuer is now in place. It has been confirmed that the land is included in the urban footprint.

362 The appellants' argument does not explain how Mr Sullivan came to sign the 8 February

2006 letter, if the false or misleading statements were included without Mr Sullivan's

knowledge. An innocent explanation would probably require evidence that, at the time of

signing the letter, Mr Sullivan was misled as to the content of the attachments that were to

accompany the letter. The appellants do not suggest that evidence of this kind might be

available.

363 As to [390], second sentence, Mr Sullivan agreed in cross-examination that he was aware by

15 February 2006 that the Court has refused AGA's application to approve the rezoning of

the Saddleback land. As to [390], third sentence, there was no evidence that Mr Sullivan

made any attempt to correct the misleading statements to ASIC. It is implicit in [390] that the

trial judge found that Mr Sullivan was aware of the misleading statements. Mr Sullivan was

given an opportunity to address that proposition when he was asked whether he reviewed the

8 February 2006 letter before it was sent to ensure that it was accurate. Accordingly, there

was no procedural unfairness in the findings at [390].

364 Nor is there any unfairness in the finding complained of at [403]. Undoubtedly, Mr Sullivan

headed the management team; undoubtedly the management team misled ASIC and did not

- 81 -

implement SVP's recommendations concerning the AGA facility; and undoubtedly the

facility did not appear to comply with a number of City Pacific's loan administration policies

and procedures. On the evidence, the trial judge was entitled to identify Mr Sullivan as a

person who was prepared to mislead ASIC because he had signed the 8 February 2006 letter

and he had not given an explanation for why he should not be found responsible for its

contents. For similar reasons, there is no unfairness in the findings complained of at [639].

365 Accordingly, no error is disclosed by ground 4(a).

Ground 4(b): "28 April" file note

366 Ground 4(b) of the notice of appeal contends that Trilogy alleged in the statement of claim

that the "28 April" file note was created and signed on that day but in cross-examination

alleged that this was false and "thereby misled the appellants in their evidence as, in the

absence of any pleading to the contrary, the appellants took at face value that the "28 April"

file note was created and signed on that day and the trial judge found that Mr Sullivan

colluded in backdating it with fraudulent intent".

367 The findings about which the appellants complain are:

(1) Having found that it was "difficult to see why Mr Sullivan would be willing to sign

the backdated documents if he did not know that the advances had already been

made", the trial judge found that Mr Sullivan "well knew that the backdating was

necessary to give the false impression that approval had been given, and the letter of

offer had been signed and sent, on 28 April 2006, before the facility limit had been

exceeded" [452].

(2) In July and August 2006, Mr McCormick prepared, and Mr Sullivan in due course

signed, documents that gave the misleading impression that the AGA facility limit

had been increased to $26 million on 28 April 2006. That was done to mislead the

compliance plan auditor, in the first instance, and then the firm conducting due

diligence [551].

368 There is no dispute that Trilogy's case, as pleaded and as articulated in Mr Martin SC's

opening, was that the "28 April" file note was created and signed on the date that it bore.

369 In cross-examination, a different case was put to Mr Sullivan based on recently obtained

metadata evidence showing that the file note was backdated, and had not been created until

July 2006. It is not clear when Trilogy obtained the metadata evidence, except that it was not

- 82 -

obtained before 6 March 2014. There is no evidence that Trilogy obtained the metadata

evidence before Mr Martin SC's opening.

370 Assuming in the appellants' favour that the new metadata evidence was received by Trilogy

before Mr Sullivan commenced to give evidence, the appellants did not point to any order

pursuant to which the evidence was required to be served.

371 Mr Sullivan was given an opportunity to address the evidence which suggested that he had

signed a backdated document in cross-examination. It was a matter for Mr Young SC's

forensic judgment whether to object to cross-examination on the new metadata evidence or to

seek clarification of Trilogy's case in the light of the new metadata evidence. It was also a

matter for Mr Young SC's forensic judgment whether to seek an adjournment to deal with the

new evidence. Those forensic judgments were required to be exercised in the context of

Mr Sullivan's positive statements in his November 2012 and April 2013 affidavits about the

events of 28 April 2006, including his positive recollections of signing the file note that day.

Mr King did not suggest that Mr Young SC's omission to do those things was not a rational,

tactical decision. An obvious consideration is possible tactical responses by Mr McCormick

(who was unrepresented).

372 Mr Sullivan was asked whether the purpose of the documents (comprising the "28 April" file

note and the "28 April" letter) being backdated was to give the appearance that the approval

had been granted prior to the facility limit being exceeded in early May 2006. Having been

given an opportunity to respond to that allegation, which Mr Sullivan denied, there was no

procedural unfairness in the trial judge's conclusions at [452] and [551] insofar as they

concerned the "28 April" file note.

373 It follows that no error is disclosed by ground 4(h) of the notice of appeal.

Ground 4(c): "28 April" letter of offer

374 Ground 4(c) contends that the appellants were denied procedural fairness by the cross-

examination of Mr Sullivan which alleged that the "28 April" letter of offer was backdated

with intent to mislead, in the absence of a pleading to that effect, and by the trial judge's

findings to the effect that Mr Sullivan colluded with Mr McCormick in backdating the

document with fraudulent intent.

375 Ultimately, the findings complained of were located in [371], [407], [452], [453], [454],

[458], [468], [551] and [639] of the trial judge's reasons.

- 83 -

376 We have previously found that Mr Sullivan was not cross-examined on the matters found at

[407] and [6391.

377 As to [454], we have noted above that it was put to Mr Sullivan in cross-examination that the

purpose of the documents being backdated to 28 April in respect of the AGA facility was to

give the appearance that the approval had been granted prior to the facility limit being

exceeded in early May 2006.

378 As to [468], we have noted above that while the relevant propositions were not put to

Mr Sullivan in terms, he agreed in cross-examination that he had an expectation that it was

necessary for a formal loan proposal to be prepared and submitted to each of the members of

the credit committee. It was not suggested that the trial judge could not conclude that

Mr Sullivan had the knowledge found at [457] and [468] concerning the Compliance Plan,

the Credit Committee Charter and the Lending Manual.

379 As to [551], Trilogy pointed to cross-examination in which Mr Sullivan agreed that on

23 August 2006 he signed three letters, dated 31 March, 1 May and 28 April. He said that

"that was to tidy up the files for the due diligence". Mr Sullivan was asked whether the "tidy

up" would create an "entirely false impression" and he disagreed. Mr Sullivan also disagreed

with the proposition that the purpose of the documents being backdated to 28 April in respect

of the AGA facility was to give the appearance that the approval had been granted prior to the

facility limit being exceeded in early May 2006. It was not put to Mr Sullivan that the letter

was prepared to mislead the compliance plan auditor and the firm conducting due diligence.

380 The remaining disputed findings are:

(1) KPMG was misled by Mr McCormick and Mr Sullivan ([371]);

(2) Mr Sullivan "well knew that the backdating was necessary to give the false

impression that approval had been given, and the letter of offer had been signed and

sent, on 28 April 2006, before the facility limit had been exceeded" ([452]);

(3) "[for the reasons already referred to, Mr Sullivan's evidence in relation to the signing

of the letter of offer dated 28 April 2006 was implausible, inconsistent and lacked

credibility... It was a false reconstruction of events by Mr Sullivan to try to justify

and explain why he would sign a backdated letter of offer" ([453]); and

(4) "...Mr Sullivan well knew that the letter was intended to mislead anyone who

inspected or audited the AGA loan file into believing that no advances had been made

- 84 -

over the approved limit because an offer of a $26 million facility had been made and

accepted on 28 April 2006" ([458]).

381 The appellants complained that they were ambushed in cross-examination by the suggestion

that the letter of offer, identified prior to the trial as backdated, was created with an intent to

mislead or deceive. The relevant question asked by Mr Martin SC in cross-examination was

whether the letter was backdated because Mr Sullivan knew advances from 1 May 2006 had

exceeded the limit of the facility, being $17.89 million.

382 There was no objection to the question by Mr Young SC and Mr King did not suggest that

Trilogy was not entitled to ask Mr Sullivan that question.

383 Mr Young SC's decision not to object to the question was clearly rational. The question was

plainly relevant to an assessment of Mr Sullivan's conduct as an officer of City Pacific.

Where Mr Sullivan had placed his honesty in issue, it would have been astonishing if

Trilogy's counsel had not tested in cross-examination the reasons why the "28 April" letter of

offer was backdated. As a matter of logic, a likely (if not, the most likely) explanation for

backdating a document is to mislead a future reader as to the date the document was created.

