Pilmer v Duke Group Ltd (in Liquidation)

• Jurisdiction: Australia Federal only
• Judge: McHugh,Gummow,Hayne,Callinan JJ,Kirby J
• Judgment Date: 31 May 2001
• Neutral Citation: 2001-0531 HCA E,[2001] HCA 31
• Court: High Court
• Docket Number: A46/1999
• Date: 31 May 2001

[2001] HCA 31

HIGH COURT OF AUSTRALIA

McHugh, Gummow, Kirby, Hayne and Callinan JJ

A46/1999

Angus Claymore Pilmer & Ors

Appellants

and

The Duke Group Limited (In Liquidation) & Ors

Respondents

Representation:

A J Myers QC with P Zappia for the appellants (instructed by Phillips Fox) at the hearing on 7 April 2000

T A Gray QC with R J Whitington QC, S J Lipman and S J Doyle for the first respondent (instructed by Fisher Jeffries) at the hearing on 7 April 2000

A J Myers QC with G T Pagone QC and P Zappia for the appellants (instructed by Phillips Fox) at the hearing on 23 November 2000

R J Whitington QC with S J Lipman and S J Doyle for the first respondent (instructed by Fisher Jeffries) at the hearing on 23 November 2000

No appearance for the second to seventh respondents.

Pilmer v The Duke Group Limited (in liquidation)

Contract — Breach — Damages — Calculation of loss — Contract of retainer for valuation of subject of takeover bid — Plaintiff company effected takeover in reliance on valuation made in breach of duty of care — Had valuation been accurate plaintiff would not have proceeded — Consideration included cash and issue and allotment of shares — Whether plaintiff suffered loss by issue of shares — Whether damages include sum representing market value of shares issued under agreement.

Companies — Company finance — Share capital — Maintenance of capital — Company limited by shares — Company issuing new shares — Issue and allotment otherwise than for cash — Whether company suffers loss by reason of issuing new shares.

Equity — Fiduciary duties — Duty of loyalty — Conflict of duties and interests — Conflict of duty and duty — Accountant retained by company to give independent expert valuation report to be placed before shareholders — Whether accountant owed fiduciary duties to company — Principles of causation in equity.

Equity — Equitable remedies — Equitable compensation — Assessment — Reduction for contributing fault.

ASX (Australian Stock Exchange Ltd) Listing Rules, Listing Rule 3J(3).

ORDER

1. Appeal allowed with costs.

2. Set aside pars 2, 7, 9 and 10 of the orders made by the Full Court of the Supreme Court of South Australia on 13 August 1999 but only to the extent that those orders affect the parties to the appeal to this Court.

3. Remit the matter to the Full Court of the Supreme Court of South Australia for the making of orders consistent with this Court's reasons for decision.

1 McHugh, Gummow, Hayne and Callinan JJ. The first respondent, The Duke Group Limited, was formerly called Kia Ora Gold Corp NL and it is convenient to refer to it as ‘Kia Ora’. Kia Ora was incorporated in South Australia in 1954 and, at the times which are now relevant, its shares were listed on the Australian Stock Exchange. It became insolvent and, in July 1989, the Supreme Court of South Australia ordered that it be wound up by the Court. The appellants are (or are the personal representatives of) those whom Kia Ora alleged and the trial judge found 1 were, at material times, the members of a partnership which carried on practice as accountants in Perth under the name ‘Nelson Wheeler’.

2 The appeal to this Court concerns limited aspects of complex litigation brought by Kia Ora in the Supreme Court of South Australia against the appellants and (among others) persons who were alleged to have been directors of Kia Ora at the relevant times (the second, third and fourth respondents to this appeal). It is convenient to refer to these respondents as ‘the Kia Ora directors’. The litigation arose out of a successful takeover bid by Kia Ora for a company called Western United Ltd. By its takeover offers, Kia Ora offered alternative forms of consideration to the shareholders of Western United for their shares in that company. Kia Ora offered either $1.20 for each share in Western United plus five shares in Kia Ora for each two shares in Western United or four shares in Kia Ora for each share in Western United. As a result of the acceptances of its offers, Kia Ora paid $25.696 million and issued and allotted 67.9 million $1 shares in Kia Ora, credited as fully paid up.

3 Kia Ora alleged that it retained the appellants' firm, Nelson Wheeler, to prepare a report which would be placed before a meeting of shareholders of Kia Ora. That report said, among other things, that 2:

‘we are of the opinion that, from the point of view of Kia Ora, the price proposed to be offered [by Kia Ora for the shares in Western United] is fair and reasonable in all of the circumstances’.