A witness who has backdated a document can expect to have his or her credit tested by

reference to that conduct, and to have his or her credit assessed by the trial judge by reference

to the explanation given in the witness box.

384 There was no procedural unfairness in cross-examining Mr Sullivan on his intention in

backdating the "28 April" letter of offer, and no procedural fairness in the trial judge's

findings of impropriety based on backdating.

385 Further, it was plainly open to the trial judge to conclude that Mr Sullivan had engaged in a

"false reconstruction of events" in giving his evidence by affidavit and in examination in

chief that was inconsistent with the metadata (including the metadata of ITB266), and was

unsupported by any contemporaneous record. Mr Sullivan was informed that his evidence on

this point was in issue: Mr Martin SC said so in his opening, as set out above. In any event,

Mr Sullivan's knowledge that his evidence on the point was in issue is demonstrated by the

fact that he gave a second account of the relevant events in his April 2013 affidavit and by his

further account in his evidence in chief. Nothing further was required before the trial judge

made his findings at [453].

- 85 -

Conclusion

386 The trial judge made findings at [407], [551] and [639] that Mr Sullivan did not have an

opportunity to address. In doing so, the trial judge failed to accord Mr Sullivan procedural

fairness.

Ground 4(d): "9 August" loan approval

387 The appellants contend, in relation to Mr Sullivan, that Trilogy did not plead that the loan

approval was backdated with fraudulent intent but the trial judge found that Mr Sullivan

colluded with Mr McCormick in backdating the document with fraudulent intent.

388

The notice of appeal refers to paras [513], [583] and [639] of his Honour's reasons. The

Schedule of Procedural Fairness Findings refers additionally to para [371].

389 As for the "28 April" letter of offer, the absence of a pleading of fraud did not preclude

Trilogy from testing Mr Sullivan's credit by reference to why the "9 August" loan approval

was backdated.

390 As to [371], the relevant findings are:

(a) KPMG was misled by Mr Sullivan; and

(b) the intention was to give the appearance of regularity because Mr Sullivan

[and Mr McCormick] were aware of the possibility that KPMG may conduct a

year-end compliance audit.

391 Mr Sullivan conceded in cross-examination that, by signing the approval with the date

9 August 2006, he was falsely representing that the approval had been given on 9 August

2006. He was not asked to address whether this false representation misled KPMG or had the

intention found by the trial judge.

392 As to [513], the finding that the backdating was "intended to give the false impression that a

facility limit of $44.87 million had been approved on 9 August 2006, and that therefore the

advances made after that time were within the facility limit" is within the scope of

Mr Sullivan's concession identified above. The same applies to the finding (at [583]) that:

The reality is that Mr Sullivan well knew what Mr McCormick was up to in preparing this proposal. He well knew that it was a false and misleading document created to "tidy up" the loan file so that, if scrutinised by City Pacific's compliance auditor or any other external party, it would appear that the Credit Committee had approved a facility limit of $44.87 million or $55 million on 9 August 2006. "Tidy-up" in that context meant mislead.

- 86 -

393 As explained above, the findings at [639] were not put to Mr Sullivan in cross-examination.

In our view, Mr Sullivan was not accorded procedural fairness in connection with those

findings.

394 Ground 4(d) of the notice of appeal is predicated upon the proposition that the trial judge

found Mr Donaldson and Mr Swan to be at least wilfully blind to the fact that the "9 August"

loan proposal was backdated with fraudulent intent. That proposition is not made out and

accordingly ground 4(d) must be dismissed insofar as it concerns Mr Donaldson and

Mr Swan.

Did any procedural unfairness have a bearing on outcome of trial?

395 The contraventions found by the trial judge are set out at [22] to [40] above.

396 In summary, the trial judge found that Mr Sullivan contravened:

(1) section 601FD(1)(b), in relation to the increases of the AGA facility limit to

$26 million and $44.87 million and the advances to AGA above the approved facility

limit from 28 April 2006 to 1 July 2007;

(2) section 601FD(1)(c), in relation to the increases of the AGA facility limit; and

(3) section 601FD(1)(f), in relation to the increases of the AGA facility limit.

397 The trial judge found that Mr Donaldson and Mr Swan contravened:

(1) section 601FD(1)(b), in relation to the increase of the AGA facility limit to

$44.87 million and the advances to AGA above the approved facility limit from

11 January 2007 to 1 July 2007;

(2) section 601FD(1)(c), in relation to the increase of the AGA facility limit to

$44.87 million; and

(3) section 601FD(1)(f), in relation to the increase of the AGA facility limit to

$44.87 million.

Mr Sullivan

398 Concerning the increase of the AGA facility to $26 million, the trial judge first considered

s 601FD(1)(f). That provision required Mr Sullivan to take all steps that a reasonable person

would take, if they were in his position, to ensure that City Pacific complied with, relevantly,

the Act, the Constitution and the Compliance Plan. At [459], his Honour identified the

- 87 -

compliance failures set out at [23] above. Those failures are objective facts, entirely unrelated

to the findings that provide the basis for ground 4. In the face of those facts, which are

unchallenged on the appeal, the trial judge was required to conclude that Mr Sullivan had

contravened s 601FD(1)(0 and there is no procedural unfairness which had any bearing on

that finding.

399 The trial judge next considered s 601FD(1)(b), which required Mr Sullivan to exercise the

degree of care and diligence that a reasonable person would exercise if they were in

Mr Sullivan's position. His Honour found a contravention, based upon the facts set out at

[24] above, which included the facts that supported the s 601FD(1)(1) contravention finding.

Each of those facts set out at [24] amply justified the s 601FD(1)(b) finding. None of them is

affected by the findings that provide the basis for ground 4. Again, the trial judge was

required to conclude that Mr Sullivan had contravened s 601FD(1)(b) and there is no

procedural unfairness which had any bearing on that finding.

400 Section 601FD(1)(c) required Mr Sullivan to act in the best interests of the members of the

Fund. The trial judge's s 601FD(1)(c) contravention finding was based on the same findings

that led to the other contravention findings. Accordingly, for the same reasons, there is no

procedural unfairness which had any bearing on that finding.

401 The trial judge found that Mr Sullivan contravened s 601FD(1)(b), by failing to prevent the

advances to AGA from 28 April 2006 to 23 August 2006, and from 24 August 2006 to

10 January 2007. As set out at [28] and [31] above, the contravention findings were based on

the same matters that gave rise to the s 601FD(1)(b) contravention in connection with the

increase of the AGA facility to $26 million. There is no relevant difference in his Honour's

reasoning that would permit a conclusion that any procedural unfairness had a bearing on

these findings.

402 Concerning the increase of the AGA facility to $44.87 million, the trial judge first considered

s 601FD(1)(b). As set out at [34] above his Honour's conclusion that Mr Sullivan had failed

in his duty to exercise the degree of care and diligence that a reasonable person would

exercise if they were in Mr Sullivan's position, was based upon the following four matters:

(a) His knowledge that the proposal was not supported by any remotely

acceptable "as is" valuation and was only really being pushed through the

- 88 -

Credit Committee to cover up the fact that advances well beyond the AGA

facility limit had already been made.

(b) His knowledge that, putting aside valuations which the trial judge found were

"not worth the paper they were written on", the "as is" valuation based on the

actual zoning and current permitted uses of the Saddleback land was

$24.975 million, which was well less than the new loan limit the subject of the

proposal.

(c) It could not possibly be suggested, on the basis of the information known to

Mr Sullivan, that the Saddleback land provided adequate security for the

proposed loan, or that the proposed loan maintained a prudent lending ratio.

(d) His knowledge that the proposed increase to the AGA facility flew in the face

of the SVP report recommendations concerning the AGA loan and was, on

almost any view, highly imprudent if not reckless in all the circumstances.

403 Those bases for the s 601FD(1)(b) contravention are unassailable. The trial judge was driven

to the conclusion that Mr Sullivan had contravened s 601FD(1)(b). There is no basis for a

conclusion that any procedural unfairness could have had a bearing on that conclusion.

404 The trial judge's findings that Mr Sullivan also contravened s 601FD(1)(1) and s 601FD(1)(c)

in connection with the increase of the AGA facility to $44.87 million are based upon the

same facts, as well as additional facts. It is unnecessary to consider the additional facts

because the contravention findings are impregnable in the light of the findings set out above.

405 Finally, the trial judge found that Mr Sullivan contravened s 601FD(1)(b), by failing to

prevent the advances to AGA from 11 January 2007 to 1 July 2007. His Honour's reasons are

set out at [38] above. His Honour described Mr Sullivan's conduct as "gross negligence" and

lacking even "a modicum of care and diligence". In the context of the earlier contravention

findings, this finding was unavoidable regardless of the extent of any deception by

Mr McCormick. Even accepting that it was not open to the trial judge to make any of the

findings that Mr Sullivan did not have an opportunity to address, it is impossible to avoid the

conclusion that the trial judge was correct in his findings concerning Mr Sullivan's

contraventions of s 601FD.

- 89 -

Mr Donakhan and Mr Swan

406 The elements of procedural unfairness identified above do not concern the position of either

Mr Donaldson or Mr Swan. Contravention findings were made against them for the reasons

set out at [35] and [40] above. Nothing raised by the appellants has cast the slightest doubt on

the correctness of those reasons.

407 It follows that ground 4 must fail.

FUNDAMENTAL MISAPPREHENSION OF FACT AND MISCARRIAGE OF TRIAL (GROUNDS 3 AND 5)

408 Ground 3 is that the trial judge proceeded on a "fundamental misapprehension of fact"

regarding the October 2005 loan approval in that the documentary evidence supporting the

loan approval was infected with fraud and "insofar as the October 2005 loan approval was

not made then it was a necessary finding that the AGA loan was overdrawn prior to 28 April

2006 and the trial judge thereby erred (at [84] and [387]) and further erred (at [451], [467]) in

making adverse findings against Mr Sullivan". In oral submissions, Mr King also contended

that the trial judge had also erred at [545].

409 Ground 5 is that the trial miscarried in that:

(a) the appellants took apparently contemporaneous documents at face value and

on the assumption that the documents were genuine and gave evidence on that

basis; but

(b) unknown to the appellants, a number of apparently contemporaneous

documents were shown to be fabricated during the trial.

410 Ultimately, this ground of appeal was not argued separately from ground 3.

411 As previously noted, the trial judge found that there was a further increase to the loan facility

in October 2005 to $17.89 million. His Honour found that the increase was specifically

approved by each of the appellants and Mr McCormick as members of the Credit Committee.

This finding corresponds with the agreed fact that an increase in the AGA facility limit to

$17.89 million was approved by Mr Sullivan on or about 5 October 2005, by Mr Swan on or

about 6 October 2005 and by Mr Donaldson on or about 7 October 2005.

412 The "fundamental misapprehension of fact" is said to be that there was a loan approval

agreed to by the appellants in early October 2005. It was said to be a misapprehension shared

- 90 -

by all parties, as a result of which the appellants had stated, in the agreed facts, that they

approved the increase in the AGA facility limit to $17.89 million.

413 The claimed misapprehension must be considered in the context of the undisputed facts that

on 6 October 2005, City Pacific made a written offer to increase the AGA loan facility to

$17.89 million and AGA accepted the offer on the same day. The letter of offer was signed

by Mr Sullivan and Mr McCormick. Although Mr King made an oral submission that

Mr Sullivan's signature on the letter of offer was forged, there was no evidence to support

that contention and it was not developed.

414 The appellants submitted that Mr Swan's approval (given by email dated 6 October 2005)

was conditional upon a valuation of $26,775,000 but no such valuation was ever obtained;

based on evidence obtained since the trial, Mr Donaldson's 7 October 2005 email approval

may well be a fabrication; and no signature from Mr Sullivan can be located on a version of

the loan approval "entirely consistent with the email version", being a version which

Mr McCormick dishonestly asserted was signed by Mr Sullivan in an email to Mr Swan and

Mr Donaldson dated 5 October 2005.

415 The findings that Mr King sought to impugn on the basis of the misapprehension regarding

the October 2005 loan approval are as follows:

(1) City Pacific approved an increase in the loan facility to $17.89 million within a week

of receiving the SVP report ([84]).

(2) On 25 August 2006, Mr McCormick sent an email to Mr Swan and Mr Donaldson

attaching a copy of the document that recorded the October 2005 credit committee

approval of the increase of the AGA facility limit to $17.89 million ([1421).

(3) The concerns raised by SVP had no impact on the appellants because, within a week

of receiving the SVP report, they approved an increase to the AGA facility in

circumstances where the supposed value of the Saddleback land referred to in the

proposal for the loan increase was not even the subject of a valuation, let alone a

valuation from a different valuer. Whilst Mr Swan noted that his approval was subject

to the receipt of a valuation, he never took any steps to ensure that an acceptable

valuation was received. Thus, SVP's concerns about the AGA facility and the

valuation of the Saddleback land based on the permitted uses apparently either fell on

deaf ears, or were deliberately ignored by the credit committee ([387]).

- 91 -

(4) Mr Sullivan signed the funds transfer request dated 11 May 2006 which was the first

request taking the facility above its approved limit ([451]).

(5) Mr Sullivan well knew that the advance made after 11 May 2006 took the balance of

the AGA facility well beyond its approved limit ([467]).

(6) The last facility limit approved by the credit committee was $17.89 million, which

was approved by the appellants and Mr McCormick in early October 2005 within

days of the receipt by City Pacific of the SVP report. The approval was premised on

the Saddleback land being valued at $26.775 million. No such valuation existed at the

time the proposal was approved and no valuation valuing the land at $26.775 million

was ever received. Nor did any member of the credit committee ever make any

subsequent enquiries to ascertain whether any such valuation was received ([545]).

Evidence at the trial

416 The agreed facts show that the appellants accepted that they approved the increase of AGA

facility limit by them, by reference to documents in the Initial Tender Bundle numbered

ITB127, ITB128, ITB132-002 and ITB147. All of these documents were in evidence before

the trial judge.

417 ITB127 is an email from Mr McCormick to Mr Donaldson and Mr Swan dated 5 October

2005. The subject of the email is "Further advance — Atkinson Gore Agricultural $4.540m".

There are two attachments to the email described as "041005 Agricultural Increase

Submission $17,890,000.doc" and "Gore Group.xls". The email states:

Please find attached a proposal for a further advance for the Gore Group.

Phil has signed his approval.

Any queries please call me otherwise look forward to receiving your response.

418 ITB128 is the unsigned loan approval that was attached to ITB127. Mr King submitted that

ITB127 falsely asserted that Mr Sullivan had signed the loan approval, in the absence of any

evidence of his signature prior to ITB127.

- 92 -

419 ITB132 is a chain of emails, following on from ITB127. It includes an email from Mr Swan

to Mr McCormick, copied to Mr Donaldson and Mr Sullivan, dated 6 October 2005

11:34 am. The email contains some suggested additions to the proposal. The email concludes

(at ITB132-002):

Subject to the aforementioned and the receipt of an acceptable valuation I approve the proposal.

420 ITB147 is a signed loan approval that is not identical to ITB128. On its face, it includes

Mr Gillam's signature dated 4 October 2005, Mr McCormick's signature dated 4 October

2005, Mr Sullivan's signature dated 5 October 2005, and a handwritten notation that the

proposal was approved by Mr Swan by email dated 6 October 2005 and by Mr Donaldson by

email dated 7 October 2005. The ITB147 proposal includes additions that had been suggested

by Mr Swan on 6 October 2005. Thus, it could not have been signed by Mr McCormick (or

Mr Gillam) on 4 October 2005, or by Mr Sullivan on 5 October 2005.

421 ITB147 includes a maturity date for the proposed loan of 9 December 2005. Based on that

date, Mr King submitted that ITB127 was created between 6 October 2005 and 9 December

2005.

422 ITB147 includes what, on its face, is an email from Mr Donaldson to Mr McCormick dated

7 October 2005. That email appears to be in response to ITB127. It states:

Steve,

1 approve the loan.

Regards,

Ian Donaldson

423 Mr King submitted that this email may be a fabrication, on the basis of the new evidence

described above. The trial proceeded upon the assumption that the email was genuine.

424 The following documents were also in evidence before the trial judge.

425 ITB375 is an email from Mr McCormick to Mr Donaldson and Mr Swan dated 25 August

2006 attaching a document titled "SCAN6499_000.pdr. The email states:

Hi Ian & Tom,

The attached proposal for an increase was actioned in October last year, has just been picked up that it needed more than just Phil and my signature,

- 93 -

We are restructuring the facility currently with new valuation etc, a new proposal will be with you in the next week or so.