By its claim, Kia Ora alleged against the appellants that for them to have provided any report was in breach of a fiduciary duty. Kia Ora alleged further that the report was prepared incompetently and in breach of their contract of retainer and of a common law duty of care. It alleged against the Kia Ora

directors that they had breached their fiduciary and statutory duties as directors. There was no allegation that the appellants were accountable in equity to Kia Ora on the footing that they had dishonestly assisted the directors to breach their fiduciary duties thereby attracting the application of the principles discussed in such decisions as Royal Brunei Airlines v Tan 3. Liability in equity was alleged to be direct rather than accessorial. The appellants themselves were said to owe a fiduciary duty to Kia Ora and its shareholders

4 The central issue in this appeal is whether Kia Ora suffered any loss by the issue and allotment of its shares to those who accepted its takeover offer for Western United. To understand how that issue arises, it is necessary to say something about the way in which, at trial, Kia Ora put its claims against the appellants and against the Kia Ora directors, and about the decisions of the primary judge (Mullighan J) 4 and, on appeal, the Full Court of the Supreme Court of South Australia 5. But before turning to those subjects, it is convenient to say something more about the facts.

The Nelson Wheeler report

5 The report which the appellants prepared (‘the Nelson Wheeler report’) was placed before Kia Ora's shareholders to comply with listing rule 3J(3) of the Main Board Listing Rules of the Australian Stock Exchange. That rule forbade a listed company from acquiring (without the prior approval of its shareholders in general meeting) securities the value of which, or the consideration for the acquisition of which, exceeded 5% of shareholders' funds of the acquiring company. It applied if the vendor would be regarded as an associate of the listed company for the purposes of s 9 of the Companies Act 1981 (Cth) or the equivalent provisions of a State Companies Code. Listing rule 3J(3) applied to Kia Ora's acquisition of Western United because the third and fourth respondents (and another person who had died before the action was commenced) were directors of and shareholders in both companies 6.

6 The listing rules required that persons associated with the vendor could not vote at the meeting of shareholders 7. They also required that notice of any meeting of shareholders to approve a transaction of the kind we have described ‘be accompanied by copies of reports, valuations or other material from independent qualified persons sufficient to establish that the purchase or sale price of such assets is a fair price’ 8.

7 The Nelson Wheeler report stated the opinion, in the terms set out earlier, that the price to be offered by Kia Ora for shares in Western United was fair and reasonable. The report was, in effect, a valuation of Western United. The final version of the report, dated 22 September 1987, valued the issued capital of Western United at $82.6 million or $3.22 per share. The then current market price for Kia Ora shares was $1.10 and, accordingly, the proposed offer to Kia Ora valued Western United at $3.95 to $4.40 per share. The report expressed the opinion that it was reasonable for Kia Ora to pay a premium to acquire all of the shares in Western United.

8 Share prices on stock exchanges around the world dropped very sharply on 19 and 20 October 1987. Share prices in Kia Ora and Western United were affected considerably. The market price of Kia Ora shares was reduced from $1.08 to 75 cents almost immediately. The price of Western United shares dropped more slowly but it dropped from $2.90 on 19 October 1987 to $1.70 on 30 October 1987. Nevertheless, Kia Ora pressed on with the takeover.

9 Kia Ora alleged that the appellants owed a duty of care to it, and its shareholders, to exercise all reasonable care, skill and diligence that a reasonably competent accountant would exhibit in carrying out the retainer to prepare such a report. By their pleading, the appellants admitted that they owed a duty of care to Kia Ora (among other things) to carry out their instructions with all reasonable care, skill and diligence but denied owing any duty to the shareholders of Kia Ora. At trial, the appellants sought to withdraw the admission that they owed a duty to Kia Ora and to amend their pleading to deny any duty of care to Kia Ora in tort but acknowledge a common law duty only to those shareholders of Kia Ora who were not associates of the Kia Ora directors 9. The trial judge held that the appellants did owe Kia Ora a common law duty of care and a like duty under

the contract of retainer 10. Kia Ora's shareholders not being party to the action, it was not necessary to decide whether the appellants owed any duty to the shareholders, or any group of shareholders. The trial judge rejected Kia Ora's claim that the appellants breached a fiduciary duty, holding that it was not shown that there was a fiduciary relationship between Kia Ora and the appellants 11

The decisions at trial and in the Full Court

10 In the course of final submissions at the trial, counsel for the appellants conceded that the report...