In the interim and to keep the file in order could you sign the approval page and return.

426 ITB376 is the attachment to ITB375. It includes signatures of Mr Gillam, Mr McCormick and

Mr Sullivan dated 4 October 2005. It is different from the loan approval that forms part of

ITB147 in the following respects:

(1) the proposal maturity date is 9 December 2006 instead of 9 December 2005;

(2) the signatures of Mr Gillam and Mr McCormick are different;

(3) the signature of Mr Sullivan is different and the date next to the signature is 4 October

2005 instead of 5 October 2005; and

(4) in the funding table, the costs associated with the purchase are $150,000 instead of

$200,000.

427 ITB122 is a third signed version of the loan approval. It is similar to 1TB376 but includes

next to the word "APPROVED" at the bottom of the page, the handwritten words "IAN

DONALDSON (See Back page)". Mr Sullivan identified his signature on this document in

cross-examination. Mr Sullivan agreed that the signature indicated that he had approved the

proposal and said "you can take it that I did read the proposal, yes".

428 ITB124 is a fourth signed version of the loan approval. It is similar to ITB376 but includes

next to the word "APPROVED" at the bottom of the page what appears to be a signature of

Mr Donaldson, dated 4 October 2005.

429 ITB125 is a fifth signed version of the loan approval. It is similar to ITB124 but contains the

signature of Mr Swan dated 4 October 2005.

- 94 -

430 In cross-examination, Mr Swan conceded that he sent the 6 October 2005 email giving

conditional approval subject to an acceptable valuation and requesting insertion of cashflow

and liquidity items. In relation to ITB125, Mr Swan accepted that it includes his signature

dated 4 October 2005 in his handwriting. Mr Swan accepted that he signed ITB125 on about

25 August 2006 and that it was "possibly correct" that he did so knowing that he had not

given his approval until 6 October 2005. Mr Swan said, concerning the discrepancy between

4 and 6 October 2005:

Two days, I wouldn't be too worried about. I don't know [sic — now] remember whether I went back and looked at the specific date of the email. I knew I had approved this, so...

So you weren't concerned about inserting 4 October 2005 as the date of approval when you had only signed it on 25 August 2006?---Because my approval was as per my email of either 5 or 6 October.

431 Mr Donaldson gave evidence that he read the October 2005 loan approval. When asked by

the trial judge whether he had seen a signed version of the proposal prior to sending the

7 October 2005 email, Mr Donaldson said that he could not recall. The appellant's

submissions stated that Mr Donaldson accepted that he probably signed a version of ITB376

on about 25 August 2006.

Further evidence

432 Mr King sought to rely on three pieces of evidence in support of ground 3:

(1) an email dated 6 October 2005 from Mr McCormick to Mr Gillam: in that email,

Mr McCormick forwarded Mr Swan's 6 October 2005 11:34 am email to Mr Gillam

and asked Mr Gilliam to incorporate the changes proposed by Mr Swan into the

proposal and to include them in all future proposals;

(2) evidence from a computer forensic examiner, Robert Urquhart, that the 7 October

2005 email purportedly from Mr Donaldson did not appear on the City Pacific hard

drive; and

(3) evidence from Mr Urquhart that a version of the loan approval was created in its

current form on 25 August 2006. On the basis of this opinion, ITB376, 118122,

ITB124 and ITB125 were created from this version of the loan approval.

433

The agreed facts do not refer to ITB376, ITB122, ITB124 and ITB125 to support the dates of

approval of the increase in the AGA facility limit to $17.89 million.

- 95 -

Submissions

434 The appellants submitted that the October 2005 loan approval was taken at trial to be an

accurate, contemporaneous business record. Based on the agreed facts and Mr King's oral

submissions, this submission referred to ITB147. The appellants submitted that the document

was fabricated, together with the 7 October 2005 email from Mr Donaldson, by

Mr McCormick, sometime between 6 October and 9 December 2005. They contended that

the findings based on the loan approval are illustrative of the trial judge's misplaced reliance

upon documents later shown to have been fabricated. The appellants also submitted that the

approval was "one of the main reasons the trial judge gave for accepting McCormick's

evidence over Sullivan" and was unsound because it was "tainted by fraud".

435 As noted above, despite the signature of Mr McCormick dated 4 October 2005 and the

signature of Mr Sullivan dated 5 October 2005, ITB147 was not created earlier than

6 October 2005. This conclusion can be reached from the documents that were in evidence at

the trial. The 6 October 2005 email from Mr McCormick to Mr Gillam supports a conclusion

that Mr McCormick was responsible for the creation of 1TB147. In this sense, ITB147 may

be described as "fabricated".

436 Orally, Mr King also submitted that ITB122 was "fabricated", on the basis that it was created

on 25 August 2006 and not 4 October 2005. He noted that Mr Sullivan was cross-examined

on ITB122, which was not one of the documents upon the basis of which the parties agreed

that Mr Sullivan had approved the loan approval on 5 October 2005. Mr King submitted that

the cross examination had proceeded upon a fundamental misapprehension of fact, namely

that ITB122 was created in 2005 when it was created in August 2006.

437 Mr King submitted that Mr Sullivan's signature was probably forged on two occasions by

Mr McCormick, including on the 6 October 2005 letter of offer. There was no evidence of a

forgery, and this submission must be put aside.

438 Trilogy raised four matters in response to ground 3:

( 1 )

Trilogy pleaded and the appellants admitted that the limit of the AGA facility was

increased to $17.89 million on or about 6 October 2005 by a written agreement

between City Pacific and AGA, which was signed by Mr Sullivan. There is no

challenge to the finding that the 6 October 2005 offer was made and accepted. Thus,

- 96 -

even if the increase was not approved, it occurred, with the result that it was not

necessary to find that the AGA loan was overdrawn prior to 28 April 2006.

(2) It was common ground at the trial that the Credit Committee had approved the

increase in the AGA facility limit in October 2005, by reason of the agreed facts. The

fact that the agreed facts refer to more than one version of the loan approval document

demonstrates that the appellants and their solicitors were conscious of the existence of

multiple versions of the loan approval when the admission was made.

(3) The trial judge found that all advances to AGA in the period from 28 April 2006 to

21 December 2006 were in excess of the AGA facility limit. That would remain the

case whether the limit was the limit as increased by the October 2005 agreement

between City Pacific and AGA or the lower limit that existed prior to that agreement.

(4) The trial judge found that Mr Sullivan was negligent in failing to take steps to prevent

advances in excess of the AGA facility limit being made, and that this was the case

whether or not he had actual knowledge that advances were being made in excess of

the limit. There is no challenge to that finding. Even if it were established (at a

putative retrial) that the October 2005 facility was not approved by the Credit

Committee, this would only provide further evidence that Mr Sullivan and

Mr McCormick (who both signed the October 2005 letter) were prepared to advance

further money to AGA in circumstances where they either knew such advances had

not been approved, or were careless as to whether such approval had been given. That

cannot cast any doubt on the findings made below regarding their "negligence" in

respect of the AGA facility.

Consideration

439 The positions of the three appellants should be considered separately. However, in each case,

their defence was conducted in circumstances in which there were six versions of the loan

approval in evidence. They were in a position to identify the discrepancies between those

documents and to consider the impact of those discrepancies for their respective defences.

440 For Mr Sullivan, the salient fact is that he signed the letter of offer dated 6 October 2005,

offering to increase the facility to $17.89 million. Mr Sullivan's signature appears on all five

of the signed October 2005 loan approvals dated 4 October 2005 (1TB122, ITB124, ITB125,

ITB376) and 5 October 2005 (ITB147). It is possible that ITB122, ITB124, ITB125 and

ITB376 include copies of a single document signed by Mr Sullivan on about 25 August 2006.

- 97 -

While the new evidence supports a conclusion that Mr Sullivan did not sign any version of

the October 2005 loan approval on 4 October 2005 or 5 October 2005, the evidence is that

Mr Sullivan represented that he had approved the loan on 4 or 5 October 2005 by his

signatures on the various loan approvals regardless of when he made that representation. That

representation is consistent with the fact that Mr Sullivan signed the 6 October 2005 letter of

offer.

441 As for Mr Swan, the trial was conducted on the basis that ITB125 was not signed by him

until 25 August 2006. Thus, the issue of the creation of a version of the October 2005 loan

approval in August 2006 was known.

442 The new evidence concerning the possible fabrication of Mr Donaldson's 7 October 2005

email is significant in that it may suggest that Mr McCormick engaged in deceit to an extent

that had not previously been identified.

443 For Mr Sullivan, it could only be in his favour that the AGA loan facility increase was

approved in the manner found by the trial judge. The alternative is that he signed the

6 October 2005 letter of offer in the absence of approval. The adverse findings about which

Mr Sullivan complains could equally have been made by reference to the letter of offer. For

example, the letter of offer was sent very shortly after City Pacific received the SVP report

and this demonstrated that the concerns raised by SVP had no impact on Mr Sullivan. As at

11 May 2006, Mr Sullivan well knew that the advance for which he signed a funds transfer

request took the facility above the amount offered by the 6 October 2005 letter of offer.

444 For these reasons, we do not accept that there was a fundamental misapprehension of fact

affecting Mr Sullivan's defence.

445 For Mr Swan, the trial judge correctly found (at [85]) that his approval, given on 6 October

2005, was "subject to...the receipt of an acceptable valuation". Accordingly, the trial judge's

finding regarding the October 2005 loan approval was congruent with the facts concerning

Mr Swan's own approval. The agreed fact, that the facility increase was approved by

Mr Swan on 6 October 2005, was made by reference to ITB132-002 as recorded in the agreed

facts document. Mr Swan and his lawyers had available to them the documents from which it

could be inferred that ITB147 was created no earlier than 6 October 2005.

446 Thus, the adverse findings made against Mr Swan in connection with the October 2005 loan

approval could equally have been made by reference to Mr Swan's 6 October 2005 email.

- 98 -

447 It follows that we do not accept that there was a fundamental misapprehension of fact

affecting Mr Swan's defence.

448 The position regarding Mr Donaldson is different. The new evidence suggests that he may

not have approved the October 2005 loan approval. If this is the case, he may also have been

deceived when, in August 2006, he signed a version of IT13376 (that was probably ITB124).

449 However, ground 3 is ultimately concerned with adverse findings against Mr Sullivan.

Mr King did not attempt to demonstrate that Mr Donaldson's position was affected adversely

by the finding concerning the October 2005 loan approval, bearing in mind that his liability

concerns the advances made from 11 January 2007 following the increase of the facility to

$44.87 million.

450 Accordingly, grounds 3 and 5 go nowhere. Since there is no "fundamental misapprehension

of fact", it is unnecessary to consider whether such a misapprehension would provide a basis

for relief on the appeal.

FABRICATIONS (GROUNDS 6 AND 7(1))

451 Ground 6 is that the trial judge erred in his reliance on documentary evidence. At [281], his

Honour noted that Trilogy's case was primarily based on documents and observed:

Messrs Sullivan, Donaldson and Swan were critical of the fact that Trilogy's case was primarily documentary. In many cases, however, documentary evidence can prove to be more reliable than the unaided recollection of events by witnesses, particularly when those events occurred some time ago. That is particularly the case where the recollections of witnesses have been shown to be defective, dishonest or otherwise lacking in credibility. In many respects, this was such a case.

452 At [927], his Honour noted that his credibility findings "were primarily based on the recorded

and documentary evidence".

453 Ground 6 set out the following complaints:

(a) it was found that Mr McCormick fabricated a number of apparently

contemporaneous documents in the relevant period and in connection with the

AGA loan facility;

(b) the trial judge relied on such fabricated documents in making adverse findings

against Mr Sullivan (at [451]), Mr Swan (at [596]) and Mr Donaldson (at

[584]); and

- 99 -

(c) the trial judge ought not to have relied on apparently contemporaneous

documents without first being satisfied that such documents were not

forgeries, fabrications or backdated.

454 The adverse findings complained of are:

[451] ... Mr Sullivan signed the very first Funds Transfer Request (dated 11 May 2006) which took the facility above its approved limit. Second, Mr Sullivan in due course signed the file note and letter of offer, both backdated to 28 April 2006. He did so apparently without demur or query, other than that he only approved an interim increase to $26 million, not the $36 million that Mr Cormick had recorded in his false file notes.

[584] In his affidavit evidence, Mr Donaldson accepted that he signed the proposal on 22 December 2006 alongside the date 9 August 2006. He did not recall why he did not change that date. He claimed that he signed the proposal as a member of City Pacific's board of directors for a number of reasons, including that the proposal was for a loan that exceeded $50 million. Mr Donaldson said virtually nothing in his affidavit in relation to any scrutiny that he gave to the loan proposal. He does not suggest that he saw, or asked to see, Mr Kogler's letter of 21 December 2006. He said that at the time he signed the proposal, he had not seen either the March 2006 Valuation or the Updated March 2006 Valuation. He claimed that he "relied strongly" on Mr Sullivan and Mr McCormick to advise him if there were any "problems or issues" with the proposal and that none of them advised him of any problems. The impression one gets from Mr Donaldson's affidavit evidence is that he gave the proposal absolutely no independent scrutiny whatsoever. That is despite the fact that it was for a very large increase to an existing loan and that the proposal was obviously backdated.

[596] The evidence and position of Mr Swan was in many respects similar to that of Mr Donaldson. Mr Swan's affidavit evidence said very little about the circumstances and basis upon which he approved the proposal. Mr Swan was sent the proposal on 22 December 2006 as an attachment to an email from Mr McCormick which suggested that the proposal had "slipped between the cracks". Mr Swan did not sign the proposal immediately. On his return from leave in January 2007, Mr Swan received an email from Mr Gillam reminding him about the proposal. He signed the proposal on 11 January 2007 and wrote "ratified 11/01/07" next to his signature. He said he did that because "the document itself showed the date 9 August 2006 on the same line where my signature was to go". Mr Swan's affidavit evidence about signing the proposal was as follows:

When I reviewed the three-page AGA document on 11 January 2007, I noted that it had already been signed by each of Messrs Gillam, McCormick, Sullivan and Trathen, apparently on 9 August 2006. Three of those as I understood it (McCormick, Sullivan and Trathen) were members of the Credit Committee. It is difficult for me now in

- 100 -

2013 to be precisely sure what went through my mind in January 2007 as to the basis on which I was being asked to sign, and did sign, this document. However, in the light of the 30 November 2006 Board minute, I believe that my understanding was that my signed approval was being sought as a member of the Board, on the basis that the upper end of the facility was now capable of reaching above $50M.

455 In oral submissions, Mr King accepted that there was no error made by the trial judge in his

reliance on the documents the subject of ground 3. Accordingly, ground 6 must fail insofar as

it is based on those documents.

456 Mr King did not address ground 6 orally. In written submissions, the appellants referred to

the evidence of Mr Anderson that eight funds transfer request forms apparently signed by

Mr Mackay contained identical signatures, and Mr Mackay's evidence that he did not sign

the forms. The appellants submitted that the forms contained forged signatures of

Mr Mackay, leading to the conclusion that close to $6 million was misappropriated from the

Fund. This argument is relevant to ground 7(f), discussed below, but does not advance

ground 6.

457 Trilogy submitted that the evidence concerning the transfer request forms, even if accepted,

could not cast doubt on the trial judge's findings for the following reasons:

(1) There was no issue in the proceeding about whether Mr Mackay had signed the

relevant forms. The issue which was pleaded, and which was admitted, was that

Mr McCormick signed each of the forms. That must remain the case, irrespective of

any evidence about Mr Mackay.

(2) It was common ground that Mr Sullivan signed eight funds transfer forms for

advances to AGA in the relevant period, including one of the forms bearing

Mr Mackay's signature. Nothing in the material or submissions about Mr Mackay's

signature casts any doubt on the findings that Mr Sullivan approved advances to

AGA, those finding being based on his admissions to that effect.

(3) In any event, the trial judge found at [522]-[524], in respect of the period from

24 August 2006 to 10 January 2007, that even if Mr Sullivan did not know about, and

did not approve, the making of advances to AGA, a reasonable person in his position

would have taken steps to ascertain whether such advances were being made and

would have taken steps to prevent them being made. This was because a reasonable

person in Mr Sullivan's position would have known that advances were being made to

AGA (as this was disclosed in the Board papers), would have known that there had

- 101 -

been no Credit Committee approval to increase the facility limit, would have

ascertained that the facility had already reached its limit, and would have known that

the funds transfer forms which he was asked to sign in relation to the AGA facility

meant that the facility was operating above its limits. There is no challenge to that

finding. Indeed, Mr Sullivan himself acknowledged that he had a responsibility, as

chief executive officer, to enquire, and should have enquired, whether the balance of

the AGA facility had increased in the period from August 2006 to December 2006,

and that he failed to do so. The trial judge did not make a similar finding in respect of

the period from 28 April 2006 to 23 August 2006, and this is the subject of Trilogy's

notice of contention.

458 In their reply submissions, the appellants submitted that the Court should treat the fresh

evidence of Mr Anderson as uncontested and supporting the appellants' case of miscarriage

of justice and denial of procedural fairness. They submitted that Mr Mackay has put on

evidence that he did not sign the documents, corroborating the case of "massive fraud" by

Mr McCormick. As noted earlier, Mr Anderson's evidence was that Mr Mackay's signatures

on eight funds transfer request forms were identical (leading the appellant's to submit that the

signatures were forgeries) and that the funds transfer request forms and all signatures of them

could have been sent to a forensic document analyst for examination, and may have revealed

further forgeries or anomalies. In any event, the possibility contemplated by Mr Anderson's

evidence does not demonstrate error on the part of the trial judge. Without the evidence of

Mr Anderson, the trial judge had no reason to have refrained from relying on apparently

contemporaneous documents.

459 The appellants argued that the significance of the "eight Mackay forgeries" is, as set out in

appeal ground 7(f), that the trial judge's conclusion that Mr Sullivan was complicit in

Mr McCormick's fraud (at [407]), [454] and [468]) is inconsistent with Mr McCormick

needing to go to the extraordinary lengths of forging Mr Mackay's signatures.

460 The submissions do not explain how the trial judge relied on the "eight Mackay forgeries" in

making adverse findings against any of the appellants, including at [451], [584] and [596] of

his Honour's reasons, being the paragraphs identified in ground 6 of the notice of appeal. Nor

do they explain how the trial judge relied on those documents in making the findings at [407],

[454] and [468], being the paragraphs identified in ground 7(f).

461 In those circumstances, these grounds of appeal are not made out.

- 102 -

INCONSISTENCIES AND ERRORS OF FACT (GROUNDS 1 AND 2(e))

Grounds 1(a) and 2(e) (Mr Sullivan)

462 Ground 1(a) is that the trial judge "erred at law in making inconsistent, contradictory and

irreconcilable credit findings" in that his Honour:

(i) found that Mr McCormick was a fraudster who fabricated documents

and who could not be believed;

(ii) accepted Mr McCormick's evidence as against Mr Sullivan at [450]

and [451]; and

(iii) later found that Mr McCormick was perjuring himself in order to

protect Mr Sullivan,

despite the appellants' case theory that Mr McCormick lied and misled all of them.

463

Ground 2(e) makes a further complaint of error in relation to [451], that the trial judge erred

in recalling Mr McCormick's evidence.

464 Trilogy did not dispute propositions (i) and (iii). At [350], the trial judge found that

Mr McCormick was a dishonest and deceitful man, and an untruthful and unreliable witness.

At [363], his Honour found that Mr McCormick was untruthful in his claim that he did not

recall any conversations with Mr Sullivan about the AGA facility during 2006 concluding

that "[t]he only reasonable inference to be drawn was that [Mr McCormick] was

endeavouring to protect Mr Sullivan".

465 The trial judge also formed a very negative view of Mr Sullivan saying, at [316], that he was

"a most unsatisfactory and unimpressive witness". At [320], the trial judge described

Mr Sullivan's demeanour during cross-examination as "at times most unimpressive". His

Honour described Mr Sullivan as trenchant and emphatic and often belligerent. At [321], the

trial judge gave three examples to support his conclusion that Mr Sullivan's evidence was

unreliable in relation to a number of key matters. At [322] and following, his Honour gave

examples of aspects of Mr Sullivan's evidence which his Honour considered were

"manifestly implausible". At [327] and following, the trial judge assessed "important aspects

of Mr Sullivan's evidence" as "simply unsatisfactory". At [330], the trial judge concluded:

Ultimately, it is not possible to conclude otherwise than that Mr Sullivan was not an honest or reliable witness in relation to the key factual issues concerning the conduct of the AGA facility during 2006 and 2007. Much of his evidence was self-serving and sought to deny or deflect responsibility onto others for his manifest failings in

- 103 -

relation to the conduct of the AGA facility. He was a man prepared to lie about his knowledge of and involvement in key events so as to extricate himself from blame or responsibility.

466 As to (ii), at [450], the trial judge rejected Mr Sullivan's claim that he only received the first

page of Funds Transfer Request forms which, the trial judge found (at [449]), was "almost

entirely bereft of any meaningful detail about the relevant loan facility such as to permit the

authorising officer to determine whether the funds transfer should be authorised". The trial

judge did not only reject Mr Sullivan's claim on the basis that it was contrary to

Mr McCormick's evidence, but also because it was implausible and entirely uncorroborated.

467 At [451], the trial judge referred to evidence given by Mr McCormick that he only advanced

funds to AGA over the approved limit in the period prior to 23 August 2006 with

Mr Sullivan's approval. Mr King submitted that this was not Mr McCormick's evidence, and

referred to his Honour's rejection at [363] of Mr McCormick's evidence that he did not recall

any conversations with Mr Sullivan concerning the AGA facility in 2006. Trilogy did not

point to any evidence by Mr McCormick supporting the trial judge's observation.

468

The trial judge observed that Mr McCormick's evidence was "by no means implausible", but

also that it was supported by inferences flowing from the following documentary evidence:

(1) the funds transfer request dated 11 May 2006 which took the facility above its

approved limit, and which was signed by Mr Sullivan;

(2) the "28 April" file note which was signed by Mr Sullivan; and

(3) the "28 April" letter of offer which was signed by Mr Sullivan.

469 There is no error in the finding at [450] which is based on both the implausibility of

Mr Sullivan's evidence, its lack of corroboration, as well as Mr McCormick's evidence. The

trial judge was not required to disregard entirely the evidence of Mr McCormick in making

the finding at [450].

470 The finding in the first sentence of [451] appears to be based in part upon a misapprehension

of Mr McCormick's evidence. Mr McCormick's evidence on this subject was as follows:

MR YOUNG: Other than Mr Sullivan being aware that there was a proposal to increase the facility to Atkinson Gore to 26 million, and Mr Sullivan was agreeable to that, apart from that, Mr Sullivan wasn't aware, as far as you know, of you advancing funds to Atkinson Gore in excess of the approved limits; isn't that right?-- -I don't the answer to that [sic].

- 104 -

You certainly didn't make him aware, did you?---Well, only through the drawdown requests that were being signed off.

471 However, the conclusion that Mr McCormick only advanced funds to AGA over the

approved limit in the period prior to 23 August 2006 with Mr Sullivan's approval is amply

supported by the three other pieces of evidence to which the trial judge referred. Although

Mr King seemed to suggest that the authenticity of the 11 May 2006 funds transfer request

was brought into question by the further evidence, the evidence of Mr Finucan and

Mr Mackay was not directed to that funds transfer request.

472 We do not accept that there is a necessary inconsistency or contradiction between the finding

in the first sentence of [451] and the trial judge's other findings. It was open to the trial judge

to accept Mr McCormick's evidence concerning the extent of Mr Sullivan's approval of

advances to AGA, particularly where there were contemporaneous records which

corroborated or tended to corroborate the fact of approval. Thus, ground 1(a) is not made out.

473 We accept that the trial judge erred in his summation of Mr McCormick's evidence at [451].

To that extent, the appellants have made out ground 2(e). However, the error is immaterial in

the light of the trial judge's conclusions, at [494] and [495], that Mr Sullivan contravened

s 601FD(1)(b) in connection with the advances, based on his failure to prevent the advances,

and his permitting the advances to be made in the context of other matters set out at [495].

The findings that Mr Sullivan knew of the advances made during the period 28 April 2006 to

23 August 2006 (at [449] and [467]), and permitted them to be made (at [4951) were

uncontested. Accordingly, while ground 2(e) is made out, it has no consequence.

Ground 1(b) (Mr Donaldson and Mr Swan)

474 Ground 1(b) contends that Mr Swan and Mr Donaldson were adversely criticised by the trial

judge about their response to the SVP report (at [400]-[404]) yet were later exonerated on the

same issue (at [491]-[492]).

475 At [400], the trial judge found that the evidence of both Mr Swan and Mr Donaldson

concerning the implementation of SVP's recommendations concerning the AGA facility was

in many respects unpersuasive and lacked credibility. His Honour then considered whether

Mr Swan and Mr Donaldson were justified "in simply delegating responsibility for the SVP

report and its implementation to management?". At [401], the trial judge found that it was not

sufficient for Mr Swan and Mr Donaldson to unquestioningly and uncritically rely on

management to deal with SVP's criticisms. At [402], his Honour noted that Trilogy did not

- 105 -

allege any breach of duty on the part of the appellants and Mr McCormick in relation to the response to the SVP report. Even so, his Honour considered the evidence concerning the SVP report to be significant for the following reasons relevant to Mr Swan and Mr Donaldson:

(1) It revealed an almost complete absence of any oversight or scrutiny of management by the independent or non-executive directors in relation to that issue (at [403]).

(2) Mr Swan and Mr Donaldson must have known from the SVP report that the AGA facility was not just a regular loan amongst the many in City Pacific's loan book. Rather, not only was it a large loan, but it was a loan that had been singled out by an independent expert as a non-complying loan. It had been the subject of specific and unequivocal recommendations (at [4041).

476 Mr King did not suggest that the trial judge was not entitled to make those findings.

477 Despite his Honour's critical analysis at [4001-1404], at [491] and [492], the trial judge said:

[491] Whilst the SVP report was undoubtedly a serious matter that required some degree of oversight by the board, including the non-executive directors, it was open to Mr Swan and Mr Donaldson to accept the assurance of management that the issues raised by SVP had been properly responded to and that SVP's recommendations were being implemented. The board approved the implementation of SVP's recommendations. The non-executive directors, including Mr Swan and Mr Donaldson, would also have been aware that management had retained external lawyers to assist in City Pacific's dealings with ASIC. Whilst the letter Mr Sullivan wrote to ASIC which reported on City Pacific's implementation of SVP's recommendations was unquestionably misleading insofar as the AGA facility was concerned, there is no evidence that Mr Swan and Mr Donaldson knew that to be the case. It is open to infer that they too were misled by this response.

[492] Mr Donaldson and Mr Swan had no good reason, at least at this stage, to second-guess Mr Sullivan's assurances to ASIC and no compelling reason to conduct further specific investigations themselves into the state of the AGA facility. The situation may have been different if they were required to make a decision in relation to the AGA facility in their capacities as members of the Credit Committee during this period. During this period, however, Mr Swan and Mr Donaldson were not required themselves to make any decisions concerning the AGA facility. They were not specifically tasked with implementing, or overseeing the implementation, of SVP's recommendations in relation to the AGA facility.

478 These reasons formed part of the trial judge's conclusion that Mr Swan and Mr Donaldson did not contravene s 601FD in relation to advances made in the period 28 April 2006 to 23 August 2006.

- 106 -

479 The findings at [491] and [492] reveal that, when it came to considering whether Mr Swan

and Mr Donaldson had contravened s 601FD, the trial judge may have taken a more lenient

approach than revealed in his earlier consideration of the significance of their response to the

SVP report. However, we do not accept that the findings demonstrate error on the part of the

trial judge. They are reconcilable on the basis that his Honour considered that Mr Swan and

Mr Donaldson were not entitled to delegate responsibility for the SVP report and its

implementation to management and it was not sufficient for them unquestioningly and

uncritically to rely on management to address the criticisms in that report. However, the

Board having approved the implementation of the SVP recommendation, it was open to

Mr Swan and Mr Donaldson to accept management's assurance that the issues raised by SVP

had been properly responded to and that SVP's recommendations were being implemented.

Acceptance of that assurance did not, without more, amount to a delegation of responsibility

for the SVP report, or an unquestioning or uncritical reliance upon management. They had no

good reason, at least during the period April to August 2006 to second-guess Mr Sullivan's

assurances to ASIC and no compelling reason to conduct further specific investigations

themselves into the AGA facility where they were not themselves required to make any

decision concerning the facility.

480 Thus, ground 1(b) raises no appellable error.

Ground 1(c) (Mr Donaldson and Mr Swan)

481 Ground 1(c) is that Mr Swan and Mr Donaldson were the subject of adverse findings (at

[334], [335], [346]) on the basis of rejected evidence, where such evidence was later accepted

([478]-[483]).

482 At [334] and [335], the trial judge considered Mr Swan's evidence concerning his supervision

or oversight of the Fund's loan book. His Honour found that Mr Swan's evidence concerning

information gleaned (or not gleaned) from the Board papers was not convincing and "at least

open to doubt".

483 At [346], the trial judge found Mr Donaldson's evidence "implausible" concerning his lack of

consideration of the loan balances that formed part of the financial reports included in the

Board papers.

484 Even so, at [477]-[483], his Honour found that Messrs Swan and Donaldson had not

ascertained the balance of the AGA loan facility from the Board papers and had not

- 107 -

remembered that they had approved a facility limit for the AGA facility for $17.89 million.

Accordingly, they had not perceived from the Board papers that the balance of the facility

was over the approved limit.

485 Again, those findings are not irreconcilable. Although his Honour did not accept the evidence

given by Mr Swan and Mr Donaldson concerning their respective lack of scrutiny of the

Board papers, this did not necessitate findings that they knew the particular fact that the

facility was over the approved limit in circumstances where the limit was not specified in the

Board papers. Thus, it was open to the trial judge to make the findings at [473]-[483] despite

the findings at [334], [335] and [346].

486 Ground 1(c) raises no appellable error.

487 The trial judge referred to the delay in delivering judgment at [924]4927] of his Honour's

reasons. His Honour recognised that the delay was relevant to a consideration of the

credibility findings in his Honour's reasons. The trial judge noted that the credibility findings

were "primarily based on the recorded and documentary evidence" but acknowledged that the

demeanour of the appellants and Mr McCormick did play a part in the credibility findings.

The trial judge stated:

Despite the delay, there was no difficulty in recalling witness demeanour.

488 The appellants criticised this statement as unhelpful. However, they did not identify any

particular error in the trial judge's recollection of the appellants' demeanour. The appellants'

case was that the trial judge should have accepted their case theory that they were victims of

deception and should not have made particular adverse findings.

OTHER COMPLAINTS ABOUT CREDIT FINDINGS (GROUND 2(a) TO (d))

489 Grounds 2(a), (b) and (d) contend that the trial judge failed to give proper weight to the

following matters in making adverse findings against the appellants including the findings

referred to in ground 1 of the notice of appeal and those as to collusion and fraud:

(a) the fact that the allegations of fraud and fabrication were not made against the

appellants until cross-examination;

(b) the possibility that the appellants' apparent confusion in the witness box was

most likely the result of the evolution of their understanding when first faced

with allegations of fraud and fabrication of documents; and

- 108 -

(c) the passage of time between the events in question and the giving of the

appellants' evidence both in affidavit and in cross-examination.

490 Ground 2(c) contends that, in contrast to his Honour's adverse findings at [136], [317]-[319],

[336] and [345], the trial judge ought to have found that the concessions made by the

appellants when faced with the allegations of fabricated documents were inconsistent with

knowledge of or collusion on their part with Mr McCormick's fraud.

Mr Donaldson and Mr Swan

491 As explained above, the trial judge did not make any finding of collusion or fraud against

Mr Swan or Mr Donaldson. As to the critical findings of the trial judge concerning the

response of Mr Swan and Mr Donaldson to the SVP report, there was no relevant allegation

of fraud or fabrication. The same applies to the adverse findings at [334], [335] and [346]

concerning their consideration of board papers. Thus, grounds 2(a) and (b) are based upon a

false premise.

492 Ground 2(b) refers relevantly to the trial judge's findings at [336] and [345]. At [336], the

trial judge made the following finding concerning Mr Swan:

The main difficulty for Mr Swan, however, was his evidence concerning the proposal to increase the AGA facility which he signed in January 2007. Mr Swan's attempt to explain his limited scrutiny of this backdated proposal lacked plausibility and credibility, as did his evidence seeking to explain why he did not ensure that it was correctly dated. His evidence in relation to that issue was such that it cast doubt on the credibility and honesty of his evidence generally.

493 Paragraph [345] of his Honour's reasons concerns Mr Donaldson. It states:

Mr Donaldson also gave inconsistent and implausible evidence concerning another recommendation made by SVP. That recommendation, which was accepted and implemented by City Pacific, was that the Lending Manager be required to certify to the Credit Committee that the valuation received in relation to the loan proposal was acceptable. Mr Donaldson appeared to accept that he was aware of that requirement. Initially, Mr Donaldson claimed that he believed that the certification requirement was met if the Lending Manager simply signed the proposal. When it was pointed out to him that this was the very practice that had been criticised by SVP, Mr Donaldson then appeared to suggest that he was not required to ensure that the certification requirement had been satisfied. He appeared to claim that he, as a member of the Credit Committee, did not need to satisfy himself that the proposal had been certified because a requirement that the Credit Committee do something did riot mean that every member of the Credit Committee had to comply. Rather, it was a "collective responsibility", and independent directors, like him, were entitled to rely on the other members of the Credit Committee. When pressed further, however, Mr Donaldson said that he simply overlooked the change in practice. He claimed that most loan proposals included a certification, and that he did not notice it when the AGA loan proposal did not include a certification.

- 109 -

494 Mr King did not explain why the findings in [336] and [345] were not open to be made by the

trial judge. By the time they entered the witness box, each of Mr Donaldson and Mr Swan

was well aware that they would be challenged about whether they had exercised the degree of

care and diligence that a reasonable person would exercise if they were in the positions of

Mr Donaldson and Mr Swan in signing the "9 August" loan approval. Contrary to ground

2(d), there is no basis for a conclusion that the trial judge failed to make sufficient allowance

for the passage of time between the disputed events and Mr Donaldson and Mr Swan's

evidence.

495 Accordingly, these grounds must be rejected in relation to Mr Swan and Mr Donaldson.

Mr Sullivan

496 The findings against Mr Sullivan of collusion and fraud have already been addressed.

497 There is no evidence that the trial judge failed to give proper weight to the matters identified

in grounds 2(a), (b) and (d) in his Honour's findings against Mr Sullivan. Mr Sullivan's

difficulty, as the trial judge observed at [317] and following, was that he had sworn

"emphatically" to a particular version of events, namely the events of 28 April 2006, by

reference to documents that he signed but which he turned out to have signed months later.

The trial judge made a careful evaluation of Mr Sullivan's credit (at [316] to [330]),

ultimately finding that he was not an honest or reliable witness in relation to the key factual

issues concerning the conduct of the AGA facility during 2006 and 2007. Mr King did not

suggest that this finding was not open to the trial judge on the evidence.

498 Paragraph [136] (referred to in ground 2(b)) sets out findings concerning the "28 April" letter

of offer which are now uncontested. Paragraphs [317]-[319] (also referred to in ground 2(b))

comprise the trial judge's assessment of Mr Sullivan's evidence concerning the "28 April"

letter of offer. Mr King did not submit that these findings were not open to be made by the

trial judge.

499 In their written closing submissions at the trial, the appellants acknowledged that

Mr Sullivan's evidence was "unsatisfactory". The submissions put the following argument:

But Mr Sullivan was not to blame. It was the robust, and perhaps slightly hubristic confidence, of a skilled pilot who undertakes to bring a ship into harbour during a storm but who is left bewildered when he discovers the rudder is unresponsive to the helm.

- 110 -

The documents Sullivan thought would be his rock-solid reference points disintegrated at the trial and when he realised this be candidly told the court he had been misled.

500 In oral closing submissions, Mr Young SC submitted that important aspects of Mr Sullivan's

evidence were to be "taken with a grain of salt", and that "both sides are contending that

Mr Sullivan's evidence is, to a very large extent, unreliable". These submissions reinforce the

conclusion that no error is disclosed by grounds 2(a) to (d) of the notice of appeal in relation

to Mr Sullivan.

Trial judge's ability to recollect demeanour (Ground 2(f))

501 Ground 2(f) contends that the trial judge erred in finding (at [927]) that the delay in delivery

of his Honour's judgment did not impair his ability to recollect demeanour.

Assessment of Mr Sullivan 's evidence

502 As an example of the trial judge's difficulty recalling demeanour, the appellants referred to

the trial judge's observation) at [3191 that Mr Sullivan was "forced to effectively concede"

that his evidence concerning the date on which he signed the "28 April" file note and the

"28 April" letter of offer was a reconstruction "and that he had no actual recollection of

signing the documents on 28 April 2006". The appellants contended that this concession was

volunteered in re-examination. Assuming this is correct, the language used by the trial judge

does not reveal a defective recollection of the circumstances of the concession. It is equally

apt to describe the circumstances of the concession made in re-examination which was the

consequence of the facts that emerged during cross-examination.

503 Mr King also contended that the trial judge "misremembered" in his Honour's assessment

that Mr Sullivan's account shifted from adamant independent recollection to grudging

acceptance of reconstruction. Mr King submitted that at all times Mr Sullivan proceeded

upon the basis that he accepted the documents at face value and that his recollection was

founded upon the documents. In support of that submission, Mr King referred at length to

Mr Sullivan's oral evidence. The oral evidence showed, among other things, that when

presented with metadata for the "28 April" file note, Mr Sullivan asserted an adamant

independent recollection, as follows:

I want to suggest to you, Mr Sullivan, that that file note, dated 28 April 2006 wasn't created on 28 April 2006, it was created on 24 July 2006, as stated in the metadata in tab 3?—Mr Martin, all I can say is your metadata expert has got it wrong.

You didn't create this document, did you? Well, I signed it on the 28th•

Well?—I put the note on 28 April.

504 That adamant independent recollection is also illustrated by the evidence in Mr Sullivan's

April 2013 affidavit concerning the events of 28 April 2006 which was given after Trilogy's

statement of claim was amended to plead the creation of the "28 April" letter of offer in

August 2006. The affidavit said nothing to the effect that Mr Sullivan's recollection was

founded upon the documents.

505 It is true that in cross-examination Mr Sullivan appeared to suggest that his recollection was

based "purely" on the dates of the documents. However, he also maintained that he recalled

"signing two documents on the same day". The trial judge asked Mr Sullivan to explain how

he could be "so emphatic that it was that date", being 28 April 2006. Eventually, in re-

examination, Mr Sullivan gave the following evidence:

HIS HONOUR: You've now looked at the metadata so the question is, having now looked at the metadata, what is the basis of your evidence that you signed those documents, that is the letter and the file note that bear the dates 28 April 2008, what's the basis of your evidence that you signed them on that day? --- The basis of my previous statement was that on the understanding that the file notes of 24 July and file notes of 18 August were correct and they supported my statement that I signed them on the 28 th . I now have confirmed the metadata with my solicitor this morning and the metadata provided by the applicant is correct, and it reflects that those two file notes were created on different days. I have to admit that because of that evidence no longer being available to me I have no real certainty as to what dates I signed the 28 April letter.

506 It is not obvious that Mr King accurately summarised the trial judge's assessment of

Mr Sullivan's account, but on the material above it was plainly open to conclude that

Mr Sullivan "shifted from adamant independent recollection to grudging acceptance of

reconstruction".

507 There is no apparent unfairness, or evidence of a failure of memory on the part of the trial

judge in the findings at [319].

Finding that Mr Sullivan approved advances over the facility limit

508 This issue is addressed in relation to ground 2(e) above. In essence, the trial judge was

mistaken in his recollection (at [451]) of Mr McCormick's evidence concerning

Mr Sullivan's approval of advances to AGA over the approved limit in the period 28 April

2006 to 23 August 2006, but there was ample evidence to support his conclusion that the

advances were, indeed, approved by Mr Sullivan.

-112-

509 In the context of his Honour's careful and detailed reasons, this error does not provide a basis for a conclusion that there was any more widespread deficiency in his Honour's treatment of the issues before him.

510 The appellants referred to two emails from Mr McCormick to Mr Gore as evidence of advances occurring without Mr Sullivan's knowledge. Those emails are dated, respectively, 29 September 2006 and 9 November 2006. Accordingly, they do not provide a foundation for a conclusion that the trial judge erred in his ultimate conclusion that the relevant advances (at an earlier point in time) were approved by Mr Sullivan.

CONCLUSION

511 The appeal must be dismissed.

512 It is unnecessary to deal with Trilogy's notice of contention.

513 Costs should follow the event. A costs order should be made against each of Mr Sullivan, Mr Swan and the estate of the late Mr Donaldson. The parties will be directed to submit draft orders to do all additional things necessary or appropriate to give effect to these reasons in relation to costs.

I certify that the preceding five hundred and thirteen (513) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop and Justices Farrell and Gleeson.

Associate:

Dated: 25 September 2017